<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                    FORM 10-Q

(Mark One)

[X]  Quarterly Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange
     Act Of 1934 For the Quarterly Period Ended April 1, 2006 or

[ ]  Transition Report Pursuant To Section 13 Or 15(d) Of The Securities
     Exchange Act Of 1934 For the Transition Period From __________ to
     _________.

     Commission file number: 0-19557

                                  Salton, Inc.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                                       <C>
                Delaware                                        36-3777824
     (State of other jurisdiction of                         (I.R.S. Employer
     Incorporation or organization)                       Identification Number)
</TABLE>

<TABLE>
<S>                                                             <C>
            1955 Field Court
             Lake Forest, IL                                       60045
(Address of principal executive offices)                        (Zip Code)
</TABLE>

                                 (847) 803-4600
              (Registrant's telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.

                               Yes   X   No
                                   -----    -----

Indicate by the check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).

Large accelerated filer       Accelerated filer  X    Non-accelerated filer
                        ---                     ---                         ---

Indicate by check mark whether the registrant is a shell company (as defined in
Rule 12b-2 of the Exchange Act).

                               Yes       No   X
                                   -----    -----

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of May 8, 2006, 14,386,390
shares of its $0.01 par value Common Stock.


                                        1

<PAGE>

<TABLE>
<CAPTION>
                                                                        PAGE NO.
                                                                        --------
<S>                                                                     <C>
PART I       FINANCIAL INFORMATION

   Item 1:   Financial Statements

             Condensed Consolidated Balance Sheets -  April 1, 2006
             and July 2, 2005                                               3

             Condensed Consolidated Statements of Operations -
             Thirteen weeks ended - April 1, 2006 and April
             2, 2005 Thirty-nine weeks ended April 1, 2006 and
             April 2, 2005                                                  4

             Condensed Consolidated Statements of Cash Flows
             -Thirty-nine weeks ended April 1, 2006 and April               5
             2, 2005

             Notes to Condensed Consolidated Financial Statements           6

   Item 2:   Management's Discussion and Analysis of Financial
             Condition and Results of Operations                           25

   Item 3:   Quantitative and Qualitative Disclosures About Market
             Risk                                                          44

   Item 4:   Controls and Procedures                                       45

PART II      OTHER INFORMATION

   Item 1:   Legal Proceedings                                             47

   Item 6:   Exhibits                                                      49

Signature                                                                  50

Index of Exhibits
</TABLE>


                                        2

<PAGE>

                                  SALTON, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                  APRIL 1,    JULY 2,
(IN THOUSANDS EXCEPT SHARE DATA)                                    2006        2005
                                                                 ---------   ---------
<S>                                                              <C>         <C>
ASSETS
CURRENT ASSETS:
   Cash                                                          $  10,908   $  14,857
   Compensating balances on deposit                                 39,265      34,355
   Restricted cash                                                   1,408          --
   Accounts receivable, less allowances                            121,044     140,179
   Inventories                                                     154,748     195,065
   Assets held for sale                                                 --         998
   Prepaid expenses and other current assets                        16,071      16,048
   Prepaid income taxes                                              1,344          --
   Deferred income taxes                                             6,043       5,524
   Current assets of discontinued operations                            --     101,927
                                                                 ---------   ---------
      Total Current Assets                                         350,831     508,953
Property, Plant and Equipment, net of $68,973 and $60,278
   accumulated depreciation, respectively                           42,029      50,227
Tradenames                                                         179,169     180,041
Non-Current Deferred Tax Asset                                       2,488      49,275
Other Assets                                                        14,189      11,555
Non-current assets of discontinued operations                           --       7,737
                                                                 ---------   ---------
TOTAL ASSETS                                                     $ 588,706   $ 807,788
                                                                 =========   =========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Revolving line of credit and other current debt, including
      accrued interest of $10,971 and $0, respectively           $  30,215   $  70,730
   Senior subordinated notes due 2005 - current                         --      45,990
   Accounts payable                                                 85,008      86,254
   Accrued expenses                                                 28,436      34,802
   Accrued interest                                                  6,247      13,589
   Income taxes payable                                              1,695       4,375
   Current liabilities of discontinued operations                       --      47,331
                                                                 ---------   ---------
      Total Current Liabilities                                    151,601     303,071
Non-Current Deferred Income Taxes                                   11,155       3,334
Senior Subordinated Notes Due 2005                                      --      79,010
Senior Subordinated Notes due 2008, including an adjustment of
   $2,079 and $7,082 to the carrying value related
   to interest rate swap agreements, respectively                   61,756     156,387
Second Lien Notes, including accrued interest
   of $13,136 and $0, respectively                                 116,407          --
Series C Preferred Stock                                             8,646          --
Term Loan and Other Notes Payable                                  117,245     100,050
Other Long Term Liabilities                                         19,530      20,283
Non-current liabilities of discontinued operations                      --       1,462
                                                                 ---------   ---------
TOTAL LIABILITIES                                                  486,340     663,597
Minority Interest in Discontinued Operations                            --      24,263
Convertible Preferred Stock, $0.01 par value; authorized,
   2,000,000 shares; 40,000 shares issued                           40,000      40,000
Commitments and contingencies

STOCKHOLDERS' EQUITY:
   Common Stock, $0.01 par value; authorized, 40,000,000
      shares; issued and outstanding: 2006-13,694,140 shares;
      2005-11,376,292 shares                                           172         148
   Treasury Stock - at cost                                        (65,793)    (65,793)
   Additional Paid-In Capital                                       62,835      55,441
   Accumulated Other Comprehensive Income                            3,746      11,513
   Retained Earnings                                                61,406      78,619
                                                                 ---------   ---------
      Total Stockholders' Equity                                    62,366      79,928
                                                                 ---------   ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                       $ 588,706   $ 807,788
                                                                 =========   =========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.


                                        3

<PAGE>

                                  SALTON, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)                 13 WEEKS ENDED              39 WEEKS ENDED
                                                         -------------------------   -------------------------
                                                           APRIL 1,      APRIL 2,      APRIL 1,      APRIL 2,
                                                             2006          2005          2006          2005
                                                         -----------   -----------   -----------   -----------
<S>                                                      <C>           <C>           <C>           <C>
NET SALES                                                $   127,657   $   153,159   $   506,461   $   630,541
Cost of Goods Sold                                            91,434       108,435       353,123       424,802
Distribution Expenses                                         10,374        13,331        33,589        42,840
                                                         -----------   -----------   -----------   -----------
GROSS PROFIT                                                  25,849        31,393       119,749       162,899
Selling, General and Administrative Expenses                  37,022        50,982       131,012       163,217
Restructuring Costs                                               80           287           237         1,077
                                                         -----------   -----------   -----------   -----------
OPERATING (LOSS)                                             (11,253)      (19,876)      (11,500)       (1,395)
Interest Expense, net                                          8,351        12,855        28,596        38,605
Gain-Early Settlement of Debt                                     --            --       (21,720)           --
                                                         -----------   -----------   -----------   -----------
(LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES        (19,604)      (32,731)      (18,376)      (40,000)
Income Taxes Expense (Benefit)                                  (540)       (9,314)       28,388       (11,828)
                                                         -----------   -----------   -----------   -----------
NET (LOSS) FROM CONTINUING OPERATIONS                        (19,064)      (23,417)      (46,764)      (28,172)
Income from Discontinued Operations, Net of Tax                   --           888         1,735         5,212
Gain on Sale of Discontinued Operations, Net of Tax               --            --        27,816            --
                                                         -----------   -----------   -----------   -----------
NET (LOSS)                                               $   (19,064)  $   (22,529)  $   (17,213)  $   (22,960)
                                                         ===========   ===========   ===========   ===========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                13,616,903    11,376,297    13,118,437    11,373,127
WEIGHTED AVERAGE COMMON AND COMMON
   EQUIVALENT SHARES OUTSTANDING                          13,616,903    11,376,297    13,118,437    11,373,127
Net (Loss) per Common Share: Basic
   (Loss) from continuing operations                     $     (1.40)  $     (2.06)  $     (3.56)  $     (2.48)
   Income from discontinued operations, net of tax                --          0.08          0.13          0.46
   Gain on sale of discontinued operations, net of tax            --            --          2.12            --
                                                         -----------   -----------   -----------   -----------
Net (Loss) per Common Share: Basic                       $     (1.40)  $     (1.98)  $     (1.31)  $     (2.02)
                                                         ===========   ===========   ===========   ===========
Net (Loss) per Common Share: Diluted
   (Loss) from continuing operations                     $     (1.40)  $     (2.06)  $     (3.56)  $     (2.48)
   Income from discontinued operations, net of tax                --          0.08          0.13          0.46
   Gain on sale of discontinued operations, net of tax            --            --          2.12            --
                                                         -----------   -----------   -----------   -----------
Net (Loss) per Common Share: Diluted                     $     (1.40)  $     (1.98)  $     (1.31)  $     (2.02)
                                                         ===========   ===========   ===========   ===========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.


                                        4

<PAGE>

                                  SALTON, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                          39 WEEKS ENDED
                                                                                       -------------------
                                                                                       APRIL 1,   APRIL 2,
(IN THOUSANDS)                                                                           2006       2005
                                                                                       --------   --------
<S>                                                                                    <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net (Loss)                                                                          $(17,213)  $(22,960)
   Adjustments to Reconcile Net (Loss) to Net Cash
      from Operating Activities:
   Imputed interest on notes payable and other non-cash items                              (192)    (1,362)
   Deferred income tax provision                                                         33,198    (14,488)
   Stock based compensation expense                                                         509         --
   Depreciation and amortization                                                         15,223     17,864
   Bad debt (recovery) provision                                                            178     (1,321)
   Gain on sale of discontinued operations                                              (27,816)        --
   (Gain) loss on disposal of property and equipment                                       (729)        41
   Inventory valuation adjustment                                                           322     (1,577)
   Impairment loss on goodwill and intangible assets                                        205        243
   Foreign currency gains                                                                   (18)        23
   Gain - early settlement of debt                                                      (21,720)        --
   Gain on sale of investment                                                                --       (109)
   Minority interest                                                                      1,404      4,381
   Changes in assets and liabilities:
      Accounts receivable                                                                 1,766      3,301
      Inventories                                                                         5,653    (14,671)
      Prepaid expenses and other current assets                                          (3,189)       379
      Other non-current assets                                                            1,761        155
      Accounts payable                                                                    7,671    (46,830)
      Income taxes payable                                                               (2,926)     2,573
      Accrued expenses                                                                   (6,941)    21,440
                                                                                       --------   --------
         NET CASH FROM OPERATING ACTIVITIES                                             (12,854)   (52,918)
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                                                  (4,000)    (8,137)
   Proceeds from sale of assets and investments                                          15,347     15,486
   Proceeds from sale of discontinued operations, net of $10,998 cash sold               69,938         --
   Increase in restricted cash                                                           (1,408)        --
   Acquisition of majority interest/business, net of cash acquired                       (4,525)        --
   Additional payment for acquisition of tradenames                                        (205)        --
   Increase in compensating balances on deposit                                          (4,910)      (194)
                                                                                       --------   --------
         NET CASH FROM INVESTING ACTIVITIES                                              70,237      7,155
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net (repayments) proceeds from revolving line of credit and other short term debt    (43,070)    25,369
   Proceeds from new credit agreement                                                    48,870         --
   Repayment of terminated credit agreement                                             (39,675)        --
   Repayment of long term debt                                                          (50,434)      (738)
   Distributions to minority shareholders                                                    --     (2,296)
   Costs associated with refinancing                                                    (14,666)      (967)
   Additional payment for tradenames                                                         --       (619)
   Common stock issued                                                                      175         27
                                                                                       --------   --------
         NET CASH FROM FINANCING ACTIVITIES                                             (98,800)    20,776
                                                                                       --------   --------
Effect of Exchange Rate Changes on Cash                                                   1,534        (16)
                                                                                       --------   --------
Decrease in Cash                                                                        (39,883)   (25,003)
Cash, Beginning of Period (1), Including Cash of Discontinued Operations of
   $35,934 and $27,917, respectively                                                     50,791     43,217
                                                                                       --------   --------
Cash, End of Period, Including Cash of Discontinued Operations of
   $0 and $10,360, respectively                                                        $ 10,908   $ 18,214
                                                                                       ========   ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
   Interest                                                                            $ 31,382   $ 27,334
   Income taxes, net of (refunds)                                                      $    304   $  5,424
</TABLE>

(1) Amount does not reconcile to face of balance sheet.

NOTE: Cash flow activity includes discontinued operations.

            See Notes to Condensed Consolidated Financial Statements.


                                        5

<PAGE>

                                  SALTON, INC.
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (UNAUDITED)

1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     In the opinion of management, the accompanying condensed consolidated
     balance sheets and related interim condensed consolidated statements of
     operations and cash flows include all adjustments, consisting only of
     normal recurring items, necessary for their fair presentation in conformity
     with principles, generally accepted in the United States of America.
     Preparing financial statements requires management to make estimates and
     assumptions that affect the reported amounts of assets, liabilities,
     revenue and expenses. Actual results may differ from these estimates. The
     Company's business is highly seasonal, with operating results varying from
     quarter to quarter. Interim results are not necessarily indicative of
     results for a full year. The information included in this Form 10-Q should
     be read in conjunction with Management's Discussion and Analysis and
     consolidated financial statements and notes thereto included in the Salton,
     Inc. 2005 Annual Report on Form 10-K.

2.   DISCONTINUED OPERATIONS

     On September 29, 2005, the Company completed the sale of its 52.6%
     ownership interest in Amalgamated Appliances Holdings Limited ("AMAP"), a
     leading distributor and marketer of small appliances and other products in
     South Africa, to a group of investors led by Interactive Capital
     (Proprietary) Limited. In the first quarter of fiscal 2006, the Company
     received proceeds, net of expenses, of approximately $81.0 million in
     connection with the transaction and recorded a gain of $27.8 million net of
     tax. Also, the Company licensed its George Foreman(R), Russell Hobbs(R) and
     Carmen(R) branded products to AMAP following the transaction.

     The following is a summary of financial results included within
     discontinued operations:

<TABLE>
<CAPTION>
                                                             THIRTEEN WEEKS      THIRTY-NINE WEEKS
                                                                 ENDED                 ENDED
                                                          -------------------   -------------------
                                                          APRIL 1,   APRIL 2,   APRIL 1,   APRIL 2,
                                                            2006       2005       2006       2005
                                                          --------   --------   --------   --------
<S>                                                       <C>        <C>        <C>        <C>
Net sales from discontinued operations                       $--      $50,206    $68,798    $223,935
                                                             ---      -------    -------    --------
Income from discontinued operations before income taxes       --      $ 2,043    $ 5,477    $ 14,200
Income taxes                                                  --          407      2,338       4,607
Minority Interest                                             --          748      1,404       4,381
                                                             ---      -------    -------    --------
Income from discontinued operations, net of tax              $--      $   888    $ 1,735    $  5,212
                                                             ===      =======    =======    ========
</TABLE>


                                        6

<PAGE>

     The following sets forth the carrying amounts of the major classes of
     assets and liabilities classified as assets and liabilities of discontinued
     operations at July 2, 2005, in the accompanying balance sheet:

<TABLE>
<CAPTION>
                                                    July 2, 2005
                                                    ------------
<S>                                                 <C>
ASSETS
Cash                                                  $ 35,934
Accounts receivable, net                                25,910
Inventories, net                                        38,349
Prepaid expenses and other current assets                1,038
Deferred tax asset                                         696
                                                      --------
Current assets of discontinued operations             $101,927
                                                      --------
Property, plant and equipment, net                    $  4,003
Tradenames                                               1,474
Other assets, net                                        2,260
                                                      --------
Noncurrent assets of discontinued operations          $  7,737
                                                      --------

LIABILITIES
Accounts payable                                      $ 30,955
Accrued expenses                                         9,334
Income taxes payable                                     7,042
                                                      --------
Current liabilities of discontinued operations        $ 47,331
                                                      --------
Other notes payable                                   $  1,462
                                                      --------
Noncurrent liabilities of discontinued operations     $  1,462
                                                      --------
</TABLE>

3.   SALE OF TABLETOP

     On September 16, 2005, the Company completed the sale of certain tabletop
     assets to Lifetime Brands, Inc. for approximately $14.2 million. With this
     transaction, Salton divested the Block(R) and Sasaki(R) brands, licenses to
     Calvin Klein(R) and Napa Style(TM) tabletop products and distribution of
     crystal products under the Atlantis(R) brand. In addition, the Company
     entered into a license with Lifetime Brands enabling it to market tabletop
     products under the Stiffel(R) brand.

4.   NEW ACCOUNTING PRONOUNCEMENTS

     In February 2006, the Financial Accounting Standards Board (FASB) issued
     Statement No. 155, "Accounting for Certain Hybrid Financial Instruments,"
     which amends Statement No. 133, "Accounting for Derivative Instruments and
     Hedging Activities" and Statement No. 140, "Accounting for Transfers and
     Servicing of Financial Assets and Extinguishments of Liabilities." This
     Statement permits fair value remeasurement for any hybrid financial
     instrument that contains an embedded derivative that otherwise would
     require bifurcation. In addition, it establishes a requirement to evaluate
     interests in securitized financial assets to identify interests that are
     freestanding derivatives or that are hybrid financial instruments that
     contain an embedded derivative requiring bifurcation. This Statement is
     effective for all financial instruments acquired, issued or subject to a
     new basis occurring after the beginning of an entity's first fiscal year
     that begins after September 15, 2006. The Company is currently evaluating
     the impact of this Statement on its financial statements.


                                        7

<PAGE>

     In February 2006, the FASB issued Staff Position FAS 123(R)-4,
     "Classification of Options and Similar Instruments as Employee Compensation
     That Allow for Cash Settlement upon the Occurrence of a Contingent Event,"
     which amends Statement No. 123(R), "Share-Based Payment." This Staff
     Position provides an exception to the general rule that options must be
     classified as liabilities if, under any circumstances, the entity can be
     required to settle the options in cash or other assets. Under this Staff
     Position, options issued as compensation to employees should be classified
     as liabilities only if (1) the cash settlement feature can be exercised
     only upon the occurrence of a contingent event outside of the employee's
     control, and (2) such event is deemed probable to occur. The guidance is
     effective upon initial adoption of Statement No. 123(R), or for the first
     reporting period beginning after the date of the Staff Position for an
     entity that adopted Statement No. 123(R) prior to the issuance of the Staff
     Position. The Company does not believe the adoption of this Statement has a
     material effect on its financial condition.

     In March 2006, the FASB issued Statement No. 156, "Accounting for Servicing
     of Financial Assets," which amends Statement No. 140, "Accounting for
     Transfers and Servicing of Financial Assets and Extinguishments of
     Liabilities." This statement provides guidance addressing the recognition
     and measurement of separately recognized servicing assets and liabilities,
     common with mortgage securitization activities. This Statement is effective
     for all separately recognized servicing assets and liabilities acquired or
     issued after the beginning of an entity's fiscal year that begins after
     September 15, 2006. The Company does not expect the adoption of this
     Statement to have a material effect on its financial condition, results of
     operations, or cash flows.

5.   SENIOR SECURED CREDIT FACILITY, LETTERS OF CREDIT AND LONG-TERM DEBT

     THIRD AMENDMENT TO SENIOR SECURED CREDIT FACILITY - On July 11, 2005, the
     Company entered into a third amendment to, and waiver under, the senior
     secured credit facility (the "Third Amendment") dated as of July 8, 2005.

     The Third Amendment permitted the transactions contemplated by the
     Company's private debt exchange offer, discussed below. The Third Amendment
     also, among other things: (1) waived the Company's failure to present its
     financial statements in accordance with GAAP as reported in the Company's
     previously announced reclassification of its outstanding preferred stock to
     a line outside of permanent equity; (2) amended the maturity date of the
     Company's senior secured credit facility from June 15, 2007 to December 31,
     2007; (3) changed the maximum size of the facility from $275.0 million to
     the difference between $287.0 million and the principal amount of the new
     second lien notes, if any, issued in connection with the exchange offer;
     and (4) revised prepayment provisions triggered by certain future
     incurrences of debt and sales of assets, which transactions would each
     require the prior written consent of the lenders under the Company's senior
     secured credit facility.

     DEBT EXCHANGE - On August 26, 2005, the Company completed a private debt
     exchange offer for the outstanding Senior Subordinated Notes due December
     15, 2005 ("2005 Notes") and the outstanding Senior Subordinated Notes due
     April 15, 2008 ("2008 Notes"). The Company accepted for exchange an
     aggregate of approximately $75.2 million in principal amount of 2005 Notes
     (approximately 60.0% of the then outstanding 2005 Notes) and approximately
     $90.1 million in principal amount of 2008 Notes (approximately 60.1% of the
     outstanding 2008 Notes) that were validly tendered in the debt exchange
     offer.


                                        8

<PAGE>

     Upon closing of the debt exchange offer, the Company issued an aggregate of
     approximately $99.2 million of senior second lien notes (the "Second Lien
     Notes"), 2,041,420 shares of its common stock, and 135,217 shares of its
     Series C preferred stock with a total liquidation preference of $13.5
     million. The Second Lien Notes mature on March 31, 2008 and bear interest
     at LIBOR plus 7%, payable in cash on January 15th and July 15th of each
     year, with the first payment due on January 15, 2006. The Series C
     preferred stock is generally non-dividend bearing and is mandatorily
     redeemable by the Company in cash at the liquidation amount on August 26,
     2010. The Company also granted certain registration rights for
     approximately 1,837,455 shares of Salton common stock and 121,707 shares of
     Series C preferred stock received by certain former holders of Subordinated
     Notes.

     The debt exchange has been accounted for as a troubled debt restructuring
     in accordance with Statement of Financial Accounting Standards ("SFAS") No.
     15. Under SFAS No. 15, the Second Lien Notes were recorded at their
     principal amount plus the total estimated future interest payments of $28.5
     million, of which $9.7 million is included in other current debt.

     The Series C preferred stock has been recorded at its fair value of $8.0
     million, using an effective interest rate of 11.06%. The associated
     discount is being accreted to interest expense through the maturity date in
     2010.

     In connection with the debt exchange offer, the Company obtained the
     consent of the holders of a majority of the outstanding 2005 Notes and a
     majority of the outstanding 2008 Notes to amend the indentures governing
     such Subordinated Notes to eliminate substantially all of the restrictive
     covenants and certain events of default contained in such indentures. The
     Company has entered into supplements to the indentures governing the 2005
     Notes and the 2008 Notes to reflect such amendments.

     On September 28, 2005, the Company completed a private exchange transaction
     in which the Company issued an additional $4.1 million of Second Lien Notes
     in exchange for $4.0 million of 2005 Notes. There were no common or
     preferred shares issued in connection with this exchange.

     FOURTH AMENDMENT TO SENIOR SECURED CREDIT FACILITY - On September 23, 2005,
     the Company entered into a fourth amendment to the senior secured credit
     facility (the "Fourth Amendment") dated as of September 22, 2005. Under the
     terms of the Fourth Amendment, the Company was required to utilize the
     proceeds received in connection with the sale of certain of its tabletop
     assets and the sale of the 52.6% ownership interest in AMAP to prepay the
     outstanding principal amount of the original $100.0 million term loan
     included therein. During the first quarter, the proceeds from the sale of
     the tabletop assets of $13.4 million had been applied against the term
     loan.

     On October 5, 2005, in accordance with the terms of the Fourth Amendment,
     the Company: 1) applied $80.8 million of proceeds from the sale of AMAP
     against the original term loan under the senior secured credit facility;
     and 2) borrowed $80.8 million under additional term loans under the senior
     secured credit facility. As required by the Fourth Amendment, the Company:
     1) used the first $24.9 million of borrowings under the additional term
     loan to repay outstanding revolving line of credit borrowings under the
     senior secured credit facility; and 2) placed $50.0 million of such
     borrowings into an interest-bearing cash collateral account which, subject
     to certain conditions, could be used to purchase, prepay or redeem the
     outstanding 2005 Notes. To the extent that the Company issued Second Lien
     Notes and/or equity in exchange for 2005 Notes prior to the maturity of the
     2005 Notes, the Company was permitted to obtain funds from the cash
     collateral account in an amount equal to the reduction of the principal
     amount of the 2005 Notes affected by such exchange. At December 31, 2005,
     all funds in the cash collateral account had been used to repurchase or
     retire 2005 Notes.


                                        9

<PAGE>

     The Fourth Amendment also modified the financial covenants that require a
     minimum EBITDA and consolidated fixed charge coverage ratio, and eliminated
     the foreign leverage ratio.

     FIFTH AMENDMENT TO SENIOR SECURED CREDIT FACILITY - On October 7, 2005, the
     Company entered into a fifth amendment to the senior secured credit
     facility (the "Fifth Amendment") dated as of October 7, 2005. The Fifth
     Amendment increased the letter of credit subfacility from $10.0 million to
     $15.0 million.

     SIXTH AMENDMENT TO AND WAIVER UNDER, SENIOR SECURED CREDIT FACILITY - On
     November 9, 2005, the Company entered into a sixth amendment to, and waiver
     under, the senior secured credit facility (the "Sixth Amendment") dated as
     of November 9, 2005.

     The Sixth Amendment, among other things: 1) waived the Company's compliance
     with the financial covenants for the twelve-month periods ending October 1,
     2005 and November 5, 2005; and 2) permitted the Company to borrow up to
     $5.0 million beyond availability for inventory purchases for the build-up
     during the 2005 Holiday season.

     SEVENTH AMENDMENT TO AND WAIVER UNDER, SENIOR SECURED CREDIT FACILITY - On
     February 8, 2006, the Company entered into a seventh amendment to, and
     waiver under, the senior secured credit facility (the "Seventh Amendment")
     dated as of February 8, 2006. The Seventh Amendment, among other things:
     (1) waived the Company's compliance with the consolidated fixed charge
     coverage ratio for the twelve-month period ended December 31, 2005; (2)
     extended from January 15, 2006 until March 15, 2006 the date by which the
     Company must deliver an executed landlord waiver for a warehouse located in
     Redlands, California; (3) restated the financial covenants for the
     twelve-month periods ending December 31, 2005 through June 30, 2007; (4)
     amended the definitions of "borrowing base" and EBITDA; and (5) eliminated
     the pledges of stock of foreign subsidiaries of the Company other than
     66-2/3% of the stock of Salton International CV.

     As of April 1, 2006, the Company had borrowed $100.0 million under the
     senior secured credit facility and had approximately $4.9 million available
     under this facility for future borrowings.

     Subsequent to April 1, 2006, the Company entered into an eighth amendment
     to and waiver under the senior secured credit facility, which amended the
     definition of "EBITDA" and extended the date for the Company to deliver an
     executed landlord waiver for a warehouse located in Redlands, California
     (see Note 17, "Subsequent Event"). The Company was in compliance with the
     financial covenants under the senior secured credit facility as of April 1,
     2006.

     RESTRICTED CASH - Under the cash dominion terms for the Revolving Line of
     Credit of the senior secured credit facility, the Company's cash
     collections are automatically forwarded to the creditor and applied against
     the loan balance. At April 1, 2006 this resulted in a negative loan balance
     of $1.4 million which the Company classified as restricted cash.

     SENIOR SUBORDINATED NOTES - During the second quarter, the Company
     repurchased $9.2 million in aggregate principal amount of the outstanding
     2005 Notes for $9.1 million and repaid the remaining $36.6 million of
     outstanding 2005 Notes upon maturity.

     LETTERS OF CREDIT - As of April 1, 2006 the Company had outstanding letters
     of credit of $0.5 million under the letter of credit subfacility of $15.0
     million.


                                       10

<PAGE>

     SALTON EUROPE FACILITY AGREEMENT - On December 23, 2005, Salton Holdings
     Limited, Salton Europe Limited and certain affiliates entered into a
     Facility Agreement with Burdale Financial Limited, as agent and security
     trustee, and a financial institution group as lender. The provisions of the
     Facility Agreement allow certain of the Company's European subsidiaries to
     borrow funds as needed in an aggregate amount not to exceed L61.0 million
     (approximately $106.1 million). The Facility Agreement matures on December
     22, 2008 and bears a variable interest rate of LIBOR plus 7% on term loans
     and LIBOR plus 2.75% on revolver loans, payable on the last business day of
     each month. At April 1, 2006, these rates for borrowings denominated in the
     Great Britain Pound were approximately 11.6% and 7.3% for term and revolver
     loans, respectively. The rate for revolver loan borrowings denominated in
     the U.S. Dollar was 7.6%.

     The Facility Agreement consists of a Revolving Credit Facility with an
     aggregate maximum availability of L50.0 million (approximately $87.0
     million) and two Term Loan Facilities of L5.0 million and L6.0 million
     (approximately $8.7 million and $10.4 million, respectively). The Company
     expects to use borrowings under these facilities to repay existing debt and
     for working capital purposes. As of April 1, 2006, under the Revolving
     Credit Facility, the Company had outstanding borrowings denominated in the
     Great Britain Pound of L6.1 million (approximately $10.6 million) and
     borrowings denominated in the U.S. Dollar of $6.1 million.

     The Facility Agreement contains a number of significant covenants that,
     among other things, restrict the ability of certain of the Company's
     European subsidiaries to dispose of assets, incur additional indebtedness,
     prepay other indebtedness, pay dividends, repurchase or redeem capital
     stock, enter into certain investments, make certain acquisitions, engage in
     mergers and consolidations, create liens, or engage in certain transactions
     with affiliates and otherwise restrict corporate and business activities.

     On December 20, 2005, the Company entered into a waiver and consent under
     its senior secured credit facility and second lien credit agreement. The
     waiver and consent, among other things: (1) consents to the Company's
     European subsidiaries entering into the Facility Agreement and performing
     their obligations thereunder; (2) waives certain covenants to the extent
     they would prohibit the Facility Agreement; and (3) waives until January
     15, 2006 the requirements that the Company deliver a fully executed
     landlord waiver with respect to one of the Company's warehouses. This
     requirement was subsequently amended by the Seventh Amendment to the senior
     secured credit facility.

6.   STOCK-BASED COMPENSATION

     STOCK OPTIONS - At April 1, 2006, the Company had stock-based employee
     compensation plans that are described more fully in Note 12 of the
     Company's 2005 Annual Report on Form 10-K. Effective July 3, 2005, the
     Company adopted SFAS No. 123(R), Share-Based Payment, which revises SFAS
     123 and supercedes ABP 25. SFAS No. 123(R) requires all share-based
     payments to employees to be recognized in the financial statements based on
     their fair value using an option-pricing model at the date of grant. The
     Company has elected to use the modified prospective method for adoption,
     which requires compensation expense to be recorded for all unvested stock
     options beginning in the first year of adoption. For all unvested options
     outstanding as of July 3, 2005, the previously measured but unrecognized
     compensation expense, based on the fair value at the original grant date,
     will be recognized over the remaining vesting period. For share-based
     payments granted subsequent to July 3, 2005, compensation expense, based on
     the fair value on the date of grant, will be recognized from the date of
     grant over the applicable vesting period. The Company uses the
     Black-Scholes option-pricing model to determine fair value of awards on the
     date of grant.


                                       11

<PAGE>

     For the thirteen weeks ended April 1, 2006, total stock-based employee
     compensation expense related to these plans was minimal. For the
     thirty-nine weeks ended April 1, 2006, total stock-based employee
     compensation expense related to these plans was $0.4 million, net of
     related income tax of $0 (see Note 15, Income Taxes). The impact on basic
     and diluted earnings per share for the thirteen weeks and thirty-nine weeks
     ended was de minimis and $(0.02), respectively. There is no compensation
     cost related to nonvested awards not yet recognized as of April 1, 2006.

     For periods prior to July 3, 2005, the Company used the intrinsic value in
     accordance with APB No. 25, "Accounting for Stock Issued to Employees," and
     related Interpretations. No stock-based compensation is reflected in net
     income, as no options granted under those plans had an exercise price less
     than the market value of the underlying common stock on the date of grant.
     The following table illustrates the effect on net income and earnings per
     share if the Company had applied the fair value recognition provisions of
     SFAS No. 123(R).

<TABLE>
<CAPTION>
                                                              13 WEEKS ENDED   39 WEEKS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)                          APRIL 2, 2005    APRIL 2, 2005
                                                               -------------    -------------
<S>                                                           <C>              <C>
Net income (loss) - as reported                                  $(22,529)        $(22,960)
Less: Total stock-based employee compensation expense
   determined under fair value based method for all awards,
   net of related taxes                                               376              948
                                                                 --------         --------
Net income (loss) - pro forma                                    $(22,905)        $(23,908)
                                                                 ========         ========
(Loss) per share - basic
   As reported                                                   $  (1.98)        $  (2.02)
   Pro forma                                                        (2.01)           (2.10)
(Loss) per share - diluted
   As reported                                                   $  (1.98)        $  (2.02)
   Pro forma                                                        (2.01)           (2.10)
</TABLE>

     Activity in the Company's stock option plans for the thirty-nine weeks
     ended April 1, 2006 was as follows:

<TABLE>
<CAPTION>
                                                 WEIGHTED
                                                  AVERAGE
                                       OPTIONS   EXERCISE
                                        (000)      PRICE
                                       -------   --------
<S>                                    <C>       <C>
Outstanding at beginning of year        2,603     $13.75
Granted                                    --
Exercised                                (105)      1.67
Expired or Canceled                      (321)     10.24
                                        -----
Outstanding at end of period            2,177     $14.85
                                        =====     ======
Options exercisable at end of period    2,177     $14.85
</TABLE>


                                       12

<PAGE>

     The following information summarizes the stock options outstanding at April
     1, 2006:

<TABLE>
<CAPTION>
                            OPTIONS OUTSTANDING                OPTIONS EXERCISABLE
                           ---------------------               ------------------
                                      WEIGHTED-
                                       AVERAGE     WEIGHTED-             WEIGHTED-
                                      REMAINING     AVERAGE               AVERAGE
                           SHARES    CONTRACTUAL    EXERCISE    SHARES    EXERCISE
RANGE OF EXERCISE PRICES    (000)   LIFE (YEARS)     PRICE       (000)     PRICE
------------------------   ------   ------------   ---------    ------   ---------
<S>                        <C>      <C>            <C>         <C>       <C>
$2.292 - $5.833                15       1.15           5.53         15       5.53
$6.333 - $10.60             1,123       5.63           8.83      1,123       8.83
$13.917-$17.50                654       3.97          14.81        654      14.81
$18.95-$37.00                 385       3.77          32.87        385      32.87
                            -----                                -----
$2.292 - $37.00             2,177       4.77         $14.85      2,177     $14.85
                            =====       ====         ======      =====     ======
</TABLE>

     STOCK GRANTS - As of April 1, 2006, the Company had granted certain
     employees common stock of the Company. A total of 192,250 shares were
     granted, of which 101,250 vest upon issuance. The remaining 91,000 shares
     have a two year vesting, with 50% vesting after one year and the remaining
     50% vesting after two years. The shares were not issued as of April 1,
     2006.

     The Company has recognized compensation cost for these stock grants at the
     fair value of the stock at the date of grant. For the thirteen weeks ended
     April 1, 2006, compensation expense related to these grants was $0.1
     million, net of related income tax of $0 (see Note 15, Income Taxes).
     Compensation cost related to nonvested awards not yet recognized is $0.1
     million and will be recognized over the requisite two year service period.

7.   NET INCOME (LOSS) PER COMMON AND COMMON EQUIVALENT SHARE

     Net income (loss) per share is computed in accordance with SFAS No. 128,
     "Earnings Per Share," and Emerging Issues Task Force Statement No. 03-6,
     "Participating Securities and the Two Class Method Under FASB Statement No.
     128, Earnings per Share." Under EITF 03-06, the Series A Preferred Stock
     are included in both basic and diluted net income (loss) per share using
     the "two-class" method, if the effect is dilutive. Diluted net income
     per share also includes dilutive common stock equivalents applying the
     treasury stock method for options and warrants.

     For the thirteen weeks ended April 1, 2006 and April 2, 2005, and for the
     thirty-nine weeks ended April 1, 2006 and April 2, 2005, the Company's
     Series A Preferred Stock was not dilutive and was excluded from the
     calculation of basic and diluted income (loss) per share. Additionally, the
     dilutive effect of the Company's outstanding common stock equivalents,
     options and warrants was excluded from the computation of diluted earnings
     per share because they had an anti-dilutive effect due to the Company's
     losses from continuing operations in these periods. Had the Company
     recognized net income from continuing operations in these periods, basic
     shares outstanding would have increased by 3,529,412 shares for the
     thirteen weeks and the thirty-nine weeks ended April 1, 2006 and April 2,
     2005 related to the Series A Preferred Stock under the two-class method;
     and diluted shares outstanding would have increased by 4,029,412 and
     3,841,795 shares for the thirteen weeks ended April 1, 2006 and April 2,
     2005, respectively, and 3,988,599 and 3,797,866 shares for the thirty-nine
     weeks ended April 1, 2006 and April 2, 2005, respectively, for the effect
     of the Series A Preferred Stock, common stock equivalents and outstanding
     options.


                                       13

<PAGE>

8.   DERIVATIVE FINANCIAL INSTRUMENTS

     The Company uses derivative financial instruments to manage foreign
     currency risk. The Company does not enter into derivative financial
     instruments for trading purposes. The Company uses forward exchange
     contracts to hedge foreign currency payables for periods consistent with
     the expected cash flow of the underlying transactions. The contracts
     generally mature within one year and are designed to limit exposure to
     exchange rate fluctuations, primarily related to the Great Britain pound
     and the Australian dollar to the U.S. dollar.

     All foreign exchange contracts related to continuing operations have been
     recorded in the consolidated balance sheets within accrued expenses at de
     minimis fair values at April 1, 2006 and July 2, 2005, respectively.
     Foreign exchange contracts with a fair value of $2.3 million, related to
     discontinued operations, have been included in the consolidated balance
     sheets as a reduction of current liabilities of discontinued operations at
     July 2, 2005. The change in the fair value of contracts related to
     continuing operations in the third quarter was insignificant. There was a
     de minimis amount at April 1, 2006 and $1.4 million at July 2, 2005
     recorded in accumulated other comprehensive income, net of tax, related to
     these contracts. The Company anticipates that all gains and losses deferred
     in accumulated other comprehensive income related to foreign exchange
     contracts will be reclassified into earnings within the next twelve months
     as the related inventories are sold. Contracts for the purchase of 5.0
     million U.S. dollars were entered into during the third quarter of fiscal
     2006. At April 1, 2006, the Company had foreign exchange forward contracts
     for the purchase of approximately 0.8 million U.S. dollars.

9.   CAPITAL STOCK

     Activity in the Company's capital accounts for the thirteen weeks and
     thirty-nine weeks ended April 1, 2006 was as follows:

<TABLE>
<CAPTION>
                                                      13 WEEKS ENDED                      39 WEEKS ENDED
                                                      APRIL 1, 2006                       APRIL 1, 2006
                                            ---------------------------------   ---------------------------------
                                               COMMON              ADDITIONAL      COMMON              ADDITIONAL
                                               SHARES     COMMON     PAID IN       SHARES     COMMON     PAID IN
(in thousands)                              OUTSTANDING    STOCK     CAPITAL    OUTSTANDING    STOCK     CAPITAL
                                            -----------   ------   ----------   -----------   ------   ----------
<S>                                         <C>           <C>      <C>          <C>           <C>      <C>
Balance, January 1, 2006 and July 3, 2005      13,523      $170      $62,363       11,376     $  148     $55,441
Stock issued - bond exchange, net of fees          --        --           --        2,042         21       6,273
Stock option exercise                              --        --           --          105          1         174
Foreman additional liability                       --        --           26           --         --         140
Share-based compensation cost                      --        --          148           --         --         509
Shares issued - Silverpoint fees                  171         2          298          171          2         298
                                               ------      ----      -------       ------     ------     -------
Balance, December 31, 2005                     13,694      $172      $62,835       13,694     $  172     $62,835
                                               ======      ====      =======       ======     ======     =======
</TABLE>

10.  COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

     For the thirteen weeks ended April 1, 2006 and April 2, 2005, components of
     other comprehensive income include foreign currency translation adjustments
     of $0.9 million and $(4.9) million, respectively, and derivative liability
     adjustments of a de minimis amount and $1.6 million, respectively. For the
     thirty-nine weeks ended April 1, 2006 and April 2, 2005, components of
     other comprehensive income include foreign currency translation adjustments
     of $(6.4) million and $(0.1) million, respectively and derivative liability
     adjustments of $(1.4) million and $5.4 million, respectively.


                                       14

<PAGE>

<TABLE>
<CAPTION>
                                                         13 WEEKS ENDED        39 WEEKS ENDED
                                                      -------------------   -------------------
                                                      APRIL 1,   APRIL 2,   APRIL 1,   APRIL 2,
(IN THOUSANDS)                                          2006       2005       2006       2005
                                                      --------   --------    -------   --------
<S>                                                   <C>        <C>        <C>        <C>
Net (Loss)                                            $(19,064)  $(22,529)  $(17,213)  $(22,960)
Other Comprehensive Income (Loss), net of tax of $3
   and $517, $(575) and $1,674, respectively               947     (3,272)    (7,767)     5,279
                                                      --------   --------   --------   --------
Comprehensive (Loss)                                  $(18,117)  $(25,801)  $(24,980)  $(17,681)
                                                      ========   ========   ========   ========
</TABLE>

     Accumulated other comprehensive income is comprised of the following:

<TABLE>
<CAPTION>
                                                                                      AS OF
                                                                               -------------------
                                                                               APRIL 1,    JULY 2,
(IN THOUSANDS)                                                                   2006       2005
                                                                               --------   --------
<S>                                                                            <C>        <C>
Minimum Pension Liability, net of tax of $(5,143) and $(5,207), respectively   $(10,781)  $(10,933)
Unrealized Loss on Derivative, net of tax of $(2) and $573, respectively             (4)     1,404
Foreign Currency Translation                                                     14,531     21,042
                                                                               --------   --------
                                                                               $  3,746   $ 11,513
                                                                               ========   ========
</TABLE>

11.  PENSION BENEFIT PLANS

     The components of net periodic pension cost are as follows:

<TABLE>
<CAPTION>
                                                          Domestic           Salton Europe             Total
                                                    -------------------   -------------------   -------------------
(In thousands)                                      4/1/2006   4/2/2005   4/1/2006   4/2/2005   4/1/2006   4/2/2005
                                                    --------   --------   --------   --------   --------   --------
<S>                                                 <C>        <C>        <C>        <C>        <C>        <C>
13 Weeks Ended:
   Service cost-benefits earned during the period    $  42      $  42      $  68      $  80      $ 110      $ 122
   Interest cost on projected benefit obligation       176        176        528        566        704        742
   Actuarial return on plan assets                    (157)      (156)      (453)      (439)      (610)      (595)
   Net amortization and deferral                        61         65        196        191        257        256
                                                     -----      -----      -----      -----      -----      -----
             Net pension cost                        $ 122      $ 127      $ 339      $ 398      $ 461      $ 525
                                                     =====      =====      =====      =====      =====      =====
</TABLE>

<TABLE>
<CAPTION>
                                                       Domestic           Salton Europe             Total
                                                 -------------------   -------------------   -------------------
(In thousands)                                   4/1/2006   4/2/2005   4/1/2006   4/2/2005   4/1/2006   4/2/2005
                                                 --------   --------   --------   --------   --------   --------
<S>                                              <C>        <C>        <C>        <C>        <C>        <C>
39 Weeks Ended:
Service cost-benefits earned during the period    $ 126      $ 126     $   206    $   236    $   332   $   362
Interest cost on projected benefit obligation       528        529       1,596      1,666      2,124     2,195
Actuarial return on plan assets                    (472)      (467)     (1,369)    (1,291)    (1,841)   (1,758)
Net amortization and deferral                       184        194         592        561        776       755
                                                  -----      -----     -------    -------    -------   -------
          Net pension cost                        $ 366      $ 382     $ 1,025    $ 1,172    $ 1,391   $ 1,554
                                                  =====      =====     =======    =======    =======   =======
</TABLE>

     The Company previously disclosed in its financial statements for the year
     ended July 2, 2005, that it expected to contribute $0.4 million to its
     domestic pension plans and $1.3 million to the Salton Europe pension plan
     in fiscal 2006. As of April 1, 2006, $0.3 million and $1.0 million of
     contributions have been made to the domestic and Europe plans,
     respectively.

12.  OPERATING SEGMENTS AND MAJOR CUSTOMERS

     Salton consists of a single operating segment which designs, sources,
     markets and distributes a diversified product mix for use in the home. The
     product mix consists of small kitchen and home appliances, electronics for
     the home, time products, lighting products, and personal care and wellness
     products. The Company believes this segmentation is appropriate based upon
     Management's operating decisions and performance assessment. Nearly all of
     the Company's products are consumer goods within the housewares market,
     procured through independent manufacturers, primarily in the Far East.


                                       15

<PAGE>

     Salton's products are distributed through similar distribution channels and
     customer base using the marketing efforts of its Global Marketing Team.

     Major Customers - For the thirteen week periods ended April 1, 2006 and
     April 2, 2005, no one customer accounted for more than 10.0% of net sales
     from continuing operations. For the thirty-nine week periods ended April 1,
     2006 and April 2, 2005, one customer accounted for 10.4% and 13.1% of net
     sales from continuing operations, respectively.

13.  LEGAL PROCEEDINGS

     SECURITIES CLASS ACTION LAWSUITS

     In May 2004, two stockholder lawsuits, named Mariss Partners, LLP v.
     Salton, Inc., Leonhard Dreimann and David M. Mulder, and Warren Beeler v.
     Salton, Inc., Leonhard Dreimann and David Mulder, were filed in the United
     States District Court for the Northern District of Illinois against the
     Company and certain Salton executives. The complaints allege that the
     defendants violated the federal securities laws, specifically Sections
     10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of
     the Securities and Exchange Commission, by making certain alleged false and
     misleading statements. The plaintiffs sought unspecified damages on behalf
     of a purported class of purchasers of the Company's securities during the
     period from November 11, 2002 through May 11, 2004. On March 17, 2006, the
     Court approved a settlement of the lawsuits and granted a final order of
     dismissal and judgment of the lawsuits. Under the terms of the settlement,
     the Company's insurers paid $2.5 million and the remaining $500,000 of the
     settlement fund is payable no later than July 16, 2007. The Company accrued
     the future payment in other long-term liabilities at the present value of
     $430,000 as of April 1, 2006.

     PRODUCT LIABILITY

     On or about October 27, 2004, a lawsuit entitled DiNatale vs. Salton was
     filed in the New York State Supreme Court against the Company. The
     plaintiffs, who seek unspecified damages, allege that they were injured by
     water contaminated with lead taken from a tea kettle sold by the Company
     under its Russell Hobbs brand. The plaintiffs' attorney had been seeking to
     convert the lawsuit into a class action suit; no class action suit has been
     filed to date. The manufacturer of the product and its insurer are
     defending this lawsuit. The Company's attorneys and its insurers are
     cooperating in the defense of the lawsuit.

     JAY KORDICH V. SALTON, INC.

     On October 19, 2005, a lawsuit named Jay Kordich v. Salton, Inc. was filed
     in the United States District Court for the Southern District of
     California. The plaintiff in this action is seeking a judicial
     determination that a covenant not to compete in an agreement between him
     and Salton is invalid and unenforceable against him plus attorneys' fees
     and costs. Salton believes that the lawsuit is without merit.

     The outcome of the foregoing legal matters cannot be predicted with
     certainty, however Salton does not believe that these actions will have a
     material adverse affect on its business, financial condition or results of
     operations. Therefore, no amounts have been accrued for such claims.


                                       16

<PAGE>

     ENVIRONMENTAL

     The Company has accrued approximately $0.2 million for the anticipated
     costs of environmental remediation at four of its current and previously
     owned sites. Although such costs could exceed that amount, Salton believes
     any such excess will not have a material adverse effect on the financial
     condition or annual results of operations of the Company.

     OTHER

     The Company is a party to various other actions and proceedings incident to
     its normal business operations. The Company believes that the outcome of
     any such litigation will not have a material adverse effect on its
     business, financial condition or results of operations. The Company also
     has product liability and general liability insurance policies in amounts
     believed to be reasonable given its current level of business. Although
     historically the Company has not had to pay any material product liability
     claims, it is conceivable that the Company could incur claims for which we
     are not insured.

14.  RESTRUCTURING COSTS

     As a result of the U.S. restructuring plan, the Company incurred $0.1
     million of restructuring costs during the third quarter of fiscal 2006,
     consisting primarily of severance charges. During the same quarter of
     fiscal 2005, restructuring costs of $0.3 million related to closure of
     certain distribution facilities and consulting services were incurred.

     For the year-to-date fiscal 2006, aggregate restructuring charges of $0.2
     million primarily relate to warehouse rationalization and severance costs.
     For the same period of fiscal 2005, restructuring costs of $1.1 million
     consist primarily of consulting, severance and legal costs associated with
     headcount reduction in the U.S. and the closure of certain distribution
     facilities.

15.  INCOME TAXES

     Deferred tax assets are recognized for deductible temporary differences,
     net operating loss carry-forwards, and credit carry-forwards if it is more
     likely than not that the tax benefit will be realized. To the extent a
     deferred tax asset cannot be recognized under the preceding criteria, a
     valuation allowance has been established. This assessment is based on an
     analysis of historical and prospective earnings that will allow the Company
     to utilize the deferred tax asset. On December 31, 2005, the Company
     recorded a valuation allowance of $26.6 million against its U.S. deferred
     tax asset balance and increased its valuation allowance on certain foreign
     entity deferred tax balances. The need for the additional valuation
     allowance recorded during the quarter was based primarily as a result of
     reduced earnings in the first half of fiscal year 2006 and the effect that
     this reduction will have on the Company's earnings for fiscal year 2006.
     This non-cash charge does not limit the Company's ability to realize future
     tax benefits associated with its net operating loss carryforwards to the
     extent that future profits result in taxable income during the carryforward
     period. The net operating loss carryforwards primarily expire beginning in
     fiscal year 2009 through fiscal year 2025.


                                       17

<PAGE>

16.  SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

     The payment obligations of the Company under the senior secured revolving
     credit facility and the senior subordinated notes are guaranteed by certain
     of the Company's wholly-owned domestic subsidiaries (Subsidiary
     Guarantors). Such guarantees are full, unconditional and joint and several.
     Separate financial statements of the Subsidiary Guarantors are not
     presented because the Company's management has determined that they would
     not be material to investors. The following supplemental financial
     information sets forth, on a combined basis, balance sheets, statements of
     income and statements of cash flows for Salton, Inc. (Parent), the
     Guarantor Subsidiaries, and the Company's Non-Guarantor subsidiaries (Other
     Subsidiaries).


                                       18

<PAGE>

CONSOLIDATING BALANCE SHEET AS OF APRIL 1, 2006
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           GUARANTOR
                                                               PARENT    SUBSIDIARIES   ELIMINATIONS     TOTAL
                                                              --------   ------------   ------------   --------
<S>                                                           <C>        <C>            <C>            <C>
                           ASSETS
Current Assets:
   Cash                                                       $     --     $    257      $      --     $    257
   Compensating balances on deposits                                --           --             --           --
   Restricted Cash                                                  --        1,408             --        1,408
   Accounts receivable, net of allowances                          173       77,742             --       77,915
   Inventories                                                   7,816       93,675        (14,897)      86,594
   Prepaid expenses and other current assets                     1,786        2,865             --        4,651
   Intercompany                                                 24,457      (62,096)           (92)     (37,731)
Prepaid income taxes                                             1,344           --             --        1,344
   Deferred income taxes                                            --           --             --           --
                                                              --------     --------      ---------     --------
      Total Current Assets                                      35,576      113,851        (14,989)     134,438
Property, Plant and Equipment, net of $68,973
   accumulated depreciation                                      5,087        8,311             --       13,398
Investments in Subsidiaries                                    348,948       53,760       (402,708)          --
Tradenames                                                     133,092       10,313             --      143,405
Non-current deferred tax asset                                      --           --             --           --
Other Assets                                                     7,921          782             --        8,703
                                                              --------     --------      ---------     --------
Total Assets                                                  $530,624     $187,017      $(417,697)    $299,944
                                                              ========     ========      =========     ========

            LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Revolving line of credit and other current debt
      including accrued interest of $9,721                    $ 10,971     $     34      $      --     $ 11,005
   Accounts payable                                              6,637        3,940             80       10,657
   Accrued expenses                                              4,241        7,032             --       11,273
   Accrued interest                                              3,618        2,629             --        6,247
   Income taxes payable                                            496           --             --          496
                                                              --------     --------      ---------     --------
      Total current liabilities                                 25,963       13,635             80       39,678
Non-current Deferred Income Taxes                                8,090           --             --        8,090
Senior subordinated notes due 2008, including an adjustment
   of $2,328 to the carrying value related to
   interest rate swap agreements                                61,756           --             --       61,756
Senior secured notes                                           116,407           --             --      116,407
Series C Preferred Stock                                         8,646           --             --        8,646
Long term debt revolving credit agreement                           --      100,000             --      100,000
Term loan and other notes payable                                   --           45             --           45
Other Long Term Liability                                        1,274        3,613             --        4,887
                                                              --------     --------      ---------     --------
      Total liabilities                                        222,136      117,293             80      339,509
Convertible Preferred Stock                                     40,000           --             --       40,000
Stockholders' Equity                                           268,488       69,724       (417,777)     (79,565)
                                                              --------     --------      ---------     --------
Total Liabilities and Stockholders' Equity                    $530,624     $187,017      $(417,697)     299,944
                                                              ========     ========      =========     ========

<CAPTION>
                                                                  OTHER      CONSOLIDATED   CONSOLIDATED
                                                              SUBSIDIARIES   ELIMINATIONS      TOTALS
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
                           ASSETS
Current Assets:
   Cash                                                         $ 10,651       $     --       $ 10,908
   Compensating balances on deposits                              39,265             --         39,265
   Restricted Cash                                                    --                         1,408
   Accounts receivable, net of allowances                         43,129             --        121,044
   Inventories                                                    68,154             --        154,748
   Prepaid expenses and other current assets                      11,420             --         16,071
   Intercompany                                                   37,731             --             --
Prepaid income taxes                                                  --             --          1,344
   Deferred income taxes                                           6,043             --          6,043
                                                                --------       --------       --------
      Total Current Assets                                       216,393             --        350,831
Property, Plant and Equipment, net of $68,973
   accumulated depreciation                                       28,631             --         42,029
Investments in Subsidiaries                                           --             --             --
Tradenames                                                        35,764             --        179,169
Non-current deferred tax asset                                     2,488             --          2,488
Other Assets                                                       5,486             --         14,189
                                                                --------       --------       --------
Total Assets                                                    $288,762       $     --       $588,706
                                                                ========       ========       ========

            LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Revolving line of credit and other current debt
      including accrued interest of $9,721                      $ 19,210      $      --       $ 30,215
   Accounts payable                                               74,351             --         85,008
   Accrued expenses                                               17,163             --         28,436
   Accrued interest                                                   --             --          6,247
   Income taxes payable                                            1,199             --          1,695
                                                                --------       --------       --------
      Total current liabilities                                  111,923             --        151,601
Non-current Deferred Income Taxes                                  3,065             --         11,155
Senior subordinated notes due 2008, including an adjustment
   of $2,328 to the carrying value related to
   interest rate swap agreements                                      --             --         61,756
Senior secured notes                                                  --             --        116,407
Series C Preferred Stock                                              --             --          8,646
Long term debt revolving credit agreement                             --                       100,000
Term loan and other notes payable                                 17,200             --         17,245
Other Long Term Liability                                         14,643             --         19,530
                                                                --------       --------       --------
      Total liabilities                                          146,831             --        486,340
Convertible Preferred Stock                                           --             --         40,000
Stockholders' Equity                                             141,931             --         62,366
                                                                --------       --------       --------
Total Liabilities and Stockholders' Equity                      $288,762       $     --       $588,706
                                                                ========       ========       ========
</TABLE>


                                       19

<PAGE>

CONSOLIDATING BALANCE SHEET AS OF JULY 2, 2005
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                           GUARANTOR
                                                               PARENT    SUBSIDIARIES   ELIMINATIONS     TOTAL
                                                              --------   ------------   ------------   --------
<S>                                                           <C>        <C>            <C>            <C>
                           ASSETS
Current Assets:
   Cash                                                       $     --     $    127      $      --     $    127
   Compensating balances on deposit                                 --           --             --           --
   Accounts receivable, net of allowances                          393       87,339             --       87,732
   Inventories                                                   2,761      141,573        (22,873)     121,461
   Assets held for sale                                             --          998             --          998
   Prepaid expenses and other current assets                     4,432        2,699             --        7,131
   Intercompany                                                 98,194      (62,146)          (240)      35,808
   Deferred income taxes                                        (3,942)       5,344             --        1,402
   Current assets of discontinued operations                        --           --             --           --
                                                              --------     --------      ---------     --------
      Total current assets                                     101,838      175,934        (23,113)     254,659
Property, Plant and Equipment, net of $60,278
   accumulated depreciation                                      7,075       10,538             --       17,613
Investments in Subsidiaries                                    362,149       53,699       (415,848)          --
Tradenames                                                     133,317       10,313             --      143,630
Non-current deferred tax asset                                      --           --         45,618       45,618
Other Assets                                                     8,223          834             --        9,057
Non-current assets of discontinued operations                       --           --             --           --
                                                              --------     --------      ---------     --------
Total Assets                                                  $612,602     $251,318      $(393,343)    $470,577
                                                              ========     ========      =========     ========

           LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Revolving line of credit and other current debt            $     --     $ 47,748      $      --     $ 47,748
   Senior subordinated notes - current                          45,990           --             --       45,990
   Accounts payable                                              2,934        5,349            (68)       8,215
   Accrued expenses                                              5,974        6,812             --       12,786
   Accrued interest                                             11,535        2,054             --       13,589
   Income taxes payable                                          3,937           --             --        3,937
   Current liabilities of discontinued operations                   --           --             --           --
                                                              --------     --------      ---------     --------
      Total current liabilities                                 70,370       61,963            (68)     132,265
Non-current Deferred Income Taxes                              (42,985)      (2,633)        45,618           --
Senior subordinated notes due 2005                              79,010           --             --       79,010
Senior subordinated notes due 2008, including an adjustment
   of $7,082 to the carrying value related to
   interest rate swap agreements                               156,387           --             --      156,387
Term loan and other notes payable                                   --      100,050             --      100,050
Other long term liabilities                                      1,995        3,588             --        5,583
Non-curent liabilities of discontinued opeartions                   --           --             --           --
                                                              --------     --------      ---------     --------
      Total liabilities                                        264,777      162,968         45,550      473,295
Minority Interest in discontinued operations                        --           --             --           --
Convertible Preferred Stock                                     40,000           --             --       40,000
Commitmetns and contingecies
Stockholders' Equity                                           307,825       88,350       (438,893)     (42,718)
                                                              --------     --------      ---------     --------
Total Liabilities and Stockholders' Equity                    $612,602     $251,318      $(393,343)    $470,577
                                                              ========     ========      =========     ========

<CAPTION>
                                                                  OTHER      CONSOLIDATED   CONSOLIDATED
                                                              SUBSIDIARIES   ELIMINATIONS      TOTALS
                                                              ------------   ------------   ------------
<S>                                                           <C>            <C>            <C>
                           ASSETS
Current Assets:
   Cash                                                         $ 14,730          $--         $ 14,857
   Compensating balances on deposit                               34,355           --           34,355
   Accounts receivable, net of allowances                         52,447           --          140,179
   Inventories                                                    73,604           --          195,065
   Assets held for sale                                               --           --              998
   Prepaid expenses and other current assets                       8,917           --           16,048
   Intercompany                                                  (35,808)          --               --
   Deferred income taxes                                           4,122           --            5,524
   Current assets of discontinued operations                     101,927           --          101,927
                                                                --------          ---         --------
      Total current assets                                       254,294           --          508,953
Property, Plant and Equipment, net of $60,278
   accumulated depreciation                                       32,614           --           50,227
Investments in Subsidiaries                                           --           --               --
Tradenames                                                        36,411           --          180,041
Non-current deferred tax asset                                     3,657           --           49,275
Other Assets                                                       2,498           --           11,555
Non-current assets of discontinued operations                      7,737           --            7,737
                                                                --------          ---         --------
Total Assets                                                    $337,211          $--         $807,788
                                                                ========          ===         ========

            LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
   Revolving line of credit and other current debt              $ 22,982          $--         $ 70,730
   Senior subordinated notes - current                                --           --           45,990
   Accounts payable                                               78,039           --           86,254
   Accrued expenses                                               22,016           --           34,802
   Accrued interest                                                   --           --           13,589
   Income taxes payable                                              438           --            4,375
   Current liabilities of discontinued operations                 47,331                        47,331
                                                                --------          ---         --------
      Total current liabilities                                  170,806           --          303,071
Non-current Deferred Income Taxes                                  3,334           --            3,334
Senior subordinated notes due 2005                                    --           --           79,010
Senior subordinated notes due 2008, including an adjustment
   of $7,082 to the carrying value related to
   interest rate swap agreements                                      --           --          156,387
Term loan and other notes payable                                     --           --          100,050
Other long term liabilities                                       14,700           --           20,283
Non-curent liabilities of discontinued opeartions                  1,462           --            1,462
                                                                --------          ---         --------
      Total liabilities                                          190,302           --          663,597
Minority Interest in discontinued operations                      24,263           --           24,263
Convertible Preferred Stock                                           --           --           40,000
Commitmetns and contingecies
Stockholders' Equity                                             122,646           --           79,928
                                                                --------          ---         --------
Total Liabilities and Stockholders' Equity                      $337,211          $--         $807,788
                                                                ========          ===         ========
</TABLE>


                                       20

<PAGE>

CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED APRIL 1, 2006
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           GUARANTOR                              OTHER    CONSOLIDATED CONSOLIDATED
                                                  PARENT  SUBSIDIARIES ELIMINATIONS   TOTAL   SUBSIDIARIES ELIMINATIONS    TOTALS
                                                --------- ------------ ------------ --------  ------------ ------------ ------------
<S>                                             <C>       <C>          <C>          <C>       <C>          <C>          <C>

Net Sales                                       $ 41,946    $ 85,465     $(54,789)  $72,622     $73,218      $(18,183)    $127,657
Cost of Goods Sold                                32,703      74,446      (54,778)   52,371      55,628       (16,565)      91,434
Distribution Expenses                                 --       6,163           --     6,163       4,211            --       10,374
                                                --------    --------     --------   -------     -------      --------     --------
   Gross Profit                                    9,243       4,856          (11)   14,088      13,379        (1,618)      25,849
Selling, General and Administrative expenses      10,038      11,599           --    21,637      17,003        (1,618)      37,022
Restructuring Costs                                   --          80           --        80          --            --           80
                                                --------    --------     --------   -------     -------      --------     --------
   Operating (Loss) Income                          (795)     (6,823)         (11)   (7,629)     (3,624)           --      (11,253)
Interest Expense, Net                            (13,524)      3,553           --    (9,971)      1,671        16,651        8,351
Income (Loss) from Subsidiary                     15,115         (14)     (15,101)       --          --            --           --
                                                --------    --------     --------   -------     -------      --------     --------
   (Loss) from Continuing Operations
       Before Income Taxes                        (2,386)    (10,362)      15,090     2,342      (5,295)      (16,651)     (19,604)
Income Taxes                                          --          --           --        --        (540)           --         (540)
                                                --------    --------     --------   -------     -------      --------     --------
   Net (Loss) Income from Continuing Operations   (2,386)    (10,362)      15,090     2,342      (4,755)      (16,651)     (19,064)
Income from Discontinued Operations, Net of Tax       --          --           --                                  --           --
Gain on Sale of Discontinued Operations, Net of
   Tax                                                --          --           --        --          --            --           --
                                                --------    --------     --------   -------     -------      --------     --------
Net (Loss)                                      $ (2,386)   $(10,362)    $ 15,090   $ 2,342     $(4,755)     $(16,651)    $(19,064)
                                                ========    ========     ========   =======     =======      ========     ========
</TABLE>

CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED APRIL 2, 2005
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           GUARANTOR                              OTHER    CONSOLIDATED CONSOLIDATED
                                                  PARENT  SUBSIDIARIES ELIMINATIONS   TOTAL   SUBSIDIARIES ELIMINATIONS    TOTALS
                                                --------- ------------ ------------ --------  ------------ ------------ ------------
<S>                                             <C>       <C>          <C>          <C>       <C>          <C>          <C>
Net Sales                                       $ 55,700    $124,772     $(87,092)  $ 93,380    $109,944     $(50,165)  $153,159
Cost of Goods Sold                                44,646     110,428      (85,555)    69,519      88,474      (49,558)   108,435
Distribution Expenses                                 --       8,601           --      8,601       4,730           --     13,331
                                                --------    --------     --------   --------    --------     --------   --------
   Gross Profit                                   11,054       5,743       (1,537)    15,260      16,740         (607)    31,393
Selling, General and Administrative expenses      11,139      14,301           --     25,440      26,149         (607)    50,982
Restructing Costs                                    173         114           --        287          --           --        287
                                                --------    --------     --------   --------    --------     --------   --------
   Operating(Loss) Income                           (258)     (8,672)      (1,537)   (10,467)     (9,409)          --    (19,876)
Interest Expense, Net                              7,254       3,792           --     11,046       1,809           --     12,855
Equity in Earnings of Subsidiaries                19,066          (9)     (19,057)        --          --           --         --
                                                --------    --------     --------   --------    --------     --------   --------
   (Loss) Income from Continuing Operations      (26,578)    (12,455)      17,520    (21,513)    (11,218)          --    (32,731)
Income Tax (Benefit) Expense                      (5,594)         --           --     (5,594)     (3,720)          --     (9,314)
                                                --------    --------     --------   --------    --------     --------   --------
Net Income (Loss) from Continuing Operations     (20,984)    (12,455)      17,520    (15,919)     (7,498)          --    (23,417)
Income from Discontinued Operations, Net of Tax       --          --           --         --         888           --        888
                                                --------    --------     --------   --------    --------     --------   --------
   Net Income (Loss)                            $(20,984)   $(12,455)    $ 17,520   $(15,919)   $ (6,610)    $     --   $(22,529)
                                                ========    ========     ========   ========    ========     ========   ========
</TABLE>


                                       21

<PAGE>

CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THIRTY-NINE WEEKS ENDED APRIL 1,
2006
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           GUARANTOR                              OTHER    CONSOLIDATED CONSOLIDATED
                                                  PARENT  SUBSIDIARIES ELIMINATIONS   TOTAL   SUBSIDIARIES ELIMINATIONS    TOTALS
                                                --------- ------------ ------------ --------  ------------ ------------ ------------
<S>                                             <C>       <C>          <C>          <C>       <C>          <C>          <C>
Net Sales                                       $125,886    $374,637    $(199,698)  $300,825    $313,301    $(107,665)    $506,461
Cost of Goods Sold                               100,954     323,110     (207,674)   216,390     239,470     (102,737)     353,123
Distribution Expenses                                 --      19,840           --     19,840      13,749           --       33,589
                                                --------    --------    ---------   --------    --------    ---------     --------
   Gross Profit                                   24,932      31,687        7,976     64,595      60,082       (4,928)     119,749
Selling, General and Administrative expenses      30,814      38,313           --     69,127      66,813       (4,928)     131,012
Restructuring Costs                                   27         210           --        237          --           --          237
                                                --------    --------    ---------   --------    --------    ---------     --------
   Operating (Loss)                               (5,909)     (6,836)       7,976     (4,769)     (6,731)          --      (11,500)
Interest Expense, Net                             (4,160)     11,851           --      7,691       4,254       16,651       28,596
Gain-Early settlement of debt                    (21,720)         --           --    (21,720)         --           --      (21,720)
Income (Loss) from Subsidiary                    (21,713)        (61)      21,774         --          --           --           --
                                                --------    --------    ---------   --------    --------    ---------     --------
(Loss) from Continuing Operations
      Before Income Taxes                         41,684     (18,626)     (13,798)     9,260     (10,985)     (16,651)     (18,376)
Income Taxes                                      28,839          --           --     28,839        (451)          --       28,388
                                                --------    --------    ---------   --------    --------    ---------     --------
   Net (Loss) from Continuing Operations          12,845     (18,626)     (13,798)   (19,579)    (10,534)     (16,651)     (46,764)
Income from Discontinued Operations, Net of Tax       --          --           --                  1,735           --        1,735
Gain on Sale of Discontinued Operations, Net of
   Tax                                           (21,323)         --           --    (21,323)     49,139           --       27,816
                                                --------    --------    ---------   --------    --------    ---------     --------
Net (Loss)                                      $ (8,478)   $(18,626)   $ (13,798)  $(40,902)   $ 40,340    $ (16,651)    $(17,213)
                                                ========    ========    =========   ========    ========    =========     ========
</TABLE>

CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THIRTY-NINE WEEKS ENDED APRIL 2,
2005
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                           GUARANTOR                              OTHER    CONSOLIDATED CONSOLIDATED
                                                  PARENT  SUBSIDIARIES ELIMINATIONS   TOTAL   SUBSIDIARIES ELIMINATIONS    TOTALS
                                                --------- ------------ ------------ --------  ------------ ------------ ------------
<S>                                             <C>       <C>          <C>          <C>       <C>          <C>          <C>
Net Sales                                       $174,077    $466,239    $(279,066)  $361,250    $479,385    $(210,094)    $630,541
Cost of Goods Sold                               141,134     396,695     (282,168)   255,661     368,961     (199,820)     424,802
Distribution Expenses                                 --      27,365           --     27,365      15,475           --       42,840
                                                --------    --------    ---------   --------    --------    ---------     --------
   Gross Profit                                   32,943      42,179        3,102     78,224      94,949      (10,274)     162,899
Selling, General and Administrative expenses      42,123      36,968           --     79,091      94,400      (10,274)     163,217
Restructuring Costs                                  527         550           --      1,077          --           --        1,077
                                                --------    --------    ---------   --------    --------    ---------     --------
   Operating Income                               (9,707)      4,661        3,102     (1,944)        549           --       (1,395)
Interest Expense, net                             21,589      11,312           --     32,901       5,704           --       38,605
Income (Loss) from Subsidiary                      4,123         (36)      (4,087)        --          --           --           --
                                                --------    --------    ---------   --------    --------    ---------     --------
   (Loss) Income from Continuing Operations      (35,419)     (6,615)       7,189    (34,845)     (5,155)          --      (40,000)
      Before Income Taxes
Income Tax (Benefit) Expense                      (9,394)         --           --     (9,394)     (2,434)          --      (11,828)
Minority Interest, net of tax                         --          --           --         --          --           --           --
                                                --------    --------    ---------   --------    --------    ---------     --------
   Net Income (Loss) from Continuing Operations  (26,025)     (6,615)       7,189    (25,451)     (2,721)          --      (28,172)
Income from Discontinued Operations, Net of Tax       --          --           --         --       5,212                     5,212
                                                --------    --------    ---------   --------    --------    ---------     --------
Net Income (Loss)                               $(26,025)   $ (6,615)   $   7,189   $(25,451)   $  2,491    $      --     $(22,960)
                                                ========    ========    =========   ========    ========    =========     ========
</TABLE>


                                       22

<PAGE>

CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THIRTY-NINE WEEKS ENDED APRIL 1,
2006
(IN THOUSANDS)

<TABLE>
                                                       GUARANTOR                                OTHER     CONSOLIDATED  CONSOLIDATED
                                            PARENT   SUBSIDIARIES  ELIMINATIONS    TOTAL    SUBSIDIARIES  ELIMINATIONS     TOTALS
                                           --------  ------------  ------------  ---------  ------------  ------------  ------------
<S>                                        <C>       <C>           <C>           <C>        <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net (loss)                              $ (8,478)   $(18,626)     $(13,798)   $ (40,902)   $ 40,340      $(16,651)      (17,213)
   Adjustments to reconcile net (loss) to
      net cash from operating activities:
      Imputed interest on notes payable
         and other non-cash items              (257)         --            --         (257)         65            --          (192)
      Deferred income tax provision          25,809       7,977            --       33,786        (588)                     33,198
      Stock based compensation expense          509          --            --          509          --            --           509
      Depreciation and amortization           5,715       1,855            --        7,570       7,653                      15,223
      Bad debt (recovery) provision              --           9            --            9         169            --           178
      Gain on sale of discontinued
         operations                          21,323          --            --       21,323     (49,139)                    (27,816)
      (Gain) Loss on disposal of property
         and equipment                           --        (708)           --         (708)        (21)           --          (729)
      Inventory valuation adjustment             --       1,342            --        1,342      (1,020)                        322
      Impairment loss on intangible asset        --         205                        205          --            --           205
      Foreign currency gains                     --         150            --          150        (168)           --           (18)
      Gain -early settlement of debt        (21,720)         --            --      (21,720)         --            --       (21,720)
      Equity in net income of
         unconsolidated affiliate/
         consolidated subsidiaries          (21,713)        (61)       21,774           --          --            --            --
      Minority interest                          --          --            --           --       1,404            --         1,404
      Changes in assets and liabilities:
         Accounts receivable                    221       9,437            --        9,658      (7,892)           --         1,766
         Inventories                         (5,054)     33,861        (7,976)      20,831     (15,178)           --         5,653
         Prepaid expenses and other
            current assets                      395        (420)           --          (25)     (3,164)           --        (3,189)
         Other non-current assets                --         (10)           --          (10)      1,771                       1,761
         Accounts payable                     3,852      (1,412)           --        2,440       5,231            --         7,671
         Income taxes payable                (4,784)         --            --       (4,784)      1,858            --        (2,926)
         Accrued expenses                    66,330         507            --       66,837     (73,778)           --        (6,941)
                                           --------    --------      --------    ---------    --------      --------      --------
            NET CASH FROM OPERATING
               ACTIVITIES                    62,148      34,106            --       96,254     (92,457)      (16,651)      (12,854)
                                           --------    --------      --------    ---------    --------      --------      --------
CASH FLOWS FROM INVESTING ACTIVITIES:
         Capital expenditures                  (504)        (81)           --         (585)     (3,415)           --        (4,000)
         Proceeds from sale of assets and
            investments                          --      15,232            --       15,232         115            --        15,347
         Proceeds from sale of
            discontinued operations, net
            of $10,998 cash sold                 --          --            --           --      69,938            --        69,938
         Increase in restricted cash                     (1,408)                    (1,408)         --                      (1,408)
         Acquisition of business, net of
            cash acquired                        --          --            --           --      (4,525)           --        (4,525)
         Additional payment for
            acquisition of tradenames          (205)                       --         (205)         --            --          (205)
         Increase in compensating
            balances on deposit                  --          --            --           --      (4,910)           --        (4,910)
                                           --------    --------      --------    ---------    --------      --------      --------
            NET CASH FROM INVESTING
               ACTIVITIES                      (709)     13,743            --       13,034      57,203            --        70,237
                                           --------    --------      --------    ---------    --------      --------      --------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Net (repayments) proceeds from
         revolving line of credit and
         other short term debt                   --     (47,551)           --      (47,551)      4,481            --       (43,070)
      Proceeds from new credit agreement         --          --            --           --      48,870            --        48,870
      Repayment of terminated credit
         agreement                               --          --            --           --     (39,675)           --       (39,675)
      Repayment of long-term debt           (50,126)       (168)           --      (50,294)       (140)           --       (50,434)
      Costs associated with refinancing     (11,488)         --            --      (11,488)     (3,178)           --       (14,666)
      Intercompany dividend                      --          --            --           --     (16,651)       16,651            --
      Common stock issued                       175          --            --          175                        --           175
                                           --------    --------      --------    ---------    --------      --------      --------
      NET CASH FROM FINANCING ACTIVITIES    (61,439)    (47,719)           --     (109,158)     (6,293)       16,651       (98,800)
                                           --------    --------      --------    ---------    --------      --------      --------
Effect of Exchange Rate Changes on Cash          --          --            --           --       1,534            --         1,534
                                           --------    --------      --------    ---------    --------      --------      --------
Decrease in Cash                                 --         130            --          130     (40,013)           --       (39,883)
Cash, Beginning of Period (1), including
  cash of discontinued operations of
  $35,934.                                       --         127            --          127      50,664            --        50,791
                                           --------    --------      --------    ---------    --------      --------      --------
Cash, End of Period                        $     --    $    257      $     --    $     257    $ 10,651      $     --      $ 10,908
                                           ========    ========      ========    =========    ========      ========      ========
</TABLE>

(1) Amount does not reconcile to face of balance sheet.

                                       23

<PAGE>

CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THIRTY-NINE WEEKS ENDED APRIL 2,
2005
(IN THOUSANDS)

<TABLE>
                                                       GUARANTOR                                OTHER     CONSOLIDATED  CONSOLIDATED
                                            PARENT   SUBSIDIARIES  ELIMINATIONS    TOTAL    SUBSIDIARIES  ELIMINATIONS     TOTALS
                                           --------  ------------  ------------  ---------  ------------  ------------  ------------
<S>                                        <C>       <C>           <C>           <C>        <C>           <C>           <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net income (loss)                       $(26,025)   $ (6,615)      $ 7,189    $(25,451)   $   2,491      $    --      $(22,960)
   Adjustments to reconcile net income
      (loss) to net cash used in
      operating activities:
      Imputed interest on notes payable
         and other non-cash items            (1,690)         --            --      (1,690)         328           --        (1,362)
      Deferred income tax provision         (21,215)     10,816            --     (10,399)      (4,089)          --       (14,488)
      Depreciation and amortization           7,091       2,457            --       9,548        8,316                     17,864
      Bad debt (recovery) provision              --      (1,367)           --      (1,367)          46                     (1,321)
      Loss on disposal of equipment              --         100            --         100          (59)          --            41
      Inventory valuation adjustment             --        (662)           --        (662)        (915)                    (1,577)
      Impairment loss on intangible asset        --         243                       243           --           --           243
      Foreign currency gains and lossess         --          23            --          23           --           --           23
      Gain on sale of investment                 --          --            --          --         (109)                      (109)
      Equity in net income of
         unconsolidated affilate/
         consolidated subsidiaries            4,124         (36)       (4,088)         --           --           --            --
      Minority interest                          --          --            --          --        4,381           --         4,381
      Changes in assets and liabilities:
         Accounts receivable                    189       8,280            --       8,469       (5,168)          --         3,301
         Inventories                           (657)      4,099        (3,101)        341      (15,012)                   (14,671)
         Prepaid expenses and other
            current assets                    1,753      (1,002)           --         751         (372)          --           379
         Other non-current assets                --          52            --          52          103                        155
         Accounts payable                         3       3,881            --       3,884      (50,714)          --       (46,830)
         Taxes payable                        6,324       1,497            --       7,821       (5,248)          --         2,573
         Accrued expenses                    32,202     (39,750)           --      (7,548)      28,988           --        21,440
                                           --------    --------       -------    --------     --------      -------      --------
            NET CASH FROM OPERATING
               ACTIVITIES                     2,099     (17,984)           --     (15,885)     (37,033)          --       (52,918)
                                           --------    --------       -------    --------     --------      -------      --------
CASH FLOWS FROM INVESTING ACTIVITIES:
         Capital expenditures                  (599)       (524)           --      (1,123)      (7,014)          --        (8,137)
         Proceeds from sale of property
            and investments                      --         120            --         120       15,366           --        15,486
         Increase in compensating
            balances on deposit                  --          --            --          --         (194)          --          (194)
                                           --------    --------       -------    --------     --------      -------      --------
            NET CASH FROM INVESTING
               ACTIVITIES                      (599)       (404)           --      (1,003)       8,158           --         7,155
                                           --------    --------       -------    --------     --------      -------      --------
CASH FLOWS FROM FINANCING ACTIVITIES:
         Net proceeds from revolving line
            of credit and other debt             --      19,070            --      19,070        6,299           --        25,369
         Repayment of long-term debt             --        (477)           --        (477)        (261)          --          (738)
         Distributions to minority
            shareholders                         --          --            --          --       (2,296)          --        (2,296)
         Costs associated with
            refinancing                        (967)         --            --        (967)          --           --          (967)
         Additional payment for patents
            and trademarks                     (376)       (243)           --        (619)          --           --          (619)
         Common stock issued                     27          --            --          27           --           --            27
                                           --------    --------       -------    --------     --------      -------      --------
            NET CASH FROM FINANCING
               ACTIVITIES                    (1,316)     18,350            --      17,034        3,742           --        20,776
                                           --------    --------       -------    --------     --------      -------      --------
Effect of Exchange Rate Changes on Cash          --          --            --          --          (16)          --           (16)
                                           --------    --------       -------    --------     --------      -------      --------
Decrease in Cash                                184         (38)           --         146      (25,149)          --       (25,003)
Cash, Beginning of Period including cash
  of discontinued operation of $27,917.           1         903            --         904       42,313           --        43,217
                                           --------    --------       -------    --------     --------      -------      --------
Cash, End of Period                        $    185    $    865       $    --    $  1,050     $(10,753)     $    --      $ 18,214
                                           ========    ========       =======    ========     ========      =======      ========
</TABLE>


                                       24

<PAGE>

17.  SUBSEQUENT EVENT

     On May 10, 2006, the Company entered into an eighth amendment to, and
     waiver under, the senior credit facility (the "Eighth Amendment") dated as
     of May 10, 2006. The Eighth Amendment, among other things: (1) extended
     from March 15, 2006 to June 15, 2006 the date by which the Company must
     deliver an executed landlord waiver for a warehouse located in Redlands,
     California; and (2) amended the definition of "EBITDA" to exclude the
     $500,000 accrual in connection with the settlement of Warren Beeler v.
     Salton, Inc. class action lawsuit.


                                       25

<PAGE>

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

     As used in this quarterly report on Form 10-Q, "we," "us," "our," "Salton"
     and "the Company" refer to Salton, Inc. and our subsidiaries, unless the
     context otherwise requires.

     This quarterly report on Form 10-Q includes forward-looking statements
     within the meaning of Section 27A of the Securities Act of 1933 and Section
     21E of the Securities Exchange Act of 1934, including without limitation
     the statements under "Risk Factors," and "Management's Discussion and
     Analysis of Financial Condition and Results of Operations." The words
     "believes," "anticipates," "plans," "expects," "intends," "estimates" and
     similar expressions are intended to identify forward-looking statements.
     These forward-looking statements involve known and unknown risks,
     uncertainties and other factors, which may cause our actual results,
     performance or achievements, or industry results, to be materially
     different from any future results, performance, or achievements expressed
     or implied by such forward-looking statements. Such factors include, among
     others, the following:

     -    our ability to realize the benefits we expect from our U.S.
          restructuring plan;

     -    our substantial indebtedness and our ability to comply with
          restrictive covenants in our debt instruments;

     -    our ability to access capital markets on attractive terms or at all;

     -    our relationships and contractual arrangements with key customers,
          suppliers, strategic partners and licensors;

     -    the cost and availability of raw materials and purchased components
          for our products;

     -    unfavorable outcomes from pending legal proceedings;

     -    cancellation or reduction of orders;

     -    the timely development, introduction and acceptance of new products;

     -    dependence on foreign suppliers and supply and marketing constraints;

     -    competitive products and pricing;

     -    economic conditions and the retail environment;

     -    international business activities;

     -    the risks related to intellectual property rights; and

     -    the risks related to regulatory matters and other risks and
          uncertainties detailed from time to time in our Securities and
          Exchange Commission Filings


                                       26

<PAGE>

     All forward looking statements included in this quarterly report on Form
     10-Q are based on information available to us on the date of this quarterly
     report. We undertake no obligation to publicly update or revise any
     forward-looking statement, whether as a result of new information, future
     events or otherwise. All subsequent written and oral forward-looking
     statements attributable to us or persons acting on our behalf are expressly
     qualified in their entirety by the cautionary statements contained
     throughout this quarterly report on Form 10-Q.

     INTRODUCTION

     Salton designs, markets and distributes small home appliances and
     electronics for the home, home decor and personal care products under
     recognized brand names in the International Housewares Industry. Our
     product mix consists of kitchen and home appliances, electronics, time
     products, lighting products, and personal care and wellness products. In
     recent years, we have expanded our international presence and strengthened
     our product offerings through strategic acquisitions and alliances as well
     as internal international growth.

     CONSOLIDATED RESULTS OF OPERATIONS

     The unaudited information included in this Form 10-Q should be read in
     conjunction with the Consolidated Financial Statements contained in our
     2005 Annual Report on Form 10-K. Interim results are not necessarily
     indicative of results for a full year. We report discontinued operations in
     accordance with the guidance from SFAS No. 144, "Accounting for the
     Impairment or Disposal of Long-Lived Assets." Accordingly, we have reported
     the sale of Amalgamated Appliance Holdings ("AMAP") as discontinued
     operations for the periods presented.

     OTHER STRATEGIC OPTIONS

     As previously disclosed in an 8-K filed on August 30, 2005, we continue to
     explore strategic options to satisfy our liquidity needs and improve our
     overall balance sheet position. These strategic options include potential
     sales of assets or businesses, the creation of new foreign debt,
     repurchases of outstanding Subordinated Notes in the open market and/or
     through privately negotiated transactions for cash or other securities
     (including Second Lien Notes, common stock and/or Series C preferred stock)
     and further reductions in expenses.

     QUARTER IN REVIEW

     For the third quarter of fiscal 2006 (thirteen weeks ended April 1, 2006),
     Salton continued its focus on returning to profitability by expanding
     efforts to lower inventory, rationalize SKUs and reduce operating expenses.
     As a result of some post-holiday overstocks and price increases, domestic
     customer demand declined in the third quarter. However, while sales in the
     third quarter fell behind those of the prior year, customer interest for
     our new products introduced at the International Housewares Show in March
     was positive. Our foreign sales continued to be impacted by a weak retail
     market in the United Kingdom, although we maintained our market share
     position in this difficult market.


                                       27

<PAGE>

     U.S. RESTRUCTURING PLAN

     As part of an effort to improve our domestic operations, we have
     successfully implemented our U.S. restructuring plan to better align
     domestic operating costs with current sales levels. Through our cost
     reduction programs and consolidation of U.S. operations, we have reduced
     cumulative domestic operating expenses by more than $65.0 million. As
     announced in the fourth quarter of fiscal 2005, we plan to continue our
     cost reduction efforts through a second U.S. cost reduction program which
     is expected to reduce domestic operations by an additional $25.0 million
     above the initial $40 million with $15.0 million to be realized in 2006 and
     $10.0 million to be realized in 2007.

     In addition to operational reductions, we have reduced domestic interest
     expense through our debt restructuring activities and asset sales.

     RESULTS OF OPERATIONS

     The following table sets forth our results of operations as a percentage of
     net sales for the thirteen weeks ended:

<TABLE>
<CAPTION>
                                                   THIRTEEN WEEKS ENDED
                                              -----------------------------
                                              APRIL 1, 2006   APRIL 2, 2005
                                              -------------   -------------
<S>                                           <C>             <C>
Net sales                                         100.0%          100.0%
Cost of goods sold                                 71.6%           70.8%
Distribution expenses                               8.1%            8.7%
                                                  -----           -----
   Gross profit                                    20.3%           20.5%
Selling, general and administrative expense        29.0%           33.3%
Restructuring costs                                 0.0%            0.2%
                                                  -----           -----
   Operating (loss)                                -8.7%           -13.0%
                                                  =====           =====
</TABLE>

     THIRD QUARTER 2006 COMPARED TO THIRD QUARTER 2005

     Salton's worldwide sales were $127.7 million in the third quarter of fiscal
     2006 versus $153.2 million in the third quarter of fiscal 2005. Net sales
     decreased domestically by $23.0 million. This decrease includes $5.7
     million of tabletop product sales as a result of the sale of the tabletop
     business in September 2005 and approximately $2.0 million of discontinued
     personal care product lines. The remaining $15.3 million decrease resulted
     primarily from post-holiday overstocks at retailers, volume and mix shifts
     as a result of price increases and planned reductions from other
     discontinued product lines.

     Gross profit for the third quarter of fiscal 2006 declined $5.5 million
     from $31.4 million in 2005 to $25.9 million in 2006. As a percent of net
     sales, gross profit was 20.3% in the third quarter of fiscal 2006 compared
     to 20.5% in the third quarter of 2005. The $5.5 million decline was driven
     by a $3.8 million decrease in foreign gross profit as a result of lower
     volume sales primarily in the United Kingdom. The remaining $1.7 million in
     gross profit decline resulted from domestic sales decreases that were
     driven largely by closeouts of discontinued product lines as we continue to
     sell certain inventory at lower margins in an effort to rationalize product
     lines and refocus on our core business. The domestic distribution expenses
     decreased $2.4 million, primarily as a result of the U.S. cost reduction
     program, which partially offset the affect of the closeout sales. The
     Company continues to experience cost pressure as a result of higher costs
     associated with raw materials such as plastic resin,


                                       28

<PAGE>

     steel, copper and corrugated material. We continue to implement price
     increases on certain products to compensate for these higher material
     costs, however, the final impact of the price increases is uncertain due to
     potential reactions of our customers, our competitors and the uncertainty
     of these market factors outside of our control.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses decreased to $37.0 million for
     the third quarter of fiscal 2006 compared to $51.0 million for the third
     quarter of fiscal 2005. U.S. operations reduced selling, general and
     administrative expenses by $6.0 million primarily driven by a $3.2 million
     decline in promotional expenditures such as certain advertising, and trade
     show expenses as a result of our U.S. cost reduction plan. The remaining
     reduction was a result of decreased expenditures in Europe in an effort to
     align costs with reduced demand as a result of the weak consumer
     environment.

     RESTRUCTURING COSTS

     As a result of the U.S. restructuring plan, the Company incurred $0.1
     million of restructuring costs during the third quarter of fiscal 2006
     related to severance costs. During the same quarter of fiscal 2005,
     restructuring costs of $0.3 million related to consulting, severance and
     legal services were incurred.

     NET INTEREST EXPENSE

     Net interest expense was $8.4 million for the third quarter of fiscal 2006
     compared to $12.9 million for the third quarter of fiscal 2005. Excluding
     amortization of fees, interest expense as a percent of the average carrying
     value of debt outstanding was a weighted average annual rate of 8.1% in the
     third quarter of fiscal 2006 compared to 9.4% in fiscal 2005. The average
     amount of all debt outstanding was $345.3 million for the third quarter of
     fiscal 2006 compared to $462.2 million for the third quarter of fiscal
     2005.

     INCOME TAXES

     The Company's provision for income taxes is based upon estimated annual tax
     rates for the year applied to federal, state, and foreign income. The
     Company expects its effective tax rate for fiscal 2006 to differ
     significantly from the prior year rate of 34.7% due to the following
     one-time events: 1) U.S. tax of $4.6 million on an intercompany foreign
     exchange gain with no related pretax income, 2) the establishment of a
     valuation allowance of $26.6 million against the U.S. net deferred tax
     asset balance offsetting tax benefits provided for U.S. net operating loss
     carryforwards, and 3) the increase of $1.5 million of valuation allowances
     against foreign deferred tax assets related to certain foreign net
     operating losses. The third quarter provision for income taxes was
     primarily related to foreign tax benefits in certain countries.


                                       29

<PAGE>

     FIRST THIRTY-NINE WEEKS 2006 COMPARED TO FIRST THIRTY-NINE WEEKS 2005

     RESULTS OF OPERATIONS

     The following table sets forth our results of operations as a percentage of
     net sales for the thirty-nine weeks ended:

<TABLE>
<CAPTION>
                                                 THIRTY-NINE WEEKS ENDED
                                              -----------------------------
                                              APRIL 1, 2006   APRIL 2, 2005
                                              -------------   -------------
<S>                                           <C>             <C>
Net sales                                         100.0%          100.0%
Cost of goods sold                                 69.7%           67.4%
Distribution expenses                               6.7%            6.8%
                                                  -----           -----
   Gross profit                                    23.6%           25.8%
Selling, general and administrative expense        25.9%           25.9%
Restructuring costs                                 0.0%            0.1%
                                                  -----           -----
   Operating (loss)                                -2.3%           -0.2%
                                                  =====           =====
</TABLE>

     NET SALES AND GROSS PROFIT

     Salton's worldwide sales were $506.5 million in first thirty-nine weeks of
     fiscal 2006 versus $630.5 million in the first thirty-nine weeks of fiscal
     2005. Net sales decreased domestically by $94.5 million. This decrease
     includes $11.8 million of tabletop product sales as a result of the sale of
     the tabletop business in September 2005 and approximately $5.3 million of
     discontinued personal care lines. The remaining $77.4 million decrease
     resulted primarily from delays in production from suppliers and cautious
     customer ordering patterns that impacted volume in the first quarter as
     well as in the first half of the second quarter followed by some overstocks
     at retailers in the third quarter and continued planned reductions of
     discontinued product lines. Foreign sales declined by $29.6 million and
     were impacted by weak consumer demand in the housewares sector in the
     United Kingdom and $8.8 million of unfavorable foreign currency
     fluctuations.

     Gross profit for the first thirty-nine weeks of fiscal 2006 declined $43.2
     million from $162.9 million in 2005 to $119.7 million in 2006. As a percent
     of net sales, gross profit was 23.6% in the first thirty-nine weeks of
     fiscal 2006 compared to 25.8% in the first thirty-nine weeks of 2005, a
     decrease of 2.2%. These decreases are primarily a result of decreased
     volume in the weak European market and an inventory shortage of higher
     margin products in the first quarter and the first half of the second
     quarter. Additionally, margins were adversely impacted by overstocks at
     retailers in the third quarter and a continuous effort throughout the year
     to close out certain inventory at lower margins in an effort to rationalize
     product lines and refocus on our core business. We have incurred global
     material cost increases in plastics, steel, copper and corrugated
     materials. Although we have recently implemented price increases on certain
     products to compensate for higher material costs, the final impact of the
     price increases is uncertain due to potential reactions of our customers,
     our competitors and the uncertainty of these market factors outside of our
     control. The decreases in gross profit were partially offset by a $7.5
     million domestic decline in distribution expenses resulting primarily from
     our U.S. cost reduction programs.


                                       30

<PAGE>

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses decreased to $131.0 million
     for the first thirty-nine weeks of fiscal 2006 compared to $163.2 million
     for the first thirty-nine weeks of fiscal 2005. U.S. operations reduced
     selling, general and administrative expenses by $17.9 million primarily
     driven by a $10.0 million decline in promotional expenditures such as
     certain advertising and trade show expenses as a result of our U.S. cost
     reduction plan. The remaining reduction was a result of decreased
     expenditures in Europe in an effort to align costs with reduced demand as a
     result of the weak consumer environment.

     RESTRUCTURING COSTS

     As a result of the U.S. restructuring plan, the Company incurred a $0.2
     million of restructuring costs during the first thirty-nine weeks of fiscal
     2006 related to severance and rationalization of warehouse and retail
     operations. During the same period of fiscal 2005, restructuring costs of
     $1.1 million related to consulting, severance and legal services were
     incurred.

     NET INTEREST EXPENSE

     Net interest expense was $28.6 million for the first thirty-nine weeks of
     fiscal 2006 compared to $38.6 million for the first thirty-nine weeks of
     fiscal 2005. Excluding amortization of fees, interest expense as a percent
     of the average carrying value of debt outstanding was a weighted average
     annual rate of 8.2% in the first thirty-nine weeks of fiscal 2006 compared
     to 9.3% in fiscal 2005. The average amount of all debt outstanding was
     $396.6 million for the first thirty-nine weeks of fiscal 2006 compared to
     $479.3 million for the first thirty-nine weeks of fiscal 2005.

     INCOME TAXES

     The Company's provision for income taxes is based upon estimated annual tax
     rates for the year applied to federal, state, and foreign income. The
     Company expects its effective tax rate for fiscal 2006 to differ
     significantly from the prior year rate of 34.6% due to the following
     one-time events: 1) U.S. tax of $4.6 million on an intercompany foreign
     exchange gain with no related pretax income, 2) the establishment of a
     valuation allowance of $26.6 million against the U.S. net deferred tax
     asset balance offsetting tax benefits provided for U.S. net operating loss
     carryforwards (as described below), and 3) the increase of $1.5 million of
     valuation allowances against foreign deferred tax assets related to certain
     foreign net operating losses.

     As noted in the preceding paragraph, the $28.1 million in additional
     valuation allowance recorded in the second quarter was a result of an
     assessment made during the quarter as to the realizability of the Company's
     deferred tax assets. In accordance with the applicable accounting standards
     (SFAS No. 109), the Company must assess whether it is more likely than not
     that it will be able to utilize the deferred tax assets. This assessment is
     based on an analysis of historical and prospective earnings that will allow
     the Company to utilize the deferred tax asset. Primarily as a result of
     reduced earnings in the first half of fiscal year 2006 and the effect that
     this reduction will have on the Company's earnings for fiscal year 2006,
     the Company provided a valuation allowance to write-down the deferred tax
     assets to an amount that is more likely than not to be realized. This
     non-cash charge does not limit the Company's ability to realize future tax
     benefits associated with its net operating loss carryforwards to the extent
     that future profits result in taxable income during the carryforward
     period. The net operating loss carryforwards primarily expire beginning in
     fiscal year 2009 through fiscal year 2025.


                                       31

<PAGE>

     DISCONTINUED OPERATIONS

     On September 29, 2005, the Company completed the sale of its 52.6%
     ownership interest in Amalgamated Appliances Holdings Limited ("AMAP"), a
     leading distributor and marketer of small appliances and other products in
     South Africa, to a group of investors led by Interactive Capital
     (Proprietary) Limited. In the first quarter of fiscal 2006, the Company
     received proceeds, net of expenses, of approximately $81.0 million in
     connection with the transaction, and recorded a gain of $27.8 million net
     of tax. Also, the Company licensed its George Foreman(R), Russell Hobbs(R)
     and Carmen(R) branded products to AMAP following the transaction.

     The following is a summary of financial results included within
     discontinued operations:

<TABLE>
<CAPTION>
                                                          THIRTY-NINE WEEKS ENDED
                                                          -----------------------
<S>                                                       <C>          <C>
                                                            APRIL 1,   APRIL 2,
                                                              2006       2005
Net sales from discontinued operations                       $68,789   $223,935
                                                             -------   --------
Income from discontinued operations before income taxes      $ 5,477   $ 14,200
Income taxes                                                   2,338      4,607
Minority Interest                                              1,404      4,381
                                                             -------   --------
Income from discontinued operations, net of tax              $ 1,735   $  5,212
                                                             =======   ========
</TABLE>

     The following sets forth the carrying amounts of the major classes of
     assets and liabilities classified as assets and liabilities of discontinued
     operations at July 2, 2005, in the accompanying balance sheet:

<TABLE>
<CAPTION>
                                                    JULY 2, 2005
                                                    ------------
<S>                                                 <C>
ASSETS
Cash                                                  $ 35,934
Accounts receivable, net                                25,910
Inventories, net                                        38,349
Prepaid expenses and other current assets                1,038
Deferred tax asset                                         696
                                                      --------
Current assets of discontinued operations             $101,927
                                                      --------
Property, plant and equipment, net                    $  4,003
Tradenames                                               1,474
Other assets, net                                        2,260
                                                      --------
Noncurrent assets of discontinued operations          $  7,737
                                                      --------
LIABILITIES
Accounts payable                                      $ 30,955
Accrued expenses                                         9,334
Income taxes payable                                     7,042
                                                      --------
Current liabilities of discontinued operations        $ 47,331
                                                      --------
Other notes payable                                   $  1,462
                                                      --------
Noncurrent liabilities of discontinued operations     $  1,462
                                                      --------
</TABLE>


                                       32

<PAGE>

     LIQUIDITY AND CAPITAL RESOURCES

     CASH FLOW FROM CONTINUING OPERATIONS

     The following discussion excludes the impact on cash flows from
     discontinued operations.

     Our primary sources of liquidity are our cash flow from continuing
     operations and borrowings under our senior secured credit facilities. In
     the first thirty-nine weeks of fiscal 2006, Salton's continuing operations
     used $9.0 million in cash flow, compared with $39.9 million in first
     thirty-nine weeks of fiscal 2005. This improvement was the result of
     inventory reductions associated with the sale of the tabletop business and
     the planned exit of certain product lines in the first thirty-nine weeks of
     fiscal 2006. In addition, declines in accounts receivable and reduced
     operating expenses associated with the U.S. cost reduction plan contributed
     to the improvement at the end of the third quarter.

     Our results of operations for the periods discussed have not been
     significantly affected by inflation or foreign currency fluctuation. We
     generally negotiate our purchase orders with our foreign manufacturers in
     United States dollars. Thus, our cost under any purchase order is not
     subject to change after the time the order is placed due to exchange rate
     fluctuations. However, the weakening of the United States dollar against
     local currencies could result in certain manufacturers increasing the
     United States dollar prices for future product purchases. Given the
     seasonal nature of our business, borrowings and availability tend to be
     highest in mid-Fall and early winter.

     The Company also currently uses foreign exchange contracts to hedge
     anticipated foreign currency transactions, primarily U.S. dollar inventory
     purchases. The contracts generally mature within one year and are designed
     to limit exposure to exchange rate fluctuations, primarily the Australian
     dollar against United States dollars.

     INVESTING ACTIVITIES

     In the thirty-nine weeks of fiscal 2006, we had $80.9 million in proceeds
     from the sale of discontinued operations as a result of the AMAP
     transaction and $15.3 million in proceeds from the sale of assets and
     investments, primarily from the sale of our tabletop division and a
     warehouse distribution facility in the U.S.

     FINANCING ACTIVITIES

     During the first thirty-nine weeks, we repaid $33.9 million on our
     worldwide credit facilities. In addition, we incurred $14.7 million of
     financing costs associated with our debt restructuring and Salton Europe
     Credit Facility and $50.3 million primarily associated with the repayment
     of the 2005 Notes.

     SENIOR SECURED CREDIT FACILITY

     On June 15, 2004, we entered into an amended and restated senior secured
     credit facility with Silver Point Finance, LLC which currently provides us
     with the ability to borrow up to approximately $188 million pursuant to a
     revolving line of credit, letters of credit and a $100.0 million term loan
     for the domestic operations. Advances under the revolving line of credit
     are primarily based upon percentages of eligible accounts receivable and
     inventories. The facility has a maturity date of December 31, 2007 and is
     subject to a prepayment premium of 4.50% if the facility is repaid by June
     15, 2006 and 3.50% if the facility is repaid thereafter.

     As of May 9, 2006, we had borrowed $101.8 million under the senior secured
     credit facility and had approximately $2.0 million available under this
     facility for future borrowings.


                                       33

<PAGE>

     Borrowings under our senior secured credit facility accrue interest, at our
     option, at either: LIBOR, plus 6.0% (or 5.0% after March 31, 2006),
     equaling 10.6% at April 1, 2006; or the Base Rate (prime rate), plus 4.0%
     (or 3.0% after March 31, 2006), equaling 11.75% at April 1, 2006. The
     Company has the option to convert any base rate loan to LIBOR rate loan.
     LIBOR rate loans are to be no lower than a rate of 7.0%.

     Our senior indebtedness contains a number of significant covenants that,
     among other things, restrict our ability to dispose of assets, incur
     additional indebtedness, prepay other indebtedness, pay dividends,
     repurchase or redeem capital stock, enter into certain investments, enter
     into sale and lease-back transactions, make certain acquisitions, engage in
     mergers and consolidations, create liens, or engage in certain transactions
     with affiliates and otherwise restrict our corporate and business
     activities. In addition, under our senior secured credit facility, we are
     required to comply with a minimum EBITDA and consolidated fixed charge
     coverage ratio. We are also required to deposit all proceeds from
     collection of accounts receivable and sale of collateral in an account
     under the exclusive dominion and control of the senior lenders.

     On September 23, 2005, the Company entered into a fourth amendment to the
     senior secured credit facility (the "Fourth Amendment") dated as of
     September 22, 2005. Under the terms of the Fourth Amendment, the Company is
     required to utilize the proceeds received in connection with the sale of
     certain of its tabletop assets and the sale of the 52.6% ownership interest
     in AMAP to prepay the outstanding principal amount of the original $100.0
     million term loan included therein. During the first quarter, the proceeds
     from the sale of the tabletop assets of $13.4 million had been applied
     against the term loan.

     On October 5, 2005, in accordance with the terms of the Fourth Amendment,
     the Company: 1) applied $80.8 million of proceeds from the sale of AMAP
     against the original term loan under the senior secured credit facility;
     and 2) borrowed $80.8 million under additional term loans under the senior
     secured credit facility. As required by the Fourth Amendment, the Company:
     1) used the first $24.9 million of borrowings under the additional term
     loan to repay outstanding revolving line of credit borrowings under the
     senior secured credit facility; and 2) placed $50.0 million of such
     borrowings into an interest-bearing cash collateral account which, subject
     to certain conditions, may be used to purchase, prepay or redeem the
     outstanding 2005 Notes. To the extent that Salton issued Second Lien Notes
     and/or equity in exchange for 2005 Notes prior to the maturity of the 2005
     Notes, the Company was permitted to obtain funds from the cash collateral
     account in an amount equal to the reduction of the principal amount of the
     2005 Notes affected by such exchange. At December 31, 2005, all funds in
     the cash collateral account had been used to repurchase or retire 2005
     Notes.

     The Fourth Amendment also modified the financial covenants that require a
     minimum EBITDA and consolidated fixed charge coverage ratio, and eliminated
     the foreign leverage ratio.

     The senior secured credit facility was amended ("the Fifth Amendment") on
     October 7, 2005 to increase the letter of credit subfacility to $15.0
     million. As of April 1, 2006, the Company had outstanding letters of credit
     of $0.5 million under the letter of credit subfacility of $15.0 million.

     On November 9, 2005, the Company entered into a sixth amendment to, and
     waiver under, the senior secured credit facility (the "Sixth Amendment")
     dated as of November 9, 2005. The Sixth Amendment, among other things: 1)
     waives the Company's compliance with the financial covenants for the
     12-month periods ending October 1, 2005 and November 5, 2005; and 2)
     permits the Company to borrow up to $5.0 million beyond availability for
     inventory purchases for the build-up during the 2005 Holiday season.


                                       34

<PAGE>

     On February 8, 2006, the Company entered into a seventh amendment to, and
     waiver under, the senior secured credit facility (the "Seventh Amendment")
     dated as of February 8, 2006. The Seventh Amendment, among other things:
     (1) waived the Company's compliance with the consolidated fixed charge
     coverage ratio for the twelve-month period ended December 3, 2005; (2)
     extended from January 15, 2006 until March 15, 2006 the date by which the
     Company must deliver an executed landlord waiver for a warehouse located in
     Redlands, California; (3) restated the financial covenants for the
     twelve-month periods ending December 31, 2005 through June 30, 2007; (4)
     amended the definitions of "borrowing base" and EBITDA; and (5) eliminated
     the pledges of stock of foreign subsidiaries of the Company other than
     66-2/3% of the stock of Salton International CV.

     On May 10, 2006, the Company entered into an eighth amendment to, and
     waiver under, the senior credit facility (the "Eighth Amendment") dated as
     of May 10, 2006. The Eighth Amendment, among other things: (1) extended
     from March 15, 2006 to June 15, 2006 the date by which the Company must
     deliver an executed landlord waiver for a warehouse located in Redlands,
     California; and (2) amended the definition of "EBITDA" to exclude the
     $500,000 accrual in connection with the settlement of Warren Beeler v.
     Salton, Inc. class action lawsuit.

     Events of default under our senior secured credit facility include, but are
     not limited to: (a) our failure to pay principal or interest when due; (b)
     our material breach of any representation or warranty; (c) covenant
     defaults; (d) our default with respect to any other debt with an
     outstanding principal amount in excess of $1.0 million if the effect
     thereof is to accelerate or permit the acceleration of such debt; and (e)
     events of bankruptcy.

     The senior secured credit facility is secured by all of our tangible and
     intangible domestic assets and a pledge of the capital stock of our
     domestic subsidiaries and the capital stock of certain of our foreign
     subsidiaries. The senior secured credit facility is unconditionally
     guaranteed by each of our direct and indirect domestic subsidiaries.

     SECOND LIEN CREDIT AGREEMENT

     On August 26, 2005, in connection with the closing of our debt exchange
     offer, we entered into a second lien credit agreement with The Bank of New
     York, as agent, which provides for the issuance of up to $110 million
     aggregate principal amount of Second Lien Notes. We issued approximately
     $99.2 million of Second Lien Notes in connection with our debt exchange
     offer. We subsequently issued an additional $4.1 million of Second Lien
     Notes in connection with our private exchange We may add additional lenders
     under the second lien credit agreement through the issuance of additional
     Second Lien Notes as long as the aggregate principal amount of the Second
     Lien Notes does not exceed $110 million.

     The second lien credit agreement and the Second Lien Notes have a maturity
     date of March 31, 2008. The interest rate with respect to the Second Lien
     Notes is the six month LIBOR plus 7%, currently 11.72125%, payable in cash
     on January 15th and July 15th of each year. The default rate is LIBOR plus
     10%.


                                       35

<PAGE>

     The Second Lien Notes are redeemable by us at our option, in whole or in
     part, at any time at a redemption price equal to the following percentage
     of the principal amount so redeemed, plus accrued and unpaid interest up to
     the redemption date:

     -    if the redemption occurs prior to the first anniversary of the
          consummation of the debt exchange offer, 102%;

     -    if the redemption occurs between the first anniversary and second
          anniversary of the closing of the debt exchange offer, 101%; and
          thereafter, 100%.

     The second lien credit agreement contains covenants that are substantially
     the same as the covenants contained in our senior secured credit facility.
     Under the terms of the second lien credit agreement, to the extent that the
     lenders under our senior secured credit facility amend or modify the
     covenants under such facility, the parallel covenants under the second lien
     credit agreement shall be automatically deemed amended or modified;
     provided that the lenders under our senior secured credit facility may not
     amend or modify the covenant limiting the maximum amount of our senior
     secured credit facility to the difference between (x) $287 million and (y)
     the aggregate principal amount of Second Lien Notes issued in connection
     with our debt exchange offer.

     The second lien credit agreement allows us, subject to the conditions in
     our senior secured credit facility, to purchase, prepay or redeem
     Subordinated Notes at any time after the debt exchange offer; provided
     that, with respect to 2008 Notes, (1) we must have a minimum level of
     availability under our senior secured credit facility of at least $4
     million after giving effect to any such purchases and (2) the aggregate
     amount spent by us to purchase 2008 Notes does not exceed $11 million.

     Notwithstanding the foregoing, we may spend more than $11 million in the
     aggregate to purchase 2008 Notes if we meet the foregoing conditions and we
     optionally prepay or redeem on a ratable basis a cumulative portion of the
     Second Lien Notes as follows (percentages and amounts assume that we issued
     $110 million of aggregate principal amount of Second Lien Notes in
     connection with the debt exchange offer):

<TABLE>
<CAPTION>
                                    Permitted Additional
      Cumulative Percentage         Amounts Available to
of the Second Lien Notes Redeemed    Purchase 2008 Notes
---------------------------------   --------------------
<S>                                 <C>
                 9%                      $ 2 million
                18%                      $ 5 million
                27%                      $ 9 million
                36%                      $14 million
                45%                      $20 million
                54%                      $27 million
                63%                      $35 million
                72%                      $44 million
                81%                      $54 million
                90%                      $66 million
               100%                      $78 million
</TABLE>


                                       36

<PAGE>

     Subject to the Intercreditor Agreement described below, if an event of
     default (other than an event of default resulting from certain events of
     bankruptcy, insolvency or reorganization) occurs and is continuing, the
     second lien agent and the holders of at least 66-2/3% in principal amount
     of Second Lien Notes then outstanding may declare the principal of and
     accrued but unpaid interest on all of the Second Lien Notes to be due and
     payable. If an event of default relating to certain events of bankruptcy,
     insolvency or reorganization occurs and is continuing, the principal of and
     interest on all of the Second Lien Notes shall automatically become
     immediately due and payable without notice or demand of any kind.

     The Second Lien Notes are our senior secured obligations and rank: (a)
     senior in right of payment to all of our existing and future subordinated
     debt, including the Subordinated Notes; and (b) equal in right of payment
     with all of our other existing and future senior debt, including
     indebtedness outstanding under our senior secured credit facility.

     The Second Lien Notes are secured by a second-priority lien on
     substantially all of our domestic assets and a pledge of the capital stock
     of our domestic subsidiaries and certain of our foreign subsidiaries. The
     Second Lien Notes are also unconditionally guaranteed by each of direct and
     indirect domestic subsidiaries.

     INTERCREDITOR AGREEMENT

     The agent and co-agent for our senior secured credit facility, and the
     second lien agent for our second lien credit agreement entered into an
     intercreditor agreement dated as of August 26, 2005 which provides that,
     among other things, any lien on collateral held by or on behalf of the
     second lien agent or any holder of the Second Lien Notes that secures all
     or any portion of the Second Lien Notes will in all respects be junior and
     subordinate to all liens granted to the lenders under our senior secured
     credit facility. At any time that the agent or co-agent under our senior
     secured credit facility notifies the second lien agent in writing that an
     event of default has occurred and is continuing under such facility, then
     the second lien agent and the holders of the Second Lien Notes will not
     have any right to exercise any secured creditor remedies (including without
     limitation, foreclosing or otherwise realizing upon collateral) or take
     certain other actions (including, without limitation, commencing or causing
     to be commenced or joining with any creditor in commencing any insolvency
     proceeding) until the first to occur of (a) payment in full in cash of all
     obligations under our senior secured credit facility after or concurrently
     with termination of all commitments to extend credit thereunder, (b) the
     date upon which the agent or co-agent under our senior secured credit
     facility shall have waived or acknowledged in writing the termination of
     such event of default or (c) 270 days following receipt of such notice by
     the second lien agent (a "standstill period"). Only two standstill periods
     may be commenced within any 360 day period, and no subsequent standstill
     period may be commenced within 60 days after the termination of the
     immediately preceding standstill period.

     The intercreditor agreement also substantially limits the rights of the
     second lien agent and the holders of the Second Lien Notes in an insolvency
     proceeding. The intercreditor agreement requires the net proceeds from the
     sale of collateral to be applied first to our obligations under our senior
     secured credit facility and then to our obligations under the second lien
     credit agreement.


                                       37

<PAGE>

     SENIOR SUBORDINATED NOTES

     In addition to borrowings under our senior secured credit facility, we
     issued $125.0 million of 2005 Notes and $150.0 million of 2008 Notes.

     In connection with our debt exchange offer, on August 26, 2005 we accepted
     for exchange an aggregate of approximately $75.2 million in principal
     amount of 2005 Notes (approximately 60.0% of the outstanding 2005 Notes)
     and approximately $90.1 million in principal amount of 2008 Notes
     (approximately 60.1% of the outstanding 2008 Notes) that were validly
     tendered in the debt exchange offer. During the second quarter, the Company
     repurchased $9.2 million in aggregate principal amount of the outstanding
     2005 Notes for $9.1 million and the Company repaid the remaining $36.6
     million of outstanding 2005 Notes upon maturity.

     Interest is payable on the 2008 Notes on April 15th and October 15th of
     each year.

     In connection with our debt exchange offer, we obtained the consent of the
     holders of a majority of the outstanding 2008 Notes to amend the indenture
     governing such Subordinated Notes to eliminate substantially all of the
     substantive covenants (other than these dealing with certain asset sales
     and the application of proceeds therefrom and changes of control) and
     certain events of default (other than these dealing with the payment of
     interest and principal when due) contained in such indentures. We have
     entered into supplements to the indenture governing the 2008 Notes to
     reflect such amendments.

     Our Subordinated Notes are general unsecured obligations and are
     subordinated to all our current and future senior debt, including all
     borrowings under our senior secured credit facility and the Second Lien
     Notes. The Subordinated Notes rank equally with all our other existing and
     future senior subordinated indebtedness.

     Our current and future domestic restricted subsidiaries jointly and
     severally guarantee our payment obligations under the Subordinated Notes on
     a senior subordinated basis. The guarantees rank junior to all senior debt
     of the guarantors (including guarantees under our senior secured credit
     facility) and equally with all other senior subordinated indebtedness of
     the guarantors.

     SALTON EUROPE FACILITY AGREEMENT

     On December 23, 2005, Salton Holdings Limited, Salton Europe Limited and
     certain affiliates entered into a Facility Agreement with Burdale Financial
     Limited, as agent and security trustee, and a financial institution group
     as lender. The provisions of the Facility Agreement allow certain of the
     Company's European subsidiaries to borrow funds as needed in an aggregate
     amount not to exceed L61.0 million (approximately $106.1 million). The
     Facility Agreement matures on December 22, 2008 and bears a variable
     interest rate of LIBOR plus 7% on term loans and LIBOR plus 2.75% on
     revolver loans, payable on the last business day of each month. At April 1,
     2006, these rates for borrowings denominated in the Great Britain Pound
     were approximately 11.6% and 7.3% for term and revolver loans,
     respectively. The rate for revolver loan borrowings denominated in the U.S.
     Dollar was 7.6%.


                                       38

<PAGE>

     The Facility Agreement consists of a Revolving Credit Facility with an
     aggregate maximum availability of L50.0 million (approximately $87.0
     million) and two Term Loan Facilities of L5.0 million and L6.0 million
     (approximately $8.7 million and $10.4 million, respectively). The Company
     expects to use borrowings under these facilities to repay existing debt and
     for working capital purposes. As of April 1, 2006, under the Revolving
     Credit Facility, the Company had outstanding borrowings denominated in the
     Great Britain Pound of L6.1 million (approximately $10.6 million) and
     borrowings denominated in the U.S. Dollar of $6.1 million.

     The Facility Agreement contains a number of significant covenants that,
     among other things, restrict the ability of certain of the Company's
     European subsidiaries to dispose of assets, incur additional indebtedness,
     prepay other indebtedness, pay dividends, repurchase or redeem capital
     stock, enter into certain investments, make certain acquisitions, engage in
     mergers and consolidations, create liens, or engage in certain transactions
     with affiliates and otherwise restrict corporate and business activities.

     On December 20, 2005, the Company entered into a waiver and consent under
     its senior secured credit facility and second lien credit agreement. The
     waiver and consent, among other things: (1) consents to the Company's
     European subsidiaries entering into the Facility Agreement and performing
     their obligations thereunder; (2) waives certain covenants to the extent
     they would prohibit the Facility Agreement; and (3) waives until January
     15, 2006 the requirements that the Company deliver a fully executed
     landlord waiver with respect to one the Company's warehouses.

     OTHER CREDIT FACILITIES

     In addition to the Salton Europe Facility Agreement, we maintain additional
     credit facilities outside of the United States that locally support our
     foreign subsidiaries operations and working capital requirements. These
     facilities are at current market rates in those localities and at certain
     peak periods of the year, are secured by various assets.

     SERIES C PREFERRED STOCK

     On August 26, 2005, we issued 135,217 shares of our Series C preferred
     stock with a total liquidation preference of $13.5 million. Our restated
     certificate of incorporation authorizes us to issue up to 150,000 shares of
     Series C preferred stock.

     The Series C preferred stock is non-dividend bearing and ranks, as to
     distribution of assets upon our liquidation, dissolution or winding up,
     whether voluntary or involuntary, (a) prior to all shares of convertible
     preferred stock from time to time outstanding, (b) senior, in preference
     of, and prior to all other classes and series our preferred stock and (c)
     senior, in preference of, and prior to all of our now or hereafter issued
     common stock.

     Except as required by law or by certain protective provisions in our
     restated certificate of incorporation, the holders of shares of Series C
     preferred stock, by virtue of their ownership thereof, have no voting
     rights.

     In the event of our liquidation, dissolution or winding up, whether
     voluntary or involuntary, holders of the Series C preferred stock will be
     paid out of our assets available for distribution to our stockholders an
     amount in cash equal to $100 per share (the "Series C Preferred Liquidation
     Preference"), before any distribution is made to the holders of our
     convertible preferred stock, our common stock or any other of our capital
     stock ranking junior as to liquidation rights to the Series C preferred
     stock.


                                       39

<PAGE>

     In the event of a change of control (as defined in our restated certificate
     of incorporation), each holder of shares of Series C preferred stock will
     have the right to require us to redeem such shares at a redemption price
     equal to the Series C Preferred Liquidation Preference plus an amount
     equivalent to interest accrued thereon at a rate of 5% per annum compounded
     annually on each anniversary date of the issuance date for the period from
     the issuance date through the change of control. The redemption price is
     payable on a date after a change of control that is 91 days after the
     earlier of (x) the date on which specified debt (including indebtedness
     under our senior secured credit facility, the second lien credit agreement,
     the indentures under which the Subordinated Notes were issued, and
     restatements and refinancings of the foregoing) matures and (y) the date on
     which all such specified debt is repaid in full, in an amount equal to the
     Series C Preferred Liquidation Preference plus an amount equivalent to
     interest accrued thereon at a rate of 5% per annum compounded annually on
     each anniversary date of the issuance date for the period from the issuance
     date through such change of control payment date. The certificate of
     designation for the Series C preferred stock provides that, in the event of
     a change of control, we shall purchase all outstanding shares of Series C
     preferred stock with respect to which the holder has validly exercised the
     redemption right before any payment with respect to the redemption of
     convertible preferred stock upon such change of control.

     We may optionally redeem, in whole or in part, the Series C preferred stock
     at any time at a cash price per share of 100% of the then effective Series
     C Preferred Liquidation Preference per share. On the fifth anniversary of
     the issuing date, we will be required to redeem all outstanding shares of
     Series C preferred stock at a price equal to the Series C Preferred
     Liquidation Preference per share, payable in cash.

     CONVERTIBLE PREFERRED STOCK

     On July 28, 1998, we issued $40.0 million of convertible preferred stock in
     connection with a Stock Purchase Agreement dated July 15, 1998. The
     convertible preferred stock is non-dividend bearing except if we breach, in
     any material respect, any of the material obligations in the preferred
     stock agreement or our restated certificate of incorporation relating to
     the convertible preferred stock, the holders of the convertible preferred
     stock are entitled to receive quarterly cash dividends on each share from
     the date of the breach until it is cured at a rate per annum equal to 12
     -1/2% of the Liquidation Preference (defined below). The preferred shares
     are convertible into 3,529,411 shares of our common stock (reflecting an
     $11.33 per share conversion price). The holders of the convertible
     preferred stock are entitled to one vote for each share of our common stock
     that the holder would receive upon conversion of the convertible preferred
     stock. In connection with the convertible preferred stock issuance, two
     individuals representing the purchasers of the preferred stock were
     appointed to serve on our Board of Directors.

     In the event of a change in control, each preferred shareholder has the
     right to require to redeem the shares at a redemption price equal to the
     Liquidation Preference (defined below) plus interest accrued thereon at a
     rate of 7% per annum compounded annually each anniversary date from July
     28, 1998 through the earlier of the date of such redemption or July 28,
     2003.


                                       40

<PAGE>

     In the event of a liquidation, dissolution or winding up, whether voluntary
     or involuntary, holders of the convertible preferred stock are entitled to
     be paid out of the assets of the Company available for distribution to its
     stockholders an amount in cash equal to $1,000 per share, plus the amount
     of any accrued and unpaid dividends thereon (the "Liquidation Preference"),
     before any distribution is made to the holders of any our common stock or
     any other of its capital stock ranking junior as to liquidation rights to
     the convertible preferred stock.

     We may optionally convert in whole or in part, the convertible preferred
     stock at any time on and after July 15, 2003 at a cash price per share of
     100% of the then effective Liquidation Preference per share, if the daily
     closing price per share of our common stock for a specified 20 consecutive
     trading day period is greater than or equal to 200% of the then current
     conversion price. On September 15, 2008, we will be required to exchange
     all outstanding shares of convertible preferred stock at a price equal to
     the Liquidation Preference per share, payable at the Company's option in
     cash or shares of our common stock.

     DISCUSSION OF CRITICAL ACCOUNTING POLICIES

     Our financial statements have been prepared in accordance with accounting
     principles generally accepted in the United States of America, which
     require us to make estimates and judgments that significantly affect the
     reported amounts of assets, liabilities, revenues and expenses and related
     disclosure of contingent assets and liabilities. We regularly evaluate
     these estimates, including those related to our allowance for doubtful
     accounts, reserve for inventory valuation, reserve for returns and
     allowances, valuation of reporting units with goodwill, valuation of
     intangible assets having indefinite lives, cooperative advertising
     accruals, pension benefits and depreciation and amortization. We base these
     estimates on historical experience and on assumptions that are believed by
     management to be reasonable under the circumstances. Actual results may
     differ from these estimates, which may impact the carrying value of assets
     and liabilities.

     ALLOWANCE FOR DOUBTFUL ACCOUNTS - We calculate allowances for estimated
     losses resulting from the inability of our customers to make required
     payments. We utilize a number of tools to evaluate and mitigate our
     customer credit risk. Management evaluates each new customer account using
     a combination of some or all of the following sources of information:
     credit bureau reports, industry credit group reports, customer financial
     statement analysis, customer supplied credit references and bank
     references. Appropriate credit limits are set in accordance with our credit
     risk policy and monitored on an on-going basis. Existing customers are
     monitored and credit limits are adjusted according to changes in their
     financial condition. Based on the procedures outlined herein, and the fact
     that no customer accounted for 10.0% or more of the gross accounts
     receivable at April 1, 2006 and only one customer accounted for 12.1% of
     the gross accounts receivable at April 2, 2005, we believe there is no
     concentration of credit risk.


                                       41

<PAGE>

     Our exposure to credit loss on our foreign currency forward contracts in
     the event of non-performance by the counterparties is believed to be remote
     due to the requirements that the counterparties consist only of major
     financial institutions that have a long-term credit rating of single-A or
     better from both Moody's and Standard& Poor's. Additionally, our foreign
     currency forward contracts generally have a term of one year or less.

     INVENTORY VALUATION - The Company values inventory at the lower of cost or
     market, and regularly reviews the book value of discontinued product lines
     and stock keeping units (SKUs) to determine if these items are properly
     valued. If market value is less than cost, the Company writes down the
     related inventory to the estimated net realizable value. The Company
     regularly evaluates the composition of inventory to identify slow-moving
     and obsolete inventories to determine if additional write-downs are
     required. The Company's domestic inventories are generally determined by
     the last-in, first-out (LIFO) method. These inventories account for
     approximately 50.7% and 60.7% of the Company's inventories as of April 1,
     2006 and July 2, 2005, respectively. All remaining inventory cost is
     determined on the first-in, first-out basis.

     COMMITMENTS AND CONTINGENCIES - We are subject to lawsuits and other claims
     related to product and other matters that are being defended and handled in
     the ordinary course of business. We maintain reserves and or accruals for
     such costs that may be incurred, which are determined on a case-by-case
     basis, taking into consideration the likelihood of adverse judgments or
     outcomes, as well as the potential range of probable loss. The reserves and
     accruals are monitored on an ongoing basis and are updated for new
     developments or new information as appropriate.

     INTANGIBLE ASSETS - We record intangible assets through transactions and
     acquisitions. The cost of acquisitions are allocated to the assets and
     liabilities acquired, including identifiable intangible assets, with the
     remaining amount being classified as goodwill. Under current accounting
     guidelines that became effective on July 1, 2001, goodwill arising from
     transactions occurring after July 1, 2001 and any existing goodwill as of
     June 30, 2002 are not amortized to expense but rather assessed annually for
     impairment. Other intangible assets that have an indefinite life are also
     assessed annually for impairment.

     The allocation of the acquisition cost to intangible assets and goodwill
     therefore has a significant impact on our future operating results. The
     allocation process requires the extensive use of estimates and assumptions,
     including estimates of future cash flows expected to be generated by the
     acquired assets. Further, when impairment indicators are identified with
     respect to previously recorded intangible assets, the values of the assets
     are determined using a variety of techniques including discounted future
     cash flows, which are based on estimated future operating results.
     Significant management judgment is required in the forecasting of future
     operating results, which are used in the preparation of projected
     discounted cash flows.

     STOCK-BASED COMPENSATION - The Company adopted SFAS No. 123(R), Share-Based
     Payment, as of the beginning of the first quarter of fiscal 2006 using the
     modified prospective method. SFAS No. 123(R) requires all share-based
     payments to employees to be recognized in the financial statements based on
     their fair value using an option-pricing model at the date of grant. The
     Company determines fair value of such awards using the Black-Scholes option
     pricing model. The Black-Sholes option pricing model incorporated certain
     assumptions, such as risk-free interest rate, expected volatility, and
     expected life of options, in order to arrive at a fair value estimate.


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<PAGE>

     DEFERRED TAXES - The Company accounts for certain income and expense items
     differently for financial reporting purposes than for income tax reporting
     purposes. Deferred taxes are provided in recognition of these temporary
     differences. A valuation allowance on net deferred tax assets is provided
     for items for which it is more likely than not that the benefit of such
     items will not be realized, in accordance with the provisions of SFAS No.
     109, "Accounting for Income Taxes". SFAS No. 109 requires an assessment of
     both positive and negative evidence when measuring the need for a deferred
     tax valuation allowance.

     NEW ACCOUNTING PRONOUNCEMENTS

     In February 2006, the Financial Accounting Standards Board (FASB) issued
     Statement No. 155, "Accounting for Certain Hybrid Financial Instruments,"
     which amends Statement No. 133, "Accounting for Derivative Instruments and
     Hedging Activities" and Statement No. 140, "Accounting for Transfers and
     Servicing of Financial Assets and Extinguishments of Liabilities." This
     Statement permits fair value remeasurement for any hybrid financial
     instrument that contains an embedded derivative that otherwise would
     require bifurcation. In addition, it establishes a requirement to evaluate
     interests in securitized financial assets to identify interests that are
     freestanding derivatives or that are hybrid financial instruments that
     contain an embedded derivative requiring bifurcation. This Statement is
     effective for all financial instruments acquired, issued or subject to a
     new basis occurring after the beginning of an entity's first fiscal year
     that begins after September 15, 2006. The Company is currently evaluating
     the impact of this Statement on its financial statements.

     In February 2006, the FASB issued Staff Position FAS 123(R)-4,
     "Classification of Options and Similar Instruments as Employee Compensation
     That Allow for Cash Settlement upon the Occurrence of a Contingent Event,"
     which amends Statement No. 123(R), "Share-Based Payment." This Staff
     Position provides an exception to the general rule that options must be
     classified as liabilities if, under any circumstances, the entity can be
     required to settle the options in cash or other assets. Under this Staff
     Position, options issued as compensation to employees should be classified
     as liabilities only if (1) the cash settlement feature can be exercised
     only upon the occurrence of a contingent event outside of the employee's
     control, and (2) such event is deemed probable to occur. The guidance is
     effective upon initial adoption of Statement No. 123(R), or for the first
     reporting period beginning after the date of the Staff Position for an
     entity that adopted Statement No. 123(R) prior to the issuance of the Staff
     Position. The Company does not believe the adoption of this Statement has a
     material effect on its financial condition.

     In March 2006, the FASB issued Statement No. 156, "Accounting for Servicing
     of Financial Assets," which amends Statement No. 140, "Accounting for
     Transfers and Servicing of Financial Assets and Extinguishments of
     Liabilities." This statement provides guidance addressing the recognition
     and measurement of separately recognized servicing assets and liabilities,
     common with mortgage securitization activities. This Statement is effective
     for all separately recognized servicing assets and liabilities acquired or
     issued after the beginning of an entity's fiscal year that begins after
     September 15, 2006. The Company does not expect the adoption of this
     Statement to have a material effect on its financial condition, results of
     operations, or cash flows.


                                       43

<PAGE>

     FORWARD LOOKING

     We anticipate capital expenditures on an ongoing basis to be at historical
     levels in relation to net sales.

     We believe that (a) future cash flow from operations based on our current
     level of operations, (b) available borrowings under our senior secured
     credit facilities, second lien credit agreement and other sources of debt
     funding and (c) funds from the sale or monetization of certain assets will
     be adequate to meet our anticipated requirements for current capital
     expenditures, working capital requirements, interest and income tax
     payments and scheduled debt payments for the next twelve months. Our
     ability to satisfy our anticipated liquidity requirements, however, is
     subject to several assumptions, some of which are beyond our control,
     including: (a) general economic, financial, competitive and other factors;
     and (b) our continued compliance with covenants in our debt instruments. If
     we are unable to satisfy our liquidity needs, we could be required to adopt
     one or more alternatives, such as reducing or delaying capital
     expenditures, borrowing additional funds, restructuring indebtedness,
     selling other assets or operations and/or reducing expenditures for new
     product development, cutting other costs, and some or such actions would
     require the consent of our senior lenders, holders of Second Lien Notes
     and/or the holders of our Subordinated Notes. We cannot assure you that any
     of such actions could be effected, or if so, on terms favorable to us, that
     such actions would enable us to continue to satisfy our liquidity needs
     and/or that such actions would be permitted under the terms of our senior
     secured credit facility, the second lien credit agreement or the indentures
     governing our Subordinated Notes.

     In addition, we have required amendments and waivers to our senior debt
     during recent periods due to our failure to remain in compliance with
     financial covenants in our senior debt. We cannot assure you that we will
     be able to comply with the financial covenants and other covenants in our
     debt instruments or that, if we fail to comply, our debt holders would
     waive our compliance or forbear from exercising their remedies.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

     We use derivative financial instruments to manage interest rate and foreign
     currency risk. Our objectives in managing our exposure to interest rate
     changes are to limit the impact of interest rate changes on earnings and
     cash flows and to lower our overall borrowing costs through the use of
     interest rate swaps. Our objectives in managing our exposure to foreign
     currency fluctuations is to reduce the impact of changes in foreign
     exchange rates on consolidated results of operations and future foreign
     currency denominated cash flows. We do not enter into derivative financial
     instruments for trading purposes. Our policy is to manage interest rate
     risk through the use of a combination of fixed and variable rate debt and
     hedge foreign currency commitments of future payments and receipts by
     purchasing foreign currency forward contracts.


                                       44

<PAGE>

     All foreign exchange contracts related to continuing operations have been
     recorded in the consolidated balance sheets within accrued expenses at de
     minimis fair values at April 1, 2006 and July 2, 2005, respectively.
     Foreign exchange contracts with a fair value of $2.3 million, related to
     discontinued operations, have been included in the consolidated balance
     sheets as a reduction of current liabilities of discontinued operations at
     July 2, 2005. The change in the fair value of contracts related to
     continuing operations in the third quarter was insignificant. There was a
     de minimis amount at April 1, 2006 and $1.4 million at July 2, 2005
     recorded in accumulated other comprehensive income, net of tax, related to
     these contracts. The Company anticipates that all gains and losses deferred
     in accumulated other comprehensive income related to foreign exchange
     contracts will be reclassified into earnings within the next twelve months
     as the related inventories are sold. Contracts for the purchase of 5.0
     million U.S. dollars were entered into during the third quarter of fiscal
     2006. At April 1, 2006, the Company had foreign exchange forward contracts
     for the purchase of approximately 0.8 million U.S. dollars.

ITEM 4. CONTROLS AND PROCEDURES

     (a) Evaluation of disclosure controls and procedures. During the quarter
     ended April 1, 2006, the Company's management discovered a deficiency in
     their disclosure controls and procedures that resulted in the omission of
     the common stock equivalent shares related to the Series A Convertible
     Preferred Stock, from the basic earnings per share calculation in periods
     of income. Upon investigation, management determined that the internal
     controls were designed effectively for each reporting period, but did not
     operate as designed. The internal controls, including the use of checklist
     procedures for considering the effect of these convertible securities on
     the calculation, were in place, however, they were not applied properly.

     Corrective measures have been put in place prior to the end of the third
     fiscal quarter of 2006, to reinforce the application of the existing
     control procedures with the Company's accounting staff and ensure their
     consistent application in the evaluation of all securities impacting the
     basic earnings per share calculation.

     Considering the corrective measure described above, the Company's principal
     executive officer and principal financial officer concluded that the
     Company's disclosure controls and procedures (as defined in Rules 13a-14(c)
     and 15d-14(c) under the Securities Exchange Act of 1934 (the Exchange Act))
     were effective as of April 1, 2006, to ensure that information required to
     be disclosed by the Company in reports that it files or submits under the
     Exchange Act was recorded, processed, summarized and reported within the
     time periods specified in the Securities and Exchange Commission rules and
     forms.

     (b) Changes in internal controls. As reported in the Company's Fiscal 2005
     Annual Report on Form 10-K, management determined that, as of July 2, 2005,
     there was an internal controls deficiency related to the Company's
     preparation and review of its income tax provision and related income tax
     accounting procedures, which constituted a material weakness. To address
     this material weakness, the Company began, prior to year end and continued
     throughout the third fiscal quarter, the remediation process, including:

     1.   Hiring additional staff with significant domestic and international
          tax experience;

     2.   Retaining external resources to supplement the Company's tax
          personnel;

     3.   Additional training of finance and tax personnel; and


                                       45

<PAGE>

     4.   Implementing additional policies and interim reporting requirements to
          ensure the accuracy of accounting and tax calculations supporting the
          amounts reflected in our financial statements and to ensure all
          significant accounts are properly reconciled on a frequent and timely
          basis.

     These remediation plans will continue to be implemented and monitored
     during the fourth quarter of this fiscal year. The material weakness will
     not be considered remediated until the remedial procedures operate for a
     period of time, are subsequently tested and management has concluded that
     the procedures are operating effectively.

     Except as described above, there were no significant changes in the
     Company's internal control during the quarter ended April 1, 2006 or other
     factors that could significantly affect these controls subsequent to the
     date of their evaluation, including any corrective actions with regard to
     significant deficiencies and material weaknesses.


                                       46

<PAGE>

                           PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

     SECURITIES CLASS ACTION LAWSUITS

     In May 2004, two stockholder lawsuits, named Mariss Partners, LLP v.
     Salton, Inc., Leonhard Dreimann and David M. Mulder, and Warren Beeler v.
     Salton, Inc., Leonhard Dreimann and David Mulder, were filed in the United
     States District Court for the Northern District of Illinois against the
     Company and certain Salton executives. The complaints allege that the
     defendants violated the federal securities laws, specifically Sections
     10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of
     the Securities and Exchange Commission, by making certain alleged false and
     misleading statements. The plaintiffs sought unspecified damages on behalf
     of a purported class of purchasers of the Company's securities during the
     period from November 11, 2002 through May 11, 2004. On March 17, 2006, the
     Court approved a settlement of the lawsuits and granted a final order of
     dismissal and judgment of the lawsuits. Under the terms of the settlement,
     the Company's insurers paid $2.5 million and the remaining $500,000 of the
     settlement fund is payable no later than July 16, 2007. The Company accrued
     the future payment in other long-term liabilities at the present value of
     $430,000 as of April 1, 2006.

     PRODUCT LIABILITY

     On or about October 27, 2004, a lawsuit entitled DiNatale vs. Salton was
     filed in the New York State Supreme Court against the Company. The
     plaintiffs, who seek unspecified damages, allege that they were injured by
     water contaminated with lead taken from a tea kettle sold by the Company
     under its Russell Hobbs brand. The plaintiffs' attorney had been seeking to
     convert the lawsuit into a class action suit; no class action suit has been
     filed to date. The manufacturer of the product and its insurer are
     defending this lawsuit. The Company's attorneys and its insurers are
     cooperating in the defense of the lawsuit.

     JAY KORDICH V. SALTON, INC.

     On October 19, 2005, a lawsuit named Jay Kordich v. Salton, Inc. was filed
     in the United States District Court for the Southern District of
     California. The plaintiff in this action is seeking a judicial
     determination that a covenant not to compete in an agreement between him
     and Salton is invalid and unenforceable against him plus attorneys' fees
     and costs. Salton believes that the lawsuit is without merit.

     The outcome of the foregoing legal matters cannot be predicted with
     certainty, however Salton does not believe that these actions will have a
     material adverse affect on its business, financial condition or results of
     operations. Therefore, no amounts have been accrued for such claims.

     ENVIRONMENTAL

     The Company has accrued approximately $0.2 million for the anticipated
     costs of environmental remediation at four of its current and previously
     owned sites. Although such costs could exceed that amount, Salton believes
     any such excess will not have a material adverse effect on the financial
     condition or annual results of operations of the Company.


                                       47

<PAGE>

     OTHER

     The Company is a party to various other actions and proceedings incident to
     its normal business operations. The Company believes that the outcome of
     any such litigation will not have a material adverse effect on its
     business, financial condition or results of operations. The Company also
     has product liability and general liability insurance policies in amounts
     believed to be reasonable given its current level of business. Although
     historically the Company has not had to pay any material product liability
     claims, it is conceivable that the Company could incur claims for which we
     are not insured.

ITEM. 6 EXHIBITS.

     The exhibits listed on the accompanying Index to Exhibits are filed as part
     of this Form 10-Q.


                                       48

<PAGE>

                                    SIGNATURE

Pursuant to the requirements 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.

Date: May 11, 2006                      SALTON, INC.


                                        /s/ William M. Lutz
                                        ----------------------------------------
                                        William M. Lutz
                                        Chief Financial Officer


                                       49

<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
 NUMBER                           DESCRIPTION OF DOCUMENT
-------                           -----------------------
<S>       <C>
10.47     Form of Restricted Stock Agreement. Incorporated by reference to the
          Registrant's Current Report on Form 8-K dated April 26, 2006

10.48     Employment Agreement effective as of December 10, 2005 between Salton,
          Inc. and William Lutz. Incorporated by reference to the Registrant's
          Current Report on Form 8-K dated April 26, 2006

10.49     Eighth Amendment to, and Waiver Under, Amended and Restated Credit
          Agreement dated as of May 10, 2006 by and among the Lenders, Wells
          Fargo Foothill, Inc., as administrative agent, and collateral agent
          for the Lenders, Silver Point Finance, LLC, as co-agent, syndication
          agent, documentation agent, arranger and book runner, Salton, Inc.,
          each of Salton's Subsidiaries identified on the signature pages
          thereof as Borrowers and each of Salton's Subsidiaries identified on
          the signature pages thereof as Guarantors. Incorporated by reference
          to the Registrant's Current Report on Form 8-K dated May 10, 2006.

12(A)     Computation of Ratio of Earnings to Fixed Charges

31.1      Certification By The Chief Executive Officer Pursuant To Section 302
          Of The Sarbanes-Oxley Act Of 2002

31.2      Certification By The Chief Financial Officer Pursuant To Section 302
          Of The Sarbanes-Oxley Act Of 2002

32.1      Certification of The Chief Executive Officer Pursuant to 18 U.S.C.
          1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
          2002

32.2      Certification of The Chief Financial Officer Pursuant to 18 U.S.C.
          1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of
          2002
</TABLE>


                                       50