<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 December 30, 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)

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

            1955 Field Court                              60045
            Lake Forest, IL                             (Zip Code)
(Address of principal executive offices)

                                 (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 [ ] Non-accelerated filer [X]

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 February 12, 2007,
15,085,490 shares of its $0.01 par value Common Stock.

================================================================================

<PAGE>

<TABLE>
<CAPTION>

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

         Item 1:  Financial Statements

                  Condensed Consolidated Balance Sheets - December 30, 2006 and      3
                  July 1, 2006

                  Condensed Consolidated Statements of Operations - Thirteen weeks   4
                  ended - December 30, 2006 and December 31, 2005 and Twenty-six
                  weeks ended December 30, 2006 and December 31, 2005

                  Condensed Consolidated Statements of Cash Flows  - Twenty-six      5
                  weeks ended December 30, 2006 and December 31, 2005

                  Notes to Condensed Consolidated Financial Statements               6

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

         Item 3:  Quantitative and Qualitative Disclosures About Market Risk         38

         Item 4:  Controls and Procedures                                            38

PART II           OTHER INFORMATION

         Item 1:  Legal Proceedings                                                  39

         Item 1A: Risk Factors                                                       40

         Item 6:  Exhibits                                                           40

Signature                                                                            41

Index of Exhibits
</TABLE>

                                       2
<PAGE>

                                  SALTON, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE DATA)                                         DECEMBER 30, 2006   JULY 1, 2006
                                                                         -----------------   ------------
<S>                                                                      <C>                 <C>
ASSETS
CURRENT ASSETS:
   Cash                                                                       $ 23,545         $ 18,103
   Compensating balances on deposit                                             39,770           39,516
   Accounts receivable, less allowances                                        138,401          117,094
   Inventories                                                                 118,018          143,997
   Prepaid expenses and other current assets                                    15,065           14,809
   Prepaid income taxes                                                          3,237            1,332
   Deferred income taxes                                                         5,365            5,433
                                                                              --------         --------
    Total Current Assets                                                       343,401          340,284
Property, Plant and Equipment, net                                              39,701           40,460
Tradenames                                                                     161,927          159,675
Non-Current Deferred Tax Asset                                                   3,633            3,269
Other Assets                                                                     8,961            9,844
                                                                              --------         --------
TOTAL ASSETS                                                                  $557,623         $553,532
                                                                              ========         ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
   Revolving line of credit and other current debt, including
        accrued interest of $10,971 and $10,971, respectively                 $151,773         $ 32,518
   Accounts payable                                                             80,616           91,308
   Accrued expenses                                                             40,936           28,081
   Accrued interest                                                              4,767            5,028
   Income taxes payable                                                          1,583              702
                                                                              --------         --------
    Total Current Liabilities                                                  279,675          157,637
Non-Current Deferred Income Taxes                                               15,048           16,271
Senior Subordinated Notes due 2008, including an adjustment of
   $1,292 and $1,829 to the carrying value related
     to interest rate swap agreements, respectively                             59,335           61,531
Second Lien Notes, including accrued interest
   of $7,619 and $13,136, respectively                                         110,891          116,407
Series C Preferred Stock, $.01 par value; authorized, 150,000 shares;
   135,217 shares issued                                                         9,474            8,922
Term Loan and Other Notes Payable                                               18,144          117,908
Other Long Term Liabilities                                                     15,964           15,668
                                                                              --------         --------
TOTAL LIABILITIES                                                              508,531          494,344
Convertible Preferred Stock, $0.01 par value; authorized,
  2,000,000 shares; 40,000 shares issued                                        40,000           40,000
STOCKHOLDERS' EQUITY:
   Common Stock, $0.01 par value; authorized, 40,000,000
     shares; issued and outstanding: 2007-15,085,490 shares;
    2006-14,386,390 shares                                                         186              178
   Treasury Stock, 7,885,845 shares - at cost                                  (65,793)         (65,793)
   Additional Paid-In Capital                                                   66,880           63,854
   Accumulated Other Comprehensive Income                                       13,533           10,297
   Retained Earnings (Deficit)                                                  (5,714)          10,652
                                                                              --------         --------
    Total Stockholders' Equity                                                   9,092           19,188
                                                                              --------         --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                                    $557,623         $553,532
                                                                              ========         ========
</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           26 WEEKS ENDED
                                                        ---------------------------  --------------------------
                                                         DECEMBER 30,  DECEMBER 31,   DECEMBER 30, DECEMBER 31,
                                                             2006         2005           2006          2005
                                                        -------------  ------------  ------------  ------------
<S>                                                     <C>            <C>           <C>           <C>
NET SALES                                               $   190,949    $   230,388   $   329,256   $   378,804
Cost of Goods Sold                                          129,979        153,318       224,157       261,689
Distribution Expenses                                        11,164         12,667        20,851        23,215
                                                        -----------    -----------   -----------   -----------
GROSS PROFIT                                                 49,806         64,403        84,248        93,900
Selling, General and Administrative Expenses                 46,300         53,572        79,846        93,990
Restructuring Costs                                              62             40           907           157
                                                        -----------    -----------   -----------   -----------
OPERATING INCOME (LOSS)                                       3,444         10,791         3,495          (247)
Interest Expense, net                                        10,578          9,196        19,854        20,245
Gain-Early Settlement of Debt                                     -            (65)            -       (21,720)
                                                        -----------    -----------   -----------   -----------
(LOSS) INCOME FROM CONTINUING OPERATIONS
  BEFORE INCOME TAXES                                        (7,134)         1,660       (16,359)        1,228
Income Tax (Benefit) Expense                                   (792)        29,473             7        28,928
                                                        -----------    -----------   -----------   -----------
NET LOSS FROM CONTINUING OPERATIONS                          (6,342)       (27,813)      (16,366)      (27,700)
Income from Discontinued Operations, Net of Tax                   -              -             -         1,735
Gain on Sale of Discontinued Operations, Net of Tax               -              -             -        27,816
                                                        -----------    -----------   -----------   -----------
NET (LOSS) INCOME                                       $    (6,342)    $  (27,813)  $   (16,366)  $     1,851
                                                        ===========    ===========   ===========   ===========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING               14,399,442     13,522,498    14,392,202    12,869,204
WEIGHTED AVERAGE COMMON AND COMMON
   EQUIVALENT SHARES OUTSTANDING                         14,399,442     13,522,498    14,392,202    12,869,204

Net Income (loss) per Common Share: Basic
   (Loss) from continuing operations                    $     (0.44)    $    (2.06)  $     (1.14)  $     (2.15)
   Income from discontinued operations, net of tax                -              -             -          0.13
   Gain on sale of discontinued operations, net of tax            -              -             -          2.16
                                                        -----------    -----------   -----------   -----------
Net (Loss) Income per Common Share: Basic               $     (0.44)    $    (2.06)  $     (1.14)  $      0.14
                                                        ===========    ===========   ===========   ===========

Net Income (Loss) per Common Share: Diluted
   (Loss) from continuing operations                    $     (0.44)    $    (2.06)  $     (1.14)  $     (2.15)
   Income from discontinued operations, net of tax                -              -             -          0.13
   Gain on sale of discontinued operations, net of tax            -              -             -          2.16
                                                        -----------    -----------   -----------   -----------
Net (Loss) Income per Common Share: Diluted             $     (0.44)    $    (2.06)  $     (1.14)  $      0.14
                                                        ===========    ===========   ===========   ===========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements

                                       4
<PAGE>

                                  SALTON, INC.
                 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                   (UNAUDITED)
<TABLE>
<CAPTION>
(IN THOUSANDS)                                                                   26 WEEKS ENDED
                                                                          ---------------------------
                                                                          DECEMBER 30,   DECEMBER 31,
                                                                             2006          2005
                                                                          ------------   ------------
<S>                                                                       <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net (Loss) Income                                                        $  (16,366)    $   1,851
  Adjustments to Reconcile Net (Loss) Income to Net Cash
    from Operating Activities:
   Imputed interest on notes payable and other non-cash items                      66          (264)
   Deferred income tax (benefit) provision                                     (1,363)       33,141
   Stock-based compensation expense                                               639           361
   Depreciation and amortization                                                6,991         8,219
   Amortization of deferred financing costs                                     3,974         1,950
   Bad debt (recovery) provision                                                  179           130
   Gain on sale of discontinued operations                                          -       (27,816)
    (Gain) loss on disposal of property and equipment                              75          (773)
   Inventory valuation adjustment                                                   -         1,486
   Impairment loss on intangible assets                                           101           186
   Foreign currency losses (gains)                                                132          (453)
   Gain - early settlement of debt                                                  -       (21,720)
   Minority interest                                                                -         1,404
   Changes in assets and liabilities:
    Accounts receivable                                                       (19,528)      (67,445)
    Inventories                                                                28,672         2,656
    Prepaid expenses and other current assets                                      (4)       (3,040)
    Other non-current assets                                                       16         2,115
    Accounts payable                                                          (10,445)        8,233
    Income taxes payable                                                       (1,054)       (2,634)
    Accrued expenses                                                            9,167         7,715
                                                                           ----------     ---------
     NET CASH FROM OPERATING ACTIVITIES                                         1,252       (54,698)
CASH FLOWS FROM INVESTING ACTIVITIES:
  Capital expenditures                                                         (5,833)       (3,000)
  Proceeds from sale of property and equipment                                    178         1,141
  Proceeds from sale of tabletop assets                                             -        14,195
  Proceeds from sale of discontinued operations, net of $10,998 cash sold           -        69,938
  Acquisition of majority interest, net of cash acquired                            -        (4,525)
  Additional payment for acquisition of trade names                              (101)         (186)
  Increase in compensating balances on deposit                                   (254)       (4,673)
                                                                           ----------     ---------
     NET CASH FROM INVESTING ACTIVITIES                                        (6,010)       72,890
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net proceeds from revolving line of credit and other short term debt         17,822        11,867
  Proceeds from new credit agreement                                                -        48,870
  Repayment of terminated credit agreement                                          -       (39,675)
  Repayment of long term debt                                                  (8,032)      (45,989)
  Costs associated with refinancing                                            (2,294)      (13,140)
  Common stock issued                                                           1,754           175
                                                                           ----------     ---------
     NET CASH FROM FINANCING ACTIVITIES                                         9,250       (37,892)
                                                                           ----------     ---------
Effect of Exchange Rate Changes on Cash                                           950         1,273
                                                                           ----------     ---------
Increase (Decrease) in Cash                                                     5,442       (18,427)
Cash, Beginning of Period, Including Cash of Discontinued Operations of
  $0 and $35,934, respectively                                                 18,103        50,791
Cash, End of Period, Including Cash of Discontinued Operations of
  $0 and $0, respectively
                                                                           ----------     ---------
Cash, End of Period                                                        $   23,545     $  32,364
                                                                           ==========     =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash Paid During the Period for:
  Interest                                                                 $   20,121     $  21,818
  Income taxes, net                                                        $    2,437     $     670
</TABLE>

NOTE: Cash flow activity includes discontinued operations for the twenty-six
weeks ended December 31, 2005.

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

In the quarter ended September 30, 2006, the Company issued a warrant for the
purchase of 719,320 shares of common stock of the Company at an exercise price
of $2.12 per share to the Agent of the Senior Secured Credit Facility.

            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. 2006 Annual Report on Form 10-K.

2.    STRATEGIC ALTERNATIVES

      The accompanying condensed consolidated financial statements have been
      prepared on a going concern basis. The Company has reported a net loss
      from continuing operations for the second quarter of fiscal 2007 and the
      26 week period ended December 30, 2006. Historically, the Company has also
      reported net losses in the prior three fiscal years, and has not
      consistently generated positive net cash flows from operating activities
      during these periods. The Company has used a combination of cash flows
      from operations, additional borrowing under certain amendments to its
      senior secured credit facility and asset sales to meet its debt service
      and working capital needs. At this time, there can be no assurance that
      the Company will be able to generate sufficient cash flows to meet its
      future working capital needs, debt service obligations and to satisfy or
      refinance its debt maturities without additional sales or monetization of
      existing assets.

      The Company has required amendments and waivers to its senior debt during
      recent periods due to a failure to remain in compliance with the financial
      covenants. There can be no assurance that the Company will be able to
      comply with the financial covenants and other covenants in its debt
      instruments or that, if it fails to comply, that its debt holders would
      waive compliance or forbear from exercising their remedies.

      In order to address the need to satisfy its continuing obligations and
      realize its long term strategy, the Company has been reviewing various
      strategic alternatives. On February 7, 2007, the Company and its
      wholly-owned subsidiary SFP Merger Sub, Inc. ("MergerSub") entered into a
      definitive merger agreement with APN Holding Company, Inc. ("APN Holdco"),
      whereby, among other things, MergerSub will merge with and into APN
      Holdco. APN Holdco acquired all of the outstanding common shares of
      Applica Incorporated ("Applica") on January 23, 2007. Additional terms of
      the merger agreement are described in Note 17, "Subsequent Events."

      The merger would result in Applica and its subsidiaries becoming
      subsidiaries of Salton. The transaction is expected to be completed by the
      end of fiscal 2007. The consummation of the merger is subject to various
      conditions, including the approval by the Company's stockholders, the
      delivery by APN Holdco of executed financing commitments within 45 days of
      the date of the merger agreement, the funding of those or alternative
      commitments and the absence of legal impediments to the consummation of
      the merger. The consummation of the merger would result in the redemption
      or refinancing of substantially all of the Company's existing debt
      obligations, and provide adequate working capital for future operations.

                                       6
<PAGE>
      While it is expected that the merger will close, if it fails to do so, the
      Company believes that its current cash flows from operating activities and
      existing credit facilities may not be sufficient to fund its operations
      and meet its overadvance repayment requirement at June 30, 2007 and its
      debt obligations that are due on December 31, 2007. In this case, the
      Company would rely on alternative sources of financing and additional
      sales of assets to refinance its maturing debt and meet its operating
      needs. The Company can not assure that it will be able to execute these
      plans on favorable terms and within a time frame that will permit it to
      continue its current operations. The financial statements do not include
      any adjustments that might result from the outcome of this uncertainty.

3.    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 preliminary 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>
                                                                 TWENTY-SIX WEEKS ENDED

                                                             DECEMBER 30,     DECEMBER 31,
                                                                  2006            2005
                                                             ------------     ------------
<S>                                                          <C>              <C>
Net sales from discontinued operations                       $          -     $     68,798
                                                             ------------     ------------
Income from discontinued operations before income taxes      $          -     $      5,477
Income taxes                                                            -            2,338
Minority Interest                                                       -            1,404
                                                             ------------     ------------
Income from discontinued operations, net of tax              $          -      $     1,735
                                                             ============     ============
</TABLE>

      At December 30, 2006 and July 1, 2006 there were no assets and liabilities
      classified as assets and liabilities of discontinued operations.

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

      NINTH AMENDMENT TO SENIOR SECURED CREDIT FACILITY - On August 15, 2006,
      the Company entered into a ninth amendment to, and waiver under, the
      senior secured credit facility (the "Ninth Amendment").

      The Ninth Amendment, among other things: (1) provides for an additional
      overadvance amount of $26.25 million; (2) eliminates the fixed charge
      coverage ratio and minimum EBITDA covenants through and including March
      2007 and revises such covenants thereafter; (3) adds a monthly cash flow
      covenant through March 2007; (4) provides that the combined outstanding
      amount of the existing overadvance of up to $16.2 million plus the
      additional overadvance of up to $26.25 million must be reduced to a
      maximum of $23.0 million by the end of March 2007; (5) excludes from
      EBITDA up to $6 million of losses or sale of excess inventory between
      August 15, 2006 and December 31, 2006; (6) increases the interest rate by
      50 basis points; and (7) extends to September 15, 2006 the date by which
      the Company must deliver an executed landlord waiver for a warehouse
      located in Redlands, California. Subsequently, as of September 27, 2006,
      the date for delivery of an executed landlord waiver was extended to July
      1, 2007.

                                       7
<PAGE>

      As partial consideration for the Ninth Amendment, the Company issued a
      warrant to purchase 719,320 shares of common stock of the Company at an
      exercise price of $2.12 per share. The warrant may be exercised any time
      before the later of December 31, 2007 and the Stated Termination Date (as
      defined in the senior secured credit facility). The Company granted
      registration rights with respect to the shares issuable upon exercise of
      the warrant.

      The $100 million term loan portion of the senior secured credit facility
      has been reclassified from long-term to current debt. The senior secured
      credit facility matures December 31, 2007.

      As of December 30, 2006, the Company had outstanding borrowings of $113.3
      million under the senior secured credit facility and had approximately
      $7.1 million available under this facility for future borrowings.

      Subsequent to December 30, 2006, the Company entered into a Tenth
      Amendment to the senior secured credit facility (see Note 17, "Subsequent
      Events").

      LETTERS OF CREDIT - As of December 30, 2006, the Company had outstanding
      letters of credit of $1.1 million under the letter of credit subfacility
      of $15.0 million.

      SALTON EUROPE FACILITY AGREEMENT - On October 10, 2006, the Company
      entered into an amendment and restatement to the Europe Facility
      Agreement, which waived compliance with the fixed charge coverage ratio
      for the months of April and May 2006 and amended the definition of such
      covenant thereafter.

      As of December 30, 2006, the Company had outstanding borrowings
      denominated in the Great Britain Pound of 21.5 million (approximately
      $42.0 million) and borrowings denominated in the U.S. Dollar of $2.4
      million, and had approximately $1.0 million available under this agreement
      for future borrowings.

      As of December 30, 2006, the Company was in compliance with covenants
      under the Senior Secured Credit Facility and the Salton Europe Facility
      Agreement.

      SENIOR SUBORDINATED NOTES - On December 28, 2006, the Company issued
      701,600 shares of Salton common stock to Harbinger Capital Partners Master
      Fund I, Ltd. ("Harbinger") for an aggregate purchase price of
      approximately $1.8 million ($2.50 per share); and (b) used the proceeds
      from such stock issuance to repurchase from Harbinger the Company's
      outstanding 12 1/4% senior subordinated notes due 2008 with an aggregate
      principal and accrued interest of approximately $1.8 million.

5.   STOCK-BASED COMPENSATION

      STOCK OPTIONS - Effective July 3, 2005, the Company adopted Financial
      Accounting Standards Board (FASB) Statement No. 123(R), "Share-Based
      Payment," which revises FASB Statement 123 "Accounting for Stock-Based
      Compensation," and supercedes Accounting Principles Board (APB) 25
      "Accounting for Stock Issued to Employees." Statement 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 uses the Black-Scholes option-pricing model to
      determine fair value of awards on the date of grant.

                                       8
<PAGE>

      There were no stock option awards granted during the twenty-six weeks
      ended December 30, 2006 or December 31, 2005. Stock-based compensation
      expense related to stock options for the thirteen weeks ended December 30,
      2006 and December 31, 2005 was $0 and $0.1 million, respectively.
      Stock-based compensation expense related to stock options for the
      twenty-six weeks ended December 30, 2006 and December 31, 2005 was $0 and
      $0.2 million, net of related income tax of $0.1 million. There was no
      compensation expense related to nonvested options not yet recognized as of
      December 30, 2006.

      A summary of the Company's fixed stock options for the twenty-six weeks
      ended December 30, 2006 is as follows:

<TABLE>
<CAPTION>
                                                                  WEIGHTED
                                                                  AVERAGE
                                                    SHARES        EXERCISE
                                                    (000)          PRICE
                                                 ------------  --------------
<S>                                              <C>           <C>
Outstanding as of July 1, 2006                          2,164  $        14.87

   Granted                                                  -

   Exercised                                                -

   Expired or Canceled                                   (584)          14.80
                                                 ------------
Outstanding as of December 30, 2006                     1,580  $        14.89
                                                 ============  ==============
Options exercisable at December 30, 2006                1,580  $        14.89

Weighted-average fair value of
  options granted during the period                                       N/A
</TABLE>

      The following information summarizes the stock options outstanding at
      December 30, 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>
$5.333-$5.833                               8             0.47   $      5.08          8   $      5.08
$6.333-$10.60                             823             4.97          8.84        823          8.84
$13.917-$17.50                            464             3.25         14.96        464         14.96
$18.95-$37.00                             285             3.04         32.48        285         32.48
                                 ------------                                  --------
$5.333-$37.00                           1,580             4.07   $     14.89      1,580   $     14.89
                                 ============   ==============   ===========   ========   ===========
</TABLE>

      STOCK GRANTS - On March 9, 2006, the Company granted certain employees
      common stock of the Company. A total of 192,250 shares were granted, of
      which 101,250 vested 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.

                                       9
<PAGE>

      The Company has previously recognized compensation cost for these stock
      grants at the fair value of the stock at the date of grant. As of December
      30, 2006, a minimal amount of compensation cost related to nonvested
      awards not yet recognized is being recognized over the remainder of the
      requisite two year service period.

      On August 24, 2006, the Company agreed to issue to David Sabin, the former
      Chairman of the Board, common stock of the Company pursuant to his
      Separation Agreement. A total of 141,510 shares will be issued upon the
      earlier of six months from the date of the Agreement or consummation of a
      change in control of the Company. The Company has recognized severance
      cost at fair value of the stock as of the date of the Agreement of $0.3
      million. Further, in the event a change of control is consummated within
      six months of the Separation Agreement, the Company has also agreed to
      issue an additional number shares of common stock of the Company equal to
      $0.6 million divided by the fair market value (as determined by the Board
      of Directors of the Company in good faith) of the consideration per share
      of common stock received by holders of common stock in connection with
      such change of control. The Company will recognize additional expense if
      and when a change of control occurs.

      On October 18, 2006, the Company agreed to issue to William Rue, the
      former President and Chief Operating Officer, common stock of the Company
      pursuant to his Separation Agreement. A total of 144,928 shares will be
      issued upon the earlier of six months from the date of the Agreement or
      consummation of a change in control of the Company. The Company has
      recognized severance cost at fair value of the stock as of the date of the
      Agreement of $0.3 million. Further, in the event a change of control is
      consummated within six months of the Separation Agreement, the Company has
      also agreed to issue an additional number shares of common stock of the
      Company equal to $0.6 million divided by the fair market value (as
      determined by the Board of Directors of the Company in good faith) of the
      consideration per share of common stock received by holders of common
      stock in connection with such change of control. The Company will
      recognize additional expense if and when a change of control occurs.

      WARRANTS - As partial consideration for the Ninth Amendment to the Senior
      Secured Credit Facility entered into on August 15, 2006, the Company
      issued a warrant to purchase 719,320 shares of common stock of the Company
      at an exercise price of $2.12 per share. The warrant may be exercised any
      time before the later of December 31, 2007 and the Stated Termination Date
      (as defined in the senior secured credit facility). The Company granted
      registration rights with respect to the shares issuable upon exercise of
      the warrant.

      The Company has recognized deferred financing cost for the warrant at fair
      value as of the date of issue of $0.6 million, which is being amortized
      over the related remaining loan term.

      The fair value of the warrant was estimated on the date of issue using the
      Black-Scholes option-pricing model. The following assumptions were used to
      estimate the fair value of the warrant:

<TABLE>
<CAPTION>
<S>                                   <C>
Dividend yield                           N/A
Expected volatility                       97.2 %
Risk-free interest rate                    5.0 %
Expected life of warrant              1.4 years
</TABLE>

                                       10
<PAGE>

6.   RECENT ACCOUNTING PRONOUNCEMENTS

      In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
      Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109"
      to clarify the accounting for uncertainty in income taxes recognized in an
      enterprise's financial statements in accordance with FASB Statement No.
      109, "Accounting for Income Taxes." This interpretation prescribes a
      recognition threshold and measurement attribute for the financial
      statement recognition and measurement of a tax position taken or expected
      to be taken in a tax return. This interpretation also provides guidance on
      derecognition, classification, interest and penalties, accounting in
      interim periods, disclosure, and transition. This interpretation is
      effective for fiscal years beginning after December 15, 2006. The Company
      is currently evaluating the impact of the interpretation on the
      consolidated financial statements.

      In September 2006, the FASB issued Statement No. 158, "Employers'
      Accounting for Defined Benefit Pension and Other Postretirement Benefit
      Plans." This statement requires companies to recognize the overfunded or
      underfunded status of a defined benefit postretirement plan as an asset or
      liability in its statement of financial position. This statement is
      effective for financial statements as of the end of the fiscal year ending
      after December 15, 2006. The Company is currently evaluating the impact of
      adopting this statement on the consolidated financial statements.

      In September 2006, the Securities and Exchange Commission issued Staff
      Accounting Bulletin No. 108, (SAB 108). SAB 108 considers the effects of
      prior year misstatements when quantifying misstatements in current year
      financial statements. It is effective for annual financial statements as
      of the end of the fiscal year ending after November 15, 2006. The Company
      does not believe the adoption of SAB 108 will have a material impact on
      the consolidated financial statements.

7.    NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

      Net income (loss) per share is computed in accordance with FASB Statement
      No. 128, "Earnings Per Share," and Emerging Issues Task Force (EITF)
      Statement No. 03-6, "Participating Securities and the Two Class Method
      Under FASB Statement No. 128, Earnings per Share." Under EITF 03-06, the
      Convertible 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, settlements
      and warrants.

      For the thirteen and twenty-six weeks ended December 30, 2006 and December
      31, 2005, the Company's Convertible Preferred Stock was not dilutive and
      was excluded from the calculation of basic and diluted loss per share.
      Additionally, the Company's outstanding common stock equivalents, options
      and warrants were excluded from the computation of diluted earnings per
      share because they had an anti-dilutive effect due to the Company's loss
      from continuing operations in the period. Had the Company recognized net
      income from continuing operations in the period, basic shares outstanding
      would have increased by 3.5 million shares related to the Convertible
      Preferred Stock under the two-class method; and diluted shares outstanding
      would have increased by 3.6 million shares for the effect of the
      Convertible Preferred Stock and outstanding warrants. Common stock
      equivalents totaling 1.6 million and 2.3 million shares at a price range
      of $5.33 to $37.00 per share were not included in the calculations as of
      December 30, 2006 and December 31, 2005, respectively, due to the
      Company's loss from continuing operations.

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

                                       11
<PAGE>

      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
      Australian dollar to the U.S. dollar.

      All foreign exchange contracts have been recorded in the consolidated
      balance sheets within accrued expenses at de minimis fair values at
      December 30, 2006 and July 1, 2006, respectively. The change in the fair
      value of contracts in the second quarter and the first half of fiscal 2007
      was insignificant.

      Contracts for the purchase of 5.6 million U.S. dollars were entered into
      during the second quarter of fiscal 2007. At December 30, 2006 the Company
      had foreign exchange forward contracts outstanding for the purchase of
      approximately 2.2 million U.S. dollars.

9.    CAPITAL STOCK

      Activity in the Company's capital accounts for the thirteen and twenty-six
      weeks ended December 30, 2006 was as follows:

<TABLE>
<CAPTION>
                                                          13 WEEKS ENDED                               26 WEEKS ENDED
                                          -----------------------------------------   --------------------------------------------
                                                         DECEMBER 30, 2006                            DECEMBER 30, 2006
                                          -----------------------------------------   --------------------------------------------
(IN THOUSANDS)                               COMMON                      ADDITIONAL      COMMON                        ADDITIONAL
                                             SHARES        COMMON         PAID IN        SHARES         COMMON          PAID IN
                                           OUTSTANDING      STOCK         CAPITAL      OUTSTANDING       STOCK          CAPITAL
                                          ------------   -----------    -----------   -------------   ------------    ------------
<S>                                       <C>             <C>           <C>           <C>            <C>              <C>
Balance, September 30 and July 1, 2006          14,384   $       178    $    64,818         14,386   $        178     $     63,854
Share-based compensation                            (1)            -            315             (3)             -              639
Sale of common stock                               702             8          1,747            702              8            1,747
Warrant issued - financing fees                      -             -              -              -              -              640
                                          ------------   -----------    -----------   ------------   ------------    -------------
Balance, December 30, 2006                      15,085   $       186    $    66,880         15,085   $        186     $     66,880
                                          ============   ===========    ===========   ============   ============    =============
</TABLE>

10.   COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

      For the thirteen weeks ended December 30, 2006 and December 31, 2005,
      components of other comprehensive income include foreign currency
      translation adjustments of $2.8 million and $(2.3) million, respectively,
      and derivative liability adjustments of a nominal amount in each period.
      For the twenty-six weeks ended December 30, 2006 and December 31, 2005,
      components of other comprehensive income include foreign currency
      translation adjustments of $3.2 million and $(7.3) million, respectively,
      and derivative liability adjustments of a nominal amount and $(1.4)
      million, respectively.

<TABLE>
<CAPTION>
                                                                  13 WEEKS ENDED                      26 WEEKS ENDED
                                                         -----------------------------     -----------------------------------
(IN THOUSANDS)                                           DECEMBER 30,     DECEMBER 31,      DECEMBER 30,         DECEMBER 31,
                                                              2006           2005               2006                2005
                                                         ------------    -------------     --------------     ----------------
<S>                                                      <C>             <C>               <C>                <C>
Net Loss                                                 $    (6,342)    $    (27,813)     $     (16,366)     $         1,851

Other Comprehensive Income (Loss), net of tax of $-0-
 and $ (595), respectively                                     2,747           (2,268)             3,236               (8,713)
                                                         -----------     ------------      -------------      ---------------
Comprehensive Loss Income                                $    (3,595)    $    (30,081)     $     (13,130)     $        (6,862)
                                                         ===========     ============      =============      ===============
</TABLE>

                                       12
<PAGE>

      Accumulated other comprehensive income is comprised of the following:

<TABLE>
<CAPTION>
                                                                                                 AS OF
                                                                                 ----------------------------------------
(IN THOUSANDS)                                                                       DECEMBER 30,            JULY 1,
                                                                                        2006                   2006
                                                                                 ------------------     -----------------
<S>                                                                              <C>                    <C>
Minimum Pension Liability, net of tax of $(4,470) and $(4,308), respectively     $           (8,550)    $          (8,173)
Unrealized Loss on Derivative, net of tax of $(3) and $0, respectively                           (6)                    -
Foreign Currency Translation                                                                 22,089                18,470
                                                                                 ------------------     -----------------
                                                                                 $           13,533     $          10,297
                                                                                 ==================     =================
</TABLE>

11.   PENSION BENEFIT PLANS

      The components of net periodic pension cost are as follows:

<TABLE>
<CAPTION>
(IN THOUSANDS)                                                DOMESTIC               SALTON EUROPE             TOTAL
THIRTEEN WEEKS ENDED:                                12/30/2006     12/31/05    12/30/2006   12/31/05  12/30/2006  12/31/05
                                                     -----------    --------    ----------   --------  ----------  --------
<S>                                                  <C>            <C>         <C>          <C>       <C>         <C>
   Service cost-benefits earned during the period    $        42    $     42     $     122   $     68  $      164  $    110
   Interest cost on projected benefit obligation             175         176           617        528         792       704
   Actuarial return on plan assets                          (167)       (157)         (592)      (453)       (759)     (610)
   Net amortization and deferral                              48          61           150        196         198       257
                                                     -----------    --------    ----------   --------  ----------  --------
             Net pension cost                        $        98    $    122    $      297   $    339  $      395  $    461
                                                     ===========    ========    ==========   ========  ==========  ========
</TABLE>

<TABLE>
<CAPTION>

(IN THOUSANDS)                                              DOMESTIC                   SALTON EUROPE           TOTAL
TWENTY-SIX WEEKS ENDED:                               12/30/06       12/31/05     12/30/06    12/31/05   12/30/06   12/31/05
                                                     -----------     --------    ----------   -------   ---------   --------
<S>                                                   <C>            <C>         <C>          <C>       <C>         <C>
   Service cost-benefits earned during the period    $        84     $     84    $      242   $    138  $     326   $    222
   Interest cost on projected benefit obligation             350          352         1,223      1,068      1,573      1,420
   Actuarial return on plan assets                          (334)        (315)       (1,173)      (916)    (1,507)    (1,231)
   Net amortization and deferral                              96          123           297        396        393        519
                                                     -----------     --------    ----------   --------  ---------   --------
             Net pension cost                        $       196     $    244    $      589   $    686  $     785   $    930
                                                     ===========     ========    ==========   ========  =========   ========
</TABLE>

      The Company previously disclosed in its financial statements for the year
      ended July 1, 2006 that it expected to contribute $0.5 million to its
      domestic pension plans and $1.5 million to the Salton Europe pension plan
      in fiscal 2007. As of December 30, 2006, $0.2 million and $0.8 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.
      Salton's products are distributed through similar distribution channels
      and customer base using the marketing efforts of its global marketing
      team.

                                       13
<PAGE>

      For the thirteen weeks ended December 30, 2006, one customer accounted for
      11.1% of net sales from continuing operations. For the thirteen weeks
      ended December 31, 2005, one customer accounted for 12.1% and another
      customer accounted for 10.3% of net sales from continuing operations. For
      the twenty-six weeks ended December 30, 2006, one customer accounted for
      10.3% of net sales from continuing operations. For the twenty-six weeks
      ended December 31, 2005, one customer accounted for 10.7% and another
      customer accounted for 10.6% of net sales from continuing operations.

13.   LEGAL PROCEEDINGS

      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 products liability insurer of the Company and the
      insurer of the manufacturer of the product are cooperating in the defense
      of the lawsuit.

      On or about December 20, 2006, a lawsuit entitled Paul E. LeBlanc, Jr.,et
      al., Plaintiffs, vs. Salton, Inc.; Salton/Maxim Housewares, Inc.:
      Bloomingdales, Inc.; Chiaphua Industries Limited,; and Does 1 through 100,
      inclusive, Defendants was filed in the Orange County Superior Court
      against the Company. The plaintiffs, who are seeking unspecified damages,
      allege that they were injured by water contaminated with lead taken from a
      tea kettle sold by the Company and also allege that the tea kettle
      violated California laws in failing to give a warning of the presence of
      lead in the product. The products liability insurer of the Company and the
      insurer of the manufacturer of the product 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, Management
      believes any such excess will not have a material adverse effect on the
      financial condition or annual results of operations of the Company.

                                       14
<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.

14.   RESTRUCTURING COSTS

      As a result of the U.S. restructuring, the Company incurred $0.1 million
      of restructuring costs during the second quarter of fiscal 2007,
      consisting primarily of severance charges. During the same quarter of
      fiscal 2006, the Company incurred minimal restructuring costs related to
      severance and warehouse rationalization.

      For the first half of fiscal 2007, the Company incurred restructuring
      costs of $0.9 million for severance charges. Restructuring costs of $0.2
      million in the first half of fiscal 2006 consisted of charges related to
      warehouse rationalization.

      Payments of $0.9 million were made in the first half of fiscal 2007,
      including $0.3 million of stock-based compensation. Accrued restructuring
      costs were minimal as of December 30, 2006.

15.   INCOME TAXES

      Deferred tax assets are recognized for deductible temporary differences,
      net operating loss carryforwards, and credit carryforwards if it is more
      likely than not that the tax benefit will be realized. To the extent that
      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. During fiscal 2006, the Company
      recorded a valuation allowance against its U.S. deferred income tax asset
      balance, its unused foreign tax credits and increased its valuation
      allowance on certain foreign entity deferred tax balances. In the first
      and second quarters of fiscal 2007, the Company further increased its U.S.
      and foreign valuation allowances. 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. Included in the Company's
      tax provision are increases in the Company's foreign valuation allowances
      for Salton Germany and Salton Spain. The U.S. net operating loss
      carryforwards primarily expire beginning in fiscal year 2009 through
      fiscal year 2025.


                                       15
<PAGE>

      In the second quarter of fiscal year 2007, the Internal Revenue Service
      completed its examination of Salton's consolidated federal income tax
      returns for fiscal years 2001 through 2004, resulting in a potential tax
      refund. As a result of the IRS examination, the Company's fiscal year 2005
      income tax return has been amended accordingly and will not be subject to
      any future IRS examination. Salton's management consented to the results
      of the examination in the second quarter. Due to the refund claim, the
      staff of the Joint Committee on Taxation is required to review and approve
      the refund amount. This process is expected to be completed by the end of
      the third quarter. Salton management believes it is appropriate to record
      any income tax refund only when approval has been received from the Joint
      Committee. Additionally, as a result of the examination, the Company has
      agreed to a revision of its tax deductible trade name tax basis resulting
      in a $2.0 million benefit to the tax provision in the twenty-six weeks
      ended December 30, 2006.

16.   SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

      The payment obligations of the Company under the senior secured credit
      facility, the second lien notes and the senior subordinated notes are
      guaranteed by certain of the Company's 100% owned domestic subsidiaries
      (Subsidiary Guarantors). Such guarantees are full, unconditional and joint
      and several.

      In December 2005, the Company entered into a facility agreement which is
      guaranteed by certain of the Company's foreign subsidiaries (see Note 4,
      "Senior Secured Credit Facility, Letters of Credit and Long-Term Debt").
      As a result of the foreign borrowing facility, primarily all of the assets
      in these foreign subsidiaries are restricted as to the transfer of funds
      to the parent in the form of cash dividends, loans, or advances. The
      column titled "Foreign Borrowers and Guarantor Subsidiaries" represents
      the financial position, results operations and cash flows of these foreign
      subsidiaries.

      The following condensed consolidating 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 under the
      domestic facility, the Guarantor Subsidiaries under the foreign facility
      and the Company's Non-Guarantor subsidiaries (Other Subsidiaries).
      Investments in subsidiaries are accounted for using the equity method for
      purposes of the consolidating presentation. The principal elimination
      entries eliminate investments in subsidiaries and intercompany
      transactions.

                                       16
<PAGE>

CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2006
(IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                                     FOREIGN
                                                                                                  BORROWERS AND
                                                             GUARANTOR                               GUARANTOR        OTHER
                                                 PARENT    SUBSIDIARIES ELIMINATIONS    TOTAL       SUBSIDIARIES  SUBSIDIARIES
                                                ------------------------------------------------------------------------------
<S>                                             <C>        <C>          <C>            <C>         <C>            <C>
                      ASSETS
Current Assets:
  Cash                                          $       -   $     455   $          -  $       455  $     17,625   $    5,465
  Compensating balances on deposit                      -           -              -            -             -       39,770
  Accounts receivable, net of allowances              120      72,722              -       72,842        41,779       23,780
  Inventories                                       4,321      69,231        (11,801)      61,751        40,035       16,232
  Prepaid expenses and other current assets         1,296       2,960              -        4,256         4,554        6,255
  Intercompany                                    107,350    (137,177)           (61)     (29,888)       (7,301)      37,189
  Prepaid income taxes                              3,237           -              -        3,237             -            -
  Deferred income taxes                                 -           -              -            -             -          128
                                                ------------------------------------------------------------------------------
     Total current assets                         116,324       8,191        (11,862)     112,653        96,692      128,819
Property, Plant and Equipment,                      3,451       6,936                      10,387        11,109       18,205
Investments in Subsidiaries                       137,576     145,020       (282,596)           -             -       83,368
Trade names                                       111,341      10,313              -      121,654        40,273            -
Non-current deferred tax asset                          -           -              -            -         2,480          557
 Other Assets, net                                  5,833          87              -        5,920         3,028           13
                                                ------------------------------------------------------------------------------
Total Assets                                    $ 374,525   $ 170,547   $   (294,458)    $250,614  $    153,582    $ 230,962
                                                ==============================================================================

      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Revolving line of credit and other current
   debt                                         $  10,971   $ 113,304   $          -  $   124,275        26,235   $   1,263
  Accounts payable                                  5,385       5,566            111       11,062         2,832       66,722
  Accrued expenses                                  3,027       6,340              -        9,367        26,559        5,010
  Accrued interest                                  2,421       2,346              -        4,767             -            -
   Income taxes payable                               917           -              -          917           672          479
                                                ------------------------------------------------------------------------------
     Total current liabilities                     22,721     127,556            111      150,388        56,298       73,474
Non-current Deferred tax liability                 10,868           -              -       10,868             -        1,158
Senior Subordinated Notes due 2008, including
   an adjustment of $1,292 to the carrying
   value related to interest rate swap             59,335           -              -       59,335             -            -
   agreements
Second Lien Notes                                 110,891           -              -      110,891             -            -
Series C Preferred Stock                            9,474           -              -        9,474             -            -
Term loan and other notes payable                                                  -            -        18,144            -
Other long term liabilities                                     2,925              -        2,925       12,965            74
                                                ------------------------------------------------------------------------------
     Total liabilities                            213,289     130,481            111      343,881        87,407       74,706
Convertible Preferred Stock                        40,000           -              -       40,000             -            -
Stockholders' Equity                              121,236      40,066       (294,569)    (133,267)       66,175      156,256
                                                ------------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity      $ 374,525   $ 170,547 $     (294,458) $   250,614  $    153,582   $  230,962
                                                ==============================================================================
<CAPTION>
                                                              TOTAL OTHER    CONSOLIDATED   CONSOLIDATED
                                                 ELIMINATIONS SUBSIDIARIES   EMLIMINATIONS    TOTALS
                                                --------------------------------------------------------
<S>                                              <C>          <C>           <C>             <C>
                      ASSETS
Current Assets:
  Cash                                           $        -   $   23,090    $      -        $  23,545
   Compensating balances on deposit                       -       39,770           -           39,770
  Accounts receivable, net of allowances                  -       65,559           -          138,401
  Inventories                                             -       56,267           -          118,018
  Prepaid expenses and other current assets               -       10,809           -           15,065
  Intercompany                                            -       29,888           -                -
  Prepaid income taxes                                    -            -           -            3,237
  Deferred income taxes                               5,237        5,365           -            5,365
                                                --------------------------------------------------------
     Total current assets                             5,237      230,748           -          343,401
Property, Plant and Equipment,                                    29,314           -           39,701
Investments in Subsidiaries                         (83,368)           -           -                -
Trade names                                               -       40,273           -          161,927
Non-current deferred tax asset                          596        3,633           -            3,633
 Other Assets, net                                        -        3,041           -            8,961
                                                --------------------------------------------------------
Total Assets                                     $ (77,535)   $  307,009    $      -        $ 557,623
                                                ========================================================

      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Revolving line of credit and other current
debt                                             $       -        27,498     $     -        $ 151,773
  Accounts payable                                       -        69,554           -           80,616
  Accrued expenses                                       -        31,569           -           40,936
   Accrued interest                                      -             -           -            4,767
   Income taxes payable                               (485)          666           -            1,583
                                                --------------------------------------------------------
     Total current liabilities                        (485)      129,287           -          279,675
Non-current Deferred tax liability                   3,022         4,180                       15,048
Senior Subordinated Notes due 2008, including
an adjustment of $1,292 to the carrying value
   related to interest rate swap agreements              -             -           -           59,335
Second Lien Notes                                        -             -           -          110,891
Series C Preferred Stock                                 -             -           -            9,474
Term loan and other notes payable                        -        18,144           -           18,144
Other long term liabilities                              -        13,039           -           15,964
                                                --------------------------------------------------------
     Total liabilities                               2,537       164,650           -          508,531
Convertible Preferred Stock                              -             -                       40,000
Stockholders' Equity                               (80,072)      142,359           -            9,092
                                                --------------------------------------------------------
Total Liabilities and Stockholders' Equity       $ (77,535)   $  307,009    $      -        $ 557,623
                                                ========================================================
</TABLE>

                                       17
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                                                 FOREIGN
                                                                                                              BORROWERS AND
                                                                GUARANTOR                                       GUARANTOR
                                                   PARENT     SUBSIDIARIES    ELIMINATIONS        TOTAL       SUBSIDIARIES
                                                 --------------------------------------------------------------------------
<S>                                              <C>          <C>             <C>               <C>          <C>
                     ASSETS
Current Assets:
  Cash                                           $       1      $   4,437      $        -       $   4,438       $   7,247
  Compensating balances on deposit                       -              -               -               -               -
  Accounts receivable, net of allowances               420         71,231               -          71,651          30,205
  Inventories                                        5,184         85,911         (14,124)         76,971          50,599
  Prepaid expenses and other current assets          1,620          1,876               -           3,496           3,031
  Intercompany                                     120,860       (161,298)              -         (40,438)        (12,164)
  Prepaid income taxes                               1,332              -               -           1,332               -
  Deferred income taxes                                  -              -               -               -               -
                                                 --------------------------------------------------------------------------
     Total current assets                          129,417          2,157         (14,124)        117,450          78,918
Property, Plant and Equipment,                       4,553          7,573               -          12,126          10,884
Investments in Subsidiaries                        144,210        145,352        (289,562)              -               -
Trade names                                        111,341         10,313               -         121,654          38,021
Non-current deferred tax asset                           -              -               -               -           2,124
 Other Assets, net                                   6,877            102               -           6,979           2,852
                                                 --------------------------------------------------------------------------
Total Assets                                     $ 396,398      $ 165,497       $(303,686)      $ 258,209       $ 132,799
                                                 ==========================================================================
      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
  Revolving line of credit and other
  current debt                                   $  10,971      $      30      $        -       $  11,001       $  21,130
  Accounts payable                                   7,075          4,397             172          11,644           3,501
  Accrued expenses                                   2,395          7,150               -           9,545          14,875
   Accrued interest                                  2,071          2,957               -           5,028               -
   Income taxes payable                                720              -               -             720              52
                                                 --------------------------------------------------------------------------
     Total current liabilities                      23,232         14,534             172          37,938          39,558
Non-current Deferred tax liability                  11,391              -               -          11,391               -
Senior Subordinated Notes due 2008,
including an adjustment of $1,829 to the
 carrying value related to
interest rate swap agreements                       61,531              -               -          61,531               -
Second Lien Notes                                  116,407              -               -         116,407               -
Series C Preferred Stock                             8,922              -               -           8,922               -
Term loan and other notes payable                        -        100,008               -         100,008          17,900
Other long term liabilities                            443          2,968               -           3,411          12,257
                                                 --------------------------------------------------------------------------
     Total liabilities                             221,926        117,510             172         339,608          69,715
Convertible Preferred Stock                         40,000              -               -          40,000               -
Stockholders' Equity                               134,472         47,987        (303,858)       (121,399)         63,084
                                                 --------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity       $ 396,398      $ 165,497       $(303,686)      $ 258,209       $ 132,799
                                                 ==========================================================================
<CAPTION>
                                                     OTHER                         TOTAL OTHER   CONSOLIDATED     CONSOLIDATED
                                                 SUBSIDIARIES      ELIMINATIONS    SUBSIDIARIES  EMLIMINATIONS      TOTALS
                                                 ---------------------------------------------------------------------------
<S>                                             <C>               <C>             <C>           <C>              <C>
                     ASSETS
Current Assets:
  Cash                                             $   6,418        $      -       $  13,665        $      -      $  18,103
   Compensating balances on deposit                   39,516               -          39,516               -         39,516
  Accounts receivable, net of allowances              15,238               -          45,443               -        117,094
  Inventories                                         16,427               -          67,026               -        143,997
  Prepaid expenses and other current assets            8,282               -          11,313               -         14,809
  Intercompany                                        52,602               -          40,438               -              -
  Prepaid income taxes                                     -               -               -               -          1,332
  Deferred income taxes                                  195           5,238           5,433               -          5,433
                                                 ---------------------------------------------------------------------------
     Total current assets                            138,678           5,238         222,834               -        340,284
Property, Plant and Equipment,                        17,450               _          28,334               -         40,460
Investments in Subsidiaries                           83,368         (83,368)              -               -              -
Trade names                                                -               _          38,021               -        159,675
Non-current deferred tax asset                           550             595           3,269                          3,269
 Other Assets, net                                        13               -           2,865               -          9,844
                                                 ---------------------------------------------------------------------------
Total Assets                                       $ 240,059       $ (77,535)      $ 295,323        $      -      $ 553,532
                                                 ===========================================================================
      LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
  Revolving line of credit and other
 current debt                                      $     387       $       -          21,517        $      -      $  32,518
  Accounts payable                                    76,163               -          79,664               -         91,308
  Accrued expenses                                     3,661               -          18,536               -         28,081
   Accrued interest                                        -               -               -                          5,028
   Income taxes payable                                  (70)              -             (18)              -            702
                                                 ---------------------------------------------------------------------------
     Total current liabilities                        80,141               -         119,699               -        157,637
Non-current Deferred tax liability                     1,858           3,022           4,880                         16,271
Senior Subordinated Notes due 2008,
including an adjustment of $1,829 to
the carrying value related to interest
rate swap agreements                                       -               -               -               -         61,531
Second Lien Notes                                          -               -               -               -        116,407
Series C Preferred Stock                                   -               -               -               -          8,922
Term loan and other notes payable                          -               -          17,900               -        117,908
Other long term liabilities                                -               -          12,257               -         15,668
                                                 ---------------------------------------------------------------------------
     Total liabilities                                81,999           3,022         154,736               -        494,344
Convertible Preferred Stock                                -               -                               -         40,000
Stockholders' Equity                                 158,060         (80,557)        140,587               -         19,188
                                                 ---------------------------------------------------------------------------
Total Liabilities and Stockholders' Equity         $ 240,059       $ (77,535)      $ 295,323        $      -      $ 553,532
                                                 ===========================================================================
</TABLE>

                                       18
<PAGE>

CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THIRTEEN WEEKS
ENDED DECEMBER 30, 2006
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                   FOREIGN BORROWERS
                                                                                                    AND  GUARANTOR     OTHER
                                                     PARENT    SUBSIDIARIES ELIMINATIONS    TOTAL    SUBSIDIARIES   SUBSIDIARIES
                                                    -----------------------------------------------------------------------------
<S>                                                 <C>         <C>         <C>          <C>            <C>         <C>
Net Sales                                           $ 42,215    $ 120,834   $  (62,003)  $  101,046     $ 65,397    $  42,157
Cost of Goods Sold                                    32,264      100,457      (63,009)      69,712       41,227       34,596
Distribution Expenses                                      -        5,429            -        5,429        4,029        1,706
                                                    -----------------------------------------------------------------------------
    Gross Profit                                       9,951       14,948        1,006       25,905       20,141        5,855
Selling, General and Administrative expenses           9,883       12,505            -       22,388       18,680        7,327
Restructuring costs                                        6           56            -           62            -            -
                                                    -----------------------------------------------------------------------------
    Operating Income (loss)                               62        2,387        1,006        3,455        1,461       (1,472)
Interest Expense, Net                                  4,185        4,462            -        8,647        1,557          374
(Income) Loss from Subsidiaries                        3,592           94       (3,686)           -            -            -
                                                    -----------------------------------------------------------------------------
   (Loss) Income Before Income Taxes                  (7,715)      (2,169)       4,692       (5,192)         (96)      (1,846)
Income Tax Expense (Benefit)                            (274)           -            -         (274)           2           37
    Net (Loss) Income from Continuing Operations      (7,441)      (2,169)       4,692       (4,918)         (98)      (1,883)
                                                    -----------------------------------------------------------------------------
Income from Discontinued Operations, Net of tax            -            -            -            -            -            -
Net (Loss) Income                                   $ (7,441)   $  (2,169)  $    4,692  $    (4,918)    $    (98)   $  (1,883)
                                                    =============================================================================
<CAPTION>
                                                                                TOTAL OTHER    TOTAL
                                                    ELIMINATIONS  SUBSIDIARIES  ELIMINATIONS CONSOLIDATED
                                                    ------------------------------------------------
<S>                                                 <C>          <C>          <C>          <C>
Net Sales                                           $       -    $ 107,554    $ (17,651)   $ 190,949
Cost of Goods Sold                                          -       75,823      (15,556)     129,979
Distribution Expenses                                       -        5,735            -       11,164
    Gross Profit                                            -       25,996       (2,095)      49,806
Selling, General and Administrative expenses                -       26,007       (2,095)      46,300
Restructuring costs                                         -            -            -           62
    Operating Income (loss)                                 -          (11)           -        3,444
Interest Expense, Net                                       -        1,931            -       10,578
(Income) Loss from Subsidiaries                             -            -            -
   (Loss) Income Before Income Taxes                        -       (1,942)           -       (7,134)
Income Tax Expense (Benefit)                             (557)        (518)           -         (792)
                                                    -------------------------------------------------
    Net (Loss) Income from Continuing Operations          557       (1,424)           -       (6,342)
Income from Discontinued Operations, Net of tax             -            -
                                                    -------------------------------------------------
Net (Loss) Income                                   $     557    $  (1,424)   $       -    $  (6,342)
                                                    =================================================
</TABLE>

                                       19
<PAGE>
CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED DECEMBER 31,
2005

(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                          FOREIGN
                                                                                                          BORROWERS
                                                               GUARANTOR                                 AND GUARANTOR    OTHER
                                                    PARENT    SUBSIDIARIES   ELIMINATIONS      TOTAL     SUBSIDIARIES  SUBSIDIARIES
                                                ------------  ------------  -------------  ------------  ------------- ------------
<S>                                             <C>           <C>           <C>            <C>           <C>           <C>
Net Sales                                       $     52,891  $    167,608  $     (78,864) $    141,635  $      67,447 $     51,915
Cost of Goods Sold                                    42,797       138,273        (83,455)       97,615         41,773       42,529
Distribution Expenses                                      -         7,452              -         7,452          3,895        1,320
                                                ------------  ------------  -------------  ------------  ------------- ------------
    Gross Profit                                      10,094        21,883          4,591        36,568         21,779        8,066
Selling, General and Administrative expenses          10,327        14,882              -        25,209         20,047       10,326
Restructuring costs                                        -            40              -            40              -            -
                                                ------------  ------------  -------------  ------------  ------------- ------------
    Operating (loss) Income                             (233)        6,961          4,591        11,319          1,732       (2,260)
Interest Expense, Net                                  4,218         4,363              -         8,581            619      (81,082)
Gain-early settlement of debt                            (65)            -              -           (65)             -            -
(Income) Loss from Subsidiaries                        2,479           (22)        (2,457)            -              -            -
                                                ------------  ------------  -------------  ------------  ------------- ------------
   (Loss) Income Before Income Taxes                  (6,865)        2,620          7,048         2,803          1,113       78,822
Income Tax Expense                                    25,516             -              -        25,516            392          297
                                                ------------  ------------  -------------  ------------  ------------- ------------
    Net (Loss) Income from Continuing
    Operations                                       (32,381)        2,620          7,048       (22,713)           721       78,525
Income from Discontinued Operations, Net of tax            -             -              -             -              -            -
                                                ------------  ------------  -------------  ------------  ------------- ------------
Net (Loss) Income                               $    (32,381) $      2,620  $       7,048  $    (22,713) $         721 $     78,525
                                                ============  ============  =============  ============  ============= ============
<CAPTION>
                                                              TOTAL OTHER   CONSOLIDATED  CONSOLIDATED
                                                 ELIMINATIONS  SUBSIDIARIES  ELIMINATIONS     TOTALS
                                                 ------------  ------------  ------------  ------------
<S>                                              <C>           <C>           <C>           <C>
Net Sales                                        $          -  $    119,362  $    (30,609) $    230,388
Cost of Goods Sold                                          -        84,302       (28,599)      153,318
Distribution Expenses                                       -         5,215             -        12,667
                                                 ------------  ------------  ------------  ------------
    Gross Profit                                            -        29,845        (2,010)       64,403
Selling, General and Administrative expenses                -        30,373        (2,010)       53,572
Restructuring costs                                         -             -             -            40
                                                 ------------  ------------  ------------  ------------
    Operating (loss) Income                                 -          (528)            -        10,791
Interest Expense, Net                                 81, 078           615             -         9,196
Gain-early settlement of debt                               -             -             -           (65)
(Income) Loss from Subsidiaries                                           -             -             -
                                                 ------------  ------------  ------------  ------------
   (Loss) Income Before Income Taxes                  (81,078)       (1,143)            -         1,660
Income Tax Expense                                      3,268         3,957             -        29,473
                                                 ------------  ------------  ------------  ------------
    Net (Loss) Income from Continuing Operations      (84,346)       (5,100)            -       (27,813)
Income from Discontinued Operations, Net of tax             -             -             -             -
                                                 ------------  ------------  ------------  ------------
Net (Loss) Income                                $    (84,346) $     (5,100) $          -  $    (27,813)
                                                 ============  ============  ============  ============
</TABLE>

                                       20
<PAGE>

CONSOLIDATING STATEMENT OF OPERATIONS FOR THE TWENTY-SIX WEEKS ENDED DECEMBER
30, 2006

(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                            FOREIGN
                                                                                                            BORROWERS
                                                                GUARANTOR                                  AND GUARANTOR
                                                     PARENT    SUBSIDIARIES  ELIMINATIONS       TOTAL      SUBSIDIARIES
                                                 ------------  ------------  -------------  -------------  -------------
<S>                                              <C>           <C>           <C>            <C>            <C>
Net Sales                                        $     78,628  $    210,768  $    (111,128) $     178,268  $     107,984
Cost of Goods Sold                                     61,199       175,904       (113,451)       123,652         68,919
Distribution Expenses                                       -        10,762              -         10,762          7,079
                                                 ------------  ------------  -------------  -------------  -------------
    Gross Profit                                       17,429        24,102          2,323         43,854         31,986
Selling, General and Administrative expenses           18,185        23,363              -         41,548         29,017
Restructuring costs                                       680           227              -            907              -
                                                 ------------  ------------  -------------  -------------  -------------
    Operating (loss)  Income                           (1,436)          512          2,323          1,399          2,969
Interest Expense, Net                                   8,029         8,102                        16,131          3,019
(Income) Loss from Subsidiaries                         9,683           332        (10,015)             -              -
                                                 ------------  ------------  -------------  -------------  -------------
   (Loss) Income Before Income Taxes                  (19,148)       (7,922)        12,338        (14,732)           (50)
Income Tax (Benefit) Expense                             (127)            -              -           (127)           247
                                                 ------------  ------------  -------------  -------------  -------------
    Net (Loss) Income from Continuing Operations      (19,021)       (7,922)        12,338        (14,605)          (297)
Income from Discontinued Operations, Net of tax                           -              -              -              -
                                                 ------------  ------------  -------------  -------------  -------------
Net (Loss) Income                                $    (19,021) $     (7,922) $      12,338  $     (14,605) $        (297)
                                                 ============  ============  =============  =============  =============
<CAPTION>
                                                    OTHER                     TOTAL OTHER   CONSOLIDATED   CONSOLIDATED
                                                 SUBSIDIARIES  ELIMINATIONS   SUBSIDIARIES  ELIMINATIONS     TOTALS
                                                 ------------  ------------  -------------  -------------  -------------
<S>                                              <C>           <C>           <C>            <C>            <C>
Net Sales                                        $     78,481  $          -  $     186,465  $     (35,477) $     329,256
Cost of Goods Sold                                     63,777             -        132,696        (32,191)       224,157
Distribution Expenses                                   3,010             -         10,089              -         20,851
                                                 ------------  ------------  -------------  -------------  -------------
    Gross Profit                                       11,694             -         43,680         (3,286)        84,248
Selling, General and Administrative expenses           12,567             -         41,584         (3,286)        79,846
Restructuring costs                                         -             -              -              -            907
                                                 ------------  ------------  -------------  -------------  -------------
    Operating (loss)  Income                             (873)            -          2,096              -          3,495
Interest Expense, Net                                     704             -          3,723              -         19,854
(Income) Loss from Subsidiaries                             -             -              -              -              -
                                                 ------------  ------------  -------------  -------------  -------------
   (Loss) Income Before Income Taxes                   (1,577)            -         (1,627)             -        (16,359)
Income Tax (Benefit) Expense                              372          (485)           134              -              7
                                                 ------------  ------------  -------------  -------------  -------------
    Net (Loss) Income from Continuing Operations       (1,949)          485         (1,761)             -        (16,366)
Income from Discontinued Operations, Net of tax                           -              -              -              -
                                                 ------------  ------------  -------------  -------------  -------------
Net (Loss) Income                                $     (1,949) $        485  $      (1,761) $           -  $     (16,366)
                                                 ============  ============  =============  =============  =============
</TABLE>

                                       21
<PAGE>

CONSOLIDATING STATEMENT OF OPERATIONS FOR THE TWENTY-SIX WEEKS ENDED DECEMBER
31, 2005

(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                            FOREIGN
                                                                                                            BORROWERS
                                                                GUARANTOR                                  AND GUARANTOR
                                                     PARENT    SUBSIDIARIES  ELIMINATIONS       TOTAL      SUBSIDIARIES
                                                 ------------  ------------  -------------  -------------  -------------
<S>                                              <C>           <C>           <C>            <C>            <C>
Net Sales                                        $     83,940  $    289,172  $    (144,909) $     228,203  $     108,601
Cost of Goods Sold                                     68,251       248,664       (152,896)       164,019         69,846
Distribution Expenses                                       -        13,676              -         13,676          7,159
                                                 ------------  ------------  -------------  -------------  -------------
    Gross Profit                                       15,689        26,832          7,987         50,508         31,596
Selling, General and Administrative expenses           20,775        26,714              -         47,489        (21,580)
Restructuring costs                                        26           131              -            157              -
                                                 ------------  ------------  -------------  -------------  -------------
    Operating (loss) Income                            (5,112)          (13)         7,987          2,862         53,176
Interest Expense, Net                                   9,364         8,299              -         17,663            784
Gain - early settlement of debt                       (21,720)            -              -        (21,720)             -
(Income) Loss from Subsidiaries                       (36,829)          (46)        36,875              -              -
                                                 ------------  ------------  -------------  -------------  -------------
    Income (Loss)  Before Income Taxes                 44,073        (8,266)       (28,888)         6,919         52,392
Income Tax Expense (Benefit)                           28,839             -              -         28,839           (591)
                                                 ------------  ------------  -------------  -------------  -------------
    Net Income (Loss) from Continuing
    Operations                                         15,234        (8,266)       (28,888)       (21,920)        52,983
Income from Discontinued Operations, Net of tax             -             -              -              -              -
Gain on Sale of Discontinued Operations,
Net of Tax                                            (21,323)            -              -        (21,323)         5,398
                                                 ------------  ------------  -------------  -------------  -------------
Net (Loss) Income                                $     (6,089) $     (8,266) $     (28,888) $     (43,243) $      58,381
                                                 ============  ============  =============  =============  =============
<CAPTION>
                                                    OTHER                     TOTAL OTHER   CONSOLIDATED   CONSOLIDATED
                                                 SUBSIDIARIES  ELIMINATIONS   SUBSIDIARIES  ELIMINATIONS     TOTALS
                                                 ------------  ------------  -------------  -------------  -------------
<S>                                              <C>           <C>           <C>            <C>            <C>
Net Sales                                        $    131,482  $          -  $     240,083  $     (89,482) $     378,804
Cost of Goods Sold                                    113,996             -        183,842        (86,172)       261,689
Distribution Expenses                                   2,380             -          9,539              -         23,215
                                                 ------------  ------------  -------------  -------------  -------------
    Gross Profit                                       15,106             -         46,702         (3,310)        93,900
Selling, General and Administrative expenses           17,147        54,244         49,811         (3,310)        93,990
Restructuring costs                                         -             -              -              -            157
                                                 ------------  ------------  -------------  -------------  -------------
    Operating (loss) Income                            (2,041)      (54,244)        (3,109)             -           (247)
Interest Expense, Net                                 (79,280)       81,078          2,582              -         20,245
Gain - early settlement of debt                             -             -              -              -        (21,720)
(Income) Loss from Subsidiaries                             -                            -              -              -
                                                 ------------  ------------  -------------  -------------  -------------
    Income (Loss)  Before Income Taxes                 77,239      (135,322)        (5,691)             -          1,228
Income Tax Expense (Benefit)                               20           660             89              -         28,928
                                                 ------------  ------------  -------------  -------------  -------------
    Net Income (Loss) from Continuing
    Operations                                         77,219      (135,982)        (5,780)             -        (27,700)
Income from Discontinued Operations, Net of tax         1,735             -          1,735              -          1,735
Gain on Sale of Discontinued Operations,
Net of Tax                                             43,741             -         49,139              -         27,816
                                                 ------------  ------------  -------------  -------------  -------------
Net (Loss) Income                                $    122,695  $   (135,982) $      45,094  $           -  $       1,851
                                                 ============  ============  =============  =============  =============
</TABLE>

                                       22

<PAGE>

CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED DECEMBER
30, 2006

(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                                     FOREIGN
                                                                                                                     BORROWERS
                                                                           GUARANTOR                               AND GUARANTOR
                                                                 PARENT   SUBSIDIARIES  ELIMINATIONS    TOTAL      SUBSIDIARIES
                                                                --------  ------------  ------------  -----------  -------------
<S>                                                             <C>       <C>           <C>           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                     $(19,021) $     (7,922) $     12,338  $   (14,605) $        (297)
   Adjustments to reconcile net loss to net cash
      from operating activities:
      Imputed interest on note payable and other non-cash items       66             -             -           66              -
      Deferred income tax (benefit) provision                       (523)            -             -         (523)          (224)
      Stock-based compensation expense                              639             -             -          639              -
      Depreciation and amortization                                1,203           820             -        2,023            636
      Amortization of deferred financing costs                     3,297             -             -        3,297            677
      Bad debt provision                                               -           (25)            -          (25)            79
      Gain on sale of discontinued operations                                                                   -
     (Gain)loss on disposal of property and equipment                  -            39             -           39              -
      Inventory valuation adjustment                                                                            -
      Impairment loss on intangible assets                             0           101             -          101              -
      Foreign currency gains and  losses                               -            38             -           38             94
      Equity in income of unconsolidated affiliate/
          consolidated subsidiaries                                9,683           332       (10,015)           -              -
      Minority Interest, net of tax                                                                             -
      Changes in assets and liabilities, net of acquisitions:
        Accounts receivable                                          300        (1,504)            -       (1,204)        (9,978)
        Inventories                                                  863        16,680        (2,323)      15,220         12,794
        Prepaid expenses and other current assets                    324        (1,083)            -         (759)        (1,306)
        Other non-current assets                                       -            16             -           16              -
        Accounts payable                                          (1,752)        1,169             -         (583)          (450)
        Income taxes payable                                      (1,708)            -             -       (1,708)           600
        Accrued expenses                                          13,820       (25,590)            -      (11,770)         5,078
                                                                --------  ------------  ------------  -----------  -------------
            NET CASH FROM OPERATING ACTIVITIES                     7,191       (16,929)            -       (9,738)         7,703
                                                                --------  ------------  ------------  -----------  -------------

CASH FLOWS FROM INVESTING ACTIVITIES:
        Capital expenditures                                        (100)         (389)            -         (489)          (235)
        Proceeds from sale of property and equipment                   -           165             -          165              -
        Additional payment for trade names                             -          (101)            -         (101)             -
        Increase in compensating balances on deposit                   -             -             -            -              -
                                                                --------  ------------  ------------  -----------  -------------
           NET CASH FROM INVESTING ACTIVITIES                       (100)         (325)            -         (425)          (235)
                                                                --------  ------------  ------------  -----------  -------------

CASH FLOWS FROM FINANCING ACTIVITIES:

        Net proceeds (repayments) from revolving line of credit
          and other short term debt                                    -        13,280             -       13,280          3,675
        Repayment of long-term debt                               (7,233)           (8)            -       (7,241)          (791)
        Costs associated with refinancing                         (1,613)            -             -       (1,613)          (681)
        Common stock issued                                        1,754             -             -        1,754              -
                                                                --------  ------------  ------------  -----------  -------------
            NET CASH FROM FINANCING ACTIVITIES                    (7,092)       13,272             -        6,180          2,203
                                                                --------  ------------  ------------  -----------  -------------
The effect of exchange rate changes on cash                            -             -             -            -            707
                                                                --------  ------------  ------------  -----------  -------------
Net (decrease)/increase in cash and cash equivalents                  (1)       (3,982)            -       (3,983)        10,378

Cash, beginning of year                                                 1         4,437             -        4,438         7,247
                                                                --------  ------------  ------------  -----------  -------------
Cash, end of period                                             $      -  $        455  $          -  $       455  $      17,625
                                                                ========  ============  ============  ===========  =============
<CAPTION>
                                                                   OTHER                    TOTAL OTHER   CONSOLIDATED CONSOLIDATED
                                                                SUBSIDIARIES  ELIMINATIONS  SUBSIDIARIES  ELIMINATIONS   TOTALS
                                                                ------------  ------------  ------------  ------------ ------------
<S>                                                             <C>           <C>           <C>           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net loss                                                     $     (1,949) $        485  $     (1,761) $          - $    (16,366)
   Adjustments to reconcile net loss to net cash                                                       -                          -
      from operating activities:                                                                       -                          -
      Imputed interest on note payable and other non-cash items            -             -             -             -           66
      Deferred income tax (benefit) provision                           (616)            -          (840)            -       (1,363)
      Stock-based compensation expense                                    -             -             -             -           639
      Depreciation and amortization                                    4,332             -         4,968             -        6,991
      Amortization of deferred financing costs                             -             -           677             -        3,974
      Bad debt provision                                                 125             -           204             -          179
      Gain on sale of discontinued operations                                            -             -             -            -
     (Gain)loss on disposal of property and equipment                     36             -            36             -           75
      Minority Interest, net of tax                                        -             -             -             -            -
      Impairment loss on intangible assets                                 -             -             -             -          101
      Foreign currency gains and  losses                                   -             -            94             -          132
      Equity in income of unconsolidated affiliate/
          consolidated subsidiaries                                        -             -             -             -            -
      Minority Interest, net of tax                                                      -             -             -            -
      Changes in assets and liabilities, net of acquisitions:                            -             -                          -
        Accounts receivable                                           (8,346)            -       (18,324)            -      (19,528)
        Inventories                                                      658             -        13,452             -       28,672
        Prepaid expenses and other current assets                      2,061             -           755             -           (4)
        Other non-current assets                                           -             -             -             -           16
        Accounts payable                                              (9,412)            -        (9,862)            -      (10,445)
        Income taxes payable                                             539          (485)          654             -       (1,054)
        Accrued expenses                                              15,859             -        20,937             -        9,167
                                                                ------------  ------------  ------------  ------------ ------------
            NET CASH FROM OPERATING ACTIVITIES                         3,287             -        10,990             -        1,252
                                                                ------------  ------------  ------------  ------------ ------------
Cash flows from investing activities:
        Capital expenditures                                          (5,109)            -        (5,344)            -       (5,833)
        Proceeds from sale of property and equipment                      13             -            13             -          178
        Additional payment for trade names                                 -             -             -             -         (101)
        Increase in compensating balances on deposit                    (254)            -          (254)            -         (254)
                                                                ------------  ------------  ------------  ------------ ------------
           NET CASH FROM INVESTING ACTIVITIES                         (5,350)            -        (5,585)            -       (6,010)
                                                                ------------  ------------  ------------  ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
        Net proceeds (repayments) from revolving line of credit
          and other short term debt                                      867             -         4,542             -       17,822
        Repayment of long-term debt                                        -             -          (791)            -       (8,032)
        Costs associated with refinancing                                  -             -          (681)            -       (2,294)
        Common stock issued                                                -             -             -             -        1,754
                                                                ------------  ------------  ------------  ------------ ------------
        Net cash from financing activities                               867             -         3,070             -        9,250
                                                                ------------  ------------  ------------  ------------ ------------
The effect of exchange rate changes on cash                              243             -           950             -          950
                                                                ------------  ------------  ------------  ------------ ------------
Net (decrease)/increase in cash and cash equivalents                    (953)            -         9,425             -        5,442

Cash, beginning of year                                                 6,418             -        13,665             -       18,103
                                                                ------------  ------------  ------------  ------------ ------------
Cash, end of period                                             $      5,465  $          -  $     23,090  $          - $     23,545
                                                                ============  ============  ============  ============ ============
</TABLE>

                                       23
<PAGE>

CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED DECEMBER
31, 2005

(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                                                       FOREIGN
                                                                                                                      BORROWERS
                                                                             GUARANTOR                              AND GUARANTOR
                                                                 PARENT     SUBSIDIARIES  ELIMINATIONS     TOTAL     SUBSIDIARIES
                                                                ----------  ------------  ------------  ----------  -------------
<S>                                                             <C>         <C>           <C>           <C>         <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income (loss)                                            $   (6,089) $     (8,266) $    (28,888) $  (43,243) $      58,381
   Adjustments to reconcile net loss to net cash
      from operating activities:
      Imputed interest on note payable and other non-cash items       (308)            -             -        (308)             -
      Deferred income tax (benefit) provision                       25,809         7,978             -      33,787           (586)
      Stock-based compensation expense                                361             -             -         361              -
      Depreciation and amortization                                  1,891         1,303             -       3,194            583
      Amortization of deferred financing costs                       1,950             -             -       1,950              -
      Bad debt provision                                                 -             -             -           -            108
      Gain on sale of discontinued operations                       21,323             -             -      21,323         (5,398)
     (Gain)loss on disposal of property and equipment                    -          (743)            -        (743)             -
      Inventory valuation adjustment                                     -         1,840             -       1,840           (354)
      Impairment loss on intangible assets                               -           186             -         186              -
      Foreign currency gains and  losses                                 -          (453)            -        (453)             -
      Gain-early settlement of debt                                (21,720)            -             -     (21,720)             -
      Equity in income of unconsolidated affiliate/
          consolidated subsidiaries                                (36,828)          (46)       36,874           -
      Minority Interest, net of tax                                      -             -             -           -              -
      Changes in assets and liabilities, net of acquisitions:
        Accounts receivable                                            221       (43,471)            -     (43,250)       (12,346)
        Inventories                                                 (2,667)       30,618        (7,987)     19,964          7,980
        Prepaid expenses and other current assets                      904        (1,416)            -        (512)          (569)
        Other non-current assets                                         -            (8)            -          (8)        22,774
        Accounts payable                                              (654)        1,052             -         398         (5,942)
        Income taxes payable                                        (4,841)            -             -      (4,841)           (92)
        Accrued expenses                                            76,528         4,016             1      80,545         12,387
                                                                ----------  ------------  ------------  ----------  -------------
            NET CASH FROM OPERATING ACTIVITIES                      55,880        (7,410)            -      48,470         76,926
                                                                ----------  ------------  ------------  ----------  -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
        Capital expenditures                                          (354)          (79)            -        (433)          (171)
        Proceeds from sale of property and equipment                     -         1,141             -       1,141              -
        Proceeds from sale of tabletop assets                            -        14,081                    14,081              -
        Proceeds from sale of discontinued operations                    -             -             -           -              -
        Acquisition of majority interest, net of cash acquired           -             -             -           -              -
        Additional payment for acquisition of trade names                -          (186)            -        (186)             -
        Increase in compensating balances on deposit                     -             -             -           -              -
                                                                ----------  ------------  ------------  ----------  -------------
           NET CASH FROM INVESTING ACTIVITIES                         (354)       14,957             -      14,603           (171)
                                                                ----------  ------------  ------------  ----------  -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
        Net proceeds from revolving line of credit
          and other short term debt                                      -        (7,016)            -      (7,016)        18,624
        Proceeds from new credit agreement                               -                           -           -         48,870
        Repayment of terminated credit agreement                         -                           -           -        (39,675)
        Repayment of long-term debt                                (45,738)         (112)                  (45,850)             -
        Costs associated with refinancing                           (9,963)            -             -      (9,963)        (3,177)
        Dividend Paid from Eu to CV                                     -             -             -           -        (81,078)
        Common stock issued                                            175             -             -         175              -
                                                                ----------  ------------  ------------  ----------  -------------
        NET CASH FROM FINANCING ACTIVITIES                         (55,526)       (7,128)            -     (62,654)       (56,436)
                                                                ----------  ------------  ------------  ----------  -------------
The effect of exchange rate changes on cash                              -             -             -           -           (362)
                                                                ----------  ------------  ------------  ----------  -------------
Net (decrease)/increase in cash and cash equivalents                     0           419             -         419         19,957

Cash, beginning of year                                                   -           127             -         127          2,019
                                                                ----------  ------------  ------------  ----------  -------------
Cash, end of period                                             $        -  $        546  $          -  $      546  $      21,976
                                                                ==========  ============  ============  ==========  =============
<CAPTION>
                                                                   OTHER                    TOTAL OTHER   CONSOLIDATED CONSOLIDATED
                                                                SUBSIDIARIES  ELIMINATIONS  SUBSIDIARIES  ELIMINATIONS    TOTALS
                                                                ------------  ------------  ------------  ------------ ------------
<S>                                                             <C>           <C>           <C>           <C>          <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income (loss)                                            $    122,695  $   (135,982) $     45,094               $      1,851
   Adjustments to reconcile net loss to net cash
      from operating activities:
      Imputed interest on note payable and other non-cash items           44             -            44             -         (264)
      Deferred income tax (benefit) provision                           (720)          660          (646)            -       33,141
      Stock-based compensation expense                                    -             -             -             -          361
      Depreciation and amortization                                    4,442             -         5,025             -        8,219
      Amortization of deferred financing costs                             -             -             -             -        1,950
      Bad debt provision                                                  22             -           130             -          130
      Gain on sale of discontinued operations                        (43,741)            -       (49,139)            -      (27,816)
     (Gain)loss on disposal of property and equipment                    (30)            -           (30)            -         (773)
      Inventory valuation adjustment                                       -             -          (354)            -        1,486
      Impairment loss on intangible assets                                 -             -             -             -          186
      Foreign currency gains and  losses                                   -             -             -             -         (453)
      Gain-early settlement of debt                                        -             -             -             -      (21,720)
      Equity in income of unconsolidated affiliate/                                       -             -                          -
          consolidated subsidiaries                                                      -             -             -            -
      Minority Interest, net of tax                                    1,404             -         1,404             -        1,404
      Changes in assets and liabilities, net of acquisitions:
        Accounts receivable                                          (11,849)            -       (24,195)            -      (67,445)
        Inventories                                                  (25,288)            -       (17,308)            -        2,656
        Prepaid expenses and other current assets                     (1,959)            -        (2,528)            -       (3,040)
        Other non-current assets                                     (74,895)       54,244         2,123             -        2,115
        Accounts payable                                              13,777             -         7,835             -        8,233
        Income taxes payable                                           2,299             -         2,207             -       (2,634)
        Accrued expenses                                             (85,217)            -       (72,830)            -        7,715
                                                                ------------  ------------  ------------  ------------ ------------
            NET CASH FROM OPERATING ACTIVITIES                       (99,016)      (81,078)     (103,168)            -      (54,698)
                                                                ------------  ------------  ------------  ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
        Capital expenditures                                          (2,396)            -        (2,567)            -       (3,000)
        Proceeds from sale of property and equipment                       -             -             -                      1,141
        Proceeds from sale of tabletop assets                         114.00             -           114             -       14,195
        Proceeds from sale of discontinued operations                 69,938             -        69,938             -       69,938
        Acquisition of majority interest, net of cash acquired        (4,525)            -        (4,525)            -       (4,525)
        Additional payment for acquisition of trade names                  -             -             -             -         (186)
        Increase in compensating balances on deposit                  (4,673)            -        (4,673)            -       (4,673)
                                                                ------------  ------------  ------------  ------------ ------------
           NET CASH FROM INVESTING ACTIVITIES                         58,458             -        58,287             -       72,890
                                                                ------------  ------------  ------------  ------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
        Net proceeds from revolving line of credit
          and other short term debt                                      259             -        18,883             -       11,867
        Proceeds from new credit agreement                                 -             -        48,870             -       48,870
        Repayment of terminated credit agreement                           -             -       (39,675)            -      (39,675)
        Repayment of long-term debt                                     (139)            -          (139)                   (45,989)
        Costs associated with refinancing                                  -             -        (3,177)                   (13,140)
        Dividend Paid from Eu to CV                                       -        81,078             -             -            -
        Common stock issued                                                -             -             -             -          175
                                                                ------------  ------------  ------------  ------------ ------------
        NET CASH FROM FINANCING ACTIVITIES                               120        81,078        24,762             -      (37,892)
                                                                ------------  ------------  ------------  ------------ ------------
The effect of exchange rate changes on cash                            1,635             -         1,273             -        1,273
                                                                ------------  ------------  ------------  ------------ ------------
Net (decrease)/increase in cash and cash equivalents                 (38,803)            -       (18,846)            -      (18,427)
Cash, beginning of year                                                48,645             -        50,664             -       50,791
                                                                ------------  ------------  ------------  ------------ ------------
Cash, end of period                                             $      9,842  $          -  $     31,818  $          -     $ 32,364
                                                                ============  ============  ============  ============  ===========
</TABLE>

                                       24
<PAGE>
17.   SUBSEQUENT EVENTS

      TENTH AMENDMENT TO SENIOR SECURED FACILITY

      On February 12, 2007, the Company entered into a tenth amendment to the
      senior secured credit facility (the "Tenth Amendment"). The Tenth
      Amendment, among other things: (1) provides that the combined outstanding
      amount of the existing overadvance of up to $16.2 million plus the
      additional overadvance of up to $27.2 million must be reduced to a maximum
      of $23.0 million by the end of June 2007; (2) eliminates the fixed charge
      coverage ratio and minimum EBITDA covenants through and including June
      2007 and revises such covenants thereafter; (3) adds a monthly cash flow
      covenant from April through June 2007; and (4) places a limit of
      availability of $105.0 million through June 2007.

      MERGER AGREEMENT

      On October 23, 2006, the Company formed a special committee comprised of
      three independent Board members to review strategic alternatives to
      enhance stockholder value. Houlihan Lokey Howard & Zukin Capital, Inc. has
      been employed to serve as financial advisor to assist the Board and the
      special committee in the process.

      On February 7, 2007, the Company and its wholly-owned subsidiary SFP
      Merger Sub, Inc. ("MergerSub") entered into a definitive merger agreement
      with APN Holding Company, Inc. ("APN Holdco"), whereby, among other
      things, MergerSub will merge with and into APN Holdco. APN Holdco acquired
      all of the outstanding common shares of Applica Incorporated ("Applica")
      on January 23, 2007. Applica is a marketer and distributor of a wide range
      of small appliances for use in and outside the home. Through its operating
      subsidiary, Applica Consumer Products, Inc., Applica markets products
      under licensed brand names such as Black & Decker(R), company-owned brand
      names such as Littermaid(TM), Infrawave(TM), Belson(R) and private label
      brand names, primarily in North America, Latin America and the Caribbean.

      The merger would result in Applica and its subsidiaries becoming
      subsidiaries of Salton. As a result of the merger, the existing
      stockholders of APN Holdco, Harbinger Capital Partners Master Fund I, Ltd.
      and Harbinger Capital Partners Special Situations Fund, L.P., would
      receive in the aggregate approximately 83 percent of the outstanding
      common stock of Salton immediately following the merger.

      The transaction is expected to be completed by the end of fiscal 2007. The
      consummation of the merger is subject to various conditions, including the
      approval by the Company's stockholders, the delivery by APN Holdco of
      executed financing commitments within 45 days of the date of the merger
      agreement, the funding of those or alternative commitments and the absence
      of legal impediments to the consummation of the merger.

      In connection with the Merger Agreement, the Company and UMB Bank, N.A.,
      the Rights Agent, entered into a Second Amendment to Rights Agreement,
      which has the effect of making the Company's existing Rights Agreement,
      dated as of June 28, 2004 and as subsequently amended as of June 7, 2006,
      and the rights issued to the Company's stockholders thereunder,
      inapplicable to the specific transactions contemplated by the Merger
      Agreement.

      In connection with the Merger Agreement, the board of directors of the
      Company approved and recommended for approval by the stockholders of the
      Company an amendment to the Company's Restated Certificate of
      Incorporation to increase the number of authorized shares of common stock
      to 150 million.


                                       25
<PAGE>

The Merger Agreement contains certain termination rights for both the Company
and APN Holdco and provides that, under certain circumstances, if financing
commitments are not delivered within 45 days or the funding thereof does not
occur, APN Holdco would be obligated to pay the Company a termination fee of
$10.3 million (which fee may be paid through the surrender by Harbinger Capital
Partners of $10.3 million of the Company's outstanding 2008 senior subordinated
notes or second lien notes). The Merger Agreement further provides that upon
termination of the Merger Agreement as the result of either the Company's Board
of Directors withdrawing its recommendation for the Merger or a superior
proposal, the Company would be obligated to pay APN Holdco a termination fee of
$2.5 million plus up to $2.0 million of expenses (or, if APN Holdco has not
delivered the financing commitments prior to such termination, a termination fee
of $1.5 million plus up to $1.0 million of expenses).

COMMITMENT AGREEMENT

Concurrently with the execution of the Merger Agreement, Harbinger Capital
Partners entered into a Commitment Agreement pursuant to which Harbinger Capital
Partners, among other things, (i) agree to execute and deliver and not revoke or
modify their unanimous written consent approving the transaction and (ii)
subject to certain exceptions, not to transfer any of their shares of APN Holdco
common stock prior to the closing of the merger.


                                       26
<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.

INTRODUCTION

Salton consists of a single operating segment which designs, sources, markets
and distributes a diversified product mix for use in the home. Our product mix
consists of small kitchen and home appliances, electronics for the home, time
products, lighting products, picture frames and personal care and wellness
products. Salton sells its products under its portfolio of well recognized brand
names such as Salton(R), George Foreman(R), WestinghouseTM, Toastmaster(R),
Melitta(R), Russell Hobbs(R), Farberware(R), Ingraham(R) and Stiffel(R). Salton
believes its strong market position results from its well-known brand names,
high quality and innovative products, strong relationships with its customer
base and the Company's focused outsourcing strategy.

STRATEGIC ALTERNATIVES

The accompanying condensed consolidated financial statements have been prepared
on a going concern basis. The Company has reported a net loss from continuing
operations for the second quarter of fiscal 2007 and the 26 week period ended
December 30, 2006. Historically, the Company has also reported net losses in the
prior three fiscal years, and has not consistently generated positive net cash
flows from operating activities during these periods. The Company has used a
combination of cash flows from operations, additional borrowing under certain
amendments to its senior secured credit facility and asset sales to meet its
debt service and working capital needs. At this time, there can be no assurance
that the Company will be able to generate sufficient cash flows to meet its
future working capital needs, debt service obligations and to satisfy or
refinance its debt maturities without additional sales or monetization of
existing assets.

The Company has required amendments and waivers to its senior debt during recent
periods due to a failure to remain in compliance with the financial covenants.
There can be no assurance that the Company will be able to comply with the
financial covenants and other covenants in its debt instruments or that, if it
fails to comply, that its debt holders would waive compliance or forbear from
exercising their remedies.

In order to address the need to satisfy its continuing obligations and realize
its long term strategy, the Company has been reviewing various strategic
alternatives. On February 7, 2007, the Company and its wholly-owned subsidiary
SFP Merger Sub, Inc. ("MergerSub") entered into a definitive merger agreement
with APN Holding Company, Inc. ("APN Holdco"), whereby, among other things,
MergerSub will merge with and into APN Holdco. APN Holdco acquired all of the
outstanding common shares of Applica Incorporated ("Applica") on January 23,
2007. Additional terms of the merger agreement are described in Note 17,
"Subsequent Events."

                                       27
<PAGE>

The merger would result in Applica and its subsidiaries becoming subsidiaries of
Salton. The transaction is expected to be completed by the end of fiscal 2007.
The consummation of the merger is subject to various conditions, including the
approval by the Company's stockholders, the delivery by APN Holdco of executed
financing commitments within 45 days of the date of the merger agreement, the
funding of those or alternative commitments and the absence of legal impediments
to the consummation of the merger. The consummation of the merger would result
in the redemption or refinancing of substantially all of the Company's existing
debt obligations, and provide adequate working capital for future operations.

While it is expected that the merger will close, if it fails to do so, the
Company believes that its current cash flows from operating activities and
existing credit facilities may not be sufficient to fund its operations and meet
its overadvance repayment requirement as June 30, 2007 and its debt obligations
that are due on December 31, 2007. In this case, the Company would rely on
alternative sources of financing and additional sales of assets to refinance its
maturing debt and meet its operating needs. The Company can not assure that it
will be able to execute these plans on favorable terms and within a time frame
that will permit it to continue its current operations. The financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

In connection with the Merger Agreement, the Company and UMB Bank, N.A., the
Rights Agent, entered into a Second Amendment to Rights Agreement, which has the
effect of making the Company's existing Rights Agreement, dated as of June 28,
2004 and as subsequently amended as of June 7, 2006, and the rights issued to
the Company's stockholders thereunder, inapplicable to the specific transactions
contemplated by the Merger Agreement.

In connection with the Merger Agreement, the board of directors of the Company
approved and recommended for approval by the stockholders of the Company an
amendment to the Company's Restated Certificate of Incorporation to increase the
number of authorized shares of common stock to 150 million.

The Merger Agreement contains certain termination rights for both the Company
and APN Holdco and provides that, under certain circumstances, if financing
commitments are not delivered within 45 days or the funding thereof does not
occur, APN Holdco would be obligated to pay the Company a termination fee of
$10.3 million (which fee may be paid through the surrender by Harbinger Capital
Partners of $10.3 million of the Company's outstanding 2008 senior subordinated
notes or second lien notes). The Merger Agreement further provides that upon
termination of the Merger Agreement as the result of either the Company's Board
of Directors withdrawing its recommendation for the Merger or a superior
proposal, the Company would be obligated to pay APN Holdco a termination fee of
$2.5 million plus up to $2.0 million of expenses (or, if APN Holdco has not
delivered the financing commitments prior to such termination, a termination fee
of $1.5 million plus up to $1.0 million of expenses).

Subsequent to December 30, 2006, the Company entered into a Tenth Amendment to
the senior secured credit facility (see Note 17, "Subsequent Events").

                                       28
<PAGE>

FORWARD LOOKING STATEMENT

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:

MERGER-RELATED RISK FACTORS:

-     the ability of APN Holdco to obtain executed debt commitment letters
      within 45 days of the date of the merger agreement and the funding
      thereof;

-     the failure to obtain approval of the merger from Salton stockholders;

-     the failure to obtain required third party consents to the Merger;

-     the ability of the two businesses to be integrated successfully;

-     the ability of the new company to fully realize the cost savings and any
      synergies from the proposed transaction; and

-     disruption from the merger making it more difficult to maintain
      relationships with customers, employees or suppliers;

OPERATIONAL AND OTHER RISK FACTORS:

-     our ability to repay or refinance our indebtedness as it matures and
      satisfy the redemption obligations under our preferred stock;

-     our previously announced review of strategic alternatives, which many not
      result in any transaction. In addition, if one is undertaken, we cannot be
      certain of its potential terms or timing;

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

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

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

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

-     unfavorable outcomes from pending legal proceedings;

                                       29
<PAGE>

-     cancellation or reduction of orders;

-     the timely development, introduction and delivery to and acceptance by
      customers of our products;

-     dependence on foreign suppliers and supply and marketing constraints;

-     competitive products and pricing;

-     economic conditions and the retail environment;

-     international business activities;

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

-     our ability to continue the listing of our common stock on the New York
      Stock Exchange. If we are delisted by the New York Stock Exchange, the
      price and liquidation of our common stock will be negatively affected;

-     the risks related to intellectual property rights; and

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

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.

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 2006
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 Financial Accounting Standards Board (FASB) 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.


                                       30
<PAGE>

QUARTER IN REVIEW

In the second quarter of fiscal 2007 (thirteen weeks ended December 30, 2006),
the Company continued to execute its U.S. Restructuring, as defined in the
Company's Annual Report on Form 10-K for fiscal 2004. This includes actions
taken to further reduce operating expenses, improve efficiencies, manage rising
material costs and focus on products and brands within the Company's core
competencies.

On October 18, 2006, the Company announced that William B. Rue decided to retire
from his position as President and Chief Operating Officer and Director of the
Company. In connection with his retirement, the Company agreed to pay Mr. Rue
approximately $0.3 million, and issue to Mr. Rue 144,928 shares of common stock
of the Company upon the earlier of six months or consummation of a change of
control. As of the date of the Agreement, the Company has recognized an expense
of $0.3 million, representing the fair value of the stock. In the event a change
of control is consummated within six months, the Company has also agreed to
issue Mr. Rue an additional number of shares of common stock of the Company
equal to $0.6 million. Mr. Rue has agreed to render consulting services to the
Company for up to 6 months in consideration of $25,000 per month.

U.S. RESTRUCTURING

We continue to identify and implement opportunities to better align domestic
operating costs with current sales levels. Through our cost reduction programs
and consolidation of U.S. operations, we have already reduced cumulative
domestic operating expenses by more than $100 million since fiscal 2005. Our
reductions have exceeded our previously announced plans and expectations. We
continue to assess our expenses and to evaluate additional potential actions
that can be taken in fiscal 2007.

                                       31
<PAGE>

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
                                                                   ----------------------------
                                                                   DECEMBER 30,    DECEMBER 31,
                                                                       2006           2005
                                                                   ------------    -------------
<S>                                                                <C>             <C>
Net sales                                                            100.0%         100.0%
Cost of goods sold                                                    68.1%          66.5%
Distribution expenses                                                  5.8%           5.5%
                                                                   -------         ------
   Gross profit                                                       26.1%          28.0%
Selling, general and administrative expense                           24.3%          23.3%
Restructuring costs                                                    0.0%           0.0%
                                                                   -------         ------
   Operating income                                                    1.8%           4.7%
                                                                   =======         ======

</TABLE>

SECOND QUARTER 2007 COMPARED TO SECOND QUARTER 2006

NET SALES AND GROSS PROFIT
Salton's worldwide sales were $190.9 million in the second quarter of fiscal
2007 versus $230.4 million in the second quarter of fiscal 2006. Net sales
decreased domestically by $44.6 million. This decrease includes $8.9 million of
planned reductions of discontinued non-core products, including reductions
associated with the discontinuation of the U.S. personal care product lines. The
remainder of the reductions in net sales resulted primarily from delays in
receiving product from our suppliers, along with reduced demand for certain
products that were sold at higher prices to compensate for higher material
costs. Foreign sales increased by $5.2 million, consisting of $6.9 million in
favorable foreign currency fluctuations.

Gross profit for the second quarter declined $14.6 million from $64.4 million in
fiscal 2006 to $49.8 million in fiscal 2007. As a percent of net sales, gross
profit was 26.1% in the second quarter of fiscal 2007 compared to 28.0% in the
same quarter of 2006, a decrease of 1.9%. These decreases are primarily a result
of the decreases in net sales in the domestic business, coupled with rising
prices from suppliers associated with their increased cost of raw materials.
Additionally, margins were adversely impacted by the write down of certain
obsolete inventories resulting from discontinued product lines. Although we
continue to assess and implement 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 competitors and the long term
uncertainty of market factors. These decreases in gross profit were partially
offset by a $1.5 million decline in distribution expenses resulting from lower
sales and inventory levels.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $46.3 million for
second quarter of fiscal 2007 compared to $53.6 million for second quarter of
fiscal 2006. U.S. operations reduced selling, general and administrative
expenses by $3.7 million primarily driven by a $2.6 million decline in
promotional expenditures such as television, certain other media and cooperative
advertising expenses as a result of lower sales volumes. The remaining reduction
was a result of decreased expenditures in Europe in an effort to align costs
with current business levels.

                                       32
<PAGE>

RESTRUCTURING COSTS
As a result of the U.S. restructuring, the Company incurred a nominal amount of
restructuring costs during the second quarters of fiscal 2007 and 2006 related
to severance and rationalization of warehouse and retail operations.

Payments of $0.2 million were made in the second quarter of fiscal 2007. Accrued
restructuring costs were minimal as of December 30, 2006.

NET INTEREST EXPENSE
Net interest expense was $10.6 million for the second quarter of fiscal 2007
compared to $9.2 million for the second quarter of fiscal 2006. Excluding
amortization of fees, interest expense as a percent of the average carrying
value of debt outstanding was a weighted average annual rate of 8.8% in the
second quarter of fiscal 2007 compared to 7.7% in fiscal 2006. The increase in
the rate is partially due to the increase in the LIBOR index along with the
refinancing of the credit facility for the European business, which carries a
higher interest rate than the facility in place during the second quarter of
fiscal 2006. The average amount of all debt outstanding was $366.2 million for
the second quarter of fiscal 2007 compared to $409.7 million for the second
quarter of fiscal 2006.

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 effective
tax rate for the second quarter fiscal 2007 is 11.1%, with a tax benefit of
$(0.8) million on a pretax loss of $(7.1) million. The tax benefit booked varied
from the statutory rates mainly due to full valuation allowances being placed on
book losses in the U.S. and certain foreign entities. The company expects the
current year's effective tax rate to vary significantly from the prior year's
rate due to the following one-time events that occurred in fiscal 2006: 1) U.S.
tax of $4.6 million on an inter-company 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.

                                       33
<PAGE>

FIRST HALF 2007 COMPARED TO FIRST HALF 2006

RESULTS OF OPERATIONS

The following table sets forth our results of operations as a percentage of net
sales for the twenty-six weeks (first half) ended:
<TABLE>
<CAPTION>
                                                                      TWENTY-SIX WEEKS ENDED
                                                                   ----------------------------
                                                                   DECEMBER 30,      DECEMBER 31,
                                                                       2006              2005
                                                                   ------------      -------------
<S>                                                                <C>               <C>
Net sales                                                             100.0%            100.0%
Cost of goods sold                                                     68.1%             69.1%
Distribution expenses                                                   6.3%              6.1%
                                                                   --------          --------
   Gross profit                                                        25.6%             24.8%
Selling, general and administrative expense                            24.2%             24.8%
Restructuring costs                                                     0.3%              0.0%
                                                                   --------          --------
   Operating income (loss)                                              1.1%              0.0%
                                                                   ========          ========
</TABLE>

NET SALES AND GROSS PROFIT
Salton's worldwide sales were $329.3 million in first half of fiscal 2007 versus
$378.8 million in the first half of fiscal 2006. Net sales decreased
domestically by $61.2 million. This decrease includes $16.8 million of planned
reductions of discontinued non-core products, including reductions associated
with the sale of the tabletop business in September 2005 and the discontinuation
of the U.S. personal care product lines. The remaining $44.4 million decrease
resulted primarily from product shortages that occurred during the first quarter
of fiscal 2007 when liquidity constraints caused inventory shortages, followed
by acceptance issues associated with price increases that occurred due to higher
raw material costs at our suppliers. Foreign sales increased by $11.6 million,
primarily due to favorable foreign currency fluctuations.

Gross profit for the first half of fiscal 2007 declined $9.6 million from $93.9
million in 2006 to $84.2 million in 2006. As a percent of net sales, gross
profit was 25.6% in the first half of fiscal 2007, compared to 24.8% in the
first half of 2006. Lower sales volumes resulted in declining gross profit,
offset by a more favorable product mix including fewer closeouts and a higher
percentage of core products in 2007. These decreases in gross profit were
partially offset by a $2.4 million decline in distribution expenses resulting
from lower sales and inventory levels.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES
Selling, general and administrative expenses decreased to $79.8 million for the
first half of fiscal 2007 compared to $94.0 million for the first half of fiscal
2006. U.S. operations reduced selling, general and administrative expenses by
$9.0 million, primarily driven by a $4.8 million decline in promotional
expenditures such as television, certain other media and cooperative advertising
expenses as a result of lower sales volumes. The remaining reduction was a
result of decreased expenditures in Europe in an effort to align costs with
reduced demand.

                                       34
<PAGE>

RESTRUCTURING COSTS
As a result of our U.S. restructuring, we incurred $0.9 million in restructuring
costs during the first half of fiscal 2007 related to severance costs.
Restructuring costs of $0.2 million in the first half of 2006 consisted of
warehouse rationalization.

Payments of $0.9 million were made in the first half of fiscal 2007, including
$0.3 million of stock-based compensation. Accrued restructuring costs were
minimal as of December 30, 2006.

On August 24, 2006, the Company agreed to issue to David Sabin, the former
Chairman of the Board, common stock of the Company pursuant to his Separation
Agreement. A total of 141,510 shares will be issued upon the earlier of six
months from the date of the Agreement or consummation of a change in control of
the Company. The company has recognized severance cost at fair value of the
stock as of the date of the Agreement of $0.3 million.

NET INTEREST EXPENSE
Net interest expense was $19.9 million for the first half of fiscal 2007
compared to $20.2 million for the first half of fiscal 2006. Excluding
amortization of fees, interest expense as a percent of the average carrying
value of debt outstanding was a weighted average annual rate of 8.6% in the
first half of fiscal 2007 compared to 8.3% in fiscal 2006. The average amount of
all debt outstanding was $353.9 million for the first half of fiscal 2007
compared to $422.3 million for the first half of fiscal 2006.

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 effective
tax rate for the first half of fiscal 2007 is (.04)% with minimal income tax
expense on a pretax loss of $(16.4) million. The tax expense booked varied from
the statutory rates mainly due to full valuation allowances being placed on book
losses in the U.S. and certain foreign entities. The Company expects its
effective tax rate for fiscal 2007 to differ significantly from the prior year's
rate due to the following one-time events which occurred in the first half of FY
2006: 1) U.S. tax of $ 4.6 million on an inter-company 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.

                                       35
<PAGE>

DISCONTINUED OPERATIONS
In the first half of fiscal 2007, no operations of the Company were reported as
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>
                                                                              TWENTY-SIX WEEKS ENDED
                                                                                DECEMBER 31, 2005
                                                                             ------------------------
<S>                                                                               <C>
Net sales from discontinued operations                                             $     68,798
                                                                                  -------------
Income from discontinued operations before income taxes                            $      5,477
Income taxes                                                                              2,338
Minority Interest                                                                         1,404
                                                                                  -------------
Income from discontinued operations, net of tax                                    $      1,735
                                                                                  =============

</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

CASH FLOW FROM CONTINUING OPERATIONS
The following discussion excludes the impact on cash flows from discontinued
operations in fiscal 2006.

Our primary sources of liquidity are our cash flow from continuing operations
and borrowings under our senior secured credit facilities. In the first half of
fiscal 2007, the Company's continuing operations provided $1.3 million in cash
flow. In the same period of fiscal 2006, our continuing operations used $32.9
million in cash flow. This improvement was primarily the result of earlier
collections of receivables at the end of the period, as well as carrying lower
levels of inventory.

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 first half of fiscal 2007, the Company used $5.8 million for capital
expenditures. In the first half of fiscal 2006, we had $80.9 million in proceeds
from the sale of discontinued operations as a result of the AMAP transaction and
$14.2 million in proceeds from the sale of tabletop assets.

                                       36
<PAGE>

FINANCING ACTIVITIES
We had net proceeds from worldwide credit facilities of $17.8 million during the
first half of fiscal 2007. These proceeds were offset by $8.0 million in
repayments of long-term debt, of which $5.5 million was for the payment of
accrued interest on the Second Lien Notes, which was 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.

On December 28, 2006, the Company issued 701,600 shares of Salton common stock
to Harbinger Capital Partners Master Fund I, Ltd. ("Harbinger") for an aggregate
purchase price of approximately $1.8 million ($2.50 per share).

CREDIT FACILITIES, OTHER DEBT AND PREFERRED STOCK
The Liquidity and Capital Resources section of Management's Discussion and
Analysis of Financial Condition and Results of Operations contained in our 2006
Annual Report on Form 10-K contains the detailed terms for our credit
facilities, other debt and preferred stock, which include the following:

      -     Senior Secured Credit Facility

      -     Second Lien Credit Agreement

      -     Intercreditor Agreement

      -     Senior Subordinated Notes

      -     Salton Europe Facility Agreement

      -     Other Credit Facilities

      -     Series C Preferred Stock

      -     Convertible Preferred Stock

An update of the above items is discussed below.

SENIOR SECURED CREDIT FACILITY -As of February 10, 2007, we had borrowed $102.0
million under the senior secured credit facility and had approximately $2.2
million available under this facility for future borrowings.

Borrowings under our senior secured credit facility accrue interest, at our
option, at either: LIBOR, plus 6.5% (effective August 15, 2006) equaling 12.0%
at February 10, 2007; or the Base Rate (prime rate), plus 4.5% (effective August
15, 2006) equaling 12.8% at February 10, 2007. The Company has the option to
convert any base rate loan to LIBOR rate loan.

TENTH AMENDMENT TO SENIOR SECURED FACILITY - On February 12, 2007, the Company
entered into a tenth amendment to the senior secured credit facility (the "Tenth
Amendment"). The Tenth Amendment, among other things: (1) provides that the
combined outstanding amount of the existing overadvance of up to $16.2 million
plus the additional overadvance of up to $27.2 million must be reduced to a
maximum of $23.0 million by the end of June 2007; (2) eliminates the fixed
charge coverage ratio and minimum EBITDA covenants through and including June
2007 and revises such covenants thereafter; (3) adds a monthly cash flow
covenant from April through June 2007; and (4) places a limit of availability of
$105.0 million through June 2007.

SECOND LIEN CREDIT AGREEMENT- The interest rate with respect to the Second Lien
Notes is the six month LIBOR plus 7%, currently 12.58%, payable in cash on
January 15th and July 15th of each year.

                                       37
<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 Pound Sterling61.0 million (approximately
$119.5 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 December 30,
2006, these rates for borrowings denominated in the Great Britain Pound were
12.2% and 7.9% for term and revolver loans, respectively. The rate for revolver
loan borrowings denominated in the U.S. Dollar was 8.1%.

The Facility Agreement consists of a Revolving Credit Facility with an aggregate
maximum availability of Pound Sterling50.0 million (approximately $97.9 million)
and two Term Loan Facilities of Pound Sterling5.0 million and Pound Sterling6.0
million (approximately $9.8 million and $11.8 million, respectively). The
Company uses borrowings under these facilities for working capital purposes. As
of December 30, 2006, under the Revolving Credit Facility, the Company had
outstanding borrowings denominated in the Great Britain Pound of Pound
Sterling11.4 million (approximately $22.3 million) and borrowings denominated in
the U.S. Dollar of $2.4 million.

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 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. There
have been no material changes in policies or estimates since July 1, 2006.

RECENT ACCOUNTING PRONOUNCEMENTS

In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting for
Uncertainty in Income Taxes - an Interpretation of FASB Statement No. 109" to
clarify the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with FASB Statement No. 109,
"Accounting for Income Taxes." This interpretation prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax return.
This interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and
transition. This interpretation is effective for fiscal years beginning after
December 15, 2006. The Company is currently evaluating the impact of the
interpretation on the consolidated financial statements.

In September 2006, the FASB issued Statement No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Benefit Plans." This statement
requires companies to recognize the overfunded or underfunded status of a
defined benefit postretirement plan as an asset or liability in its statement of
financial position. This statement is effective for financial statements as of
the end of the fiscal year ending after December 15, 2006. The Company is
currently evaluating the impact of adopting this statement on the consolidated
financial statements.

                                       38
<PAGE>

In September 2006, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 108, (SAB 108). SAB 108 considers the effects of prior
year misstatements when quantifying misstatements in current year financial
statements. It is effective for annual financial statements as of the end of the
fiscal year ending after November 15, 2006. The Company does not believe the
adoption of SAB 108 will have a material impact on the consolidated financial
statements.

FORWARD LOOKING

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


                                       39
<PAGE>

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

      The market risk of the Company's financial instruments as of December 30,
      2006 has not significantly changed since July 1, 2006. The market risk
      profile of the Company on July 1, 2006 is disclosed in the Company's 2006
      Annual Report on Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

      (a) Evaluation of disclosure controls and procedures. Salton carried out
      an evaluation, under the supervision and with the participation of
      Salton's management, including Salton's principal executive officer and
      principal financial officer, of the effectiveness of the design and
      operation of Salton's disclosure controls and procedures pursuant to Rule
      13a-15 under the Securities Exchange Act of 1934, as amended (the
      "Exchange Act"), as of December 30, 2006. Based upon that evaluation, the
      principal executive officer and principal financial officer concluded that
      Salton's disclosure controls and procedures were effective to ensure that
      information required to be disclosed by the Company (including its
      consolidated subsidiaries) in the reports the Company files or submits
      under the Exchange Act, is recorded, processed, summarized and reported
      within the periods specified in the SEC's rules and forms.

      (b) Changes in internal controls. As reported in the Company's Fiscal 2006
      Annual Report on Form 10-K, management determined that, as of July 1,
      2006, actions taken to remediate a previously disclosed internal controls
      deficiency related to the Company's preparation and review of its income
      tax provision and related income tax accounting procedures had not been
      fully implemented and tested. This deficiency, which constituted a
      material weakness, required further action, which continued throughout the
      first and second fiscal quarters of 2007. The remediation process
      includes:

          1.   Implementing additional policies and improving interim reporting
               requirements for the Company's foreign subsidiaries to ensure the
               accuracy of accounting and tax calculations and supporting
               detailed schedules;

          2.   Streamlining the processes to ensure adequate time for review
               and controls testing;

          3.   Continuing the utilization of external resources to supplement
               the Company's tax personnel; and

          4.    Additional training of finance and tax personnel as required;

      These remediation plans will continue to be implemented and monitored
      during the remaining quarters 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.

      There were no other changes in the Company's internal controls during the
      quarter ended December 30, 2006 that could materially affect or is
      reasonably likely to affect the Company's internal controls over financial
      reporting.

                                       40
<PAGE>

                           PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

      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 products liability insurer of the Company and the
      insurer of the manufacturer of the product are cooperating in the defense
      of the lawsuit.

      On or about December 20, 2006, a lawsuit entitled Paul E. LeBlanc, Jr.,et
      al., Plaintiffs, vs. Salton, Inc.; Salton/Maxim Housewares, Inc.:
      Bloomingdales, Inc.; Chiaphua Industries Limited,; and Does 1 through 100,
      inclusive, Defendants was filed in the Orange County Superior Court
      against the Company. The plaintiffs, who are seeking unspecified damages,
      allege that they were injured by water contaminated with lead taken from a
      tea kettle sold by the Company and also allege that the tea kettle
      violated California laws in failing to give a warning of the presence of
      lead in the product. The products liability insurer of the Company and the
      insurer of the manufacturer of the product 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.

      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.

                                       41
<PAGE>

    ITEM. 1A  RISK FACTORS.

In the course of operations, we are subject to certain risk factors, which are
set forth above in Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Forward Looking Statement Disclosure and
in our Annual Report on Form 10-K. Except as set forth below, there have been no
material changes to any of the risk factors disclosed in our most recently filed
Annual Report on Form 10-K.

      -     the ability of APN Holdco to obtain executed debt commitment letters
            within 45 days of the date of the merger agreement and the funding
            thereof;

      -     the failure to obtain approval of the merger from Salton
            stockholders;

      -     the failure to obtain required third party consents to the Merger;

      -     the ability of the two businesses to be integrated successfully;

      -     the ability of the new company to fully realize the cost savings and
            any synergies from the proposed transaction within the proposed time
            frame; and

      -     disruption from the merger making it more difficult to maintain
            relationships with customers, employees or suppliers.

ITEM. 6 EXHIBITS.

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

                                       42
<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:  February 13, 2007                             SALTON, INC.

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

                                       43
<PAGE>

                                  EXHIBIT INDEX
<Table>
<Caption>
EXHIBIT NUMBER                                          DESCRIPTION OF DOCUMENT
--------------   -----------------------------------------------------------------------------------------------------------
<S>              <C>
    10.55        Separation Agreement dated as of October 18, 2006 by and between William B. Rue and Salton, Inc.
                 Incorporated by reference to the Registrant's Current Report on Form 8-K dated October 18, 2006.

    10.56        Agreement dated as of November 15, 2006, by and among Salton, Inc. and Harbinger Capital Partners Master
                 Fund I, Ltd. Incorporated by reference to the Registrant's Current Report on Form 8-K dated November 15,
                 2006.

    10.57        Amendment, dated as of December 15, 2006, by and among Salton, Inc. and Harbinger Capital Partners Master
                 Fund I, Ltd.  Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 15,
                 2006.  Incorporated by reference to the Registrant's Current Report on Form 8-K dated December 15, 2006.

    10.58        Stock Purchase Agreement dated as of December 28, 2006 by and between Salton, Inc. and Harbinger Capital
                 Partners Master Fund I, Ltd. Incorporated by reference to the Registrant's Current Report on Form 8-K dated
                 December 28, 2006.

    10.59        Registration Rights Agreement dated as of December 28, 2006 by and between Salton, Inc. and Harbinger
                 Capital Partners Master Fund I, Ltd. Incorporated by reference to the Registrant's Current Report on Form
                 8-K dated December 28, 2006.

    10.60        Debt Repurchase Agreement dated as of December 28, 2006 by and between Salton, Inc. and Harbinger Capital
                 Partners Master Fund I, Ltd. Incorporated by reference to the Registrant's Current Report on Form 8-K dated
                 December 28, 2006.

    10.61        Extension Agreement dated as of November 15, 2006 between George Foreman and Salton, Inc. Incorporated by
                 reference to the Registrant's Current Report on Form 8-K dated January 12, 2007.

    10.62        Second Amendment to Rights Agreement dated as of February 7, 2007, by and between Salton, Inc. and UMB
                 Bank, N.A. Incorporated by reference to the Registrant's Current Report on Form 8-K dated February 7, 2007.

    10.63        Agreement and Plan of Merger dated as of February 7, 2007 by and between Salton, Inc., SFP Merger Sub,
                 Inc., and APN Holding Company, Inc. Incorporated by reference to the Registrant's Current Report on Form
                 8-K dated February 7, 2007.

    10.64        Commitment Agreement dated as of February 7, 2007 by and between Salton, Inc., Harbinger Capital Partners
                 Master Fund I, Ltd., and Harbinger Capital Partners Special Situations Fund, L.P. Incorporated by
                 reference to the Registrant's Current Report on Form 8-K dated February 7, 2007.
</Table>

                                       44
<PAGE>
<Table>
<S>          <C>
10.65        Tenth Amendment to Amended and Restated Credit Agreement dated as of February 12, 2007 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 February 12, 2007.

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>

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