SALTON INC - 10-K Annual Report

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

FORM 10-K

[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For The Fiscal Year Ended June 28, 2003

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934

For The Transition Period From to

COMMISSION FILE NUMBER 0-19557

SALTON, INC.
(Exact Name Of Registrant As Specified In Its Charter)

DELAWARE 36-3777824
(State or other jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification Number)
1955 FIELD COURT 60045
LAKE FOREST, ILLINOIS (Zip Code)
(Address of Principal Executive Offices)

(847) 803-4600
(Registrant's Telephone Number, Including Area Code)

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: NONE

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: COMMON STOCK $.01
PAR VALUE

[X] YES
[ ] NO Indicate by check mark whether this 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.

The aggregate market value of the Common Stock held by non-affiliates of
the Registrant as of December 28, 2002 was approximately $97,000,000
computed on the basis of the last reported sale price per share $10.09
of such stock on the NYSE. This determination of affiliate status is not
necessarily a conclusive determination for other purposes.

[X] YES
[ ] NO Indicate by check mark whether the Registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).

[ ] Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.

The number of shares of the Registrant's Common Stock outstanding as of
September 17, 2003 was 11,187,386.

DOCUMENTS INCORPORATED BY REFERENCE
Part III of this Form 10-K incorporates by reference certain information from
the Registrant's proxy statement relating to its 2003 Annual Meeting of
Stockholders (the "2003 Proxy Statement").

SALTON, INC.

INDEX TO FORM 10-K
FOR THE FISCAL YEAR ENDED JUNE 28, 2003

2

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING
INFORMATION

This annual report on Form 10-K 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 degree of leverage;

- - Economic conditions and the retail environment;

- - The timely development, introduction and customer acceptance of our products;

- - Competitive products and pricing;

- - Dependence on foreign suppliers and supply and manufacturing constraints;

- - Our relationship and contractual arrangements with key customers, suppliers
and licensors;

- - Cancellation or reduction of orders;

- - International business activities;

- - Availability and success of future acquisitions;

- - The risks relating to legal proceedings;

- - The risks relating to intellectual property matters;

- - The risks relating to regulatory matters; and

- - Other risks detailed from time to time in our Commission filings.

All forward looking statements included in this annual report on Form 10-K
are based on information available to us on the date of this annual 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 annual report on Form 10-K.

PART I

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

ITEM 1. Business

Salton, Inc. is a leading designer, marketer and distributor of branded,
high quality small appliances, home decor and personal care products. Our
product mix includes a broad range of small kitchen and home appliances,
tabletop products, time products, lighting products, picture frames and personal
care and wellness products. We sell our products under our portfolio of well
recognized brand names such as Salton(R), George Foreman(R), Westinghouse(TM),
Toastmaster(R), Melitta(R), Russell Hobbs(R), Farberware(R), Ingraham(R) and
Stiffel(R). We believe our strong market position results from our well-known
brand names, our high quality and innovative products, our strong relationships
with our customer base and our focused outsourcing strategy.

We currently market and sell our products in North America, Europe, Asia,
Australia, New Zealand and South Africa through an internal sales force and a
network of independent commissioned sales representatives. We

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predominantly sell our products to mass merchandisers, department stores,
specialty stores and mail order catalogs. Our customers include many premier
retailers, such as Wal-Mart, Target Corporation, Sears, Kmart Corporation,
Federated Department Stores, J.C. Penney Company, Argos Limited, Kohl's
Department Stores, May Company Department Stores, Bed, Bath & Beyond, Lowe's and
Linens 'n Things. We also sell certain of our products directly to consumers
through paid half-hour television programs referred to as infomercials, our
Internet websites and our retail outlets.

We outsource most of our production to independent manufacturers, located
primarily in the Far East. The Company has substantial experience with and
expertise in managing production relationships with third-party suppliers. We
work with our suppliers to provide the lowest possible cost for our customers
while maintaining reasonable gross margins for us.

Salton was incorporated in Delaware in October 1991. Our common stock
traded on the NASDAQ National market under the symbol "SALT" until February
1999. The Company moved to the New York Stock Exchange at that time and our
common stock has traded under the symbol "SFP" since. Our principal corporate
offices are located at 1955 Field Court, Lake Forest, Illinois 60045.

On May 16, 2003 we increased our 30.8% interest in Amalgamated Appliance
Holdings Limited (AMAP), a South African company, to a 52.6% interest. AMAP
offers Salton the alliance to enter developing markets on the African continent
and introduce them to our brands and product lines. AMAP's results for the
period of May 16, 2003 through June 28, 2003 have been consolidated with Salton
for financial statement presentation.

The Company's fiscal year ends on the Saturday closest to June 30. Unless
otherwise stated, references to years in this report relate to fiscal years
rather than calendar years.

BUSINESS SEGMENT AND PRODUCT INFORMATION

Salton consists of a single operating segment which designs, sources,
markets and distributes a diversified product mix for use in the home. Our
product mix consists of small kitchen and home appliances, tabletop products,
time products, lighting products, picture frames and personal care and wellness
products. We believe this segmentation is appropriate based upon Management's
operating decisions and performance assessment. Nearly all of our products are
consumer goods within the housewares market, procured through independent
manufacturers, primarily in the Far East. Our products are distributed through
similar distribution channels and customer base using the marketing efforts of
our Global Marketing Team.

BRAND PORTFOLIO

Our brand portfolio contains many time-honored traditions as well as
recently established names within the international housewares industry. We
believe this brand portfolio contains many brands with strong consumer
recognition throughout the world. While many of our brands are owned, we
continue to enhance our portfolio through licensing agreements and strategic
alliances. Our brands include:

Salton(R) Westinghouse(TM) Toastmaster(R) Sansui(TM)
George Foreman(R) One:One(TM) Westclox(R) Atlantis(TM)
Russell Hobbs(R) Breadman(R) Stiffel(R) Big Ben(R)
Melitta(R) Calvin Klein(R) Carmen(R) Pifco(R)
Farberware(R) Ingraham(R) Relaxor(R) Pioneer(TM)
Beyond(TM) Carmengirls.com(TM) Juiceman(R) Pineware(TM)
Andrew Collinge(TM) Block(R) icebox(R) Haden(TM)

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We develop and introduce a wide selection of new products and enhance
existing products to satisfy the various tastes, preferences and budgets of
consumers and to service the needs of a broad range of customers. Our product
divisions include Small Appliances, Home Decor, and Personal Care and Wellness.

The following table sets forth the approximate amounts of our net sales by
product division during the periods shown.

(1) For fiscal 2001, the table includes the sales of Salton Europe from June 1,
2001 through June 30, 2001. Subsequent years contain a full year of sales of
Salton Europe.

(2) Fiscal 2003 includes the results of AMAP for period May 16, 2003 through
June 28, 2003.

SMALL APPLIANCES

We design, market and distribute an extensive line of small appliances.
These products consist of heating appliances, motor driven appliances, beverage
makers, cookware and floor care. At the end of fiscal 2003, we marketed
approximately 5,721 stock keeping units (SKUs), including 3,701 SKUs acquired in
the AMAP acquisition.

Within our small appliance division, Salton is known for the George Foreman
branded product line which started as a single grill in 1995. Since 1995, Salton
has sold approximately 45.0 million units of the George Foreman line worldwide.
We have established the George Foreman name as a significant product brand,
representing 44.1% of our sales in the fiscal year ended June 28, 2003.

Salton continues to develop new and innovative appliance products.
Subsequent to our year-end, we began shipping the Melitta One:One beverage
maker. This pod-operated beverage maker dispenses one cup of coffee or tea in
less than sixty seconds. Salton also launched Westinghouse Unplugged, a cordless
upright vacuum cleaner with HEPA filteration and bagless technology. Salton
plans to launch its Beyond line of connected kitchen and home appliances in
2004. These appliances offer the flexibility of standard appliance service with
advanced Internet linked capabilities to improve the efficiency within the home.

HOME DECOR

This broad range of products consist of tabletop products, picture frames,
time and lighting products marketed by our Salton At Home Division. At the end
of fiscal 2003, we had approximately 5,578 SKUs under a variety of brand names
within this product division.

Salton has an exclusive licensing agreement with Calvin Klein for tabletop
and picture frame products and during fiscal 2003, introduced the Thomas O'Brien
product line in tabletop. Our time products include a variety of clocks under
well recognized brand names such as Ingraham and Westclox. Salton also markets
lighting products under the Stiffel name acquired in August 2001.

PERSONAL CARE AND WELLNESS

Salton offers a broad range of personal care and wellness products. These
products include health equipment, massagers, hair care, beauty, oral health
care and relaxation items. At the end of fiscal 2003, we marketed approximately
839 SKUs in this product division.

During fiscal 2003, we launched Carmengirls.com, a line of personal care
products for the young woman. In addition, Salton introduced its hair and beauty
products under the Andrew Collinge product line.

5

NEW PRODUCT DEVELOPMENT

We believe that the enhancement and extension of our existing products and
the development of new products are necessary for our continued success and
growth. We design style, features and functionality of our products to meet
customer requirements for quality, performance, product mix and pricing. We work
closely with both retail customers and suppliers to identify consumer needs and
preferences and to generate new product ideas. We evaluate new ideas and seek to
develop and acquire new products and improve existing products to satisfy
industry requirements and changing consumer preferences.

During fiscal 2003, we introduced 5,729 new SKUs, including 3,701 from the
acquisition of AMAP.

CUSTOMERS AND DISTRIBUTION CHANNELS

We currently market and sell our products in North America, Europe, Asia,
Australia, New Zealand and South Africa through an internal sales force and a
network of commissioned sales representatives to mass merchandisers, department
stores, specialty stores and mail order catalogs. We also sell products directly
to consumers through infomercials, Internet websites and our own retail outlets.

We provide promotional support for our products with the aid of television,
radio and print advertising, cooperative advertising with retailers and in-store
displays and product demonstrations. We believe that these promotional
activities are important to strengthening our brand name recognition.

During first quarter of fiscal 2004, we signed an agreement with Amazon.com
for marketing, distribution and direct fulfillment of our products. In addition,
during fiscal 2003, we opened eSalton.com, our ecommerce site.

Our total net sales to our five largest customers during fiscal 2003 were
39.3% of net sales, with Wal-Mart representing 12.5% of our net sales and Target
Corporation representing 11.9% of our net sales. Our total net sales to our five
largest customers during fiscal 2002 were 43.0% of net sales, with Wal-Mart
representing 13.9% of our net sales and Target Corporation representing 12.0% of
our net sales. In fiscal 2001, our total net sales to our five largest customers
were 47.4% of net sales with Wal-Mart representing 11.7% of our net sales, Kmart
Corporation representing 10.9% of our net sales and Target Corporation
representing 9.4% of our net sales.

During fiscal 2003, 2002 and 2001, sales recorded outside of North America
accounted for 30.7%, 16.6%, 3.4% of total net sales, respectively. See Note 14
of the Notes to Consolidated Financial Statements for information regarding
revenues of the Company's geographic areas for each of the three fiscal years
ended June 28, 2003, June 29, 2002, and June 30, 2001.

SOURCES OF SUPPLY

Most our products are manufactured to our specifications by manufactures
located primarily in the Far East. We believe that we maintain good business
relationships with our overseas manufacturers.

We do not maintain long-term purchase contracts with manufacturers and
operate principally on a purchase order basis. We believe we are not currently
dependent on any single manufacturer. However, one supplier located in China,
accounted for 33.2% of our product purchases during fiscal 2003, 32.5% of our
product purchases in fiscal 2002 and 35.2% of purchases in fiscal 2001. We
believe that the loss of any one supplier would not have a long term material
adverse effect on our business because other suppliers with which we do business
would be able to increase production to fulfill our requirements however, the
loss of a supplier could, in the short term, adversely effect our business until
alternative supply arrangements are secured.

BACKLOG

Our backlog consists of orders for our products, which may be subject to
change and cancellation until shipment. The dollar amount of backlog as of
August 29, 2003 was $84.1 million. At August 28, 2002, we had backlog of
approximately $58.4 million. Customer order patterns vary from year to year,
largely because of annual differences in consumer acceptance of product lines,
product availability, marketing strategies, inventory levels of retailers and
differences in overall economic conditions. As a result, comparisons of backlog
as of any date in

6

a given year with backlog at the same date in a prior year are not necessarily
indicative of future results of operations or prospects.

COMPETITION

We compete in the global housewares market. While the Domestic and Western
European markets are strongly developed, the remainder of the global market is
less developed and offers, we believe, significant opportunities for business
expansion. Competition is based upon price, access to retail shelf space,
product features and enhancements, brand names, new product introductions and
marketing.

The retail industry continues to consolidate leaving fewer retail outlets
and increased competition for shelf space. We expect retailers will continue to
consolidate their vendor base by dealing primarily with a smaller number of
suppliers that can offer a diversified product mix, meet logistical and volume
requirements and offer comprehensive levels of customer service and marketing
support. We believe our competitive pricing, high level of customer service,
strategic acquisitions and alliances, as well as our portfolio of well
recognized brand names, new technology and innovative products, position us to
compete and benefit from this environment.

SEASONALITY

Due to holiday buying patterns, sales are traditionally higher in the
second fiscal quarter than in the other quarterly periods and the Company
typically earns a disproportionate share of operating income in this quarter.

TRADEMARKS, PATENTS AND LICENSING ARRANGEMENTS

We hold numerous patents and trademarks registered in the United States and
foreign countries for various products and processes. We have registered certain
of our trademarks with the United States Patent and Trademark Office and we
consider these trademarks to be of considerable value and of material importance
to our business. The Company's right to use these tradenames continues as long
as it uses these names.

Salton maintains many licensing and contractual relationships to market and
distribute products under specific names and designs. These licensing
arrangements generally require certain license fees and royalties. Some of our
agreements contain minimum sales requirements that, if not satisfied, may result
in the termination of the agreements.

On April 22, 2002, we entered into an exclusive licensing agreement with
Westinghouse Electric Corporation to use its marquis Westinghouse brand name,
Circle W trademark, and the brand awareness statement "You can be sure... if
it's a Westinghouse" on the following product categories: kitchen electrics,
fans and heaters, personal care, table top air cleaners and humidifiers, clocks
and vacuums. The agreement, which covers North America, South America, Africa,
Europe, Asia and Australia-New Zealand, has a term ending on March 31, 2008.
Upon completion of the six-year term, the agreement is renewable for additional
five year terms. We are subject to pay minimum royalty payments to Westinghouse
beginning in the third year of the agreement.

REGULATION

We are subject to federal, state and local regulations concerning consumer
products safety. Foreign jurisdictions also have regulatory authorities
overseeing the safety of consumer products. In general, we have not experienced
difficulty complying with such regulations and compliance, with them, has not
had an adverse effect on our business. Our small electric appliance products
sold in the United States are listed by Underwriters Laboratory, Inc. (UL) or
ETL; and similar products sold in other countries are listed with local
organizations similar to UL if required.

PRODUCT WARRANTIES

Our products are generally sold with a limited one-to-three year warranty
from the date of purchase. In the case of defects in material workmanship, we
agree to replace or repair the defective product without charge while under the
warranty time frame.

7

EMPLOYEES

As of August 29, 2003, we employed approximately 2,700 persons, including
approximately 1,350 persons employed in South Africa by Amalgamated Appliance
Holdings Limited. We increased our investment in AMAP to 52.6% ownership
interest as of May 16, 2003.

ADDITIONAL INFORMATION

Pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934,
the Company's Annual Reports on Form 10-K, including this Form 10-K, as well as
the Company's Quarterly Reports on Form 10-Q and Current Reports on Form 8-K are
filed electronically with the SEC. The public may read or copy any materials we
file with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0300. The SEC maintains an
Internet site that contains reports, proxy and information statements, and other
information regarding issuers that file electronically with the SEC. The address
of that site is http://www.sec.gov. In addition, we make the 10-K and 10-Q
filings as well as the Current Reports on Form 8-K available free of charge as
soon as reasonably practicable on our Internet website http://www.saltoninc.com
or by contacting our corporate offices at (847) 803-4600.

8

RISK FACTORS

Prospective investors should carefully consider the following risk factors,
together with the other information contained in this annual report on Form
10-K, in evaluating us and our business before purchasing our securities. In
particular, prospective investors should note that this annual report on Form
10-K contains forward-looking statements within the meaning of Section 27A of
the Securities Act and Section 21E of the Exchange Act and that actual results
could differ materially from those contemplated by such statements. See "Special
Note Regarding Forward-Looking Statements." The factors listed below represent
certain important factors which we believe could cause such results to differ.
These factors are not intended to represent a complete list of the general or
specific risks that may affect us. It should be recognized that other risks may
be significant, presently or in the future, and the risks set forth below may
affect us to a greater extent than indicated.

OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL HEALTH AND
PREVENT US FROM FULFILLING OUR PAYMENT OBLIGATIONS.

We have a significant amount of indebtedness relative to our equity size.
As of June 28, 2003 we had total consolidated indebtedness of $374.2 million,
including $148.8 million of 12 1/4% senior subordinated notes due 2008 and
$125.0 million of 10 3/4% senior subordinated notes due 2005, excluding $12.1
million related to the fair value of a monetized fixed to floating interest rate
swap on the notes due 2008 and $4.6 million for the loan notes to Pifco
shareholders that are fully cash collateralized, and total stockholders' equity
of $253.9 million. We also had additional availability under our revolving
credit facility of $35.8 million, net of $22.7 million reserved for the final
payments on the Foreman notes. Subsequent to year end, we made the final
installment payment to George Foreman. We may incur additional indebtedness in
the future, including through additional borrowings under our credit agreement,
subject to availability.

Our ability to service our debt obligations, including the notes, and to
fund planned capital expenditures will depend upon our future operating
performance, which will be affected by prevailing economic conditions in the
markets we serve and financial, business and other factors, certain of which are
beyond our control. We cannot assure you that our business will generate
sufficient cash flow from operations or that future borrowings will be available
under our credit facility in an amount sufficient to enable us to service our
indebtedness, including the notes, or to fund our other liquidity needs. We may
need to refinance all or a portion of the principal of the notes on or prior to
maturity. We cannot assure you that we will be able to effect any refinancing on
commercially reasonable terms or at all.

Our high level of debt could have important consequences for you, such as:

- - our debt level makes us more vulnerable to general adverse economic and
industry conditions;

- - our ability to obtain additional financing for acquisitions, or to fund future
working capital, capital expenditures or other general corporate requirements
may be limited;

- - we will need to use a substantial portion of our cash flow from operations for
the payment of principal of, and interest on, our indebtedness, which will
reduce the amount of money available to fund working capital, capital
expenditures or other general corporate purposes;

- - our flexibility in planning for, or reacting to, changes in our business and
the industry in which we compete may be limited; and

- - our debt level may place us at a competitive disadvantage to our less
leveraged competitors.

OUR DEBT INSTRUMENTS CONTAIN RESTRICTIVE COVENANTS THAT COULD ADVERSELY AFFECT
OUR BUSINESS BY LIMITING OUR FLEXIBILITY.

Our revolving credit agreement and the indentures governing the 12 1/4%
senior subordinated notes and the 10 3/4% senior subordinated notes impose
restrictions that affect, among other things, our ability to incur debt, pay
dividends, sell assets, create liens, make capital expenditures and investments,
merge or consolidate, enter into transactions with affiliates, and otherwise
enter into certain transactions outside the ordinary course of business. Our
revolving credit agreement also requires us to maintain specified financial
ratios, including a minimum consolidated
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and U.S. fixed charge coverage ratio, and meet certain other financial tests.
Our ability to continue to comply with these covenants and restrictions may be
affected by events beyond our control. A breach of any of these covenants or
restrictions would result in an event of default under our revolving credit
agreement and the indentures. Upon the occurrence of a breach, the lenders under
our revolving credit agreement could elect to declare all amounts borrowed
thereunder, together with accrued interest, to be due and payable, foreclose on
the assets securing our revolving credit agreement and/or cease to provide
additional revolving loans or letters of credit, which could have a material
adverse effect on us. A failure to comply with the restrictions in the
indentures could result in an event of default under the indentures with similar
consequences.

IF WE WERE TO LOSE ONE OR MORE OF OUR MAJOR CUSTOMERS, OUR FINANCIAL RESULTS
WOULD SUFFER.

Our success depends on our sales to our significant customers. Our total
net sales to our five largest customers during fiscal 2003 were 39.3% of net
sales, with Wal-Mart representing 12.5% of our net sales and Target Corporation
representing 11.9% of our net sales. Our total net sales to our five largest
customers during fiscal 2002 were 43.0% of net sales, with Wal-Mart representing
13.9% of our net sales and Target Corporation representing 12.0% of our net
sales. In fiscal 2001, our total net sales to our five largest customers were
47.4% of net sales with Wal-Mart representing 11.7% of our net sales, Kmart
Corporation representing 10.9% of our net sales and Target Corporation
representing 9.4% of our net sales. We do not have long-term agreements with our
major customers, and purchases are generally made through the use of individual
purchase orders. A significant reduction in purchases by any of these major
customers or a general economic downturn in retail sales could have a material
adverse effect on our business, financial condition and results of operations.

OUR DEPENDENCE ON FOREIGN SUPPLIERS SUBJECTS US TO THE RISKS OF DOING BUSINESS
ABROAD.

We depend upon unaffiliated foreign companies for the manufacture of most
of our products. Our arrangements with our suppliers are subject to the risks of
doing business abroad, including:

- - import duties;

- - trade restrictions;

- - production delays due to unavailability of parts or components; increase in
transportation costs and transportation delays; work stoppages; foreign
currency fluctuations; and

- - political and economic instability.

THE SMALL HOUSEHOLD APPLIANCE INDUSTRY IS HIGHLY COMPETITIVE AND WE MAY NOT BE
ABLE TO COMPETE EFFECTIVELY.

We believe that competition is based upon several factors, including:

- - price;

- - access to retail shelf space;

- - product features and enhancements;

- - brand names; new product introductions; and

- - marketing support and distribution approaches.

IF THE RETAIL INDUSTRY CONTINUES TO EXPERIENCE AN ECONOMIC SLOWDOWN, OUR
FINANCIAL RESULTS WILL BE ADVERSELY AFFECTED.

We sell our products to consumers through major retail channels, primarily
mass merchandisers, department stores, specialty stores and mail order catalogs.
As a result, our business and financial results can fluctuate with the financial
condition of our retail customers and the retail industry. The current general
slowdown in the retail sector has adversely impacted our net sales of products,
our operating margins and our net income. If such conditions

10

continue or worsen, it could have a material adverse effect on our business,
financial condition and results of operations.

The current general slowdown in the retail sector has resulted in, and we
expect it to continue to result in, additional pricing and marketing support
pressures on us.

Certain of our retail customers have filed for bankruptcy protection in
recent years. We continually monitor and evaluate the credit status of our
customers and attempt to adjust sales terms as appropriate. Despite these
efforts, a bankruptcy filing by, or other adverse change in the financial
condition of, a significant customer could adversely affect our financial
results.

ACQUISITIONS MAY BE DIFFICULT TO INTEGRATE AND MAY DISRUPT OUR BUSINESS.

We continue to seek opportunities to acquire businesses and product lines
that fit within our acquisition strategy, including the expansion of our
international sales through the acquisition of complementary businesses. We may
not successfully identify acceptable acquisition candidates or integrate any
acquired operations. For instance, we cannot assure you that the anticipated
benefits of our recent acquisition of a majority interest in Amalgamated
Appliance Holdings Limited will be realized. Opportunities for growth through
acquisitions, future operating results and the success of acquisitions may be
subject to the effects of, and changes in, U.S. and foreign trade and monetary
policies, laws and regulations, political and economic developments, inflation
rate and tax laws.

Our acquisitions of additional businesses and product lines may require
additional capital and the consent of our lenders and may have a significant
impact on our business, financial condition and results of operations. We may
finance acquisitions with internally generated funds, bank borrowings, public
offerings or private placements of debt or equity securities, or through a
combination of these sources. This may have the effect of increasing our debt
and reducing our cash available for other purposes.

Acquisitions may also require substantial attention from, and place
substantial additional demands upon, our senior management. This may divert
senior management's attention away from our existing businesses, making it more
difficult to manage effectively. In addition, unanticipated events or
liabilities relating to these acquisitions or the failure to retain key
personnel could have a material adverse effect on our business, results of
operations and financial condition.

EXPANDING OUR INTERNATIONAL SALES WILL SUBJECT US TO ADDITIONAL BUSINESS RISKS
AND MAY CAUSE OUR PROFITABILITY TO DECLINE DUE TO INCREASED COSTS.

We intend to pursue growth opportunities internationally. During fiscal
2003, 2002 and 2001, sales recorded outside of North America accounted for
30.7%, 16.6%, 3.4% of total net sales, respectively. Our pursuit of
international growth opportunities may require significant investments for an
extended period before returns on these investments, if any, are realized.
International operations are subject to a number of other risks and potential
costs, including:

- - the risk that because our brand names may not be locally recognized, we must
spend significant amounts of time and money to build a brand identity without
certainty that we will be successful;

- - unexpected changes in regulatory requirements;

- - inadequate protection of intellectual property in foreign countries;

- - foreign currency fluctuations; transportation costs;

- - adverse tax consequences; and

- - political and economic instability.

We cannot assure you that we will not incur significant costs in addressing
these potential risks.

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IF WE HAVE TO EXPEND SIGNIFICANT AMOUNTS TO REMEDIATE ENVIRONMENTAL LIABILITIES,
OUR FINANCIAL RESULTS WILL SUFFER.

Prior to 2003, we manufactured certain of our products at our owned plants
in the United States and Europe. Our previous manufacturing of products at these
sites exposes us to potential liabilities for environmental damage that these
facilities may have caused or may cause nearby landowners. During the ordinary
course of our operations, we have received, and we expect that we may in the
future receive, citations or notices from governmental authorities asserting
that our facilities are not in compliance with, or require investigation or
remediation under, applicable environmental statutes and regulations. Any
citations or notices could have a material adverse effect on our business,
results of operations and financial condition.

THE SEASONAL NATURE OF OUR BUSINESS COULD ADVERSELY IMPACT OUR OPERATIONS.

Our business is highly seasonal, with operating results varying from
quarter to quarter. We have historically experienced higher sales during
mid-Fall and early Winter primarily due to increased demand by customers for our
products attributable to holiday sales. This seasonality has also resulted in
additional interest expense for us during this period due to an increased need
to borrow funds to maintain sufficient working capital to finance product
purchases and customer receivables for the seasonal period. Lower sales than
expected by us during this period, a lack of availability of product, a general
economic downturn in retail sales or the inability to service additional
interest expense due to increased borrowings could have a material adverse
effect on our business, financial condition and results of operations.

LONG LEAD TIMES AND CUSTOMER DEMANDS MAY CAUSE US TO PURCHASE MORE INVENTORY
THAN NECESSARY.

Manufacturing lead times and a strong concentration of our sales occurring
during mid-Fall and early Winter time period require that we purchase products
and thereby increase inventories based on anticipated sales and forecasts
provided by our customers and our sales personnel. In an extended general
economic slowdown we cannot assure you that our customers will order these
inventories as anticipated.

PRODUCT RECALLS OR LAWSUITS RELATING TO DEFECTIVE PRODUCTS COULD ADVERSELY
IMPACT OUR FINANCIAL RESULTS.

We face exposure to product recalls and product liability claims in the
event that our products are alleged to have manufacturing or safety defects or
to have resulted in injury or other adverse effects. We cannot assure you that
we will be able to maintain our product liability insurance on acceptable terms,
if at all, or that product liability claims will not exceed the amount of our
insurance coverage. As a result, we cannot assure you that product recalls and
product liability claims will not adversely affect our business.

THE INFRINGEMENT OR LOSS OF OUR PROPRIETARY RIGHTS COULD HAVE AN ADVERSE EFFECT
ON OUR BUSINESS.

We regard our copyrights, trademarks, service marks and similar
intellectual property as important to our success. We rely on copyright and
trademark laws in the United States and other jurisdictions to protect our
proprietary rights. We seek to register our trademarks in the United States and
elsewhere. These registrations could be challenged by others or invalidated
through administrative process or litigation. If any of these rights were
infringed or invalidated, our business could be materially adversely affected.

We license various trademarks and trade names from third parties for use on
our products. These licenses generally place marketing obligations on us and
require us to pay fees and royalties based on net sales or profits. Typically,
each license may be terminated if we fail to satisfy minimum sales obligations
or if we breach the license. The termination of these licensing arrangements
could adversely affect our business, financial condition and results of
operations.

WE MAY BE SUBJECT TO LITIGATION AND INFRINGEMENT CLAIMS, WHICH COULD CAUSE US TO
INCUR SIGNIFICANT EXPENSES OR PREVENT US FROM SELLING OUR PRODUCTS.

We cannot assure you that others will not claim that our proprietary or
licensed products are infringing their intellectual property rights or that we
do not in fact infringe those intellectual property rights. If someone claimed

12

that our proprietary or licensed products infringed their intellectual property
rights, any resulting litigation could be costly and time consuming and would
divert the attention of management and key personnel from other business issues.
We also may be subject to significant damages or an injunction against use of
our proprietary or licensed products. A successful claim of patent or other
intellectual property infringement against us could harm our financial
condition.

COMPLIANCE WITH GOVERNMENTAL REGULATIONS COULD SIGNIFICANTLY INCREASE OUR
OPERATING COSTS OR PREVENT US FROM SELLING OUR PRODUCTS.

Most federal, state and local authorities require certification by
Underwriters Laboratory, Inc., an independent, not-for-profit corporation
engaged in the testing of products for compliance with certain public safety
standards, or other safety regulation certification prior to marketing
electrical appliances. Foreign jurisdictions also have regulatory authorities
overseeing the safety of consumer products. Our products, or additional
electrical appliances which may be developed by us, may not meet the
specifications required by these authorities. A determination that we are not in
compliance with these rules and regulations could result in the imposition of
fines or an award of damages to private litigants.

IF WE DO NOT ATTRACT AND RETAIN SKILLED PERSONNEL, OUR ABILITY TO GROW AND
DEVELOP OUR BUSINESS WILL SUFFER.

Our continued success will depend significantly on the efforts and
abilities of David C. Sabin, Chairman; Leonhard Dreimann, Chief Executive
Officer; William B. Rue, President and Chief Operating Officer and David Mulder,
Executive Vice President, Chief Administrative Officer and Senior Financial
Officer. The loss of the services of one or more of these individuals could have
a material adverse effect on our business. In addition, as our business develops
and expands, we believe that our future success will depend greatly on our
ability to attract and retain highly qualified and skilled personnel. We do not
have, and do not intend to obtain, key-man life insurance on our executive
officers.

THE INTERESTS OF OUR SIGNIFICANT STOCKHOLDER MAY CONFLICT WITH YOUR INTERESTS.

As of June 28, 2003 Centre Partners Management LLC and entities directly or
indirectly controlled by Centre Partners beneficially owned in the aggregate
28.0% of our common stock. Centre Partners is able to exercise significant
influence with respect to the election of directors or major corporate
transactions such as a merger or sale of all or substantially all of our assets.
Centre Partners generally has the right to designate two directors as long as it
and its affiliates own at least 12.5% of the total voting power of our
outstanding common stock and one director as long as it and its affiliates own
at least 7.5% of the total voting power of our outstanding common stock. The
interests of Centre Partners may conflict with your interests in certain
circumstances.

TAKEOVER DEFENSE PROVISIONS WHICH WE HAVE IMPLEMENTED MAY ADVERSELY AFFECT THE
MARKET PRICE OF OUR COMMON STOCK.

Various provisions of Delaware corporation law and of our corporate
governance documents may inhibit changes in control not approved by our board of
directors and may have the effect of depriving stockholders of an opportunity to
receive a premium over the prevailing market price of our common stock in the
event of an attempted hostile takeover or may deter takeover attempts by third
parties. In addition, the existence of these provisions may adversely affect the
market price of our common stock. These provisions include:

- - a classified board of directors;

- - a prohibition on stockholder action through written consents;

- - a requirement that special meetings of stockholders be called only by the
board of directors;

- - availability of "blank check" preferred stock.

13

WE DO NOT ANTICIPATE PAYING DIVIDENDS.

We have not paid dividends on our common stock and we do not anticipate
paying dividends in the foreseeable future. We intend to retain future earnings,
if any, to finance the expansion of our operations and for general corporate
purposes, including future acquisitions. In addition, our credit agreement and
senior subordinated notes contain restrictions on our ability to pay dividends
on our capital stock.

ITEM 2. Properties

Salton leases its principal executive offices based in Lake Forest,
Illinois. In addition, Salton also leases the following:

In addition, Salton also owns the following:

Subsequent to year end, the Company completed a build-to-suit warehouse in
Redlands, California of approximately 984,000 square feet. As a result, the
Company has consolidated three of its former warehouses into this new facility.

We believe our facilities are suitable and adequate for our current level
of operations.

ITEM 3. Legal Proceedings

ATTORNEY GENERALS OF NEW YORK AND ILLINOIS

On September 6, 2002, we entered into an agreement with the Attorneys
General of New York and Illinois governing our future conduct with retailers
relating to our indoor electric grills. The agreement was approved on May 30,
2003 by the United States District Court of the Southern District of New York.
Under the agreement, we made payments totaling $4.5 million in 2003 and are
required to make an additional $3.5 million payment in 2004.

APPLICA

During the first quarter, we settled all amounts due to Applica, Inc.
pursuant to a settlement agreement effective on June 21, 2002. This resulted in
the cancellation of the $15 million Junior Subordinated note that the Company
issued to Applica in 1998.

ENVIRONMENTAL

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

14

OTHER

We received a letter from Philips Domestic Appliances and Personal Care
B.V. (Philips) accusing us of interfering in a contractual relationship between
Philips and a manufacturing source for Salton, Electrical & Electronics (E&E),
misappropriating trade secrets and infringing other unspecified intellectual
property rights in connection with our development and marketing of the One:One
single serve coffee maker. On August 14, 2003, we filed a complaint in the
United States District Court for the Northern District of Illinois seeking a
declaratory judgment that we have not infringed the alleged trade secret rights
of Philips and have not tortiously interfered with the contractual relationship
between Philips and E&E.

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

ITEM 4. Submissions of Matters to a Vote of Security Holders

None

ITEM 4A. Executive Officers of the Registrant

Our executive officers and their respective ages as of September 17, 2003,
are as follows:

DAVID C. SABIN has served as Chairman of the Company since September 1991
and has served as Secretary and a director of the Company since its inception in
August 1988 and is a founder of the Company.

LEONHARD DREIMANN has served as Chief Executive Officer and a director of
the Company since its inception in August 1988 and is a founder of the Company.
From 1988 to July 1998, Mr. Dreimann served as President of the Company. From
1987 to 1988, Mr. Dreimann served as president of the Company's predecessor
Salton, Inc., a wholly-owned subsidiary of SEVKO, Inc. Prior to 1987, Mr.
Dreimann served as managing director of Salton Australia Pty. Ltd., a
distributor of Salton brand kitchen appliances.

WILLIAM B. RUE has been a director of the Company since August 1998. Mr.
Rue has served as President of the Company since August 1998, as Chief Operating
Officer of the Company since December 1994 and as Chief Financial Officer and
Treasurer of the Company from September 1988 to January 1999. He is also a
founder of the Company. From 1985 to 1988, he was Treasurer of SEVKO, Inc. and
from 1982 to 1984 he was Vice President-Finance of Detroit Tool Industries
Corporation. Prior to that time, Mr. Rue had been employed since 1974 by the
accounting firm of Touche Ross & Co.

DAVID M. MULDER serves as the Executive Vice President, Chief
Administrative Officer and Senior Financial Officer. Mr. Mulder is responsible
for overseeing corporate finance, U.S. operations, U.S. information technology
and U.S. human resources. Prior to joining the Company, Mr. Mulder recently
served as Chief Financial and Administrative Officer of KoSa, an international
manufacturing company in Houston, Texas. From 1995 to 2000, he held a number of
senior level positions at Fruit of the Loom, a consumer products company. Mr.
Mulder's most recent position at Fruit of the Loom was a corporate Executive
Vice President and the Chief Executive Officer of their European division.

15

PART II

ITEM 5. Market for the Registrant's Common Equity and Related Stockholder
Matters

The registrant's common stock has traded on the New York Stock Exchange
under the symbol "SFP" since February 26, 1999. From October 1991 until February
25, 1999, our common stock traded on the NASDAQ National Market under the symbol
"SALT." The following table sets forth, for the periods indicated, the high and
low sales prices for the common stock as reported on the New York Stock
Exchange.

DIVIDENDS

We have not paid dividends on our common stock and we do not anticipate
paying dividends in the foreseeable future. We intend to retain future earnings,
if any, to finance the expansion of our operations and for general corporate
purposes, including future acquisitions. In addition, our credit agreement and
senior subordinated notes contain restrictions on our ability to pay dividends
on our capital stock.

RECENT SALES OF UNREGULATED SECURITIES

On April 3, 2003, we issued warrants to purchase 50,000 shares of our
common stock to a third party serving as our public relations firm. The issuance
of the warrants was determined to be exempt from regulation under Section 4(2)
of the Securities Act of 1933 as a transaction by an issuer not involving a
public offering.

COMMON STOCK

The Certificate of Incorporation authorizes the issuance of 40,000,000
common shares, par value $0.01 per share. As of September 17, 2003, there were
approximately 335 holders of record of our common stock.

PREFERRED STOCK

The Certificate of Incorporation authorizes the issuance of 2,000,000
preferred shares, par value $0.01 per share.

We have 40,000 outstanding shares of convertible preferred stock. The
convertible preferred stock is generally non-dividend bearing; however, if we
breach in any material respect any of our material obligations in the preferred
stock agreement or the Certificate of Incorporation relating to the convertible
preferred stock, the holders of convertible preferred stock are entitled to
receive quarterly cash dividends on each share of convertible preferred stock
from the date of such breach until it is cured at a rate per annum equal to 12
1/2% of the Liquidation Preference as defined below. The payment of dividends
is limited by the terms of our credit agreement.

Each holder of the convertible preferred stock is generally entitled to one
vote for each share of Salton common stock which such holder could receive upon
the conversion of the convertible preferred stock. Each share of convertible
preferred stock is convertible at any time into that number of shares of Salton
common stock obtained by dividing $1,000 by the Conversion Price in effect at
the time of conversion. The "Conversion Price" is equal to $11.33, subject to
certain anti-dilution adjustments.

16

In the event of a Change of Control (as defined), each holder of shares of
convertible preferred stock has the right to require us to redeem such shares at
a redemption price equal to the Liquidation Preference plus an amount equivalent
to interest accrued thereon at a rate of 7% per annum compounded annually on
each anniversary date of July 28, 1998 for the period 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 of the Company,
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 Salton common stock or any
other of our 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 Performance per
share, payable at the Company's option in cash or shares of Salton common stock.

As of September 18, 2003 there were 40,000 shares of the convertible
preferred stock outstanding, held by 7 shareholders of record. There is no
established market for the convertible preferred stock.

17

ITEM 6. Selected Financial Data

The following financial data as of and for the fiscal years ended June 28,
2003, June 29, 2002, June 30, 2001, July 1, 2000 and June 26, 1999 have been
derived from and should be read in conjunction with, our audited consolidated
financial statements, including the notes thereto.

- ---------------

(1) Excluding $4.6 million in fiscal 2003, $18.2 million in fiscal 2002 and
$11.3 million in fiscal 2001 related to the loan notes to Pifco shareholders
which were fully cash collateralized and excluding $12.1 million in fiscal
2003, $8.4 million in fiscal 2002 and $(0.5) million in fiscal 2001 related
to the fair value of a monetized fixed to floating interest rate swap on the
notes due 2008.

Certain prior year information has been reclassified to conform with
current year presentation.

ITEM 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations

INTRODUCTION

Salton designs, markets and distributes small home appliances, home decor
and personal care products under recognized brand names in the International
Housewares Industry. Our product mix consists of kitchen and home appliances,
tabletop products, time products, lighting products, picture frames and personal
care and wellness products. In recent years, we have expanded our international
presence into Western Europe and South Africa

18

through strategic acquisitions and alliances. In addition, we have managed to
generate internal international growth and strengthen our domestic product
offerings through these acquisitions and alliances.

ACQUISITIONS

On May 16, 2003 we increased our 30.8% interest in Amalgamated Appliance
Holdings Limited (AMAP), a South African Company, to a 52.6% interest for $7.5
million. Due to the increase in ownership, AMAP's results for the period of May
16, 2003 through June 28, 2003 have been consolidated with Salton in accordance
with GAAP for financial statement presentation. Prior to May 16, 2003 in
accordance with GAAP, our investment in AMAP was accounted for on the equity
method and was included in consolidated assets.

NEW ACCOUNTING PRONOUNCEMENTS

The Financial Accounting and Standards Board (FASB) Emerging Issues Task
Force (EITF) Issue No. 02-16, "Accounting By A Customer (Including A Reseller)
For Cash Consideration Received From A Vendor" addressed the accounting
treatment for vendor allowances. The Company receives allowances from certain
vendors through a variety of arrangements. Given the promotional nature of the
Company's business, the allowances are generally intended to offset the
Company's costs of promoting, selling and advertising the vendors' products.
Vendor allowances are recognized as a reduction of cost of sales when the
purpose for which the vendor funds were intended to be used has been fulfilled.
The adoption of EITF Issue No. 02-16 in 2003 did not have a material impact on
the Company's financial position or results of operations.

In May 2003, the FASB issued Statement of Financial Accounting Standards
(SFAS) No. 150, "Accounting for Certain Instruments with Characteristics of both
Liabilities and Equity." This Statement establishes standards for how an issuer
classifies and measures certain financial instruments with characteristics of
both liabilities and equity. SFAS 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first interim period beginning after June 15, 2003. The Company
does not believe adoption of this Statement will have a material impact on its
Consolidated Financial Statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The provisions of SFAS 149
are not expected to have a material impact on the Company's Consolidated
Financial Statements.

In January 2003, the FASB issued FASB Interpretation (FIN) No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of FIN No. 46 are to provide guidance on the identification
of entities for which control is achieved through means other than through
voting rights (Variable Interest Entities) and how to determine when and which
business enterprise should consolidate the Variable Interest Entity (the Primary
Beneficiary). The transitional disclosure requirements of FIN No. 46 take effect
immediately and are required in all financial statements issued after January
31, 2003, if certain conditions are met. The Company is not the primary
beneficiary of any variable interest entities as of June 28, 2003. Therefore,
FIN No. 46 will not impact its financial statements at that date.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees,
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the Company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
FIN 45 will be effective for the Company on a prospective basis to guarantees
issued or modified after December 31, 2002. The disclosure requirements in this
interpretation have been adopted by the Company. The Company does not expect
this Statement to have a material impact on the Company's financial position and
results of operations.

19

BASIS FOR PRESENTATION

The consolidated statement of income and statement of cash flows for the
year ended June 28, 2003 and the consolidated balance sheet as of June 28, 2003
include the combined operations of Salton and AMAP, reflecting the additional
ownership interest as previously discussed. Accounting principles generally
accepted in the United States of America (GAAP) require results for the other
years presented, including results of operations and cash flows for the fiscal
years ended June 29, 2002 and June 30, 2001 and the consolidated balance sheet
as of June 29, 2002 be presented on a historical basis with Salton's investment
in AMAP accounted for under the equity method of accounting.

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.

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

ALLOWANCE FOR DOUBTFUL ACCOUNTS -- We record allowances for estimated
losses resulting from the inability of our customers to make required payments.
We assess the credit worthiness of our customers based on multiple sources of
information and analyze such factors as our historical bad debt experiences,
publicly available information regarding our customers and the inherent credit
risk related to them, information from subscription based credit reporting
companies, trade association data and reports, current economic trends and
changes in customer payment terms or payment patterns. This assessment requires
significant judgment. If the financial condition of our customers were to
worsen, additional write-offs may be required, resulting in write-offs that are
not included in the allowance for doubtful accounts at June 28, 2003.

INVENTORY VALUATION -- Our inventories are generally determined using the
last-in, first-out (LIFO) cost method. We value our inventory at the lower of
cost or market, and regularly review 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, we write down the related inventory
to the lower of market or net realizable value. We regularly evaluate the
composition of our inventory to identify slow-moving and obsolete inventories to
determine if additional write-offs are required. Changes in consumer purchasing
patterns, however, could result in the need for additional write-offs.

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 acquisition is 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 periodically assessed for impairment. Intangible assets that
have an indefinite life are also periodically assessed for impairment.

The allocation of the acquisition cost to intangible assets and goodwill
therefore has a significant impact on our future operating results. The
allocation process requires the extensive use of estimates and assumptions,
including estimates of future cash flows expected to be generated by the
acquired assets. Further, when impairment indicators
20

are identified with respect to previously recorded intangible assets, the values
of the assets are determined using discounted future cash flow techniques, 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.

As of June 28, 2003, the Company prepared estimates of the fair values of
those reporting units having recorded goodwill amounts. Such estimates exceeded
the carrying values of the reporting units; however, shortfalls in future
operating results and/or application of more conservative market assumptions
could have an adverse impact on the comparison of fair value to carrying value.
If these conditions arise, and a shortfall in fair value versus carrying value
results, further analysis of intangibles at the unit level could result in an
impairment charge of a material portion of the $27.0 million of goodwill.

YEAR IN REVIEW

Salton faced a difficult year in the United States market with a labor
lockout in the West Coast ports, a disappointing holiday sales season at retail,
overstocked retailers and a war driven economic environment. Despite these
conditions, we were able to generate net income of $8.0 million for the full
year, reduce our indebtedness, net of cash, by $108.0 million and reduce
inventories to their lowest level since fiscal 2001.

RESULTS OF OPERATIONS

The following table sets forth our results of operations as a percentage of
net sales for the periods indicated:

2003 COMPARED TO 2002

NET SALES AND GROSS PROFIT

Salton's net sales for 2003 were $894.9 million. This represented a
decrease of 6.4% compared to 2002. While overall sales in the domestic market
decreased, our strong portfolio of brand names contributed to our success
internationally. We experienced significant volume decreases in the domestic
market as a result of a disappointing holiday season at retail. This left
retailers overstocked during the third quarter of fiscal 2003 further depressing
sales. In addition, we experienced a decrease of approximately $37.0 million in
net sales attributable to domestic price reductions in an effort to gain long
term market presence, an initiative to reduce domestic inventory levels and
reduce the number of stock keeping units (SKUs) the Company carries in
inventory. These actions occurred primarily in the second half of 2003. These
decreases were offset by just over $110.0 million in international sales
increases primarily associated with the George Foreman and Russell Hobbs brands,
the inclusion of AMAP's sales for the period of May 16, 2003 through June 28,
2003 and the inclusion of a full year of sales under the Look For acquisition,
now renamed Salton France.

Gross profit in 2003 decreased to $257.6 million or 28.8% of net sales as
compared to $317.5 million or 34.4% of net sales in 2002 primarily as a result
of domestic price and volume reductions discussed above.

21

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES

Selling, general and administrative expenses decreased to 23.3% of net
sales or $208.2 million in 2003 compared to 24.2% of net sales or $223.6 million
for 2002.

Expenditures for television, royalty expense, certain other media and
cooperative advertising and trade show expenses were 9.8% of net sales or $88.1
million in fiscal 2003 compared to 10.8% of net sales or $99.7 million in fiscal
2002. This decrease is primarily associated with a decline in infomercial
advertising partially offset by an increase in direct advertising.

FAIR MARKET VALUE ADJUSTMENT ON DERIVATIVES

Salton Europe 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. We recognized a pre-tax benefit for an increase in the fair
market value of the derivatives of $2.5 million, or $1.8 million net of tax,
from foreign exchange contracts that did not qualify as cash flow hedges for
accounting purposes in accordance with U.S. GAAP. Unrealized pre-tax losses
resulting from foreign exchange contracts that qualified as cash flow hedges
were de minimis.

NET INTEREST EXPENSE

Net interest expense was $40.2 million for fiscal 2003 compared to $44.4
million in fiscal 2002. The decrease is primarily attributable to lower average
borrowings under the current and former revolver and term loan agreement and our
repayment of certain other obligations existing in 2002. Our rate of interest on
amounts outstanding under the revolver, term loan and senior subordinated debt
was a weighted average annual rate of 8.9% in fiscal 2003 compared to 8.2% in
fiscal 2002. The average amount of all debt outstanding was $428.3 million for
fiscal 2003 compared to $485.2 million for fiscal 2002.

INCOME TAXES

The effective tax rate for federal, state and foreign income taxes were
approximately 24.6% in 2003 versus approximately 32.3% in 2002. The Company's
income tax rate for 2003 was favorably impacted due to a disproportionately
greater amount of income subject to lower foreign tax rates and a taxable loss
in the domestic entities. The Company anticipates that in future years, its
effective income tax rate will return to that of historical rates.

NET INCOME

The Company reported net income of $8.0 million or basic earnings per
common share of $0.71 per share for the fiscal year 2003 compared with net
income of $30.1 million or basic earnings per common share of $2.74 per share
for the fiscal year 2002. Net income for 2003 was primarily reduced by a pricing
transition in the domestic market partially offset by expansion and internal
growth in the international markets.

2002 COMPARED TO 2001

NET SALES AND GROSS PROFIT

Salton's net sales for 2002 were $922.5 million. This represented an
increase of 16.5% compared to 2001. This increase is primarily attributable to
increased sales of products under the George Foreman, Stiffel, Toastmaster,
Aircore, Farberware, Melitta and other brands. These increases in sales were
partially offset by decreases in sales of products under the White-Westinghouse
product line, primarily sold to Kmart, as well as reductions primarily in sales
of Juiceman, Salton, Maxim and Magic Chef brands. Sales of new product lines,
primarily under the Westclox, Spartus, Big Ben and Look For brands and the
addition of a full year of sales of product and brand names acquired in
connection with Salton Europe, also helped offset the sales decreases. Much of
the sales increase occurred in the second and fourth quarters of 2002 with
particularly strong sales of products under the George Foreman, Toastmaster,
Stiffel and Farberware brands, as well as strong sales of products and brand
names acquired in connection with Salton Europe and Westclox. The fourth quarter
of fiscal 2001 only included one month of results from Salton Europe.
22

Gross profit in fiscal 2002 was $317.5 million or 34.4% of net sales as
compared to $268.5 million or 33.9% of net sales in 2001. Cost of goods sold
during 2002 decreased to 59.0% of net sales compared to 59.9% in 2001. Gross
profit increased slightly, primarily from an increase in distribution expenses,
$5.3 million for reserve increases related to certain trade and royalty
receivables and $5.3 million associated with the exiting of certain product
lines, offset by an improvement in sales of higher priced items with higher
gross margins, particularly George Foreman products, Russell Hobbs products and
Rejuvenique products and a reduction in sales of White-Westinghouse products
which generally have lower gross margins. Gross profit for 2001 was reduced by
$8.1 million related to inventory losses, $5.1 million in LIFO charges and $2.0
million related to trade receivables. Distribution expenses increased, as a
percentage of sales, due to higher costs of operating our warehouses and
increased outside warehouse space added during the year. We consolidated three
U.S. west coast warehouses into a new leased facility completed in July 2003.
Additionally we incurred a full year of expenses in 2002 related to the
operation of Salton Europe. The increase was partially offset by a reduction in
freight costs from changing certain customers from prepaid freight to collect
freight during the year.

SELLING, GENERAL AND ADMINISTRATIVE EXPENSES.

Selling, general and administrative expenses increased to 24.2% of net
sales or $223.6 million in fiscal 2002 compared to 19.8% of net sales or $156.9
million for fiscal 2001. Selling, general and administrative expenses include a
full year of Salton Europe or $29.5 million compared to one month of Salton
Europe or $1.3 million in fiscal 2001.

Expenditures for television, royalty expense, certain other media and
cooperative advertising and trade show expenses were 10.8% of net sales or $99.7
million in fiscal 2002 compared to 8.9% of net sales or $70.2 million in fiscal
2001. This increase was primarily from increased spending on cooperative
advertising, direct advertising, royalty expenses and trade show expenses,
partially offset by decreased spending on infomercial advertising. These
expenditures were driven primarily to penetrate new brands into the European
market, and to increase sales in a promotionally driven domestic market.

The remaining selling, general and administrative costs increased to $123.9
million or 13.4% of net sales in fiscal 2002 compared to $86.6 million or 10.9%
of net sales in fiscal 2001. This was primarily attributable to increased
salaries, amortization on goodwill and other intangibles, increased legal and
other professional expenses related to legal matters and a domestic corporate
restructuring for improved reporting purposes, rent, travel, product development
costs to support our sales activities, and increases in certain other
administrative expenses to support the activities of the company. The increases
in salaries, product development and other administrative expense were primarily
related to the integration of new or acquired product lines and businesses, and
infrastructure and systems improvements.

FAIR MARKET VALUE ADJUSTMENT ON DERIVATIVES

Salton Europe entered into 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. We recognized a pre-tax charge for a decrease in the
fair market value of the derivatives of $2.4 million, or $1.5 million net of
tax, from foreign exchange contracts that did not qualify as cash flow hedges
for accounting purposes in accordance with U.S. GAAP. Unrealized pre-tax losses
of $1.0 million or $0.6 million net of tax, from foreign exchange contracts that
qualified as cash flow hedges were included as a separate component of
accumulated other comprehensive income. The fair market value adjustment
occurred primarily in the fourth quarter as the dollar weakened against the
pound sterling.

NET INTEREST EXPENSE

Net interest expense was $44.4 million for fiscal 2002 compared to $37.7
million in fiscal 2001. The increase is primarily attributable to interest
expense of $10.5 million related to the $150.0 million senior subordinated debt
offering completed in April, 2001, interest expense of $1.4 related to the
accretion of the Pifco loan notes and a reduction in interest income of $1.0
million for funds kept on deposit during fiscal 2002, partially offset by a
reduction of interest paid of $4.8 million on reduced borrowings under our
revolver and term debt and lower rates during fiscal 2002. Our rate of interest
on amounts outstanding under the revolver, term loan and senior subordi-

23

nated debt was a weighted average annual rate of 8.24% in fiscal 2002 compared
to 9.8% in fiscal 2001. The average amount of all debt outstanding was $485.2
million for fiscal 2002 compared to $369.8 million for fiscal 2001. These
increases contributed to higher interest expense and the increased borrowings
were used to provide working capital necessary to support the business and make
acquisitions.

NET INCOME

The Company reported net income of $30.1 million or basic earnings per
share of $2.74 per share for the fiscal year 2002 compared with net income of
$46.2 million or basic earnings per share of $3.93 per share for the fiscal year
2001. Net income for 2002 declined as a result of increased selling, general and
administrative expenses, $3.0 million for certain bankruptcies, $2.2 million for
exiting certain product lines and $2.6 million for legal settlements.

INCOME TAX EXPENSE

Salton had tax expense of $14.4 million in fiscal 2002 as compared to tax
expense of $27.7 million in fiscal 2001. The overall tax rate for fiscal 2002
was 32.3% of pretax income compared to 37.5% in fiscal 2001. This reduction was
primarily due to certain initiatives implemented in fiscal 2002 that reduced our
state taxes and by the impact of certain legal settlements, which were not
taxable.

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

Our primary sources of liquidity are our cash flow from operations and
borrowings under our senior secured revolving credit facility. In 2003, Salton's
operations provided $130.6 million in cash flow, compared with $5.3 million in
2002. This is primarily a result of generating cash through decreased
inventories, decreases in accounts receivable and increases in accounts payable.
Given the seasonal nature of our business, borrowings and availability tend to
be highest in mid-Fall and early Winter.

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.

Salton Europe 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 British Pound
Sterling against United States dollars.

We incurred approximately $23.0 million for capital expenditures during
fiscal 2003.

REVOLVING CREDIT FACILITY

On May 9, 2003, we entered into a four-year senior secured revolving credit
facility which provides us with the ability to borrow up to $275.0 million
(including $10.0 million for letters of credit). Advances under the senior
secured credit facility are primarily based upon percentages of eligible
accounts receivable and inventories. The credit agreement is secured by all of
the tangible and intangible assets of our domestic entities and 65.0% of the
capital stock of certain of our foreign subsidiaries.

As of June 28, 2003, we had borrowed $76.1 under the senior secured
revolving credit facility and had approximately $35.8 million available under
this facility for future borrowings with an additional $22.7 million reserved
for the final payments on the Foreman notes. Subsequent to year end, we made the
final installment payment to George Foreman.

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,

24

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 revolving credit facility, we are
required to comply with a minimum domestic and consolidated fixed charge
coverage ratio. In addition to the above, under the Credit Agreement, the
Company is required to maintain a minimum level of availability of $25.0 million
for the period July 1st-December 31st and $35.0 million for the period January
1st-June 30th of any given year. If the Company fails to maintain these minimum
availability levels, all proceeds from the sale of collateral (including working
capital) shall be deposited for the benefit of the Agent and released to the
Company at the discretion and consent of the Required Lenders. No additional
payments were required since the inception of the Credit Agreement and none were
required in fiscal 2003 and 2002 pertaining to the previous revolving and term
debt facilities.

Borrowings under our senior secured credit facility accrue interest, at our
option, at either: LIBOR, plus a specified margin, which is determined by our
consolidated fixed charge coverage ratio, equaling 3.5% at June 28, 2003; or the
Base Rate (Wachovia Bank's prime rate), plus a specified margin, which is
determined by our consolidated fixed charge coverage ratio and is 4.0% at June
28, 2003.

SENIOR SUBORDINATED NOTES

In addition to borrowings under our senior secured revolving credit
facility, we had $125.0 million of 10 3/4% senior subordinated notes due 2005
outstanding and $150.0 million of 12 1/4% senior subordinated notes due 2008
outstanding (excluding $12.1 million related to the fair value of interest rate
swap agreements that have been monetized).

The indenture governing our 12 1/4% senior subordinated notes due 2008 and
10 3/4% senior subordinated notes due 2005 contains, covenants that, among
other things, limit our ability and the ability of our restricted subsidiaries
to incur additional indebtedness and issue preferred stock, pay dividends or
make certain other restricted payments, create certain liens, enter into certain
transactions with affiliates, enter into sale and lease-back transactions, sell
assets or enter into certain mergers and consolidations.

OTHER CREDIT FACILITIES

We maintain credit facilities out 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.

COMMITMENTS AND CONTINGENCIES

To facilitate an understanding of the Company's contractual obligations and
commercial commitments, the following data is provided:

(1) Payments required under certain litigation and Attorney Generals settlement.
The Attorney Generals settlement requires us to make one additional payment
of $3.5 million on March 1, 2004.

(2) Outstanding letters of credit for inventory purchases.

(3) Executive salaries and bonuses under employment agreements expiring in 2005
and 2006.

FORWARD LOOKING

We anticipate capital expenditures on an ongoing basis to be approximately
2.0% of net sales.

We believe that future cash flow from operations based on our current level
of operations and anticipated growth, together with our strengthened balance
sheet and available borrowings under our senior secured revolving credit
facility and other sources of debt funding, will be adequate to meet our
anticipated requirements for current capital expenditures, potential
acquisitions and alliances, working capital requirements, interest and income
tax payments and scheduled debt payments. Our anticipated earnings and growth
are subject to general economic, financial, competitive and other factors that
are beyond our control. We cannot assure you that our business will continue to
generate sufficient cash flow from operations in the future to service our debt
and make necessary capital expenditures after satisfying certain liabilities
arising in the ordinary course of business. If unable to do so, we may be
required to refinance all or a portion of our existing debt, including the
notes, sell assets or obtain additional financing. We cannot assure you that any
refinancing would be available or that any sales of assets or additional
financing could be obtained.

ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk

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. The following
tables provide information about our market sensitive financial instruments and
constitutes a "forward-looking statement." Our major risk exposures are changing
interest rates in the United States and foreign currency commitments in Europe.
The fair values of our long-term, fixed rate debt and foreign currency forward
contracts were estimated based on dealer quotes. The carrying amount of
short-term debt and long-term variable-rate debt approximates fair value. All
items described in the tables are non-trading.

- ---------------

(1) The variable rate revolving credit facility is set periodically at an
established base rate (equivalent to the prime rate of interest) or, at our
election, a LIBOR rate plus an applicable margin of 225 basis points.

(2) In fiscal 2002 and 2003, we terminated various interest rate swap contracts
on $150 million notional amount of indebtedness resulting in gains from
early termination. These gains were deferred as adjustments to the carrying
amount of the outstanding debt and are being amortized as an adjustment to
interest expense related to the debt over the remaining period originally
covered by the terminated swap. The Company did not have an interest rate
swap agreement in effect as of June 28, 2003.

(3) The Foreman note does not include an interest element. The 8.5% is the
estimated interest rate used for calculating the net present value.

We use foreign currency forward contracts with terms of less than one year,
to hedge our exposure to changes in foreign currency exchange rates. In managing
our foreign currency exposures, we identify and aggregate naturally occurring
offsetting positions and then hedges residual balance sheet exposures. At June
28, 2003, we had forward contracts outstanding for the purchase of $60.0 million
over the course of the next twelve months, which had an aggregate fair value of
$1.0 million.

ITEM 8. Financial Statements and Supplementary Data

The consolidated financial statements of the Company, including the notes
to all such statements and other supplementary data are included in this report
beginning on page F-1.

ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None

ITEM 9A. Controls and Procedures

The Company's management, including Leonhard Dreimann, Chief Executive
Officer and David Mulder, Executive Vice President, Chief Administrative Officer
and Senior Financial Officer, have evaluated the effectiveness of the Company's
"disclosure controls and procedures," as such term is defined in Rules 13a-14
and 15d-14 promulgated under the Securities Exchange Act of 1934, as amended, as
of this Annual Report on Form 10-K. Based upon their evaluation, the principal
officer and principal financial officer concluded that the Company's disclosure
controls and procedures are effective. There were no significant changes in the
Company's internal controls or in other factors that could significantly affect
these controls, during the Company's fourth fiscal quarter.

27

PART III

ITEM 10. Directors and Executive Officers of the Registrant

The information required by this Item 10 as to the Directors of the Company
is incorporated herein by reference to the information set forth under the
caption "Election of Directors" in the Company's definitive Proxy Statement for
the 2003 Annual Meeting of Stockholders, since such Proxy Statement will be
filed with the Securities and Exchange Commission not later than 120 days after
the end of our fiscal year pursuant to Regulation 14A. Information required by
this Item 10 as to the executive officers of the Company is included in Part I
of this Annual Report on Form 10-K.

ITEM 11. Executive Compensation

The information required by this Item 11 is incorporated by reference to
the information set forth under the caption "Compensation of Directors and
Executive Officers" in the Company's definitive Proxy Statement for the 2003
Annual Meeting of Stockholders, since such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
our fiscal year pursuant to Regulation 14A.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

The information required by this Item 12 is incorporated by reference to
the information set forth under the caption "Stock Ownership of Principal
Holders and Management" in the Company's definitive Proxy Statement for the 2003
Annual Meeting of Stockholders, since such Proxy Statement will be filed with
the Securities and Exchange Commission not later than 120 days after the end of
our fiscal year pursuant to Regulation 14A.

EQUITY COMPENSATION PLAN INFORMATION

This table shows information about the securities authorized for issuance
under our equity compensation plans as of June 28, 2003.

(1) Includes our:

- 1992 Stock Option Plan

- 1995 Stock Option Plan

- 1995 Non-Employee Directors Stock Option Plan

- 1998 Stock Option Plan

- 2002 Stock Option Plan

(2) Includes our:

- 1999 Stock Option Plan

- 2000 Stock Option Plan

- 2001 Stock Option Plan

ITEM 13. Certain Relationships and Related Transactions

The information required by this Item 13 is incorporated by reference to
the information set forth under the caption "Certain Transactions" in the
Company's definitive Proxy Statement for the 2003 Annual Meeting of
Stockholders, since such Proxy Statement will be filed with the Securities and
Exchange Commission not later than 120 days after the end of our fiscal year
pursuant to Regulation 14A.

28

PART IV

ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K

(A)1 AND 2

An "Index to Financial Statements and Financial Statement Schedules" has
been filed as a part of this Report beginning on page 31 hereof.

(A)(3) EXHIBITS:

An "Exhibit Index" has been filed as part of this Report beginning on page
E-1 hereof and is incorporated herein by reference.

(B) REPORTS ON FORM 8-K

The following current reports on Form 8-K were filed during the fourth
fiscal quarter of 2003:

(i) Current Report on Form 8-K dated May 13, 2003, reporting under
Item 5, Other Events, the announcement of our third quarter results.

(ii) Current Report on Form 8-K dated May 29, 2003 reporting under
Item 5, Other Events, an Agreement to have George Foreman assist in
promoting Salton Products.

29

SIGNATURES

Pursuant to the requirements of Section 13 of the Securities Exchange Act of
1934, as amended (the "Exchange Act") the Registrant has duly caused this report
to be signed on its behalf by the undersigned, thereunto duly authorized on the
26th day of September, 2003.

SALTON, INC.

By: /s/ LEONHARD DREIMANN

------------------------------------
Leonhard Dreimann
Chief Executive Officer

Pursuant to the requirements of the Exchange Act, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities
indicated on September 26th, 2003.

30

SALTON, INC.

INDEX TO FINANCIAL STATEMENTS AND
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED JUNE 28, 2003

31

INDEPENDENT AUDITORS' REPORT

To the Board of Directors and Stockholders of
Salton, Inc.
Lake Forest, Illinois

We have audited the accompanying consolidated balance sheets of Salton,
Inc. (the "Company") as of June 28, 2003 and June 29, 2002 and the related
consolidated statements of income, stockholders' equity, and cash flows for each
of the three years in the period ended June 28, 2003. Our audits also included
the financial statement schedule listed in the Index at Item 14 of the Annual
Report on Form 10-K. These financial statements and the financial statement
schedule are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements based on our audits.

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

In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Salton, Inc. as of June 28,
2003 and June 29, 2002 and the results of its operations and its cash flows for
each of the three years in the period ended June 28, 2003, in conformity with
accounting principles generally accepted in the United States of America. Also,
in our opinion, such financial statement schedule, when considered in relation
to the basic consolidated financial statements taken as a whole, presents
fairly, in all material respects, the information set forth therein.

As discussed in Notes 1 and 2 to the consolidated financial statements, the
Company changed its method of accounting for goodwill and certain identifiable
intangible assets in 2003 and its method of accounting for inventory in 2002.

DELOITTE & TOUCHE LLP
Chicago, Illinois
September 23, 2003

F-1

SALTON, INC.

CONSOLIDATED BALANCE SHEETS

JUNE 28, 2003 AND JUNE 29, 2002
(IN THOUSANDS EXCEPT SHARE DATA)

See notes to consolidated financial statements.

F-2

SALTON, INC.

CONSOLIDATED BALANCE SHEETS (CONTINUED)

JUNE 28, 2003 AND JUNE 29, 2002
(IN THOUSANDS EXCEPT SHARE DATA)

See notes to consolidated financial statements.

F-3

SALTON, INC.

CONSOLIDATED STATEMENTS OF INCOME
YEARS ENDED JUNE 28, 2003, JUNE 29, 2002, AND JUNE 30, 2001
(IN THOUSANDS EXCEPT PER SHARE DATA)

See notes to consolidated financial statements.

F-4

(This page intentionally left blank)

F-5

SALTON, INC.

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
YEARS ENDED JUNE 30,2001, JUNE 29, 2002 AND JUNE 28, 2003
(IN THOUSANDS)

See notes to consolidated financial statements.

F-6

See notes to consolidated financial statements.

F-7

SALTON, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

YEARS ENDED JUNE 28, 2003, JUNE 29, 2002, AND JUNE 30, 2001
(IN THOUSANDS)

See notes to consolidated financial statements.
F-8

SALTON, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 28, 2003, JUNE 29, 2002, AND JUNE 30, 2001
(IN THOUSANDS EXCEPT SHARE DATA)

SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

In the quarter ended June 28, 2003, the Company issued a common stock
purchase warrant valued at $136 to a third party for 50,000 shares of the
Company's common stock.

In the quarter ended March 29, 2003, the Company incurred a capital lease
obligation of $260.

In the quarter ended September 28, 2002, the Company authorized the
issuance of 184,980 shares of common stock for payment of executive bonuses.

In the quarter ended September 28, 2002, the Company incurred a capital
lease obligation of $418.

In the quarter ended June 29, 2002, the Company incurred a capital lease
obligation of $812.

In the quarter ended June 30, 2001, the Company authorized the issuance of
167,229 shares of common stock for payment of executive bonuses.

In the quarter ended September 30, 2000, Salton acquired trademarks, other
intellectual property and molds of the Stiffel Company for $6,500. The purchase
was paid by the issuance of 200,000 shares of Salton, Inc. common stock. In
addition, the Company reached an agreement to satisfy $22,750 of payment
obligations incurred in connection with its acquisition of the George Foreman
name by issuing 621,161 shares of Salton, Inc. common stock. In the quarter
ended December 30, 2000, the Company increased its investment in an
unconsolidated affiliate approximately 10% by issuing 109,000 shares of Salton,
Inc. common stock. In the quarter ended March 31, 2001, in accordance with the
Stiffel purchase agreement, Salton paid $2,043 under the guarantee provision to
make up for the shortfall between the $6,500 purchase price and the proceeds
from the sale of the 200,000 shares. In July 2001, to satisfy the $20,000
guarantee to George Foreman, the Company took back 456,175 of the 546,075 shares
issued to him on September 30, 2000 and paid him cash of $18,000 which was net
of the proceeds from the sale of the remaining shares previously issued to him.
Also, the Company determined it intends to pay the other venture participants in
cash for the stock price guarantee related to the 75,086 shares issued to them
on September 30, 2000. As of June 29, 2002, the guarantee liability to the other
venture participants was $1.4 million.
See notes to consolidated financial statements. (Concluded)

F-9

SALTON, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED JUNE 28, 2003, JUNE 29, 2002, AND JUNE 30, 2001

1. SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES

Salton, Inc. is a leading designer, marketer and distributor of branded,
high quality small appliances, home decor and personal care products. Our
product mix includes a broad range of small kitchen and home appliances,
tabletop products, time products, lighting products, picture frames and personal
care and wellness products. We sell our products under our portfolio of well
recognized brand names such as Salton, George Foreman, Westinghouse,
Toastmaster, Melitta, Russell Hobbs, Farberware, Ingraham and Stiffel. We
believe our strong market position results from our well-known brand names, our
high quality and innovative products, our strong relationships with our customer
base and our focused outsourcing strategy.

Principles of Consolidation -- The consolidated financial statements
include the accounts of all majority-owned subsidiaries. Investments in
affiliates, in which the Company has the ability to exercise significant
influence, but not control, are accounted for by the equity method. Intercompany
balances and transactions are eliminated in consolidation.

Fiscal Year -- The Company's fiscal year ends on the Saturday closest to
June 30. Unless otherwise stated, references to years in this report relate to
fiscal years rather than calendar years.

Reclassifications -- Certain reclassifications have been made to prior year
financial statements and the notes to conform with current year presentation.

Use of Estimates -- In preparing financial statements in conformity with
accounting principles generally accepted in the United States of America,
management is required to make estimates and assumptions that affect the
reported amounts of assets and liabilities and the disclosure of contingent
assets and liabilities at the date of the financial statements and revenues and
expenses during the reporting period. Actual results could differ from those
estimates. Significant estimates include the 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.

Allowance for Doubtful Accounts -- The Company calculates allowances for
estimated losses resulting from the inability of customers to make required
payments. The Company assesses the credit worthiness of customers based on
multiple sources of information and analyzes such factors as historical bad debt
experiences, publicly available information regarding customers and the inherent
credit risk related to them, information from subscription based credit
reporting companies, trade association data and reports, current economic trends
and changes in customer payment terms or payment patterns. The Company's
calculation is then reviewed by management to assess whether, based on economic
events, additional analyses are required to appropriately estimate losses.

Inventories -- The Company's inventories are generally determined using the
last-in, first-out (LIFO) cost method. 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 determine slow-moving and obsolete inventories
to determine if additional write-offs are required. Cost is determined by the
last-in, first-out (LIFO) method for approximately 67.0% and 80.0% of the
Company's inventories as of 2003 and 2002, respectively. All remaining inventory
cost is determined on the first-in, first-out basis. See Note 2 "Change in
Accounting Method" and Note 4 "Inventories."

F-10

Property, Plant and Equipment -- Property, plant and equipment are stated
at cost. Expenditures for maintenance costs and repairs are charged against
income. Depreciation, which includes amortization of assets under capital
leases, as well as depreciation for leasehold improvements, is based on the
straight-line method over the useful lives of the assets (see table below). For
tax purposes, assets are depreciated using accelerated methods.

Patents, Trademarks and Other Identifiable Intangible Assets -- The
identifiable intangible assets of the Company are primarily trademarks acquired
in transactions and business combinations. The Company adopted the provisions of
Statement of Financial Accounting Standards (SFAS) No. 142, "Goodwill and Other
Intangible Assets" at the beginning of 2003. Under the provisions of SFAS No.
142, identifiable intangibles with finite lives are amortized and those with
indefinite lives are not amortized. The estimated useful life of an identifiable
intangible asset to the Company is based upon a number of factors including the
effects of demand, competition and the level of maintenance expenditures
required to obtain future cash flows. Prior to the start of 2002, the Company
followed the provisions of Accounting Principles Board Opinion (APB) No. 17,
which required that all identifiable intangibles be amortized by systematic
charges to income over the period expected to benefit.

The Company tests identifiable intangible assets with an indefinite life
for impairment, at a minimum on an annual basis, relying on a number of factors
including operating results, business plans and projected future cash flows.
Identifiable intangible assets that are subject to amortization are evaluated
for impairment using a process similar to that used to evaluate other long-lived
assets. The impairment test for identifiable intangible assets not subject to
amortization consists of a comparison of the fair value of the intangible asset
with its carrying amount. An impairment loss is recognized for the amount by
which the carrying value exceeds the fair value of the asset.

Goodwill -- Under the provisions of SFAS No. 142, goodwill is no longer
amortized. Prior to the start of 2002, the Company followed the provisions of
APB Opinion No. 17, which required that goodwill be amortized by systematic
charges to income over the period expected to benefit. That period ranged from
10 to 40 years.

Long-Lived Assets -- Long-lived assets are reviewed for possible impairment
whenever events or changes in circumstances indicate that the carrying amount of
such assets may not be recoverable. If such review indicates that the carrying
amount of long-lived assets is not recoverable, the carrying amount of such
assets is reduced to the estimated recoverable value.

Revenue Recognition -- The Company recognizes revenues when goods are
shipped to its customers and title to such goods has been transferred. Provision
is made for estimated cost of returns, warranties, and product liability claims.

Distribution Expenses -- Distribution expenses consist primarily of
freight, warehousing, and handling costs of products sold.

Advertising -- The Company sponsors various programs under which it
participates in the cost of advertising and other promotional efforts for
Company products undertaken by its retail customers. Advertising and promotion
costs associated with these programs are expensed in the period in which the
advertising or other promotion by the retailer occurs.

The Company's tradenames and, in some instances, specific products, also
are promoted from time to time through direct marketing channels, primarily
television. Advertising and promotion costs are expensed in the period in which
the advertising and promotion occurs.

Self-Insurance -- The Company maintains a self-insurance program for health
claims and workers' compensation claims for certain covered employees. The
Company accrues estimated future costs that will be incurred for existing
employee claims. The Company does not provide any post-retirement health care
benefits.

F-11

Income Taxes -- The Company accounts for income taxes using the asset and
liability approach. The measurement of deferred tax assets is reduced, if
necessary, by the amount of any tax benefits that, based on available evidence,
management believes will not be realized.

Stock Based Compensation -- The Company has various stock-based
compensation plans which are described more fully in Note 10. The Company
accounts for those plans 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, "Accounting for Stock-Based Compensation," as
amended by SFAS No. 148, "Accounting for Stock-Based Compensation -- Transition
and Disclosure, an amendment of SFAS No. 123."

Fair Value of Financial Instruments -- The carrying values of financial
instruments included in current assets and liabilities approximate fair values
due to the short-term maturities of these instruments. The fair value of the
Company's long-term, fixed rate debt was estimated based on dealer quotes and
approximates the carrying value recorded. The carrying amount of short-term debt
and long-term variable-rate debt approximates fair value.

Accounting Pronouncements -- Effective at the beginning of fiscal year
2003, the Company adopted SFAS No. 142, "Goodwill and Other Intangible Assets."
Upon adoption of SFAS No. 142, amortization of goodwill and certain intangible
assets ceased. Those assets are now subject to fair-value based impairment tests
performed, at a minimum, on an annual basis. In addition, a transitional
goodwill and other intangible assets impairment test is required as of the
adoption date. These impairment tests are conducted on each business of the
Company where goodwill and other intangible assets are recorded, and may require
two steps. The initial step is designed to identify potential goodwill
impairment by comparing an estimate of fair value for each applicable business
to its respective carrying value. For those businesses where the carrying value
exceeds fair value, a second step is performed to measure the amount of
impairment in existence, if any.

The Company had approximately $24.4 million of goodwill and $188.1 million
of intangible assets with indefinite lives recorded in its consolidated balance
sheet at the beginning of fiscal 2003. The Company completed the required
transitional impairment tests of goodwill and intangible assets with indefinite
lives as of the beginning of fiscal 2003. During the first quarter of fiscal
year 2003, the Company recorded an impairment charge of $0.8 million related to
the Company's decision to abandon the Welbilt tradename and discontinue the
related product line. As of the beginning of fiscal 2003, the Company determined
that no other impairment of goodwill or intangible assets with indefinite lives
had occurred. The increase in the carrying value of goodwill since June 29, 2002
reflects the impact of changes in foreign currency exchange rates and goodwill
recorded in connection with the AMAP acquisition.

As of June 28, 2003, the Company prepared estimates of the fair values of
those reporting units having recorded goodwill amounts. Such estimates exceeded
the carrying values of the reporting units, however, shortfalls in future

F-12

operating results and/or application of more conservative market assumptions
could have an adverse impact on the comparison of fair value to carrying value.
If these conditions arise, and a shortfall in fair value versus carrying value
results, further analysis of intangibles at the unit level could result in an
impairment charge of a material portion of the $27.0 million of goodwill.

In accordance with SFAS No. 142, the effect of the standard is to be
reflected prospectively. Supplemental comparative disclosures as if the standard
had been adopted retroactively is as follows:

The Financial Accounting and Standards Board (FASB) Emerging Issues Task
Force (EITF) Issue No. 02-16, "Accounting By A Customer (Including A Reseller)
For Cash Consideration Received From A Vendor" addressed the accounting
treatment for vendor allowances. The Company receives allowances from certain
vendors through a variety of arrangements. Given the promotional nature of the
Company's business, the allowances are generally intended to offset the
Company's costs of promoting, selling and advertising the vendors' products.
Vendor allowances are recognized as a reduction of cost of sales when the
purpose for which the vendor funds were intended to be used has been fulfilled.
The adoption of EITF Issue No. 02-16 in 2003 did not have a material impact on
the Company's financial position or results of operations.

In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of both Liabilities and Equity." This Statement
establishes standards for how an issuer classifies and measures certain
financial instruments with characteristics of both liabilities and equity. SFAS
150 is effective for financial instruments entered into or modified after May
31, 2003, and otherwise is effective at the beginning of the first interim
period beginning after June 15, 2003. The Company does not believe adoption of
this Statement will have a material impact on its Consolidated Financial
Statements.

In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities," which amends and clarifies
financial accounting and reporting for derivative instruments. SFAS No. 149 is
effective for contracts entered into or modified after June 30, 2003, and for
hedging relationships designated after June 30, 2003. The provisions of SFAS 149
are not expected to have a material impact on the Company's Consolidated
Financial Statements.

F-13

In January 2003, the FASB issued FASB Interpretation (FIN) No. 46,
"Consolidation of Variable Interest Entities, an interpretation of ARB 51." The
primary objectives of FIN No. 46 are to provide guidance on the identification
of entities for which control is achieved through means other than through
voting rights (Variable Interest Entities) and how to determine when and which
business enterprise should consolidate the Variable Interest Entity (the Primary
Beneficiary). The transitional disclosure requirements of FIN No. 46 take effect
immediately and are required in all financial statements issued after January
31, 2003, if certain conditions are met. The Company is not the primary
beneficiary of any variable interest entities as of June 28, 2003. Therefore,
FIN No. 46 will not impact its financial statements at that date.

In November 2002, the FASB issued Interpretation No. 45 (FIN 45),
"Guarantor's Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others." FIN 45 elaborates on the
existing disclosure requirements for most guarantees, including loan guarantees,
such as standby letters of credit. It also clarifies that at the time a company
issues a guarantee, the Company must recognize an initial liability for the fair
value, or market value, of the obligations it assumes under that guarantee and
must disclose that information in its interim and annual financial statements.
FIN 45 will be effective for the Company on a prospective basis to guarantees
issued or modified after December 31, 2002. The Company does not expect this
Statement to have a material impact on the Company's financial position and
results of operations. The disclosure requirements in this interpretation have
been adopted by the Company.

2. CHANGE IN ACCOUNTING METHOD

During the fourth quarter of fiscal year 2002, the Company changed its
method of accounting for certain inventories (principally Salton branded
products) from the first-in, first-out method (FIFO) to the last-in, last-out
(LIFO) method, retroactively effective as of July 1, 2001. The Company believes
the new method is preferable because the LIFO method of valuing inventories more
closely matches current costs and revenues in periods of price level changes.
This change was also made to apply a consistent method of inventory valuation
for all domestic inventories. During fiscal 2002, the integration of processes
and systems for domestic inventories was completed. As such, continued separate
tracking for FIFO and LIFO valuation purposes would be without business or
economic substance. The change results in substantially all of the Company's
domestic inventories being accounted for on the LIFO method.

The net effect of this change was to decrease net income by $0.4 million,
or $0.03 per diluted share. It is not possible to determine the pro forma effect
of retroactive application of the change for prior periods. It is not possible
to determine the cumulative effect of the change on retained earnings at July 1,
2001 or the pro forma effect of retroactive application of the change for prior
periods.

3. ACQUISITIONS AND ALLIANCES

On May 16, 2003 the Company increased its 30.8% interest in Amalgamated
Appliance Holdings Limited (AMAP) to a 52.6% interest for $7.5 million. AMAP is
a leading manufacturer and distributor of a wide range of branded consumer
electronics and appliances in South Africa. AMAP is a publicly held company,
listed on the Johannesburg Stock Exchange, which owns the rights to the Salton
brand name in South Africa. The Chief Executive Officer and the President and
Chief Operating Officer of Salton, Inc. are members of the board of directors
for AMAP. AMAP's results for the period of May 16, 2003 through June 28, 2003
have been consolidated with Salton for financial statement presentation. Prior
to this increase, the investment was accounted for under the equity method of
accounting, and is included in the consolidated financial statements in other
assets.

On May 2, 2001, the Company acquired the stock of Pifco Holdings PLC
(Pifco), a United Kingdom based producer and marketer of personal care
appliances, electrical hardware, cookware and battery operated products (the
Pifco Acquisition). The Company paid Pifco shareholders $4 per share, for a
total purchase price of approximately $75.0 million. In addition, acquisition
related expenses of $4.3 million were included in the purchase price. The
acquisition was accounted for as a purchase.

Approximately $17.7 million of the purchase price was paid by issuing loan
notes (the Loan Notes) in accordance with the purchase offer, with the remainder
paid in cash. The Loan Notes have been fully funded by the Company and recorded
as an escrow asset as of June 28, 2003 and June 29, 2002. The notes bear
interest at 1%
F-14

below LIBOR per annum, payable semi-annually, and are due June 30, 2006. The
Loan Notes have been recorded at their net present value, or $4.6 million as of
June 28, 2003 and $18.2 million as of June 29, 2002. The Loan Notes may be
prepaid, at the option of the holder, after June 30, 2002. On July 1, 2002,
$13.3 million of the Loan Notes were redeemed by shareholders. It is assumed
that the balance will be redeemed on their third anniversary, June 30, 2004.

The operating results of Pifco have been included in the consolidated
statements of earnings from the date of acquisition and included sales of
approximately $7.2 million and net income of approximately $0.3 million for
fiscal 2001.

In fiscal 2002, Pifco was renamed Salton Europe.

In the quarter ended December 25, 1999, Salton acquired, effective July 1,
1999, the right to use in perpetuity and worldwide the name George Foreman in
connection with the marketing and sale of food preparation and non-alcoholic
drink preparation and serving appliances. The aggregate purchase price payable
to George Foreman and other participants was $137.5 million, of which $113.8
million is payable in five annual cash installments, and the remaining $23.8
million was paid through the issuance of 779,191 shares of Salton, Inc. common
stock issued out of treasury. The first cash installment of $22.8 million was
paid during the first half of fiscal 2000. In connection with the transaction
Salton issued a five-year $91.0 million non-interest bearing subordinated
promissory note which as of June 28, 2003, has a remaining balance of $22.8
million.

On July 2, 2001, the Company took back 456,175 of the 546,075 shares issued
to George Foreman on September 7, 2000 and paid him $18.0 million. This payment,
which represented $20.0 million less the proceeds George Foreman received from
the sale on the open market of shares previously issued to him, terminated the
guarantee obligation with respect to the shares issued to him and satisfied the
third annual installment due under the note payable to George Foreman. According
to the terms of the agreement, as of July 2003, the Company had paid the
remaining installments due under the note payable to George Foreman.

In fiscal 2002, the Company acquired the trademarks, certain rights and
patents and other intellectual property, assets and molds of the Westclox, Big
Ben and Spartus brands for $9.8 million; acquired the worldwide manufacturing,
distribution and intellectual property rights in connection with certain food
grilling products for grilling products for $15.0 million; and formed a
wholly-owned subsidiary, Icebox, LLC, to design and develop next generation
kitchen products and e-commerce solutions. Icebox, LLC took title to tangible
and intangible assets of Coachmaster International Corporation (CMI), which were
pledged as collateral by CMI in connection with $12.5 million of loans made by
the Company, and upon which the Company had foreclosed.

4. INVENTORIES

A summary of inventories is as follows:

If the first-in, first-out (FIFO) method of inventory valuation had been
used to determine cost for 100.0% of the Company's inventories, FIFO would
approximate carrying value at June 28, 2003. Inventories would have been $0.4
million higher at June 29, 2002. During the fourth quarter of fiscal year 2002,
the Company recorded a reduction in inventory of $4.6 million associated with
exiting certain product lines.

F-15

5. REVOLVING LINE OF CREDIT, LETTERS OF CREDIT AND LONG-TERM DEBT

Revolving Credit Facility -- On May 9, 2003, the Company replaced its
revolving and term debt facilities with a new four-year senior secured revolving
credit facility (the Credit Agreement) that provides the ability to borrow up to
$275.0 million (including $10.0 million for letters of credit). As of June 28,
2003, the Company had borrowings of $76.1 million outstanding under this
facility. Available borrowings under the Credit Agreement are primarily based
upon percentages of eligible accounts receivable and inventories. As of June 28,
2003, the Company had $35.8 million available for future borrowings, net of
$22.7 million reserved for the final payments on the Foreman notes. Typically,
given the seasonal nature of Salton's business, borrowings and availability tend
to be highest in mid-Fall and early Winter. The Credit Agreement is secured by
all of the tangible and intangible assets of domestic entities and 65.0% of the
capital stock of certain foreign subsidiaries.

The Credit Agreement contains a number of significant covenants that, among
other things, restrict the ability of the Company 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 may otherwise restrict corporate and business activities. In addition, under
the Credit Agreement, the Company is required to comply with a consolidated and
U.S. fixed charge coverage ratio. At June 28, 2003, the Company was in
compliance with the covenants described above. At June 28, 2003, the rate plus
applicable margin on the Credit Agreement was 3.50% for LIBOR rate loans and
4.00% for Base (Prime) rate loans.

Information regarding borrowings under the Credit Agreement and the
previous revolving credit agreement is as follows:

Senior Subordinated Notes -- On December 16, 1998, the Company issued
$125.0 million of 10 3/4% Senior Subordinated Notes (the 2005 Subordinated
Notes) due 2005. Proceeds of the 2005 Subordinated Notes were used to repay
outstanding indebtedness and for working capital and general corporate purposes.
The 2005 Subordinated Notes contain a number of significant covenants that,
among other things, restrict the ability of the Company 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 may otherwise restrict corporate and business activities. At
June 28, 2003, the Company was in compliance with all the provisions described
above. If the Company incurs additional indebtedness, the Company is required to
comply with a specified financial fixed charge coverage ratio.

On April 23, 2001, the Company issued $150.0 million of 12 1/4% Senior
Subordinated notes (the 2008 Subordinated Notes) due 2008. Proceeds of the 2008
Subordinated Notes were used to repay outstanding indebtedness and for the
acquisition of Pifco Holdings PLC (see Note 3 Acquisitions and Alliances). The
2008 Subordinated Notes contain a number of significant covenants that, among
other things, restrict the ability of the Company 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 may otherwise restrict corporate and business activities. At June 28, 2003,
the Company was in compliance with all the provisions

F-16

described above. If the Company incurs additional indebtedness, the Company is
required to comply with a specified financial fixed charge coverage ratio.

Long-term debt matures as follows:

The recorded balance of the 2008 Subordinated Notes includes the following
components:

In addition to the preceding maturity schedules, the Company is required to
make additional mandatory payments of 100% of insurance and condemnation
proceeds (over $1.0 million with regard to proceeds relating to fixed assets).
All such amounts are applied to the reduction of loans under the Credit
Agreement. In addition to the above, under the Credit Agreement, the Company is
required to maintain a minimum level of availability of $25.0 million for the
period July 1st-December 31st and $35.0 million for the period January 1st-June
30th of any given year. If the Company fails to maintain these minimum
availability levels, all proceeds from the sale of collateral (including working
capital) shall be deposited for the benefit of the Agent and released to the
Company at the discretion and consent of the Required Lenders. No additional
payments were required since the inception of the Credit Agreement and none were
required in fiscal 2003 and 2002 pertaining to the previous revolving and term
debt facilities.

6. DERIVATIVE FINANCIAL INSTRUMENTS

The Company uses derivative financial instruments to manage interest rate
and foreign currency risk. The Company does not enter into derivative financial
instruments for trading purposes. Interest rate swap agreements are used as part
of the Company's program to manage the fixed and floating interest rate mix of
its total debt portfolio and related overall cost of borrowing. The Company's
European subsidiary 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 British
pound.

F-17

When entered into, these financial instruments are designated as hedges of
underlying exposures. When a high correlation between the hedging instrument and
the underlying exposure being hedged exists, fluctuations in the value of the
instruments are offset by changes in the value of the underlying exposures.

The estimated fair values of derivatives used to hedge or modify the
Company's risks fluctuate over time. These fair value amounts should not be
viewed in isolation, but rather in relation to the fair values of the underlying
hedging transactions and investments and to the overall reduction in the
Company's exposure to adverse fluctuations in interest rates and foreign
exchange rates. The notional amounts of the derivative financial instruments do
not necessarily represent amounts exchanged by the parties and, therefore, are
not a direct measure of the Company's exposure from its use of derivatives. The
amounts exchanged are calculated by reference to the notional amounts and by
other terms of the derivatives, such as interest rates or exchange rates.

INTEREST RATE MANAGEMENT -- At June 30, 2001, the Company had an interest
rate swap contract to pay a variable-rate interest on $150.0 million notional
amount of indebtedness. This contract was terminated in June 2002 resulting in a
gain of $8.1 million. At June 29, 2002, the Company had an interest rate swap
contract to pay a variable-rate interest on $150.0 million notional amount of
indebtedness. This contract was terminated in the first quarter of fiscal 2003
resulting in the receipt of $6.1 million, including a gain of $4.4 million. The
Company simultaneously entered into another interest rate swap contract to pay a
variable-rate interest on $150.0 million notional amount of indebtedness. This
contract was terminated in the second quarter of fiscal 2003, resulting in the
receipt of $2.0 million, including a gain of $1.8 million. The gains from early
termination of the swap contracts were deferred as adjustments to the carrying
amount of the outstanding debt and are being amortized as an adjustment to
interest expense related to the debt over the remaining period originally
covered by the terminated swap. The Company did not have an interest rate swap
agreement in effect as of June 28, 2003.

FOREIGN CURRENCY MANAGEMENT -- All foreign exchange contracts have been
recorded on the balance sheet at fair value of $1.0 million classified within
accrued expenses. The change in the fair value of contracts that qualify as
foreign currency cash flow hedges and are highly effective was de minimis. The
changes in the fair value of contracts that do not qualify as foreign currency
cash flow hedges of $2.5 million were recorded through earnings. The Company
anticipates that all gains and losses in accumulated other comprehensive income
related to foreign exchange contracts will be reclassified into earnings during
fiscal year 2004. At June 28, 2003, the Company's European subsidiary had
foreign exchange contracts for the purchase of 60.0 million U.S. dollars.

7. SHAREHOLDER'S EQUITY

On July 28, 1998, the Company 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 the Company
breaches, in any material respect, any of the material obligations in the
preferred stock agreement or the 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 to 12 1/2% of the Liquidation
Preference (defined below). The preferred shares are convertible into 3,529,411
shares of Salton common stock (reflecting a $11.33 per share conversion price).
The holders of the convertible preferred stock are entitled to one vote for each
share of Salton 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 the Company's Board of Directors.

In the event of a change in control of the Company, each preferred
shareholder has the right to require the Company 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 of the Company,
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 Salton

F-18

common stock or any other of its capital stock ranking junior as to liquidation
rights to the convertible preferred stock.

The Company 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 the Company 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, the Company will be required to
exchange all outstanding shares of convertible preferred stock at a price equal
to the Liquidation Performance per share, payable at the Company's option in
cash or shares of Salton common stock.

On April 3, 2003, the Company issued a common stock purchase warrant to a
third party for 50,000 shares of the Company's common stock at a price of
$10.50. The warrant can be exercised in full at any time prior to the expiration
date of April 3, 2005.

Accumulated other comprehensive income is comprised of the following:

8. EARNINGS PER SHARE

(1) Net income is the same for purposes of calculating basic and diluted EPS.

Options to purchase 270,000 shares at a price of $29.25 per share were
outstanding at June 28, 2003, June 29, 2002, and June 30, 2001 but were not
included in the computation of diluted EPS because the options are contingent
upon the Company's share price reaching specified targets for a specified period
of time. Options and warrants to purchase 1,288,010 shares of common stock at a
price range of $10.44 to $37.00 per share, 643,572 shares of common stock at a
price range of $17.50 to $37.00 per share and 486,293 shares of common stock at
a price range of $27.38 to $37.00 per share were outstanding at June 28, 2003,
June 29, 2002 and June 30, 2001, respectively, but were not included in the
computation of diluted EPS because the exercise prices were greater than the
average market price of the common shares.

9. EMPLOYEE BENEFIT PLANS

The Company has a 401(k) defined contribution plan that covers eligible
domestic employees. The employees are eligible for benefits upon completion of
one year of service. Under the terms of the plan, the Company may elect to match
a portion of the employee contributions. The Company's discretionary matching
contribution is based on a portion of participants' eligible wages, as defined,
up to a maximum amount ranging typically from two percent to six percent. The
Company's total matching contributions were approximately $0.5 million, $0.5
million, and $0.6 million, in fiscal 2003, 2002 and 2001, respectively.

F-19

The Company has two defined benefit plans that cover substantially all of
the domestic employees of Toastmaster as of the date the plans were curtailed.
Substantially all Salton Europe employees are eligible to participate in a
contributory defined benefit plan. Pension benefits are based on length of
service, compensation, and, in certain plans, Social Security or other benefits.
The Company uses March 31 as the measurement date for determining pension plan
assets and obligations. Effective October 30, 1999, the Company's Board of
Directors approved the freezing of benefits under the two Toastmaster defined
benefit plans. Beginning October 31, 1999, no further benefits were accrued
under the Toastmaster plans. Effective June 26, 1999, the Company adopted SFAS
No. 132, "Employers' Disclosures about Pension and Other Postretirement
Benefits." SFAS No. 132 requires the disclosure of the information presented
below:

F-20

Under the requirements of SFAS No. 87, "Employers' Accounting for
Pensions," an additional minimum pension liability for both plans, representing
the excess of accumulated benefits over the plan assets and accrued pension
costs, was recognized at June 28, 2003, with the balance recorded as a separate
reduction of stockholders' equity, net of deferred tax effect.

10. STOCK-BASED COMPENSATION

In October 1995, SFAS No. 123, "Accounting For Stock-Based Compensation,"
was issued and is effective for financial statements for fiscal years beginning
after December 15, 1995, as amended by SFAS No. 148, "Accounting for Stock-Based
Compensation -- Transition and Disclosure, an amendment of SFAS No. 123." As
permitted by the statement, the Company continues to measure compensation cost
for stock option plans in accordance with Accounting Principles Board Opinion
No. 25, "Accounting For Stock Issued to Employees." Accordingly, no compensation
cost has been recognized for the Company's fixed stock option plans. Had
compensation cost for the Company's stock option plans been determined
consistent with the fair value method outlined in SFAS No. 123, the impact on
the Company's net income and earnings per common share would have been as
follows:

Options to purchase common stock of the Company have been granted to
employees under the 1992, 1995, 1998, 1999, 2000, 2001 and 2002 stock option
plans at prices equal to the fair market value of the stock on the dates the
options were granted. Options have also been granted to non-employee directors
of the Company, which are exercisable one year after the date of grant. All
options granted expire 10 years from the date of grant, and can vest immediately
or up to 3 years from the date of grant.

F-21

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option-pricing model. The following assumptions were used
during the respective years to estimate the fair value of options granted:

A summary of the Company's fixed stock options for the fiscal years ended
June 28, 2003, June 29, 2002, and June 30, 2001, is as follows:

The following information summarizes the stock options outstanding at June
28, 2003:

11. RELATED PARTY TRANSACTIONS

The Company purchased inventory from Applica, Inc. of $0.0 million and $3.0
million, in fiscal years ended June 28, 2003 and June 29, 2002, respectively.
Applica owned shares of Salton common stock until July 1998 at which time the
Company repurchased the shares.

The Company purchased inventory from Markpeak, Ltd. (Markpeak), a Hong Kong
company, including commissions, of $0.0 million and $0.1 million, in fiscal
years 2003 and 2002, respectively. The Company had a receivable from Markpeak of
$0.0 million and $19.2 million at June 28, 2003 and June 29, 2002, respectively.
The Company owed Markpeak $3.6 million at June 28, 2003, June 29, 2002 and June
30, 2001, respectively. Markpeak acts as a buying agent on behalf of the Company
with certain suppliers in the Far East. A director of the Company is the former
managing director of Markpeak. The Company paid Shapiro, Devine, Craparo, Inc.
(SDC), a manufac-

F-22

turers representative firm, commissions of $0.3 million, $0.5 million, $0.5
million, in fiscal 2003, 2002 and 2001, respectively. A director of the company
was a co-founder of SDC and as of January 1, 2003 is no longer associated with
SDC. Therefore, SDC will no longer be considered a Related Party. The Company
did not owe any current commissions at June 28, 2003. The company owed $0.0
million and $0.1 million for current commissions at June 28, 2003 and June 29,
2002.

12. COMMITMENTS AND CONTINGENCIES

LEASES -- The Company leases certain facilities and equipment under
long-term operating leases. Rental expense under all leases was approximately
$11.5 million, $9.1 million, and $8.4 million for the fiscal years ended June
28, 2003, June 29, 2002, and June 30, 2001, respectively. Leased equipment
meeting certain criteria is capitalized and the present value of the related
lease payments is recorded as a liability. Amortization of capitalized leased
assets is computed on the straight-line method of the term of the lease.

The future minimum rental commitments as of June 28, 2003 were as follows:

FISCAL YEAR ENDED

Present value of net minimum capital lease obligations:

Current portion $ 596
Long term portion 873
- ----------------------------------------------------------------------
Total obligations $1,469
- ----------------------------------------------------------------------

Assets recorded under capital leases are included in Property, Plant and
Equipment as follows:

OTHER COMMITMENTS -- The Company has employment agreements with its four
executive officers. The first of these agreements to be reviewed for renewal is
in June 2005 with the remaining reviews in June 2006. Such agreements provide
for minimum salary levels as well as for incentive bonuses that are payable if
the Company achieves specified target performance goals. The agreements also
provide for lump sum severance payments upon termination of employment under
certain circumstances. The Company's aggregate commitment for future salaries at
June 28, 2003, excluding bonuses, was approximately $6.0 million.

Salton maintains various licensing and contractual relationships to market
and distribute products under specific names and designs. These licensing
arrangements generally require certain license fees and royalties. Some of the
agreements contain minimum sales requirements that, if not satisfied, may result
in the termination of the agree-

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ments. Total royalties paid under these agreements, were $4.0 million, $8.2
million and $8.0 million in fiscal 2003, 2002 and 2001, respectively.

WARRANTIES AND OTHER CLAIMS -- The Company generally warrants its products
against defects for a period of one to three years. Additionally, credits are
issued to customers for damages sustained during shipment, claimed shortages,
certain returns of undamaged product, and other general allowances. Segregating
all allowances granted by discrete category at times require substantial
judgment. Accordingly, a single accrual covering all estimated future claims,
returns, and account allowances is recorded when products are shipped. Thus,
revenue is recognized based upon management's best estimate of future returns
and warranty claims considering the Company's historical experience. Management
also periodically reviews doubtful accounts and makes changes to the allowance
accordingly. The following table summarizes the changes in the Company's
aggregate accrual for returns, allowances and doubtful accounts:

13. LEGAL PROCEEDINGS

ATTORNEY GENERALS OF NEW YORK AND ILLINOIS

On September 6, 2002, the Company entered into an agreement with the
Attorneys General of New York and Illinois governing its future conduct with
retailers relating to its indoor electric grills. The agreement was approved on
May 30, 2003 by the United States District Court of the Southern District of New
York. Under the agreement, the Company made payments totaling $4.5 million in
2003 and are required to make an additional $3.5 million payment in 2004.

APPLICA

During the first quarter, the Company settled all amounts due to Applica,
Inc. pursuant to a settlement agreement effective on June 21, 2002. This
resulted in the cancellation of the $15 million Junior Subordinated note that
the Company issued to Applica in 1998.

ENVIRONMENTAL

The Company has accrued approximately $0.2 million for the anticipated
costs of environmental remediation at four sites. Although such costs could
exceed that amount, the Company 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 received a letter from Philips Domestic Appliances and Personal
Care B.V. (Philips) accusing Salton of interfering in a contractual relationship
between Philips and a manufacturing source for Salton, Electrical & Electronics
(E&E), misappropriating trade secrets and infringing other unspecified
intellectual property rights in connection with its development and marketing of
the One:One single serve coffee maker. On August 14, 2003, the Company filed a
complaint in the United States District Court for the Northern District of
Illinois seeking a declaratory judgment that the Company has not infringed the
alleged trade secret rights of Philips and have not tortiously interfered with
the contractual relationship between Philips and E&E.

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The Company is party to various other actions and proceedings incident to
its normal business operations. The Company believes the outcome of any
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 it could incur
claims for which it is not insured.

14. OPERATING SEGMENTS

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, tabletop products,
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.

PRODUCT INFORMATION -- NET SALES

GEOGRAPHIC INFORMATION

* Other Foreign Countries contains shipments directly imported to customers
including customers of North America and European Union.

Net sales by geographic area are based upon revenues generated from each
country's operations. Sales generated from any one foreign geographic area did
not exceed 10.0% of net sales for 2001.

MAJOR CUSTOMERS AND SUPPLIERS -- The Company's net sales in the aggregate
to its five largest customers during 2003, 2002 and 2001 were 39.3%, 43.0% and
47.4% of total net sales in these periods, respectively. One customer accounted
for 12.5%, 13.9% and 11.7% of total net sales during 2003, 2002 and 2001,
respectively, while another customer accounted for 11.9%, 12.0% and 9.4%, for
the same respective years.

In 1997, the Company entered into a major supply contract with Kmart
Corporation (Kmart). Under the contract, the Company supplied Kmart with small
kitchen appliances, personal care products, heaters, fans and electrical air
cleaners and humidifiers under the White-Westinghouse brand name. Sales to Kmart
approximated 2.7%, 5.5% and 10.9%, of total net sales of the Company in 2003,
2002 and 2001, respectively. The contract was terminated by mutual agreement
during 2003, after Kmart's bankruptcy filing.

Although the Company has long-established relationships with many of its
customers, it does not have any significant long-term contracts with them. A
significant concentration of the Company's business activity is with

F-25

department stores, mass merchandisers, specialty stores, home shopping networks
and warehouse clubs whose ability to meet their obligations to the Company is
dependent upon prevailing economic conditions within the retail industry.

During 2003, 2002 and 2001, one supplier located in China accounted for
approximately 33.2%, 32.5% and 35.0% of the Company's product purchases.

15. INCOME TAXES

Income before income taxes is as follows:

Federal, state and foreign taxes were approximately as follows:

Deferred taxes based upon differences between the financial statement and
tax bases of assets and liabilities and available tax carryforwards consisted
of:

Tax benefits from net operating loss carry-forwards will expire by 2019.

F-26

A reconciliation of the statutory federal income tax rate to the effective
rate is as follows:

U.S. income taxes were not provided on certain unremitted earnings of
Salton Hong Kong, Ltd., Salton Europe, and Salton Australia which the Company
considers to be permanently invested. The cumulative amount of U.S. income taxes
which have not been provided totaled approximately $11.7 million at June 28,
2003.

16. QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)

Unaudited quarterly financial data is as follows (amounts in thousands,
except per share data).

- ---------------

(1) The Company has historically experienced higher sales in the mid-Fall to
early Winter due to holiday sales, which primarily impacts the second
quarter.

(2) Total quarterly earnings per common share may not equal the annual amount
because net income per common share is calculated independently for each
quarter. Common stock equivalents can change on a quarter-to-quarter basis
due to their dilutive impact on the independent quarterly EPS calculation.

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17. SUPPLEMENTAL CONSOLIDATING FINANCIAL INFORMATION

The payment obligations of the Company under the 12 1/4% senior
subordinated notes (see Note 5 Revolving Line of Credit, Letter of Credit and
Long-Term Debt) 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 earnings and statements of cash flows for the Subsidiary
Guarantors, the Company's non-guarantor subsidiaries and for Salton, Inc.

F-28

CONSOLIDATING BALANCE SHEET AS OF JUNE 28, 2003
(IN THOUSANDS)

F-29

CONSOLIDATING BALANCE SHEET AS OF JUNE 29, 2002
(IN THOUSANDS)

F-30

CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 28, 2003
(IN THOUSANDS)

CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 29, 2002
(IN THOUSANDS)

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CONSOLIDATING STATEMENT OF INCOME FOR THE YEAR ENDED JUNE 30, 2001
(IN THOUSANDS)

F-32

CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JUNE 28, 2003
(IN THOUSANDS)

F-33

CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JUNE 29, 2002
(IN THOUSANDS)

F-34

CONSOLIDATING STATEMENT OF CASH FLOWS FOR YEAR ENDED JUNE 30, 2001
(IN THOUSANDS)

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