<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 31, 2005 or

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

     Commission file number: 0-19557

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

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

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

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

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

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

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

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

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

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

Indicate the number of shares outstanding of each of the issuer's classes of
common stock, as of the latest practicable date: As of February 3, 2006,
13,522,712 shares of its $0.01 par value Common Stock.


                                       1

<PAGE>

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

        Item 1: Financial Statements

                Condensed Consolidated Balance Sheets -                       3
                December 31, 2005 and July 2, 2005

                Condensed Consolidated Statements of Operations -             4
                Thirteen weeks ended - December 31, 2005 and
                January 1, 2005 and Twenty-six weeks ended
                December 31, 2005 and January 1, 2005

                Condensed Consolidated Statements of Cash Flows -             5
                Twenty-six weeks ended December 31, 2005 and
                January 1, 2005

                Notes to Condensed Consolidated Financial Statements          6

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

        Item 3: Quantitative and Qualitative Disclosures About Market        45
                Risk

        Item 4: Controls and Procedures                                      45

PART II OTHER INFORMATION

        Item 1: Legal Proceedings                                            47

        Item 4: Submission of Matters to a Vote of Security Holders          48

        Item 6: Exhibits                                                     49

Signature                                                                    50

Index of Exhibits                                                            51
</TABLE>


                                       2
<PAGE>

                                  SALTON, INC.
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (UNAUDITED)

<TABLE>
<CAPTION>
(IN THOUSANDS EXCEPT SHARE DATA)                                 DECEMBER 31, 2005   JULY 2, 2005
                                                                 -----------------   ------------
<S>                                                              <C>                 <C>
ASSETS

CURRENT ASSETS:
   Cash                                                               $ 32,364         $ 14,857
   Compensating balances on deposit                                     39,028           34,355
   Accounts receivable, less allowances                                189,607          140,179
   Inventories                                                         155,174          195,065
   Assets held for sale                                                     --              998
   Prepaid expenses and other current assets                            15,835           16,048
   Prepaid income taxes                                                  1,410               --
   Deferred income taxes                                                 5,939            5,524
   Current assets of discontinued operations                                --          101,927
                                                                      --------         --------
      Total Current Assets                                             439,357          508,953
Property, Plant and Equipment, net                                      44,537           50,227
Tradenames                                                             178,822          180,041
Non-Current Deferred Tax Asset                                           1,934           49,275
Other Assets                                                            13,698           11,555
Non-current assets of discontinued operations                               --            7,737
                                                                      --------         --------
TOTAL ASSETS                                                          $678,348         $807,788
                                                                      ========         ========

LIABILITIES AND STOCKHOLDERS' EQUITY

CURRENT LIABILITIES:
   Revolving line of credit and other current debt, including
      accrued interest of $9,721 and $0, respectively                 $ 83,042         $ 70,730
   Senior subordinated notes due 2005 - current                             --           45,990
   Accounts payable                                                     84,829           86,254
   Accrued expenses                                                     43,493           34,802
   Accrued interest                                                      4,540           13,589
   Income taxes payable                                                  1,488            4,375
   Current liabilities of discontinued operations                           --           47,331
                                                                      --------         --------
      Total Current Liabilities                                        217,392          303,071
Non-Current Deferred Income Taxes                                       11,155            3,334
Senior Subordinated Notes Due 2005                                          --           79,010
Senior Subordinated Notes due 2008, including an adjustment of
   $2,328 and $7,082 to the carrying value related
   to interest rate swap agreements, respectively                       61,981          156,387
Second Lien Notes, including accrued interest
   of $18,774 and $0, respectively                                     122,046               --
Series C Preferred Stock                                                 8,370               --
Term Loan and Other Notes Payable                                      117,524          100,050
Other Long Term Liabilities                                             19,870           20,283
Non-current liabilities of discontinued operations                          --            1,462
                                                                      --------         --------
TOTAL LIABILITIES                                                      558,338          663,597
Minority Interest in Discontinued Operations                                --           24,263
Convertible Preferred Stock, $0.01 par value; authorized,
   2,000,000 shares; 40,000 shares issued                               40,000           40,000
Commitments and contingencies

STOCKHOLDERS' EQUITY:
   Common Stock, $0.01 par value; authorized, 40,000,000
      shares; issued and outstanding: 2006-13,522,712 shares;
      2005-11,376,292 shares                                               170              148
   Treasury Stock - at cost                                            (65,793)         (65,793)
   Additional Paid-In Capital                                           62,363           55,441
   Accumulated Other Comprehensive Income                                2,800           11,513
   Retained Earnings                                                    80,470           78,619
                                                                      --------         --------
      Total Stockholders' Equity                                        80,010           79,928
                                                                      --------         --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                            $678,348         $807,788
                                                                      ========         ========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements


                                       3

<PAGE>

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

<TABLE>
<CAPTION>
                                                                     13 WEEKS ENDED               26 WEEKS ENDED
                                                               --------------------------   --------------------------
                                                               DECEMBER 31,    JANUARY 1,   DECEMBER 31,    JANUARY 1,
(IN THOUSANDS EXCEPT SHARE AND PER SHARE DATA)                     2005           2005          2005           2005
                                                               ------------   -----------   ------------   -----------
<S>                                                            <C>            <C>           <C>            <C>
NET SALES                                                      $   230,388    $   272,698   $   378,804    $   477,382
Cost of Goods Sold                                                 153,318        178,381       261,689        316,367
Distribution Expenses                                               12,667         16,574        23,215         29,509
                                                               -----------    -----------   -----------    -----------
GROSS PROFIT                                                        64,403         77,743        93,900        131,506
Selling, General and Administrative Expenses                        53,572         65,380        93,990        112,234
Restructuring Costs                                                     40            118           157            790
                                                               -----------    -----------   -----------    -----------
OPERATING INCOME (LOSS)                                             10,791         12,245          (247)        18,482
Interest Expense, net                                                9,196         12,872        20,245         25,751
Gain-Early Settlement of Debt                                          (65)            --       (21,720)
                                                               -----------    -----------   -----------    -----------
INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE INCOME TAXES         1,660           (627)        1,228         (7,269)
Income Taxes Expense (Benefit)                                      29,473           (318)       28,928         (2,515)
                                                               -----------    -----------   -----------    -----------
NET (LOSS) FROM CONTINUING OPERATIONS                              (27,813)          (309)      (27,700)        (4,754)
Income from Discontinued Operations, Net of Tax                         --          3,066         1,735          4,324
Gain on Sale of Discontinued Operations, Net of Tax                     --             --        27,816             --
                                                               -----------    -----------   -----------    -----------
NET (LOSS) INCOME                                              $   (27,813)   $     2,757   $     1,851    $      (430)
                                                               ===========    ===========   ===========    ===========

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING                      13,522,498     11,372,138    12,869,204     11,371,542
WEIGHTED AVERAGE COMMON AND COMMON
   EQUIVALENT SHARES OUTSTANDING                                13,522,498     11,372,138    12,869,204     11,371,542

Net Income (loss) per Common Share: Basic
   (Loss) from continuing operations                           $     (2.06)   $     (0.03)  $     (2.15)   $     (0.42)
   Income from discontinued operations, net of tax                      --           0.27          0.13           0.38
   Gain on sale of discontinued operations, net of tax                  --             --          2.16             --
                                                               -----------    -----------   -----------    -----------
Net (Loss) Income per Common Share: Basic                      $     (2.06)   $      0.24   $      0.14    $     (0.04)
                                                               ===========    ===========   ===========    ===========

Net (Loss) per Common Share: Diluted
   (Loss) from continuing operations                           $     (2.06)   $     (0.03)  $     (2.15)   $     (0.42)
   Income from discontinued operations, net of tax                      --           0.27          0.13           0.38
   Gain on sale of discontinued operations, net of tax                  --             --          2.16             --
                                                               -----------    -----------   -----------    -----------
Net (Loss) Income per Common Share: Diluted                    $     (2.06)   $      0.24   $      0.14    $     (0.04)
                                                               ===========    ===========   ===========    ===========
</TABLE>

            See Notes to Condensed Consolidated Financial Statements.


                                       4
<PAGE>

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

<TABLE>
<CAPTION>
                                                                  26 WEEKS ENDED
                                                            -------------------------
                                                            DECEMBER 31,   JANUARY 1,
(IN THOUSANDS)                                                  2005          2005
                                                            ------------   ----------
<S>                                                         <C>            <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net Income (Loss)                                          $  1,851      $   (430)
   Adjustments to Reconcile Net Income (Loss) to Net Cash
      from Operating Activities:
   Imputed interest on notes payable and other non-cash
      items                                                       (264)         (910)
   Deferred income tax provision                                33,141        (5,878)
   Stock based compensation expense                                361            --
   Depreciation and amortization                                10,169        12,125
   Bad debt (recovery) provision                                   130        (1,468)
   Gain on sale of discontinued operations                     (27,816)           --
   (Gain) loss on disposal of property and equipment              (773)           38
   Inventory valuation adjustment                                1,486          (899)
   Impairment loss on goodwill and intangible assets               186            --
   Foreign currency gains                                         (453)         (925)
   Gain - early settlement of debt                             (21,720)           --
   Minority interest                                             1,404         3,632
   Changes in assets and liabilities:
      Accounts receivable                                      (67,445)      (90,087)
      Inventories                                                2,656       (15,386)
      Prepaid expenses and other current assets                 (3,040)        2,164
      Other non-current assets                                   2,115          (715)
      Accounts payable                                           8,233        (9,769)
      Income taxes payable                                      (2,634)        4,579
      Accrued expenses                                           7,715        22,269
                                                              --------      --------
         NET CASH FROM OPERATING ACTIVITIES                    (54,698)      (81,660)
CASH FLOWS FROM INVESTING ACTIVITIES:
   Capital expenditures                                         (3,000)       (5,962)
   Proceeds from sale of assets and investments                 15,336           136
   Proceeds from sale of discontinued operations                80,936            --
   Acquisition of majority interest/business, net of cash
      acquired                                                  (4,525)           --
   Additional payment for acquisition of tradenames               (186)           --
   Increase in compensating balances on deposit                 (4,673)         (465)
                                                              --------      --------
         NET CASH FROM INVESTING ACTIVITIES                     83,888        (6,291)
CASH FLOWS FROM FINANCING ACTIVITIES:
   Net proceeds from revolving line of credit and other
      short term debt                                           11,867        79,080
   Proceeds from new credit agreement                           48,870            --
   Repayment of terminated credit agreement                    (39,675)           --
   Repayment of long term debt                                 (45,989)         (486)
   Distributions to minority shareholders                           --        (2,296)
   Costs associated with refinancing                           (13,140)         (217)
   Additional payment for tradenames                                --          (251)
   Common stock issued                                             175            27
                                                              --------      --------
         NET CASH FROM FINANCING ACTIVITIES                    (37,892)       75,857
                                                              --------      --------
Effect of Exchange Rate Changes on Cash                          1,273         2,617
                                                              --------      --------
Decrease in Cash                                                (7,429)       (9,477)
Cash of Discontinued Operations                                (10,998)           --
Cash, Beginning of Period                                       50,791        46,847
                                                              --------      --------
Cash, End of Period                                           $ 32,364      $ 37,370
                                                              ========      ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Cash Paid (Received) During the Period for:

   Interest                                                   $ 21,818      $ 23,190
   Income taxes, net of (refunds)                             $    670      $  3,964
</TABLE>

NOTE: Cash flow activity includes discontinued operations.


           See Notes to Condensed Consolidated Financial Statements.


                                       5

<PAGE>

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

1.   CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

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

2.   DISCONTINUED OPERATIONS

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

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

<TABLE>
<CAPTION>
                                                            THIRTEEN WEEKS ENDED        TWENTY-SIX WEEKS ENDED
                                                          -------------------------   -------------------------
                                                          DECEMBER 31,   JANUARY 1,   DECEMBER 31,   JANUARY 1,
                                                             2005           2005          2005          2005
                                                          ------------   ----------   ------------   ----------
<S>                                                       <C>            <C>          <C>            <C>
Net sales from discontinued operations                         $--        $104,278       $68,798      $173,729
                                                               ---        --------       -------      --------
Income from discontinued operations before income taxes         --        $  8,796       $ 5,477      $ 12,157
Income taxes                                                    --           3,153         2,338         4,201
Minority Interest                                               --           2,577         1,404         3,632
                                                               ---        --------       -------      --------
Income from discontinued operations, net of tax                $--        $  3,066       $ 1,735      $  4,324
                                                               ===        ========       =======      ========
</TABLE>


                                       6

<PAGE>

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

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

3.   SALE OF TABLETOP

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

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

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

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


                                       7
<PAGE>

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

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

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

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

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

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

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


                                       8

<PAGE>

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

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

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

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

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

     The Company was not in compliance with the consolidated fixed charge
     coverage ratio covenant as of December 3, 2005. Subsequent to December 31,
     2005, the Company entered into an amendment and waiver to the senior
     secured credit facility which, among other things, waives the Company's
     compliance with the consolidated fixed charge coverage ratio for the
     twelve-month period ending December 3, 2005 and restates the financial
     covenants for the twelve month periods ending December 31, 2005 through
     June 30, 2007 (see Note 16, "Subsequent Events").

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

     LETTERS OF CREDIT - As of December 31, 2005 the Company had outstanding
     letters of credit of $7.9 million under the letter of credit subfacility of
     $15.0 million.


                                       9

<PAGE>

     SALTON EUROPE FACILITY AGREEMENT - On December 23, 2005, Salton Holdings
     Limited, Salton Europe Limited and certain affiliates entered into a
     Facility Agreement with Burdale Financial Limited, as agent and security
     trustee, and a financial institution group as lender. The provisions of the
     Facility Agreement allow certain of the Company's European subsidiaries to
     borrow funds as needed in an aggregate amount not to exceed L61.0 million
     (approximately $104.8 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 31, 2005, these rates for borrowings denominated in
     the Great Britain Pound were approximately 11.6% and 7.3% for term and
     revolver loans, respectively. The rate for revolver loan borrowings
     denominated in the U.S. Dollar was 7.1%.

     The Facility Agreement consists of a Revolving Credit Facility with an
     aggregate maximum availability of L50.0 million (approximately $85.9
     million) and two Term Loan Facilities of L5.0 million and L6.0 million
     (approximately $8.6 million and $10.3 million, respectively). The Company
     expects to use borrowings under these facilities to repay existing debt and
     for working capital purposes. As of December 31, 2005, outstanding
     borrowings denominated in the Great Britain Pound were L10.8 million
     (approximately $18.6 million) and borrowings denominated in the U.S. Dollar
     were $6.6 million.

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

     On December 20, 2005, the Company entered into a waiver and consent under
     its senior secured credit facility and second lien credit agreement. The
     waiver and consent, among other things: (1) consents to the Company's
     European subsidiaries entering into the Facility Agreement and performing
     their obligations thereunder; (2) waives certain covenants to the extent
     they would prohibit the Facility Agreement; and (3) waives until January
     15, 2006 the requirements that the Company deliver a fully executed
     landlord waiver with respect to one the Company's warehouses. This
     requirement was amended subsequent to quarter-end (see Note 16, "Subsequent
     Events").

5.   STOCK-BASED COMPENSATION

     At December 31, 2005, the Company had stock-based employee compensation
     plans that are described more fully in Note 12 of the Company's 2005 Annual
     Report on Form 10-K. Effective July 3, 2005, the Company adopted SFAS No.
     123(R), Share-Based Payment, which revises SFAS 123 and supercedes ABP 25.
     SFAS No. 123(R) requires all share-based payments to employees to be
     recognized in the financial statements based on their fair value using an
     option-pricing model at the date of grant. The Company has elected to use
     the modified prospective method for adoption, which requires compensation
     expense to be recorded for all unvested stock options beginning in the
     first year of adoption. For all unvested options outstanding as of July 3,
     2005, the previously measured but unrecognized compensation expense, based
     on the fair value at the original grant date, will be recognized over the
     remaining vesting period. For share-based payments granted subsequent to
     July 3, 2005, compensation expense, based on the fair value on the date of
     grant, will be recognized from the date of grant over the applicable
     vesting period. The Company uses the Black-Scholes option-pricing model to
     determine fair value of awards on the date of grant.


                                       10

<PAGE>

     For the thirteen weeks ended December 31, 2005, total stock-based employee
     compensation expense was $0.1 million, net of minimal income tax. For the
     twenty-six weeks ended December 31, 2005, total stock-based employee
     compensation expense was $0.2 million, net of related income tax of $0.1
     million. The impact on basic and diluted earnings per share for the
     thirteen weeks and twenty-six weeks ended was de minimis and $(0.02),
     respectively. Compensation cost related to nonvested awards not yet
     recognized is minimal and will primarily be recognized in the quarter
     ending April 1, 2006.

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

<TABLE>
<CAPTION>
                                                  13 WEEKS ENDED    26 WEEKS ENDED
(IN THOUSANDS, EXCEPT PER SHARE DATA)            JANUARY 1, 2005   JANUARY 1, 2005
                                                 ---------------   ---------------
<S>                                              <C>               <C>
Net income (loss) - as reported                       $2,757           $  (430)
Less: Total stock-based employee compensation
   expense determined under fair value based
   method for all awards, net of related taxes           287               572
                                                      ------           -------
Net income (loss) - pro forma                         $2,470           $(1,002)
                                                      ======           =======
Net loss per common share: Basic and diluted
   As reported                                        $ 0.24           $ (0.04)
   Pro forma                                          $ 0.22           $ (0.09)
</TABLE>

     Activity in the Company's stock option plans for the twenty-six weeks ended
     December 31, 2005 was as follows:

<TABLE>
<CAPTION>
                                                 WEIGHTED
                                                  AVERAGE
                                       OPTIONS   EXERCISE
                                        (000)      PRICE
                                       -------   --------
<S>                                    <C>       <C>
Outstanding at beginning of year        2,603     $13.75
Granted                                    --
Exercised                                (105)      1.67
Expired or Canceled                      (218)      8.91
                                        -----     ------
Outstanding at end of period            2,280     $14.77
                                        =====     ======
Options exercisable at end of period    2,279     $14.77
</TABLE>


                                       11

<PAGE>

     The following information summarizes the stock options outstanding at
     December 31, 2005:

<TABLE>
<CAPTION>
                            OPTIONS OUTSTANDING
                           ---------------------               OPTIONS EXERCISABLE
                                      WEIGHTED-                -------------------
                                       AVERAGE     WEIGHTED-             WEIGHTED-
                                      REMAINING     AVERAGE               AVERAGE
                           SHARES    CONTRACTUAL    EXERCISE    SHARES    EXERCISE
RANGE OF EXERCISE PRICES   (000)    LIFE (YEARS)     PRICE      (000)      PRICE
                           ------   ------------   ---------    ------   ---------
<S>                        <C>      <C>            <C>         <C>       <C>
$2.292 - $5.833                18       1.51           5.52         18       5.52
$6.333 - $10.60             1,185       5.92           8.84      1,184       8.84
$13.917-$17.50                660       4.23          14.83        660      14.83
$18.95-$37.00                 417       4.15          31.95        417      31.95
                            -----                                -----
$0.583 - $37.00             2,280       5.07         $14.77      2,279     $14.77
                            =====       ====         ======      =====     ======
</TABLE>

6.   NET INCOME PER COMMON AND COMMON EQUIVALENT SHARE

     Basic net income (loss) per common share is computed based upon the
     weighted average number of common shares outstanding. Diluted net income
     (loss) per common share is computed based upon the weighted average number
     of common shares outstanding, adjusted for dilutive common stock
     equivalents applying the treasury stock method for options and warrants and
     the if-converted method for convertible securities.

     For the thirteen weeks ended December 31, 2005 and January 1, 2005, and for
     the twenty-six weeks ended December 31, 2005 and January 1, 2005, the
     dilutive effect of 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
     losses from continuing operations in these periods. Had the Company
     recognized net income from continuing operations in these periods,
     incremental shares attributable to the assumed conversion of preferred
     stock and the exercise of outstanding options would have increased diluted
     shares outstanding by 3,951,059 and 3,766,527 shares for the thirteen weeks
     ended December 31, 2005 and January 1, 2005, respectively, and 3,968,515
     and 3,772,200 shares for the twenty-six weeks ended December 31, 2005 and
     January 1, 2005, respectively.

7.   DERIVATIVE FINANCIAL INSTRUMENTS

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

     All foreign exchange contracts related to continuing operations have been
     recorded in the consolidated balance sheets within accrued expenses at de
     minimis fair values at December 31, 2005 and July 2, 2005, respectively.
     Foreign exchange contracts with a fair value of $2.3 million, related to
     discontinued operations, have been included in the consolidated balance
     sheets as a reduction of current liabilities of discontinued operations at
     July 2, 2005. The change in the fair value of contracts related to
     continuing operations in the second quarter was insignificant. There was a
     de minimis amount at December 31,


                                       12
<PAGE>

     2005 and $1.4 million at July 2, 2005 recorded in accumulated other
     comprehensive income, net of tax, related to these contracts. The Company
     anticipates that all gains and losses deferred in accumulated other
     comprehensive income related to foreign exchange contracts will be
     reclassified into earnings within the next twelve months as the related
     inventories are sold. Contracts for the purchase of 2.5 million U.S.
     dollars were entered into during the second quarter of fiscal 2006. At
     December 31, 2005, the Company had foreign exchange forward contracts for
     the purchase of approximately 1.9 million U.S. dollars.

8.   CAPITAL STOCK

     Activity in the Company's capital accounts for the thirteen weeks and
     twenty-six weeks ended December 31, 2005 was as follows:

<TABLE>
<CAPTION>
                                                      13 WEEKS ENDED                      26 WEEKS ENDED
                                                    DECEMBER 31, 2005                   DECEMBER 31, 2005
                                            ---------------------------------   ---------------------------------
                                               COMMON              ADDITIONAL      COMMON              ADDITIONAL
                                               SHARES     COMMON     PAID IN       SHARES     COMMON     PAID IN
(in thousands)                              OUTSTANDING    STOCK     CAPITAL    OUTSTANDING    STOCK     CAPITAL
                                            -----------   ------   ----------   -----------   ------   ----------
<S>                                         <C>           <C>      <C>          <C>           <C>      <C>
Balance, October 2, 2005 and July 3, 2005      13,521      $170      $62,356       11,376      $148      $55,441
Stock issued - bond exchange, net of fees           2                      2        2,042        21        6,273
Stock option exercise                              --        --           --          105         1          174
Foreman additional liability                       --        --          (86)          --        --          114
Share-based compensation cost                      --        --           91           --        --          361
                                               ------      ----      -------       ------      ----      -------
Balance, December 31, 2005                     13,523      $170      $62,363       13,523      $170      $62,363
                                               ======      ====      =======       ======      ====      =======
</TABLE>

9.   COMPREHENSIVE INCOME AND ACCUMULATED OTHER COMPREHENSIVE INCOME

     For the thirteen weeks ended December 31, 2005 and January 1, 2005,
     components of other comprehensive income include foreign currency
     translation adjustments of $(2.3) million and $9.4 million, respectively
     and derivative liability adjustments of a de minimis amount and $(1.9)
     million, respectively. For the twenty-six weeks ended December 31, 2005 and
     January 1, 2005, components of other comprehensive income include foreign
     currency translation adjustments of $(7.3) million and $4.9 million,
     respectively and derivative liability adjustments of $(1.4) million and
     $3.7 million, respectively.

<TABLE>
<CAPTION>
                                                             13 WEEKS ENDED              26 WEEKS ENDED
                                                       -------------------------   -------------------------
                                                       DECEMBER 31,   JANUARY 1,   DECEMBER 31,   JANUARY 1,
(IN THOUSANDS)                                             2005          2005          2005          2005
                                                       ------------   ----------   ------------   ----------
<S>                                                    <C>            <C>          <C>            <C>
Net Income (Loss)                                        $(27,813)      $ 2,757       $ 1,851       $ (430)
Other Comprehensive (Loss) Income, net of tax of $18
   and $(594), $(578) and $1,157, respectively             (2,268)        7,492        (8,713)       8,551
                                                         --------       -------       -------       ------
Comprehensive Income (Loss)                              $(30,081)      $10,249       $(6,862)      $8,121
                                                         ========       =======       =======       ======
</TABLE>


                                       13

<PAGE>

     Accumulated other comprehensive income is comprised of the following:

<TABLE>
<CAPTION>
                                                                                        AS OF
                                                                               -----------------------
                                                                               DECEMBER 31,    JULY 2,
(IN THOUSANDS)                                                                     2005         2005
                                                                               ------------   --------
<S>                                                                            <C>            <C>
Minimum Pension Liability, net of tax of $(5,101) and $(5,207), respectively     $(10,683)    $(10,933)
Unrealized Loss on Derivative, net of tax of $(4) and $573, respectively              (10)       1,404
Foreign Currency Translation                                                       13,493       21,042
                                                                                 --------     --------
                                                                                 $  2,800     $ 11,513
                                                                                 ========     ========
</TABLE>

10.  PENSION BENEFIT PLANS

     The components of net periodic pension cost are as follows:

<TABLE>
<CAPTION>
                                                        Domestic             Salton Europe               Total
(In thousands)                                   ---------------------   ---------------------   ---------------------
13 Weeks Ended:                                  12/31/2005   1/1/2005   12/31/2005   1/1/2005   12/31/2005   1/1/2005
                                                 ----------   --------   ----------   --------   ----------   --------
<S>                                              <C>          <C>        <C>          <C>        <C>          <C>
Service cost-benefits earned during the period      $  42       $  42       $  68       $  79       $ 110       $ 121
Interest cost on projected benefit obligation         176         176         528         559         704         735
Actuarial return on plan assets                      (157)       (156)       (453)       (433)       (610)       (589)
Net amortization and deferral                          61          65         196         188         257         253
                                                    -----       -----       -----       -----       -----       -----
   Net pension cost                                 $ 122       $ 127       $ 339       $ 393       $ 461       $ 520
                                                    =====       =====       =====       =====       =====       =====
</TABLE>

<TABLE>
<CAPTION>
                                                        Domestic             Salton Europe               Total
(In thousands)                                   ---------------------   ---------------------   ---------------------
26 Weeks Ended:                                  12/31/2005   1/1/2005   12/31/2005   1/1/2005   12/31/2005   1/1/2005
                                                 ----------   --------   ----------   --------   ----------   --------
<S>                                              <C>          <C>        <C>          <C>        <C>          <C>
Service cost-benefits earned during the period      $  84       $  84      $  138      $  156      $   222     $   240
Interest cost on projected benefit obligation         352         353       1,068       1,100        1,420       1,453
Actuarial return on plan assets                      (315)       (311)       (916)       (852)      (1,231)     (1,163)
Net amortization and deferral                         123         129         396         370          519         499
                                                    -----       -----      ------      ------      -------     -------
   Net pension cost                                 $ 244       $ 255      $  686      $  774      $   930     $ 1,029
                                                    =====       =====      ======      ======      =======     =======
</TABLE>

     The Company previously disclosed in its financial statements for the year
     ended July 2, 2005, that it expected to contribute $0.4 million to its
     domestic pension plans and $1.3 million to the Salton Europe pension plan
     in fiscal 2006. As of December 31, 2005, $0.3 million and $0.7 million of
     contributions have been made to the domestic and Europe plans,
     respectively.

11.  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, picture frames 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.


                                       14

<PAGE>

     Major Customers - 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 same fiscal period ended
     January 1, 2005, one customer accounted for 13.2% and another customer
     accounted for 10.4% of net sales from continuing operations. For the first
     half of fiscal 2006, one customer accounted for 10.7% and one customer
     accounted for 10.6% of net sales from continuing operations. For the first
     half of fiscal 2005, one customer accounted for 13.8% of net sales from
     continuing operations.

12.  LEGAL PROCEEDINGS

     SECURITIES CLASS ACTION LAWSUITS

     In May 2004, two stockholder lawsuits, named Mariss Partners, LLP v.
     Salton, Inc., Leonhard Dreimann and David M. Mulder, and Warren Beeler v.
     Salton, Inc., Leonhard Dreimann and David Mulder, were filed in the United
     States District Court for the Northern District of Illinois against the
     Company and certain Salton executives. The complaints allege that the
     defendants violated the federal securities laws, specifically Sections
     10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of
     the Securities and Exchange Commission, by making certain alleged false and
     misleading statements. The plaintiffs seek unspecified damages on behalf of
     a purported class of purchasers of the Company's securities during the
     period from November 11, 2002 through May 11, 2004. The Company believes
     that these lawsuits are without merit and that it has compelling defenses
     to the allegations contained in the complaints. The parties are engaged in
     settlement discussions.

     PRODUCT LIABILITY

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

     After receiving notice of a lawsuit, the Company voluntarily suspended
     selling the product. The Company believes that, at substantially the same
     time, the two retailers who had purchased the kettle from the Company also
     suspended selling the product. The Company believes that only a limited
     number of the kettles were sold to consumers.

     The Company voluntarily contacted the U.S. Food and Drug Administration
     ("FDA") and shared its information and test results concerning the product
     with the agency. The Company issued a recall of the product. The
     manufacturer has agreed to compensate the Company for its legal costs and
     out of pocket expenses in connection with the recall and to supply
     replacement products.

     In connection with the tea kettle matter, the Company reviewed other
     products received from the same manufacturer and subsequently notified the
     FDA that some manufacturing runs of another coffee maker product might have
     a lead content above FDA allowed standards. As a result, the FDA requested
     the Company to recall the product. The Company has done so and the retailer
     to whom the product was sold has cooperated in returning for credit its
     unsold units of the product. The manufacturer has agreed to compensate the
     Company for the costs that it may incur.


                                       15

<PAGE>

     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.

13.  RESTRUCTURING COSTS

     As a result of the U.S. restructuring plan, the Company incurred a nominal
     amount of restructuring costs during the second quarter of fiscal 2006
     related to severance and rationalization of warehouse and retail
     operations. During the same quarter of fiscal 2005, restructuring costs of
     $0.1 million related to consulting, severance and legal services were
     incurred.

     For the first half of fiscal 2006, aggregate restructuring charges of $0.2
     million primarily relate to warehouse rationalization. For the first half
     of fiscal 2005, restructuring costs of $0.8 million consist primarily of
     consulting, severance and legal costs.

14.  INCOME TAXES

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


                                       16

<PAGE>

     the carryforward period. The net operating loss carryforwards primarily
     expire beginning in fiscal year 2009 through fiscal year 2025.

15.  SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

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


                                       17
<PAGE>

CONSOLIDATING BALANCE SHEET AS OF DECEMBER 31, 2005
(IN THOUSANDS)

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

Current Assets:
   Cash                                    $     --    $    546     $      --    $    546    $ 31,818         $--        $ 32,364
   Compensating balances on deposits             --          --            --          --      39,028          --          39,028
   Accounts receivable, net of allowances       173     131,263            --     131,436      58,171          --         189,607
   Inventories                                5,428      96,420       (14,886)     86,962      68,212          --         155,174
   Prepaid expenses and other current
      assets                                  1,280       3,861            --       5,141      10,694          --          15,835
   Intercompany                              13,495     (62,828)         (944)    (50,277)     50,277          --              --
Prepaid income taxes                          1,410          --            --       1,410          --          --           1,410
   Deferred income taxes                         --          --            --          --       5,939          --           5,939
                                           --------    --------     ---------    --------    --------         ---        --------
      Total Current Assets                   21,786     169,262       (15,830)    175,218     264,139          --         439,357
Property, Plant and Equipment, net            5,641       8,890            --      14,531      30,006          --          44,537
Investments in Subsidiaries                 438,971      53,745      (492,716)         --          --          --              --
Tradenames                                  133,167      10,313            --     143,480      35,342          --         178,822
Non-current deferred tax asset                   --          --            --          --       1,934          --           1,934
Other Assets                                  7,205         780            --       7,985       5,713          --          13,698
                                           --------    --------     ---------    --------    --------         ---        --------
Total Assets                               $606,770    $242,990     $(508,546)   $341,214    $337,134         $--        $678,348
                                           ========    ========     =========    ========    ========         ===        ========

   LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Revolving line of credit and other
      current debt including accrued
      interest of $9,721                   $  9,721    $ 40,621     $      --    $ 50,342    $ 32,700         $--        $ 83,042
   Accounts payable                           2,983       6,405          (772)      8,616      76,213          --          84,829
   Accrued expenses                           4,098       9,439            --      13,537      29,956          --          43,493
   Accrued interest                           1,729       2,811            --       4,540          --          --           4,540
   Income taxes payable                         506          --            --         506         982          --           1,488
                                           --------    --------     ---------    --------    --------         ---        --------
      Total current liabilities              19,037      59,276          (772)     77,541     139,851          --         217,392
Non-current Deferred Income Taxes             8,090          --            --       8,090       3,065          --          11,155
Senior subordinated notes due 2008,
   including an adjustment of $2,328
   to the carrying value related to
   interest rate swap agreements             61,981          --            --      61,981          --          --          61,981
Second Lien Notes, including accrued
   interest of $18,774                      122,046          --            --     122,046          --          --         122,046
Series C Preferred Stock                      8,370          --            --       8,370          --          --           8,370
Term loan and other notes payable                --     100,050            --     100,050      17,474          --         117,524
Other Long Term Liability                     1,882       3,580            --       5,462      14,408          --          19,870
                                           --------    --------     ---------    --------    --------         ---        --------
      Total liabilities                     221,406     162,906          (772)    383,540     174,798          --         558,338
Convertible Preferred Stock                  40,000          --            --      40,000          --          --          40,000
Commitmetns & Contingencies
Stockholders' Equity                        345,364      80,084      (507,774)    (82,326)    162,336          --          80,010
                                           --------    --------     ---------    --------    --------         ---        --------
Total Liabilities and Stockholders'
   Equity                                  $606,770    $242,990     $(508,546)    341,214    $337,134         $--        $678,348
                                           ========    ========     =========    ========    ========         ===        ========
</TABLE>


                                       18

<PAGE>

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

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

Current Assets:
   Cash                                    $     --    $    127     $      --    $    127    $ 14,730       $    --      $ 14,857
   Compensating balances on deposit              --          --            --          --      34,355            --        34,355
   Accounts receivable, net of allowances       393      87,339            --      87,732      52,447            --       140,179
   Inventories                                2,761     141,573       (22,873)    121,461      73,604            --       195,065
   Assets held for sale                          --         998            --         998          --            --           998
   Prepaid expenses and other current
      assets                                  4,432       2,699            --       7,131       8,917            --        16,048
   Intercompany                              98,194     (62,146)         (240)     35,808     (35,808)           --            --
   Deferred income taxes                     (3,942)      5,344            --       1,402       4,122            --         5,524
   Current assets of discontinued
      operations                                 --          --            --          --     101,927            --       101,927
                                           --------    --------     ---------    --------    --------       -------      --------
      Total current assets                  101,838     175,934       (23,113)    254,659     254,294            --       508,953

Property, Plant and Equipment, net            7,075      10,538            --      17,613      32,614            --        50,227
Investments in Subsidiaries                 362,149      53,699      (415,848)         --          --            --            --
Tradenames                                  133,317      10,313            --     143,630      36,411            --       180,041
Non-current deferred tax asset                   --          --        45,618      45,618       3,657            --        49,275
Other Assets                                  8,223         834            --       9,057       2,498            --        11,555
Non-current assets of discontinued
   operations                                    --          --            --          --       7,737            --         7,737
                                           --------    --------     ---------    --------    --------       -------      --------
Total Assets                               $612,602    $251,318     $(393,343)   $470,577    $337,211       $    --      $807,788
                                           ========    ========     =========    ========    ========       =======      ========

   LIABILITIES AND STOCKHOLDERS' EQUITY

Current Liabilities:
   Revolving line of credit and other
      current debt                         $     --    $ 47,748     $      --    $ 47,748    $ 22,982       $    --      $ 70,730
   Senior subordinated notes - current       45,990          --            --      45,990          --            --        45,990
   Accounts payable                           2,934       5,349           (68)      8,215      78,039            --        86,254
   Accrued expenses                           5,974       6,812            --      12,786      22,016            --        34,802
   Accrued interest                          11,535       2,054            --      13,589          --            --        13,589
   Income taxes payable                       3,937          --            --       3,937         438            --         4,375
   Current liabilities of discontinued
      operations                                 --          --            --          --      47,331            --        47,331
                                           --------    --------     ---------    --------    --------       -------      --------
      Total current liabilities              70,370      61,963           (68)    132,265     170,806            --       303,071

Non-current Deferred Income Taxes           (42,985)     (2,633)       45,618          --       3,334            --         3,334
Senior subordinated notes due 2005           79,010          --            --      79,010          --            --        79,010
Senior subordinated notes due 2008,
   including an adjustment of $7,082 to
   the carrying value related to interest
   rate swap agreements                     156,387          --            --     156,387          --            --       156,387
Term loan and other notes payable                --     100,050            --     100,050          --            --       100,050
Other long term liabilities                   1,995       3,588            --       5,583      14,700            --        20,283
Non-current liabilities of discontinued
   operations                                    --          --            --          --       1,462            --         1,462
                                           --------    --------     ---------    --------    --------       -------      --------
      Total liabilities                     264,777     162,968        45,550     473,295     190,302            --       663,597
Minority Interest in discontinued
   operations                                    --          --            --          --      24,263            --        24,263
Convertible Preferred Stock                  40,000          --            --      40,000          --            --        40,000
Commitments and contingencies
Stockholders' Equity                        307,825      88,350      (438,893)    (42,718)    122,646            --        79,928
                                           --------    --------     ---------    --------    --------       -------      --------
Total Liabilities and Stockholders'
   Equity                                  $612,602    $251,318     $(393,343)   $470,577    $337,211       $    --      $807,788
                                           ========    ========     =========    ========    ========       =======      ========
</TABLE>


                                       19
<PAGE>

CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED DECEMBER 31,
2005
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                  GUARANTOR                               OTHER     CONSOLIDATED  CONSOLIDATED
                                       PARENT   SUBSIDIARIES  ELIMINATIONS    TOTAL   SUBSIDIARIES  ELIMINATIONS     TOTALS
                                      --------  ------------  ------------  --------  ------------  ------------  ------------
<S>                                   <C>       <C>           <C>           <C>       <C>           <C>           <C>
Net Sales                             $ 52,891    $167,608      $(78,864)   $141,635    $119,362      $(30,609)     $230,388
Cost of Goods Sold                      42,797     138,273       (83,455)     97,615      84,302       (28,599)      153,318
Distribution Expenses                       --       7,452            --       7,452       5,215            --        12,667
                                      --------    --------      --------    --------    --------      --------      --------
   Gross Profit                         10,094      21,883         4,591      36,568      29,845        (2,010)       64,403
Selling, General and Administrative
   expenses                             10,328      14,882            --      25,210      30,372        (2,010)       53,572
Restructuring Costs                         --          40            --          40          --            --            40
                                      --------    --------      --------    --------    --------      --------      --------
   Operating (Loss) Income                (234)      6,961         4,591      11,318        (527)           --        10,791
Interest Expense, Net                    4,217       4,363            --       8,580         616            --         9,196
Gain-Early settlement of debt              (65)         --            --         (65)         --            --           (65)
Income (Loss) from Subsidiary            2,479         (22)       (2,457)         --          --            --            --
                                      --------    --------      --------    --------    --------      --------      --------
   (Loss) Income from Continuing
      Operations Before Income Taxes    (6,865)      2,620         7,048       2,803      (1,143)           --         1,660
Income Taxes                            25,516          --            --      25,516       3,957            --        29,473
                                      --------    --------      --------    --------    --------      --------      --------
   Net (Loss) Income from Continuing
      Operations                       (32,381)      2,620         7,048     (22,713)     (5,100)           --       (27,813)
Income from Discontinued Operations,
   Net of Tax                               --          --            --                                    --            --
Gain on Sale of Discontinued
   Operations, Net of Tax                               --            --          --          --            --            --
                                      --------    --------      --------    --------    --------      --------      --------
Net Income (Loss)                     $(32,381)   $  2,620      $  7,048    $(22,713)   $ (5,100)     $     --      $(27,813)
                                      ========    ========      ========    ========    ========      ========      ========
</TABLE>

CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THIRTEEN WEEKS ENDED JANUARY 1,
2005
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                 GUARANTOR                               OTHER     CONSOLIDATED  CONSOLIDATED
                                      PARENT   SUBSIDIARIES  ELIMINATIONS    TOTAL   SUBSIDIARIES  ELIMINATIONS     TOTALS
                                      -------  ------------  ------------  --------  ------------  ------------  ------------
<S>                                   <C>      <C>           <C>           <C>       <C>           <C>           <C>
Net Sales                             $70,297    $191,908     $(109,824)   $152,381    $202,079      $(81,762)     $272,698
Cost of Goods Sold                     57,148     161,976      (112,679)    106,445     148,315       (76,379)      178,381
Distribution Expenses                      --      10,110            --      10,110       6,464            --        16,574
                                      -------    --------     ---------    --------    --------      --------      --------
   Gross Profit                        13,149      19,822         2,855      35,826      47,300        (5,383)       77,743
Selling, General and Administrative
   expenses                            16,641      12,381            --      29,022      41,741        (5,383)       65,380
Impairment loss on Goodwill and
   Intangible Assets                                                 --          --          --                          --
Restructuring Costs                      (102)        220            --         118          --            --           118
                                      -------    --------     ---------    --------    --------      --------      --------
   Operating (Loss) Income             (3,390)      7,221         2,855       6,686       5,559            --        12,245
Interest Expense, Net                   7,028       4,042            --      11,070       1,802            --        12,872
Gain-Early settlement of debt              --          --            --          --          --            --            --
Income (Loss) from Subsidiary          (8,509)        (20)        8,529          --          --            --            --
                                      -------    --------     ---------    --------    --------      --------      --------
   (Loss) Income from Continuing
      Operations Before Income Taxes   (1,909)      3,199        (5,674)     (4,384)      3,757            --          (627)
Income Taxes                           (1,830)         --            --      (1,830)      1,512            --          (318)
                                      -------    --------     ---------    --------    --------      --------      --------
   Net (Loss) Income from Continuing
      Operations                          (79)      3,199        (5,674)     (2,554)      2,245            --          (309)
Income from Discontinued Operations,
   Net of Tax                              --          --            --          --       3,066            --         3,066
                                      -------    --------     ---------    --------    --------      --------      --------
Net Income (Loss)                     $   (79)   $  3,199     $  (5,674)   $ (2,554)   $  5,311      $     --      $  2,757
                                      =======    ========     =========    ========    ========      ========      ========
</TABLE>


                                       20

<PAGE>

CONSOLIDATING STATEMENT OF OPERATIONS FOR THE TWENTY-SIX WEEKS ENDED DECEMBER
31, 2005
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                  GUARANTOR                               OTHER     CONSOLIDATED  CONSOLIDATED
                                       PARENT   SUBSIDIARIES  ELIMINATIONS    TOTAL   SUBSIDIARIES  ELIMINATIONS     TOTALS
                                      --------  ------------  ------------  --------  ------------  ------------  ------------
<S>                                   <C>       <C>           <C>           <C>       <C>           <C>           <C>
Net Sales                             $ 83,940    $289,172     $(144,909)   $228,203    $240,083      $(89,482)     $378,804
Cost of Goods Sold                      68,251     248,664      (152,896)    164,019     183,842       (86,172)      261,689
Distribution Expenses                       --      13,676            --      13,676       9,539            --        23,215
                                      --------    --------     ---------    --------    --------      --------      --------
   Gross Profit                         15,689      26,832         7,987      50,508      46,702        (3,310)       93,900
Selling, General and Administrative
   expenses                             20,775      26,715            --      47,490      49,810        (3,310)       93,990
Restructuring Costs                         27         130            --         157          --            --           157
                                      --------    --------     ---------    --------    --------      --------      --------
   Operating (Loss) Income              (5,113)        (13)        7,987       2,861      (3,108)           --          (247)
Interest Expense, Net                    9,364       8,299            --      17,663       2,582            --        20,245
Gain-Early settlement of debt          (21,720)         --            --     (21,720)         --            --       (21,720)
Income (Loss) from Subsidiary          (36,829)        (46)       36,875          --          --            --            --
                                      --------    --------     ---------    --------    --------      --------      --------
   Income (Loss) from Continuing
      Operations Before Income Taxes    44,072      (8,266)      (28,888)      6,918      (5,690)           --         1,228
Income Taxes                            28,839          --            --      28,839          89            --        28,928
                                      --------    --------     ---------    --------    --------      --------      --------
   Net (Loss) Income from Continuing
      Operations                        15,233      (8,266)      (28,888)    (21,921)     (5,779)           --       (27,700)
Income from Discontinued Operations,
   Net of Tax                               --          --            --                   1,735            --         1,735
Gain on Sale of Discontinued
   Operations, Net of Tax              (21,323)         --            --     (21,323)     49,139            --        27,816
                                      --------    --------     ---------    --------    --------      --------      --------
Net Income (Loss)                     $ (6,090)   $ (8,266)    $ (28,888)   $(43,244)   $ 45,095      $     --      $  1,851
                                      ========    ========     =========    ========    ========      ========      ========
</TABLE>

CONSOLIDATING STATEMENT OF INCOME FOR THE TWENTY-SIX WEEKS ENDED JANUARY 1, 2005
(IN THOUSANDS)

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

Net Sales                             $118,377    $341,466     $(191,974)   $267,869    $369,441     $(159,928)     $477,382
Cost of Goods Sold                      96,488     286,266      (196,613)    186,141     280,487      (150,261)      316,367
Distribution Expenses                       --      18,764            --      18,764      10,745            --        29,509
                                      --------    --------     ---------    --------    --------     ---------      --------
   Gross Profit                         21,889      36,436         4,639      62,964      78,209        (9,667)      131,506
Selling, General and Administrative
   expenses                             30,984      22,665            --      53,649      68,252        (9,667)      112,234
Restructuring Costs                        354         436            --         790          --                         790
                                      --------    --------     ---------    --------    --------     ---------      --------
   Operating Income                     (9,449)     13,335         4,639       8,525       9,957            --        18,482
Interest Expense, net                   14,335       7,521            --      21,856       3,895            --        25,751
Income (Loss) from Subsidiary          (14,943)        (27)       14,970          --          --            --            --
                                      --------    --------     ---------    --------    --------     ---------      --------
   (Loss) Income from Continuing
      Operations Before Income Taxes    (8,841)      5,841       (10,331)    (13,331)      6,062            --        (7,269)
Income Taxes                            (3,799)         --            --      (3,799)      1,284            --        (2,515)
                                      --------    --------     ---------    --------    --------     ---------      --------
   Net (Loss) Income from Continuing
      Operations                        (5,042)      5,841       (10,331)     (9,532)      4,778            --        (4,754)
Income from Discontinued Operations,
   Net of Tax                               --          --            --                   4,324            --         4,324
                                      --------    --------     ---------    --------    --------     ---------      --------
Net Income (Loss)                     $ (5,042)   $  5,841     $ (10,331)   $ (9,532)   $  9,102     $      --      $   (430)
                                      ========    ========     =========    ========    ========     =========      ========
</TABLE>


                                       21
<PAGE>

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

<TABLE>
<CAPTION>
                                                                  GUARANTOR
                                                       PARENT    SUBSIDIARIES   ELIMINATIONS     TOTAL
                                                      --------   ------------  ------------   --------
<S>                                                   <C>        <C>           <C>            <C>
Cash flows from operating activities:
   Net income (loss)                                  $ (6,090)    $ (8,266)     $(28,888)    $(43,244)
   Adjustments to reconcile net income (loss) to
      net cash from operating activities:
      Imputed interest on notes payable
         and other non-cash items                         (308)          --            --         (308)
      Deferred income tax provision                     25,809        7,977            --       33,786
      Stock based compensation expense                     361           --            --          361
      Depreciation and amortization                      3,841        1,303            --        5,144
      Bad debt (recovery) provision                         --           --            --           --
      Gain on sale of discontinued operations           21,323           --            --       21,323
     (Gain) Loss on disposal of property and
         equipment                                          --         (743)           --         (743)
      Inventory valuation adjustment                        --        1,840            --        1,840
      Impairment loss on intangible asset                   --          186            --          186
      Foreign currency gains                                --         (453)           --         (453)
      Gain -early settlement of debt                   (21,720)          --            --      (21,720)
      Equity in net income of unconsolidated
         affiliate/consolidated subsidiaries           (36,829)         (46)       36,875           --
      Minority interest                                     --           --            --           --
      Changes in assets and liabilities:
         Accounts receivable                               221      (43,472)           --      (43,251)
         Inventories                                    (2,667)      30,619        (7,987)      19,965
         Prepaid expenses and other current assets         904       (1,416)           --         (512)
         Other non-current assets                           --           (8)           --           (8)
         Accounts payable                                 (654)       1,052            --          398
         Income taxes payable                           (4,841)          --            --       (4,841)
         Accrued expenses                               76,530        4,017            --       80,547
                                                      --------     --------      --------     --------
            NET CASH FROM OPERATING ACTIVITIES          55,880       (7,410)           --       48,470
                                                      --------     --------      --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Capital expenditures                                (354)         (79)           --         (433)
      Proceeds from sale of assets and investments          --       15,222            --       15,222
      Proceeds from sale of discontinued operations         --           --            --           --
      Acquisition of business, net of cash acquired         --           --            --           --
      Additional payment for acquisition of
         tradenames                                         --         (186)           --         (186)
      Increase in compensating balances on deposit          --           --            --           --
                                                      --------     --------      --------     --------
           NET CASH FROM INVESTING ACTIVITIES             (354)      14,957            --       14,603
                                                      --------     --------      --------     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Net proceeds from revolving line of credit
         and other short term debt                          --       (7,016)           --       (7,016)
      Proceeds from new credit agreement                    --           --            --           --
      Repayment of terminated credit agreement              --           --            --           --
      Repayment of long-term debt                      (45,738)        (112)           --      (45,850)
      Costs associated with refinancing                 (9,963)          --            --       (9,963)
      Intercompany dividend                                 --           --            --           --
      Common stock issued                                  175           --            --          175
                                                      --------     --------      --------     --------
         NET CASH FROM FINANCING ACTIVITIES            (55,526)      (7,128)           --      (62,654)
                                                      --------     --------      --------     --------
Effect of Exchange Rate Changes on Cash                     --           --            --           --
                                                      --------     --------      --------     --------
Net Change in Cash                                          --          419            --          419
Cash of discontinued operations                             --           --            --           --
Cash, Beginning of Period                                   --          127            --          127
                                                      --------     --------      --------     --------
Cash, End of Period                                   $     --     $    546      $     --     $    546
                                                      ========     ========      ========     ========

<CAPTION>
                                                         OTHER      CONSOLIDATED   CONSOLIDATED
                                                      SUBSIDIARIES   ELIMINATIONS      TOTALS
                                                      -----------   ------------   ------------
<S>                                                   <C>           <C>            <C>
Cash flows from operating activities:
   Net income (loss)                                   $181,077      $(135,982)         1,851
   Adjustments to reconcile net income (loss) to
      net cash from operating activities:
      Imputed interest on notes payable
         and other non-cash items                            44             --           (264)
      Deferred income tax provision                      (1,305)           660         33,141
      Stock based compensation expense                       --             --            361
      Depreciation and amortization                       5,025                        10,169
      Bad debt (recovery) provision                         130             --            130
      Gain on sale of discontinued operations           (49,139)                      (27,816)
     (Gain) Loss on disposal of property and
         equipment                                          (30)            --           (773)
      Inventory valuation adjustment                       (354)                        1,486
      Impairment loss on intangible asset                    --                           186
      Foreign currency gains                                 --             --           (453)
      Gain -early settlement of debt                         --             --        (21,720)
      Equity in net income of unconsolidated
         affiliate/consolidated subsidiaries                 --             --             --
      Minority interest                                   1,404             --          1,404
      Changes in assets and liabilities:
         Accounts receivable                            (24,194)            --        (67,445)
         Inventories                                    (17,309)                        2,656
         Prepaid expenses and other current assets       (2,528)            --         (3,040)
         Other non-current assets                       (52,121)        54,244          2,115
         Accounts payable                                 7,835             --          8,233
         Income taxes payable                             2,207             --         (2,634)
         Accrued expenses                               (72,832)            --          7,715
                                                       --------      ---------       --------
            NET CASH FROM OPERATING ACTIVITIES          (22,090)       (81,078)       (54,698)
                                                       --------      ---------       --------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Capital expenditures                               (2,567)            --         (3,000)
      Proceeds from sale of assets and investments          114             --         15,336
      Proceeds from sale of discontinued operations      80,936             --         80,936
      Acquisition of business, net of cash acquired      (4,525)            --         (4,525)
      Additional payment for acquisition of
         tradenames                                          --             --           (186)
      Increase in compensating balances on deposit       (4,673)            --         (4,673)
                                                       --------      ---------       --------
           NET CASH FROM INVESTING ACTIVITIES            69,285             --         83,888
                                                       --------      ---------       --------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Net proceeds from revolving line of credit
         and other short term debt                       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)            --        (45,989)
      Costs associated with refinancing                  (3,177)            --        (13,140)
      Intercompany dividend                             (81,078)        81,078             --
      Common stock issued                                    --             --            175
                                                       --------      ---------       --------
         NET CASH FROM FINANCING ACTIVITIES             (56,316)        81,078        (37,892)
                                                       --------      ---------       --------
Effect of Exchange Rate Changes on Cash                   1,273             --          1,273
                                                       --------      ---------       --------
Net Change in Cash                                       (7,848)            --         (7,429)
Cash of discontinued operations                         (10,998)            --        (10,998)
Cash, Beginning of Period                                50,664             --         50,791
                                                       --------      ---------       --------
Cash, End of Period                                    $ 31,818      $      --       $ 32,364
                                                       ========      =========       ========
</TABLE>


                                       22

<PAGE>
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE TWENTY-SIX WEEKS ENDED JANUARY 1,
2005
(IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  GUARANTOR
                                                       PARENT    SUBSIDIARIES   ELIMINATIONS     TOTAL
                                                      --------   -----------   ------------   --------
<S>                                                   <C>        <C>           <C>            <C>
Cash flows from operating activities:
   Net income (loss)                                  $ (5,042)   $  5,841       $(10,331)    $ (9,532)
   Adjustments to reconcile net income (loss) to
      net cash used in operating activities:
      Imputed interest on notes payable and other
         non-cash items                                 (1,127)         --             --       (1,127)
      Deferred income tax provision                     (3,798)         --             --       (3,798)
      Foreign currency gains and losses                     --        (925)            --         (925)
      Depreciation and amortization                      4,894       1,645             --        6,539
      Bad debt (recovery) provision                                 (1,476)            --       (1,476)
      Loss (gain) on disposal of equipment                  --          70             --           70
      Inventory valuation adjustment                                  (730)            --         (730)
      Equity in net income of unconsolidated
         affiliate/consolidated subsidiaries           (14,943)        (28)        14,971           --
      Minority interest                                     --          --                          --
      Changes in assets and liabilities:
         Accounts receivable                               311     (28,012)            --      (27,701)
         Inventories                                    (7,217)      9,842         (4,640)      (2,015)
         Prepaid expenses and other current assets       2,261      (1,222)            --        1,039
         Other non-current assets                            0        (588)            --         (588)
         Accounts payable                                 (854)      2,587             --        1,733
         Taxes payable                                   6,774          28             --        6,802
         Accrued expenses                               19,384     (35,178)            --      (15,794)
                                                      --------    --------       --------     --------
            NET CASH FROM OPERATING ACTIVITIES             643     (48,146)            --      (47,503)
                                                      --------    --------       --------     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Capital expenditures                                (202)       (376)            --         (578)
      Proceeds from sale of assets                          --          93             --           93
      Increase in compensating balances on deposit          --          --             --           --
                                                      --------    --------       --------     --------
         NET CASH FROM INVESTING ACTIVITIES               (202)       (283)            --         (485)
                                                      --------    --------       --------     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Net proceeds from revolving line of credit
         and other debt                                     --      48,562             --       48,562
      Repayment of long-term debt                           --        (337)            --         (337)
      Distributions to minority shareholders                --          --             --           --
      Costs associated with refinancing                   (217)         --             --         (217)
      Common stock issued                                   27          --             --           27
      Additional payment for tradenames                   (251)         --             --         (251)
                                                      --------    --------       --------     --------
      NET CASH FROM FINANCING ACTIVITIES                  (441)     48,225             --       47,784
                                                      --------    --------       --------     --------

Effect of Exchange Rate Changes on Cash                     --          --             --           --
                                                      --------    --------       --------     --------
Net Change in Cash                                          --        (204)            --         (204)
Cash, Beginning of Period                                    1         904             --          905
                                                      --------    --------       --------     --------
Cash, End of Period                                   $      1    $    700        $    --      $   701
                                                      ========    ========       ========     ========

<CAPTION>
                                                         OTHER      CONSOLIDATED   CONSOLIDATED
                                                      SUBSIDIARIES   ELIMINATIONS      TOTALS
                                                      -----------   ------------   ------------
<S>                                                   <C>           <C>            <C>
Cash flows from operating activities:
   Net income (loss)                                   $  9,102          $--         $   (430)
   Adjustments to reconcile net income (loss) to
      net cash used in operating activities:
      Imputed interest on notes payable and other
         non-cash items                                     217           --             (910)
      Deferred income tax provision                      (2,080)          --           (5,878)
      Foreign currency gains and losses                      --           --             (925)
      Depreciation and amortization                       5,586           --           12,125
      Bad debt (recovery) provision                           8           --           (1,468)
      Loss (gain) on disposal of equipment                  (32)          --               38
      Inventory valuation adjustment                       (169)          --             (899)
      Equity in net income of unconsolidated
         affiliate/consolidated subsidiaries                 --           --               --
      Minority interest                                   3,632           --            3,632
      Changes in assets and liabilities:
         Accounts receivable                            (62,386)          --          (90,087)
         Inventories                                    (13,371)                      (15,386)
         Prepaid expenses and other current assets        1,125           --            2,164
         Other non-current assets                          (127)          --             (715)
         Accounts payable                               (11,502)          --           (9,769)
         Taxes payable                                   (2,223)          --            4,579
         Accrued expenses                                38,063           --           22,269
                                                       --------          ---         --------
            NET CASH FROM OPERATING ACTIVITIES          (34,157)          --          (81,660)
                                                       --------          ---         --------
CASH FLOWS FROM INVESTING ACTIVITIES:
      Capital expenditures                               (5,384)          --           (5,962)
      Proceeds from sale of assets                           43           --              136
      Increase in compensating balances on deposit         (465)          --             (465)
                                                       --------          ---         --------
         NET CASH FROM INVESTING ACTIVITIES              (5,806)          --           (6,291)
                                                       --------          ---         --------
CASH FLOWS FROM FINANCING ACTIVITIES:
      Net proceeds from revolving line of credit
         and other debt                                  30,518           --           79,080
      Repayment of long-term debt                          (149)          --             (486)
      Distributions to minority shareholders             (2,296)          --           (2,296)
      Costs associated with refinancing                      --           --             (217)
      Common stock issued                                    --           --               27
      Additional payment for tradenames                      --           --             (251)
                                                       --------          ---         --------
      NET CASH FROM FINANCING ACTIVITIES                 28,073           --           75,857
                                                       --------          ---         --------
Effect of Exchange Rate Changes on Cash                   2,617           --            2,617
                                                       --------          ---         --------
Net Change in Cash                                       (9,273)          --           (9,477)
Cash, Beginning of Period                                45,942           --           46,847
                                                       --------          ---         --------
Cash, End of Period                                    $ 36,669          $--         $ 37,370
                                                       ========          ===         ========
</TABLE>


                                       23
<PAGE>

16.  SUBSEQUENT EVENTS

     SEVENTH AMENDMENT TO AND WAIVER UNDER, SENIOR SECURED CREDIT FACILITY -

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


                                       24

<PAGE>

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

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

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

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

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

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

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

     -    unfavorable outcomes from pending legal proceedings;

     -    cancellation or reduction of orders;

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

     -    dependence on foreign suppliers and supply and marketing constraints;

     -    competitive products and pricing;

     -    economic conditions and the retail environment;

     -    international business activities;

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

     -    the risks related to intellectual property rights; and

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


                                       25

<PAGE>

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

     INTRODUCTION

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

     CONSOLIDATED RESULTS OF OPERATIONS

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

     SIGNIFICANT EVENTS AND RECENT DEVELOPMENTS DURING THE QUARTER

     REPURCHASES OF OUTSTANDING SUBORDINATED NOTES

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

     SALTON EUROPE FACILITY AGREEMENT

     On December 23, 2005, Salton Holdings Limited, Salton Europe Limited and
     certain affiliates entered into a Facility Agreement with Burdale Financial
     Limited, as agent and security trustee, and a financial institution group
     as lender. The provisions of the Facility Agreement allow certain of the
     Company's European subsidiaries to borrow funds as needed in an aggregate
     amount not to exceed L61.0 million (approximately $105.0 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
     31, 2005, these rates for borrowings denominated in the Great Britain Pound
     were approximately 11.6% and 7.3% for term and revolver loans,
     respectively. The rate for revolver loan borrowings denominated in the U.S.
     Dollar was 7.1%.


                                       26

<PAGE>
     The Facility Agreement consists of a Revolving Credit Facility with an
     aggregate maximum availability of L50.0 million (approximately $86.0
     million) and two Term Loan Facilities of L5.0 million and L6.0 million
     (approximately $8.6 million and $10.3 million, respectively). The Company
     expects to use borrowings under these facilities to repay existing debt and
     for working capital purposes. As of December 31, 2005, outstanding
     borrowings denominated in the Great Britain Pound were L10.8 million
     (approximately $18.6 million) and borrowings denominated in the U.S. Dollar
     were $6.6 million.

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

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

     OTHER STRATEGIC OPTIONS

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

     QUARTER IN REVIEW

     For the second quarter of fiscal 2006 (thirteen weeks ended December 31,
     2005), Salton repaid the outstanding 10 3/4% senior subordinated notes upon
     maturity and continued to rebuild confidence lost during the first quarter
     when uncertainty among suppliers and customers impacted our product
     availability and customer demand. The asset sales and restructuring
     activities at the end of the first quarter improved our liquidity and
     suppliers resumed production levels in an effort to meet demands. However,
     this effort was not sufficient to recover demand and adversely impacted
     sales in the second quarter. While our market share remains strong, foreign
     sales were impacted by a weak retail market in the United Kingdom. The
     effects of domestic cost reductions continue to benefit performance in the
     quarter.


                                       27

<PAGE>

     U.S. RESTRUCTURING PLAN

     As part of an effort to improve our domestic operations, we have
     successfully implemented our U.S. restructuring plan in an effort to better
     align domestic operating costs with current sales levels. Through our cost
     reduction programs and consolidation of U.S. operations, we have reduced
     cumulative domestic operating expenses by more than $60 million. As
     announced in the fourth quarter of fiscal 2005, we plan to continue our
     cost reduction efforts through a second U.S. cost reduction program which
     is expected to reduce domestic operations by an additional $25.0 million
     above the initial $40 million with $15.0 million to be realized in 2006 and
     $10.0 million to be realized in 2007.

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

     RESULTS OF OPERATIONS

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

<TABLE>
<CAPTION>
                                                 THIRTEEN WEEKS ENDED
                                              -------------------------
                                              DECEMBER 31,   JANUARY 1,
                                                  2005          2005
                                              ------------   ----------
<S>                                           <C>            <C>
Net sales                                        100.0%        100.0%
Cost of goods sold                                66.5%         65.4%
Distribution expenses                              5.5%          6.1%
                                                 -----         -----
   Gross profit                                   28.0%         28.5%
Selling, general and administrative expense       23.3%         24.0%
Restructuring costs                                0.0%          0.0%
                                                 -----         -----
   Operating income                                4.7%          4.5%
                                                 =====         =====
</TABLE>

     SECOND QUARTER 2006 COMPARED TO SECOND QUARTER 2005

     NET SALES AND GROSS PROFIT

     Salton's worldwide sales were $230.4 million in the second quarter of
     fiscal 2006 versus $272.7 million in the second quarter of fiscal 2005. Net
     sales decreased domestically by $24.6 million. This decrease includes $6.1
     million of tabletop product sales as a result of the sale of the tabletop
     business in September 2005. The remaining $18.5 million decrease resulted
     primarily from product delays that impacted volume in the first half of the
     second quarter and reductions due to discontinued product lines. Foreign
     sales declined by $17.7 million. The foreign sales were impacted by weak
     consumer demand for housewares products in the United Kingdom and $5.0
     million in unfavorable foreign currency fluctuations.


                                       28

<PAGE>

     Gross profit for the second quarter of fiscal 2006 declined $13.3 million
     from $77.7 million in 2005 to $64.4 million in 2006. As a percent of net
     sales, gross profit was 28.0% in the second quarter of fiscal 2006 compared
     to 28.5% in the second quarter of 2005, a decrease of 0.5%. These decreases
     are primarily a result of decreased volume due to the weak European market
     and an inventory shortage of higher margin products. Additionally, margins
     were adversely impacted by closeout sales of discontinued product lines as
     we continue to sell certain inventory at lower margins in an effort to
     rationalize product lines and refocus on our core business. Although we
     have recently implemented price increases on certain products to compensate
     for higher material costs, the final impact of the price increases is
     uncertain due to potential reactions of our competitors and the long term
     uncertainty of market factors. These decreases in gross profit were
     partially offset by a $2.7 million domestic decline in distribution
     expenses resulting primarily from our U.S. cost reduction programs.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses decreased to $53.6 million for
     second quarter of fiscal 2006 compared to $65.4 million for second quarter
     of fiscal 2005. U.S. operations reduced selling, general and administrative
     expenses by $6.7 million primarily driven by a $1.8 million decline in
     promotional expenditures such as television, certain other media and
     cooperative advertising, and trade show expenses as a result of our U.S.
     cost reduction plan. The remaining reduction was a result of decreased
     expenditures in Europe in an effort to align costs with reduced demand as a
     result of the weak consumer environment.

     RESTRUCTURING COSTS

     As a result of the U.S. restructuring plan, the Company incurred a nominal
     amount of restructuring costs during the second quarter of fiscal 2006
     related to severance and rationalization of warehouse and retail
     operations. During the same quarter of fiscal 2005, restructuring costs of
     $0.1 million related to consulting, severance and legal services were
     incurred.

     NET INTEREST EXPENSE

     Net interest expense was $9.2 million for the second quarter of fiscal 2006
     compared to $12.9 million for the second quarter of fiscal 2005. Excluding
     amortization of fees, interest expense as a percent of the average carrying
     value of debt outstanding was a weighted average annual rate of 7.7% in the
     second quarter of fiscal 2006 compared to 8.7% in fiscal 2005. The average
     amount of all debt outstanding was $409.7 million for the second quarter of
     fiscal 2006 compared to $513.0 million for the second quarter of fiscal
     2005.

     INCOME TAXES

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


                                       29

<PAGE>


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

     DISCONTINUED OPERATIONS

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

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

<TABLE>
<CAPTION>
                                                                  THIRTEEN WEEKS ENDED
                                                          -----------------------------------
                                                          DECEMBER 31, 2005   JANUARY 1, 2005
                                                          -----------------   ---------------
<S>                                                       <C>                 <C>
Net sales from discontinued operations                           $--              $104,278
                                                                 ---              --------
Income from discontinued operations before income taxes           --              $  8,796
Income taxes                                                      --                 3,153
Minority Interest                                                 --                 2,577
                                                                 ---              --------
Income from discontinued operations, net of tax                  $--              $  3,066
                                                                 ===              ========
</TABLE>


                                       30

<PAGE>

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

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

     FIRST HALF 2006 COMPARED TO FIRST HALF 2005

     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 31, 2005   JANUARY 1, 2005
                                              -----------------   ---------------
<S>                                           <C>                 <C>
Net sales                                           100.0%             100.0%
Cost of goods sold                                   69.1%              66.3%
Distribution expenses                                 6.1%               6.2%
                                                    -----              -----
   Gross profit                                      24.8%              27.5%
Selling, general and administrative expense          24.8%              23.5%
Restructuring costs                                   0.0%               0.2%
                                                    -----              -----
   Operating (loss) income                            0.0%               3.8%
                                                    =====              =====
</TABLE>


                                       31
<PAGE>

     NET SALES AND GROSS PROFIT

     Salton's worldwide sales were $378.8 million in first half of fiscal 2006
     versus $477.4 million in the first half of fiscal 2005. Net sales decreased
     domestically by $71.6 million. This decrease includes $6.1 million of
     tabletop product sales as a result of the sale of the tabletop business in
     September 2005. The remaining $65.5 million decrease resulted primarily
     from delays in production from suppliers and cautious customer ordering
     patterns that impacted volume in the first quarter as well as in the first
     half of the second quarter and additional reductions as a result of
     discontinued product lines. Foreign sales declined by $27.0 million. The
     foreign sales were impacted by a weak consumer demand in the housewares
     sector in the United Kingdom and $5.4 million of unfavorable foreign
     currency fluctuations.

     Gross profit for the first half of fiscal 2006 declined $37.6 million from
     $131.5 million in 2005 to $93.9 million in 2006. As a percent of net sales,
     gross profit was 24.8% in the first half of fiscal 2006 compared to 27.5%
     in the first half of 2005, a decrease of 2.7%. These decreases are
     primarily a result of decreased volume in the weak European market and an
     inventory shortage of higher margin products in the first quarter and the
     first half of the second quarter. Additionally, margins were adversely
     impacted by closeout sales of discontinued product lines as we continue to
     move certain inventory at lower margins in an effort to rationalize product
     lines and refocus on our core business. We have incurred global material
     cost increases in plastics, steel and corrugated materials. Although we
     have recently implemented price increases on certain products to compensate
     for higher material costs, the final impact of the price increases is
     uncertain due to potential reactions of our competitors and the long term
     uncertainty of consumer acceptance. These decreases in gross profit were
     partially offset by a $5.1 million domestic decline in distribution
     expenses resulting primarily from our U.S. cost reduction programs.

     SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

     Selling, general and administrative expenses decreased to $94.0 million for
     the first half of fiscal 2006 compared to $112.2 million for the first half
     of fiscal 2005. U.S. operations reduced selling, general and administrative
     expenses by $12.0 million primarily driven by a $6.8 million decline in
     promotional expenditures such as television, certain other media and
     cooperative advertising, and trade show expenses as a result of our U.S.
     cost reduction plan. The remaining reduction was a result of decreased
     expenditures in Europe in an effort to align costs with reduced demand as a
     result of the weak consumer environment.

     RESTRUCTURING COSTS

     As a result of the U.S. restructuring plan, the Company incurred a $0.2
     million of restructuring costs during the first half of fiscal 2006 related
     to severance and rationalization of warehouse and retail operations. During
     the same period of fiscal 2005, restructuring costs of $0.8 million related
     to consulting, severance and legal services were incurred.

     NET INTEREST EXPENSE

     Net interest expense was $20.2 million for the first half of fiscal 2006
     compared to $25.8 million for the first half of fiscal 2005. Excluding
     amortization of fees, interest expense as a percent of the average carrying
     value of debt outstanding was a weighted average annual rate of 8.3% in the
     first half of fiscal 2006 compared to 9.2% in fiscal 2005. The average
     amount of all debt outstanding was $422.3 million for the first half of
     fiscal 2006 compared to $489.2 million for the first half of fiscal 2005.


                                       32

<PAGE>

     INCOME TAXES

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

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

     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   January 1, 2005
                                                          -----------------   ---------------
<S>                                                       <C>                 <C>
Net sales from discontinued operations                         $68,798            $173,729
                                                               -------            --------
Income from discontinued operations before income taxes        $ 5,477            $ 12,158
Income taxes                                                     2,338               4,201
Minority Interest                                                1,404               3,633
                                                               -------            --------
Income from discontinued operations, net of tax                $ 1,735            $  4,324
                                                               =======            ========
</TABLE>


                                       33

<PAGE>

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

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

     LIQUIDITY AND CAPITAL RESOURCES

     CASH FLOW FROM CONTINUING OPERATIONS

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

     Our primary sources of liquidity are our cash flow from continuing
     operations and borrowings under our senior secured credit facilities. In
     the first half of fiscal 2006, Salton's continuing operations used $32.9
     million in cash flow, compared with $70.4 million in first half of fiscal
     2005. This decrease was a result of inventory shortages, the sale of
     tabletop inventory and a planned exit of certain product lines in the first
     half of fiscal 2006. In addition, as a result of delayed shipments, the
     timing of supplier invoices increased accounts payable at the end of the
     second quarter.

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

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


                                       34

<PAGE>

     INVESTING ACTIVITIES

     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
     $15.3 million in proceeds from the sale of assets and investments,
     primarily from the sale of our tabletop division and a warehouse
     distribution facility in the U.S.

     FINANCING ACTIVITIES

     We had net proceeds from worldwide credit facilities of $21.1 million.
     These proceeds were offset by $13.1 million of financing costs associated
     with our debt restructuring and Salton Europe Credit Facility during the
     first half and $45.9 million for the repayment of 2005 Notes.

     SENIOR SECURED CREDIT FACILITY

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

     As of February 7, 2006, we had borrowed $119.0 million under the senior
     secured credit facility and had approximately $3.8 million available under
     this facility for future borrowings.

     Borrowings under our senior secured credit facility accrue interest, at our
     option, at either: LIBOR, plus 6.0% (or 5.0% after March 31, 2006),
     equaling 10.6% at January 31, 2006; or the Base Rate (prime rate), plus
     4.0% (or 3.0% after March 31, 2006), equaling 11.5% at January 31, 2006.
     The Company has the option to convert any base rate loan to LIBOR rate
     loan. LIBOR rate loans are to be no lower than a rate of 7.0%.

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

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


                                       35

<PAGE>

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

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

     The senior secured credit facility was amended ("The Fifth Amendment") on
     October 7, 2005 to increase the letter of credit subfacility to $15.0
     million. As of December 31, 2005 the Company had outstanding letters of
     credit of $7.9 million under the letter of credit subfacility of $15.0
     million.

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

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

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

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


                                       36

<PAGE>

     SECOND LIEN CREDIT AGREEMENT

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

     The second lien credit agreement and the Second Lien Notes have a maturity
     date of March 31, 2008. The interest rate with respect to the Second Lien
     Notes is the six month LIBOR plus 7%, equaling 11.06125% for the first
     interest period after the closing of the debt exchange offer, payable in
     cash on January 15th and July 15th of each year, commencing January 15,
     2006. The default rate is LIBOR plus 10%.

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

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

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

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

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


                                       37

<PAGE>

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

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

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

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

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


                                       38

<PAGE>

     INTERCREDITOR AGREEMENT

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

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

     SENIOR SUBORDINATED NOTES

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

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

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

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


                                       39

<PAGE>

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

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

     SALTON EUROPE FACILITY AGREEMENT

     On December 23, 2005, Salton Holdings Limited, Salton Europe Limited and
     certain affiliates entered into a Facility Agreement with Burdale Financial
     Limited, as agent and security trustee, and a financial institution group
     as lender. The provisions of the Facility Agreement allow certain of the
     Company's European subsidiaries to borrow funds as needed in an aggregate
     amount not to exceed L61.0 million (approximately $104.8 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
     31, 2005, these rates for borrowings denominated in the Great Britain Pound
     were approximately 11.6% and 7.3% for term and revolver loans,
     respectively. The rate for revolver loan borrowings denominated in the U.S.
     Dollar was 7.1%.

     The Facility Agreement consists of a Revolving Credit Facility with an
     aggregate maximum availability of L50.0 million (approximately $85.9
     million) and two Term Loan Facilities of L5.0 million and L6.0 million
     (approximately $8.6 million and $10.3 million, respectively). The Company
     expects to use borrowings under these facilities to repay existing debt and
     for working capital purposes.

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

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

     OTHER CREDIT FACILITIES

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


                                       40

<PAGE>

     SERIES C PREFERRED STOCK

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

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

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

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

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

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


                                       41

<PAGE>

     CONVERTIBLE PREFERRED STOCK

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

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

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

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

     DISCUSSION OF CRITICAL ACCOUNTING POLICIES

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


                                       42

<PAGE>

     The following critical accounting policies required the most significant
     estimates used in the preparation of our consolidated financial statements:

     ALLOWANCE FOR DOUBTFUL ACCOUNTS - We calculate allowances for estimated
     losses resulting from the inability of our customers to make required
     payments. We utilize a number of tools to evaluate and mitigate our
     customer credit risk. Management evaluates each new customer account using
     a combination of some or all of the following sources of information:
     credit bureau reports, industry credit group reports, customer financial
     statement analysis, customer supplied credit references and bank
     references. Appropriate credit limits are set in accordance with our credit
     risk policy and monitored on an on-going basis. Existing customers are
     monitored and credit limits are adjusted according to changes in their
     financial condition. Based on the procedures outlined herein, and the fact
     that only one customer accounted for 13.8% and 14.0% of the gross accounts
     receivable at December 31, 2005 and January 1, 2005, respectively, we
     believe there is no concentration of credit risk.

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

     INVENTORY VALUATION - The Company values inventory at the lower of cost or
     market, and regularly reviews the book value of discontinued product lines
     and stock keeping units (SKUs) to determine if these items are properly
     valued. If market value is less than cost, the Company writes down the
     related inventory to the estimated net realizable value. The Company
     regularly evaluates the composition of inventory to identify slow-moving
     and obsolete inventories to determine if additional write-downs are
     required. The Company's domestic inventories are generally determined by
     the last-in, first-out (LIFO) method. These inventories account for
     approximately 52.3% and 60.7% of the Company's inventories as of December
     31, 2005 and July 2, 2005, respectively. All remaining inventory cost is
     determined on the first-in, first-out basis.

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

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


                                       43

<PAGE>

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

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

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

     FORWARD LOOKING

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

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


                                       44

<PAGE>

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

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS

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

     All foreign exchange contracts related to continuing operations have been
     recorded in the consolidated balance sheets within accrued expenses at de
     minimis fair values at December 31, 2005 and July 2, 2005, respectively.
     Foreign exchange contracts with a fair value of $2.3 million, related to
     discontinued operations, have been included in the consolidated balance
     sheets as a reduction of current liabilities of discontinued operations at
     July 2, 2005. The change in the fair value of contracts related to
     continuing operations in the second quarter was insignificant. There was a
     de minimis amount at December 31, 2005 and $1.4 million at July 2, 2005
     recorded in accumulated other comprehensive income, net of tax, related to
     these contracts. The Company anticipates that all gains and losses deferred
     in accumulated other comprehensive income related to foreign exchange
     contracts will be reclassified into earnings within the next twelve months
     as the related inventories are sold. Contracts for the purchase of 2.5
     million U.S. dollars were entered into during the second quarter of fiscal
     2006. At December 31, 2005, the Company had foreign exchange forward
     contracts for the purchase of approximately 1.9 million U.S. dollars.

ITEM 4. CONTROLS AND PROCEDURES

     (a) Evaluation of disclosure controls and procedures. Based on their
     evaluation the Company's principal executive officer and principal
     financial officer concluded that the Company's disclosure controls and
     procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the
     Securities Exchange Act of 1934 (the Exchange Act)) were effective as of
     December 31, 2005 to ensure that information required to be disclosed by
     the Company in reports that it files or submits under the Exchange Act was
     recorded, processed, summarized and reported within the time periods
     specified in the Securities and Exchange Commission rules and forms.


                                       45

<PAGE>

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

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

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

          3.   Additional training of finance and tax personnel; and

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

     These remediation plans will continue to be implemented and monitored
     during the third and fourth 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.

     Except as described above, there were no significant changes in the
     Company's internal control during the quarter ended December 31, 2005 or
     other factors that could significantly affect these controls subsequent to
     the date of their evaluation, including any corrective actions with regard
     to significant deficiencies and material weaknesses.


                                       46
<PAGE>

                           PART II: OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

     SECURITIES CLASS ACTION LAWSUITS

     In May 2004, two stockholder lawsuits, named Mariss Partners, LLP v.
     Salton, Inc., Leonhard Dreimann and David M. Mulder, and Warren Beeler v.
     Salton, Inc., Leonhard Dreimann and David Mulder, were filed in the United
     States District Court for the Northern District of Illinois against the
     Company and certain Salton executives. The complaints allege that the
     defendants violated the federal securities laws, specifically Sections
     10(b) and 20(a) of the Securities Exchange Act of 1934 and Rule 10b-5 of
     the Securities and Exchange Commission, by making certain alleged false and
     misleading statements. The plaintiffs seek unspecified damages on behalf of
     a purported class of purchasers of the Company's securities during the
     period from November 11, 2002 through May 11, 2004. The Company believes
     that these lawsuits are without merit and that it has compelling defenses
     to the allegations contained in the complaints. The parties are engaged in
     settlement discussions.

     PRODUCT LIABILITY

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

     After receiving notice of a lawsuit, the Company voluntarily suspended
     selling the product. The Company believes that, at substantially the same
     time, the two retailers who had purchased the kettle from the Company also
     suspended selling the product. The Company believes that only a limited
     number of the kettles were sold to consumers.

     The Company voluntarily contacted the U.S. Food and Drug Administration
     ("FDA") and shared its information and test results concerning the product
     with the agency. The Company issued a recall of the product. The
     manufacturer has agreed to compensate the Company for its legal costs and
     out of pocket expenses in connection with the recall and to supply
     replacement products.

     In connection with the tea kettle matter, the Company reviewed other
     products received from the same manufacturer and subsequently notified the
     FDA that some manufacturing runs of another coffee maker product might have
     a lead content above FDA allowed standards. As a result, the FDA requested
     the Company to recall the product. The Company has done so, the retailer to
     whom the product was sold has cooperated in returning for credit its unsold
     units of the product. The manufacturer has agreed to compensate the Company
     for the costs that it may incur.


                                       47

<PAGE>

     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.

ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     The Annual Meeting of Shareholders was held on December 8, 2005.

     The following proposal was adopted by the margins indicated:

          1.   To elect three Class I Directors for a term expiring in 2008.

<TABLE>
<CAPTION>
                       NUMBER OF SHARES
                    ---------------------
                        FOR      WITHHELD
                    ----------   --------
<S>                 <C>          <C>
Daniel J. Stubler   15,015,590     92,856
Bruce G. Pollack    14,939,019    169,427
Bruce J. Walker     15,018,295     90,151
</TABLE>


                                       48

<PAGE>

     The following proposal was adopted by the margins indicated:

          2.   To ratify the appointment of Deloitte & Touche LLP as the
               auditors for the 2006 fiscal year.

<TABLE>
<CAPTION>
    FOR      AGAINST   ABSTAIN
----------   -------   -------
<S>          <C>       <C>
15,063,260    34,779    10,407
</TABLE>

ITEM. 6 EXHIBITS.

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


                                       49

<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 9, 2006                  SALTON, INC.


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


                                       50

<PAGE>

                                  EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT NUMBER                       DESCRIPTION OF DOCUMENT
--------------                       -----------------------
<S>              <C>
     10.43       General Release and Separation Agreement dated as of December
                 5, 2005 by and between David M. Mulder and Salton, Inc.
                 Incorporated by reference to the Registrant's Current Report on
                 Form 8-K dated December 5, 2005.

     10.44       Facility Agreement dated as of December 23, 2005 by and among
                 Salton Holdings Limited, Salton Europe Limited, certain
                 affiliates of Salton Holdings Limited, Burdale Financial
                 Limited, as agent and security trustee, and the financial
                 institutions party thereto as lenders. Incorporated by
                 reference to the Registrant's Current Report on Form 8-K dated
                 December 23, 2005.

     10.45       Waiver and Consent Under Amended and Restated Credit Agreement
                 dated as of December 20, 2005 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 December 23, 2005.

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

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

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

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

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

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


                                       51