UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-QSB/A

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

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2006

or

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

FOR THE TRANSITION PERIOD From _____________ to ______________

Commission File Number 333-57576

SUNSET BRANDS, INC.

(Exact name of registrant as specified in its charter)

Nevada	91-2007330
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

10990 Wilshire Boulevard, Suite 1220, Los Angeles, CA 90024

(Address of principal executive office)

(310) 478-4600

(Registrant's telephone number, including area code)

Check whether the issuer: (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [  ]

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [  ] No [X]

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS

Check whether the registrant filed all documents and reports required by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes [  ] No [  ]

State the number of shares outstanding of each of the issuer's classes of common equity, as of the latest practical date:

22,926,240 shares of common stock, $.001 par value, outstanding as of May 26, 2006

Transitional Small Business Disclosure Format (check one):Yes [  ] No [X]

INDEX TO FORM 10-QSB

Sunset Brands, Inc.

For The Quarter Ending March 31, 2006

Part I. Financial Information		Page
Item 1.	Financial Statements
	Condensed Consolidated Balance Sheets (Unaudited) March 31, 2006 and December 31, 2005	3
	Condensed Consolidated Statements of Operations (Unaudited) for the Three Months Ended March 31, 2006 and 2005	4
	Condensed Consolidated Statements of Cash Flows (Unaudited) for the Three Months Ended March 31, 2006 and 2005	5
	Notes to Condensed Consolidated Financial Statements (Unaudited) ……	6
Item 2.	Management's Discussion and Analysis of Financial Condition or Plan of Operation	14
Item 3.	Controls and Procedures	17
Part II. Other Information
Item 1.	Legal Proceedings	18
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	18
Item 3.	Defaults Upon Senior Securities	19
Item 4.	Submission of Matters to a Vote of Security Holders	19
Item 5.	Other Information	19
Item 6.	Exhibits and Reports on Form 8-K	19

2

Part I - Financial Information

Item 1. Financial Statements

SUNSET BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

	March 31,			December 31,
	2006			2005
ASSETS
Current Assets
Cash	$	130,819		$	141,613
Accounts receivable, net of allowances of $210,987 and $189,132, respectively		1,023,231			1,018,344
Receivable from related parties		-			25,141
Other receivables		4,281			5,640
Inventories		1,111,669			1,204,029
Prepaid expenses and other current assets		222,641			167,266
Total Current Assets		2,492,641			2,562,033
Property and equipment, net of accumulated depreciation of $510 and $0, respectively		7,537			2,599
Intangible assets, net of accumulated amortization of $157,839 and $56,589		7,342,161			7,443,411
Goodwill		10,549,798			10,549,798
Total Assets	$	20,392,137		$	20,557,841
LIABILITIES AND SHAREHOLDERS' DEFICIT
Current Liabilities
Accounts payable	$	2,170,676		$	2,212,250
Accrued liabilities		2,473,790			1,676,134
Related party payables		278,895			349,277
Notes payable, current portion		6,899,068			6,999,069
Capital lease obligation, current portion		4,613			4,613
Note payable to related party		1,500,000			1,500,000
Revolving credit note payable		1,115,046			1,270,061
Total Current Liabilities		14,442,088			14,011,404
Long Term Liabilities
Notes payable, net of unamortized discounts of $1,013,765 and $1,054,055, net of current portion		5,133,654			5,100,257
Capital lease obligation, net of current portion		1,910			2,931
Derivative warrant liability		1,274,782			2,660,133
Total Long Term Liabilities		6,410,346			7,763,321
Shareholders' Deficit
Preferred stock, Series A redeemable, convertible - par value $0.001per share; 10,000,000 shares authorized; 3,887,000 shares outstanding; liquidation preference of $3,498,300		524,479			524,479
Preferred stock, Series B convertible - par value $0.001 per share;800,000 shares authorized; 321,429 shares outstanding; liquidation preference of $1,800,000		1,151,318			1,151,318
Common stock - par value $0.001 per share; 200,000,000 shares authorized; 22,926,240 shares and 21,036,698 shares outstanding		22,928			21,037
Additional paid-in capital		17,845,716			17,612,231
Deferred compensation		-			(145,788	)
Accumulated deficit		(20,004,738	)		(20,380,161	)
Total Shareholders' Deficit		(460,297	)		(1,216,884	)
Total Liabilities and Shareholders' Deficit	$	20,392,137		$	20,557,841

The accompanying notes are an integral part of these condensed consolidated financial statements.

3

SUNSET BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)

For the Three Months Ended March 31,	2006			2005
Sales	$	4,216,493		$	30,128
Cost of Sales		(1,972,866	)		(21,490	)
Gross Profit		2,243,627			8,638
Operating Expenses
Marketing, selling and distribution		1,388,772			-
General and administrative		1,241,970			1,247,377
Total Operating Expenses		2,630,742			1,247,377
Operating Loss		(387,115	)		(1,238,739	)
Interest expense		(503,287	)		(128,217	)
Gain on derivative warrant liability		1,385,351			-
Other expenses		(19,314	)		(29,174	)
Income (Loss) Before Income Taxes		475,635			(1,396,130	)
Provision for Income Taxes		(7,500	)		-
Net Income (Loss)		468,135			(1,396,130	)
Preferred dividends		(92,712	)		-
Income (Loss) Applicable to Common Shareholders	$	375,423		$	(1,396,130	)
Basic Earnings (Loss) Per Common Share	$	0.02		$	(0.17	)
Diluted Earnings (Loss) Per Common Share	$	0.01		$	(0.17	)

The accompanying notes are an integral part of these condensed consolidated financial statements.

4

SUNSET BRANDS, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

For the Three Months Ended March 31,	2006			2005
Cash Flows from Operating Activities:
Net income (loss)	$	468,135		$	(1,396,130	)
Adjustments to reconcile net income (loss) to net cash used in operating activities
Depreciation		510			2,545
Amortization of intangible assets		101,250			-
Issuance of stock and warrants for services		99,814			470,251
Compensation from stock options and stock grants		116,350			137,500
Accretion of discount on loans		40,290			125,655
Bad debt provision		6,000			30,138
Loss on disposal of property and equipment		-			23,318
Gain on derivative warrant liability		(1,385,351	)		-
Changes in operating assets and liabilities, net of effects from acquisitions:
Accounts receivable		(10,887	)		5,294
Prepaid expenses and other current assets		(55,375	)		(9,336	)
Other receivables		1,359			-
Inventories		92,360			6,786
Accounts payable and accrued liabilities		663,370			182,560
Net Cash Provided by (Used in) Operating Activities		137,825			(421,419	)
Cash Flows from Investing Activities:
Lease deposit		-			(44,988	)
Deposit for U.S. Mills acquisition escrow		-			(500,000	)
Deferred acquisition expenses		-			(53,730	)
Purchase of equipment		(5,448	)		-
Net Cash Used in Investing Activities		(5,448	)		(598,718	)
Cash Flows from Financing Activities:
Proceeds from notes payable - related parties		119,759			-
Principal payments on notes payable		(106,894	)		-
Principal payments on capital lease obligation		(1,021	)		-
Net change in line of credit		(155,015	)		-
Proceeds from issuance of notes payable		-			550,000
Net Cash Provided by (Used in) Financing Activities		(143,171	)		550,000
Net Decrease in Cash		(10,794	)		(470,137	)
Cash at Beginning of Period		141,613			521,585
Cash at End of Period	$	130,819		$	51,448
Supplemental Schedule of Noncash Investing and Financing Activities:
Exercise of stock options for reduction in related party payables	$	165,000		$	-
Accrual of Series B preferred dividends		92,712			-
Cancellation of escrow shares for Low Card acquisition		-			870

The accompanying notes are an integral part of these condensed consolidated financial statements.

5

SUNSET BRANDS, INC AND SUSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2006

NOTE 1 -SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements - The accompanying unaudited financial statements have been condensed and, therefore, do not include all disclosures normally required by accounting principles generally accepted in the United States of America. These statements should be read in conjunction with the Company’s annual financial statements included in the Company’s December 31, 2005 Annual Report on Form 10-KSB. In the opinion of management, all adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented have been included in the accompanying condensed financial statements and consist of only normal recurring adjustments. The results of operations for the three months ended March 31, 2006 are not necessarily indicative of the results that may be expected for the full year ending December 31, 2006.

Use of Estimates -The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect reported amounts in the financial statements and the accompanying notes. Actual results could differ from those estimates.

Business Condition- Sunset’s financial statements are prepared using accounting principles generally accepted in the United States of America applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. As of March 31, 2006, the Company has negative working capital of $11,949,447, had an accumulated deficit of $20,004,738 and had a stockholders’ deficit of $406,297. These matters raise substantial doubt about Sunset’s ability to continue as a going concern.

Continued operations, as well as the implementation of Sunset’s business plan, will depend upon its ability to raise additional funds through equity or debt financings. Sunset’s ability to continue as a going concern is dependent on additional sources of capital, reduction in operational losses and the success of its business plan. If Sunset is unable to improve operating results or obtain such additional financing if and when needed, management will be required to curtail growth plans and scale back projected acquisition activities. There is no assurance that Sunset will be successful in raising additional financing, or if so, at terms favorable to the Company, or be able to improve operational results.

Allowances for Accounts Receivable- The Company provides an allowance for doubtful accounts equal to estimated bad debt losses, estimated cash discounts, and estimated marketing allowances. Amounts deemed uncollectible are charged against the allowance. The estimated losses are based on historical collection experience together with the current status of existing receivables. The allowance for doubtful accounts at March 31, 2006 and December 31, 2005 was $30,000 and $24,000, respectively. Projected merchandising allowances and cash discount allowances at March 31, 2006 and December 31, 2005 were $180,987 and $165,132, respectively. Increases in the allowances are recognized as a reduction of sales revenue.

Inventories- Inventories are valued at lower of cost, determined on the first-in, first-out basis, or market value. At March 31, 2006 and 2005, the Company’s inventories consisted of finished goods. The Company currently subcontracts the manufacturing of its products and procurement of materials to independent manufacturers. When there is evidence that the inventory’s value is less than original cost, the inventory is reduced to market value. The Company determines market value on current resale amounts and whether obsolescence exists. There was no allowance for obsolescence provided at March 31, 2006 or December 31, 2005.

6

SUNSET BRANDS, INC AND SUSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2006

Goodwill and Identifiable Intangible Assets- The Company examines the carrying value of its excess of cost over net assets acquired and other identifiable intangible assets to determine whether there are any impairment losses. If indicators of impairment are present in intangible assets used in operations, and future cash flows are not expected to be sufficient to recover the assets carrying amount, an impairment loss would be charged to expenses in the period identified. No event has been identified that would indicate an impairment of the value of material intangible assets recorded in the accompanying consolidated financial statements.

Revenue Recognition- Sales of products are recognized upon shipment to customers by the Company or the Company’s independent manufacturers when persuasive evidence of an arrangement exists, sales prices are determinable, and collectibility is reasonably assured.

Shipping and Handling Costs- In accordance with EITF 00-10, the Company records revenue related to shipping and handling costs charged to customers in net sales. The related expense is recorded in freight-out expense included in cost of good sold. For the three months ended March 31, 2006 and 2005, the Company recorded total shipping and handling costs of $287,537 and $8,352, respectively.

Basic and Diluted Earnings (Loss) per Common Share -Basic earnings (loss) per common share is computed by dividing the net income (loss) available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed by dividing the net income (loss) adjusted for assumed conversions by the weighted-average number of common and dilutive potential common shares outstanding during the period. The computation of basic and diluted earnings (loss) per common share was as follows:

For the Three Months Ended March 31,	2006			2005
Net income (loss)	$	468,135		$	(1,396,130	)
Less: Series B preferred stock dividends		(92,712	)		-
Income (loss) available to common shareholders		375,423			(1,396,130	)
Plus: Income impact of assumed conversions:
Interest on 12% convertible debenture		147,945			-
Income available to common shareholders plus assumed conversions	$	523,368		$	(1,396,130	)
Basic weighted-average common shares outstanding		22,007,236			8,182,913
Plus: Incremental shares from assumed conversions:
Employee stock options		25,735			-
Warrants		2,027,541			-
Convertible Series A preferred stock		5,033,572			-
12% Convertible debenture		13,513,513			-
Diluted weighted-average common shares outstanding		42,607,597			8,182,913
Basic Earnings (Loss) per Common Share	$	0.02		$	(0.17	)
Diluted Earnings (Loss) Per Common Share	$	0.01		$	(0.17	)

At March 31, 2006 and 2005, there were 16,553,055 and 4,383,205, respectively, potentially issuable common shares that were excluded from the calculation of diluted earnings (loss) per common share because their effect would have been anti-dilutive.

7

SUNSET BRANDS, INC AND SUSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2006

Share Based Compensation-Effective January 1, 2006, the Company adopted the provisions of Statement of Financial Accounting Standards No. 123R, Share-Based Payment (“FAS 123R”) for its stock-based employee compensation plans. The Company previously accounted for these plans under the recognition and measurement principles of Accounting Principles Board Opinion No. 25, Accounting for Stock-Based Compensation (“SFAS 123”) as amended by SFAS No.148, Accounting for Stock-Based Compensation - Transition and Disclosure.

Under APB 25, compensation expense was recorded in earnings for the Company’s stock-based options granted under its compensation plans. The pro forma effects on net income (loss) and earnings (loss) per share for the options and awards granted under the plans were instead disclosed in a note to the consolidated financial statements. Under SFAS 123R, all stock-based compensation is measured at the grant date based on the fair value of the option or award, and is recognized as an expense in earnings over the requisite service, which is typically through the date the options vest.

The Company adopted SFAS 123R using the modified prospective method. Under this method, for all stock-based options and awards granted prior to January 1, 2006 that remain outstanding as of that date, compensation cost is recognized for the unvested portion over the remaining requisite service period, using the grant date fair value measured under the original provisions of SFAS 123 for pro forma and disclosure purposes. Furthermore, compensation cost is also recognized for any awards issued, modified, repurchased or cancelled after January 1, 2006.

The Company utilizes the Black-Scholes-Merton model for calculating the fair value of employee stock options. The following table summarizes the Black-Scholes-Merton option pricing model assumptions used to compute the weighted-average fair value of stock options granted during the periods:

	Three Months Ended
	March 31,
	2006	2005
Dividend yield	N/A*	5%
Expected volatility	N/A*	0%
Risk-free interest rate	N/A*	3.54%
Expected holding period (in years)	N/A*	10
Weighted-average fair value of options granted	N/A*	$2.40

________________

* Not applicable as there were no options granted during the period.

No options were granted for the three months ended March 31, 2006. Total compensation costs relating to employee stock-based compensation was $116,350 and $137,500 during the three months ended March 31, 2006 and 2005, respectively, including the effects from adoption of SFAS 123R. The following table illustrates the effect on net income (loss) and earnings (loss) per share as if the Company had applied the fair-value recognition provisions of SFAS 123 or SFAS 123R to all its stock-based compensation awards:

8

SUNSET BRANDS, INC AND SUSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2006

For the Three Months Ended March 31,	2006			2005
Net income (loss) as reported	$	468,135		$	(1,396,130	)
Add: Total share-based compensation expense included in reported net income (loss)		116,350			137,500
Less: Total share based compensation expense determined under fair value based method		(116,350	)		(390,550	)
Pro Forma Net Income (Loss)	$	468,135		$	(1,649,180	)
Basic earnings (loss) per common share
As reported	$	0.02		$	(0.17	)
Pro forma	$	0.02		$	(0.20	)
Diluted earnings (loss) per common share
As reported	$	0.01		$	(0.17	)
Pro forma	$	0.01		$	(0.20	)

NOTE 2 - DESCRIPTION OF BUSINESS

Sunset Brands, Inc. (the Company or Sunset) through its wholly owned subsidiary, U.S. Mills, Inc. (U.S. Mills) is engaged in the production and distribution of healthy and natural food products. U.S. Mills’ customers include distributors that service natural food stores, natural food store chains and supermarkets.

Until December 2004, the Company’s subsidiary, Low Carb Creations, Inc. (Low Carb) was a marketer of sweet and savory products for consumers interested in maintaining a low carbohydrate, healthy life style. Low Carb provided development, distribution and consulting services related to low carbohydrate foods throughout the Untied States and Canada. During December 2004, Low Carb discontinued its active pursuit of its low carbohydrate business due to an inability to distribute its products. However, the Company has not reclassified its Low Carb operations out of continuing operations inasmuch as the Company has not formally determined to discontinue or dispose of its Low Carb operations.

NOTE 3 -RELATED PARTY TRANSACTIONS

At March 31, 2006, due to the foreclosure of a bank line of credit, the Company now owes a shareholder an amount equal to the collateral the shareholder paid of $221,272. Sunset and the shareholder have not agreed upon an interest rate or repayment schedule.

Pursuant to the terms of a Services Agreement, the Company pays Sunset Holdings, Inc., a company related by virtue of its control by the Sunset Chief Executive Officer, monthly fees in the amount of $12,500 in exchange for the use of office space, furniture, telephone usage, insurance, computer equipment and payroll reimbursement for use of office personnel. In addition, the services of the Company’s Chef Executive Officer, Chief Financial Officer and Vice President of Corporate Development are provided to the Company through the Services Agreement. Such Services Agreement calls for annual payments of $370,000 in exchange for the services of the three executives. The Services Agreement has an initial term of one year and will be automatically renewed for successive one year terms unless written notice is given that the Company or Sunset Holdings desires to terminate the Services Agreement.

9

SUNSET BRANDS, INC AND SUSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2006

NOTE 4 - NOTES PAYABLE

On November 10, 2005, the Company issued a $2,000,000 promissory note payable to Capital Source Finance LLC for $2,000,000 paid directly to IBF Liquidating Fund LLC in connection with the acquisition of U.S. Mills, Inc. The note bears interest at prime plus 4% and is secured by all of the assets of the Company. The balance due under the note payable was $1,866,667 at March 31, 2006. The note payable and the line of credit to CapitalSource Finance LLC were considered to be in default as a result of Sunset’s failure to maintain certain financial covenants of the credit agreement with CapitalSource. The note payable is considered a current liability as of March 31, 2006 and December 31, 2005.

On November 10, 2005, the Company issued $11,000,000 of promissory notes to IBF Liquidating Fund LLC in connection with the acquisition of U.S. Mills, Inc. The notes are due on November 9, 2008 and are subordinate to the note payable to CapitalSource Funding LLC and the line of credit payable to CapitalSource Funding, LLC. The notes consist of a $1,000,000 senior subordinated note with interest payable at prime plus 4%, a $5,000,000 12% subordinated note, and a $5,000,000 12% secured convertible debenture which is convertible into 13,513,513 common shares at the rate of $0.37 per common share. The note holder received a beneficial conversion option of $922,416 that was recognized as additional paid-in capital. The notes were recorded net of a $2,951,732 discount. The discount is being amortized to interest expense over the term of the notes. The $5,000,000 secured convertible debenture is considered a current liability as of March 31, 2006 and December 31, 2005 as a result of Sunset’s failure to maintain certain financial covenants under the credit agreement with CapitalSource.

On June 7, 2006, the Company entered into a Forbearance and Amendment agreement with CapitalSource Finance LLC whereby CapitalSource LLC agreed to forbear from exercising its rights and remedies under the previously executed loan agreements through August 28, 2006 or upon the occurrence of any event of default other than the existing forbearance defaults. In addition, CapitalSource Finance LLC agreed to amend and restate the financial covenants. As a result, the Company is now in compliance with the financial covenants of the loan agreement.

NOTE 5 - LINES OF CREDIT

On November 10, 2005, the Company entered into a revolving credit facility with Capital Source Finance LLC. The Company can borrow up to a $3,000,000 under the credit facility. The line of credit bears interest at 1% over the prime interest rate. The credit facility is secured by substantially all of the assets of US Mills. The credit agreement terminates and all amounts outstanding there under are due and payable on November 10, 2008. The balance due under the revolving credit facility was $1,115,046 and $1,270,061 at March 31, 2006 and December 31, 2005, respectively. The line of credit due to Capital Source Finance is considered in default and a current liability in the accompanying financial statements.

The Company’s outstanding borrowings under prior separate secured credit agreements were an aggregate $221,272. The loans were guaranteed by a pre-reorganization shareholder of the Company and secured by the shareholder’s assets. Under terms of a January 14, 2005 settlement agreement with the pre-reorganization shareholders of Low Carb, the Company agreed to make timely payments on the credit agreements guaranteed by certain former Low Carb shareholders and agreed to use commercially reasonable efforts to fully repay the credit agreements by April 1, 2005 or obtain a release of the former Low Carb shareholders’ personal guarantee of the bank line of credit. The Company paid $31,589 against the line of credit and continued to accrue monthly interest. The Company was unable to payoff the lines of credit prior to the due date and during the third quarter of 2005 the bank attached the assets securing the lines of credit. The Company has reclassified the debt as due to related parties for the amount foreclosed upon. The Company is in negotiations with the former Low Carb shareholders in an attempt to reach a satisfactory solution.

10

SUNSET BRANDS, INC AND SUSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2006

NOTE 6 - NOTES PAYABLE TO RELATED PARTIES

On November 10, 2005, the Company executed a promissory note to Sunset Holdings International, Ltd., an entity controlled by the president of the Company, in the amount of $1,500,000, which amount was paid directly to IBF Liquidating Fund LLC in connection with the acquisition of U.S. Mills, Inc. Sunset Holdings also entered into an agreement that it would purchase the 12% secured convertible debenture note payable to IBF Liquidating Fund LLC if the Company is unable to locate a substitute investor for such note.

On November 10, 2005, Sunset Holdings guaranteed payment of the remaining $128,005 due under the terms of a note payable to N.Y. Holdings Limited.

NOTE 7 - COMMON STOCK

On March 10, 2005 Sunset issued an aggregate 100,000 shares to two directors for services. Of the shares issued, 25,000 shares vested on the date of issuance, and the balance vest ratably over the next eight fiscal quarters, provided the directors continue to provide services to Sunset over the vesting period. The shares had a fair value on the date of the grant of $400,000, or $4.00 per share, based upon the quoted trading value of the shares on the date of issuance. The Company recognized stock-based compensation during the three months ended March 31, 2006 of $11,897 related to these common shares.

During the three months ended March 31, 2006, Sunset issued 389,542 common shares to various service providers or directors for services valued at $99,814. The Company estimated the value of the services based upon the value for which the Company’s shares were quoted as trading on the dates of the respective issuances.

During the quarter ended March 31, 2006, an employee of the Company exercised 1,500,000 stock options for a reduction of notes payable to a related party of $165,000.

NOTE 8 - REORGANIZATION SETTLEMENT AGREEMENT

On January 14, 2005, Sunset entered into a settlement agreement with the pre-reorganization shareholders of Low Carb to resolve certain matters which have arisen from the October 4, 2004 reorganization agreement and the declining business of Low Carb during 2004. Under the reorganization agreement, Low Carb was acquired in exchange for the issuance of 3,451,960 shares of common shares and the issuance of 278,000 shares of Series A preferred stock. The Company also issued a $2,000,000 note payable to the former Low Carb shareholders and a deferred $1,000,000 payment to the former Low Carb shareholders conditional upon reaching $17.5 million in sales.

Under terms of the January 14, 2005 settlement agreement, the former Low Carb shareholders agreed to cancel the $2,000,000 note payable and the deferred $1,000,000 conditional payment, and return 869,145 shares of common stock. Sunset agreed to make timely payments on its bank line of credit guaranteed by certain former Low Carb shareholders with a $235,000 outstanding principal, and agreed to use commercially reasonable efforts to fully repay the line by April 1, 2005 or obtain a release of the former Low Carb shareholder’s personal guarantee of that bank line of credit. Sunset paid $31,589 against the line of credit and monthly interest and received an extension from the bank extending the due date on the line of credit to July 13, 2005. Sunset is in negotiations with the former Low Carb shareholder in an attempt to reach a satisfactory solution for both parties. Under the settlement agreement Sunset agreed to facilitate the sale of 750,000 of the former Low Carb shareholders’ common stock and Sunset’s Chief Executive Officer purchased an additional 500,000 shares of Sunset common stock from the former Low Carb shareholders for $100,000 or $0.20 per share. Sunset has the right to redeem the Chief Executive’s shares at his cost.

11

SUNSET BRANDS, INC AND SUSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2006

During the quarter ended September 30, 2005, the lender foreclosed on the line of credit and took the shareholder’s assets guaranteeing the line of credit.

NOTE 9 - COMMITMENTS AND CONTINGENCIES

During 2005, the Company abandoned an office in leased premises in Vancouver, Washington. The lease expires on October 31, 2006 and the Company is currently in default for non-payment. The remaining monthly lease payments in the amount of $73,502 have been accrued at March 31, 2006.

Rent expense charged to operations for the three months ended March 31, 2006 and 2005 amounted to $24,586 and $21,848, respectively.

Employment Agreements — Upon completion of the mergers, Sunset entered into one-year employment agreements with two former Low Carb shareholders. The agreements provide for annual base salary of $100,000 and $125,000 per year, respectively. The employment agreements have a one-year term but will be automatically renewed for successive one-year terms unless written notice is given that such party desires to terminate the Agreement. If termination of employment of either occurs other than for cause, the Company is required to pay the agreed salary through the expiration of the agreement The Company has stopped payment to the former Low Carb shareholders. The Company, however, continues to record a monthly accrual for payments due to the former Low Carb shareholders.

Legal Proceedings—In the ordinary course of its business, Low Carb Creations and Sunset may be subject to legal claims or proceedings relating to employment matters, customer complaints or other matters. Sunset or Low Carb Creations are currently a party to the following litigation or legal proceeding which could reasonably be expected to have a material adverse effect:

Amico Public Relations has threatened to bring an action against Low Carb Creations in the amount of $7,091 alleged to be due under a "Letter of Contract Agreement" dated September 13, 2003 for unpaid invoiced charges for public relations services.

Chef Warren. CJW Productions vs. Low Carb Creations is an action brought in Hillsborough County, State of Florida, on a contract between Low Carb Creations and Chef Jerry Warren's production company, providing for Chef Warren's representation of Low Carb Creation brands at 25 consumer food shows throughout the country. Chef Warren is claiming at least $25,000 plus attorney fees and unspecified contract damages to be proven at trial. Since receiving service of the complaint on October 9, 2004, Low Carb Creations has attempted to settle this lawsuit. The normal response deadline was waived pending settlement negotiations.

Food Product Laboratory. Food Products Laboratory v. Low Carb Creations, Inc. is an action brought in Multnomah County, State of Oregon, on a disputed bill for food ingredient testing services. The amount claimed in litigation is $13,335. The Summons is dated November 17, 2004. The normal deadline for responsive filing by Low Carb Creations was waived pending settlement negotiations.

F.G.H. F.G.H. Consulting, Inc. vs. Low Carb Creations, Inc. is an action brought in Clark County, Washington in November 2004. The normal response date was waived pending settlement negotiations. This is a complaint based on several claimed brokerage arrangements with Low Carb Creations and unpaid accounts for ingredients and food products. The original amounts claimed in the pleadings were in excess of $72,000. However, Low Carb Creations disputes many portions of the claim.

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SUNSET BRANDS, INC AND SUSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

MARCH 31, 2006

Ad Group, Inc. Ad Group, Inc. vs. Low Carb Creations, Inc. is an action brought in the State of Oregon for Lane County in April 2005. The amount claimed in litigation is $36,769 for unpaid amounts due them.

Puentes Brothers vs. Low Crab Creations, Inc. is an action brought in the State of Oregon for Marion County in April 2005. The amount claimed in litigation is $27,266 for unpaid amount due them.

NOTE 10 - SUBSEQUENT EVENTS

On June 7, 2006, the Company entered into a Forbearance and Amendment agreement with CapitalSource Finance LLC whereby CapitalSource LLC agreed to forbear from exercising its rights and remedies under the previously executed loan agreements through August 28, 2006 or upon the occurrence of any event of default other than the existing forbearance defaults. In addition, CapitalSource Finance LLC agreed to amend and restate the financial covenants. As a result, the Company is now in compliance with the financial covenants of the loan agreement.

The Company has deposited $125,000 into an interest bearing bank account and it is being held pending the outcome of future financing transactions. If the Company does not complete a financing transaction by June 30, 2006, the deposit shall be contributed to US Mills as an equity contribution and a second deposit of $125,000 shall be established. If a financing transaction is not consummated by July 14, 2006, the second deposit shall also be contributed to US Mills as a capital contribution.

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Item 2.Management's Discussion and Analysis of Financial Condition or Plan of Operation

Forward-Looking Information

This report contains forward-looking statements that involve risks and uncertainties. These statements relate to future events or our future financial performance. In some cases, you can identify forward-looking statements by terminology including “could,” “may,” “will,” “should,” “expect,” “intend,” “plan,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “continue” or “opportunity,” the negative of these terms or other comparable terminology. These statements are only predictions. Actual events or results may differ materially. In evaluating these statements, you should specifically consider various factors, including the risks described below and in other parts of this report. These factors may cause our actual results to differ materially from any forward-looking statements.

Although we believe that the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, levels of activity, performance, or achievements. We are under no duty to update any of the forward-looking statements after the date of this report to conform them to actual results or to changes in our expectations.

Overview

We intend to capitalize on the growing demand for healthy foods. It is our goal to become a category leader in this field through both expanded marketing of existing products under brands owned or licensed by US Mills and the introduction of new products. Although there can be no assurances that we will be successful in our business plan, we believe that through US Mills and its management team, as well as the additional management resources that we intend to add, Sunset will be well-positioned to emerge as a leader in the nutritious food industry.

Going Concern

The accompanying financial statements have been prepared in conformity with generally accepted accounting principles, which contemplate continuation of our Company as a going concern. We had net income of $468,135 for the three months ended March 31, 2006, however, at March 31, 2006, we had an accumulated deficit of $20,004,738 and a working capital deficit of $11,949,447. These factors raise substantial doubt as to our ability to continue as a going concern should we not be able to execute our acquisition plan.

The application of the going concern concept is dependent upon our ability to receive continued financial support from external investors and attain profitable operations through our acquisition strategy. These financial statements do not include any adjustments relating to the recoverabilityand classification of recorded assets amounts, or amounts and classification of liabilities that might be necessary should we be unable to continue as a going concern. Management plans to obtain equity and debt financing from external investors and to actively pursue profitable acquisitions.

There can be no assurance that management’s plan will be successful. Failure to obtain the support of additional external investors to finance our acquisition strategy will impair our ability to continue as a going concern.

Results of Operations

Comparison of the three months ended March 31, 2006 and 2005

Primarily due to the lack of available working capital, Low Carb had limited operations during the quarter ended March 31, 2005. As a result, a comparison of operations between the three months ended March 31, 2006 and 2005 is not meaningful. Accordingly, the discussion of operational results for 2006 and 2005 address each quarter separately and not on a comparative basis.

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Net sales for the three months ended March 31, 2006 were $4,216,493 and $30,128 for the three months ended March 31, 2005. Net sales for 2005 were negatively impacted by the suspension of marketing and operational activities in December 2004 of Low Carb due to a lack of available working capital and by a decline in the overall popularity of low carbohydrate food and drink items.

Gross profit for the three months ended March 31, 2006 was $2,243,627, or 53.2% of net sales, and $8,638, or 26.7% of net sales, for the three months ended March 31, 2005. The gross profit margin for 2006 was positively driven by the Uncle Sam and Farina product lines. Gross profit in 2005 was impacted by the aforementioned decrease in net sales as noted above.

Marketing, selling and distribution expenses for the three months ended March 31, 2006 were $1,388,772, or 32.9% of net sales, and $0 for the comparable period of 2005. The lack of marketing, selling and distribution expenses for 2005 reflects the suspension of all marketing and operational activities for Low Carb in December 2004 in order to preserve working capital.

General and administrative expenses were $1,241,970 for the three months ended March 31, 2006 and $1,247,377 for the three months ended March 31, 2005. General and administrative expenses for 2006 include costs associated with equity issuances to outside consultants for services rendered, the vesting of employee stock options and the vesting of stock previously issued to an outside director for serving as members of the board. General and administrative expenses for 2005 primarily reflect equity issuances to outside directors for serving as members of the board, equity issuances to vendors for services performed and penalties owed to investors for non-timely filing of a registration statement along with general increases across all levels in anticipation of business growth in 2005.

Operating losses of $387,115 and $1,238,739 were incurred for the three months ended March 31, 2006 and 2005, respectively.. The operating losses resulted primarily from the aforementioned increases in expenses, lack of working capital and the cessation of marketing and operational activities in December 2004 for Low Carb, as previously discussed.

Interest expense for the three months ended March 31, 2006 was $503,287 and $128,217 for the comparable period in 2005. Interest expense in 2006 is attributable to $15,661,533 in outstanding debt along with the amortization of note discounts recorded on debt issued in conjunction with the US Mills acquisition. Interest expense in 2005 also reflects the amortization of note discounts and interest recorded on $820,000 of debt during the quarter.

Other income for the three months ended March 31, 2006 was $1,366,036, reflecting a gain on the adjustment to the derivative warrant liability as a result of a decrease in Sunset’s stock price. Other expenses for the three months ended March 31, 2005 were $29,174.

Income before income taxes was $475,634 for the three months ended March 31, 2006. Loss before income taxes was $1,396,130 for the three months ended March 31, 2005. The income/loss before income taxes is attributable to the aforementioned items discussed above.

Net income for the three months ended March 31, 2006 amounted to $468,135. Net loss for the three months ended March 31, 2005 amounted to $1,396,130. The income/loss is primarily attributable to the aforementioned items discussed above.

Preferred dividends of $92,712, applicable to the Series B Preferred stock, were recorded for the three months ended March 31, 2006. No preferred dividends were recognized for the quarter ended March 31, 2005.

Income applicable to common shareholders amounted to $375,422, or $0.02 basic earnings per common share, for the three months ended March 31, 2006. Loss applicable to common shareholders for the quarter ended March 31, 2005 was $1,396,130, or $0.17 basic earnings per common share. The income/loss is primarily attributable to the aforementioned items discussed above.

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Liquidity and Capital Resources

As of March 31, 2006, we had total current assets of $2,492,641, and total current liabilities of $14,442,008, resulting in a working capital deficit of $11,949,447. We incurred significant losses and negative cash flows from operations in 2005; however, we have been successful in obtaining cash resources through private placements and settling certain payables through the issuance of common stock, in addition, to the positive cash flow provided by the US Mills acquisition. .

On November 10, 2005, Sunset Brands, as guarantor, entered into a Revolving Credit, Term Loan, and Security Agreement (the "Credit Agreement") with Capital Source Finance LLC, a Delaware limited liability company, as lender, and US Mills, the Company's wholly-owned subsidiary, as borrower. Pursuant to the Credit Agreement, the Lender agreed to make available to US Mills a revolving credit facility in the maximum principal amount of $3,000,000 and a term loan in the maximum principal amount of $3,500,000. The collateral for the payment of all amounts due under the Credit Agreement consists of substantially all of the assets of US Mills. A significant portion of the proceeds of the Credit Agreement were used to refinance the obligations and indebtedness of US Mills in connection with the Merger discussed above. The Credit Agreement terminates and all amounts outstanding thereunder shall be due and payable in full three years from November 10, 2005.Upon the occurrence of an event of default under the Credit Agreement, the Company may become directly liable for US Mill's obligations under the Credit Agreement.

Sunset is currently in default of several financial covenants under the Credit Agreement and, accordingly, $8,066,667 of long term notes payable have been classified as current liabilities. Sunset is in negotiations with CapitalSource to revise the financial covenants.

Our continued operations, as well as the implementation of our business plan, will depend upon our ability to raise additional funds through equity or debt financings. Our ability to continue as a going concern is dependent on additional sources of capital, reduction in operational losses and the success of our business plan. To the extent we raise additional capital through the sale of equity or convertible debt securities, the issuance of such securities may result in dilution to existing stockholders. If additional funds are raised through the issuance of debt securities, these securities may have rights, preferences and privileges senior to holders of common stock and the terms of such debt could impose restrictions on our operations. Regardless of whether our cash assets prove to inadequate to meet our operational needs, we may seek to compensate providers of services by issuance of stock in lieu of cash, which may also result in dilution to existing shareholders.

Net cash provided by operating activities was $137,825 for the three months ended March 31, 2006. Net cash used by operating activities was $421,419 for the comparable period in 2005. The net gain of $705,539 for quarter ended March 31, 2006 was offset by a non-cash item of $1,385,351, which relates to a gain on an adjustment to derivative warrant liability. Additional non-cash items of $101,241 for amortization of intangible assets, $99,814 for issuance of stock for services, and $116,350 reflecting compensation from vesting of stock options and stock offset the gain from adjustment to the derivative warrant liability. The net loss of $1,396,130 for the three months ended March 31, 2005 was offset by non-cash items of $974,711, primarily $470,251 for stock and warrants issued for services, $137,500 for compensation from stock options and stock grants, and $125,655 for accretion of discount on loans.

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Net cash used in investing activities was $5,448 for the three months ended March 31, 2006 and $598,718 for the comparable period in 2005. Net cash used in investing activities for 2005 related primarily to a cash deposit of $500,000 for the US Mills acquisition.

Net cash used for financing activities was $143,171 for the three months ended March 31, 2006. Net cash provided by financing activities was $550,000 for the three months ended March 31, 2005. In 2006, net cash used for financing activities related primarily to principal payments on notes payable and the line of credit. In 2005, net cash provided by financing activities related to proceeds from issuance of a short term loan of $550,000.

Plan of Operation

In order to satisfy our cash requirements for the next twelve months and to implement our acquisition strategy, we will have to raise additional funds. Accordingly, we have targeted several profitable acquisition candidates in the “better for you” food and nutritional category and intend to raise additional funds through equity and debt financings to complete these transactions. Our acquisition strategy contemplates one to two acquisitions in 2006, subject to our ability to obtain the necessary financings and successful integration of company operations.

If we are successful in implementing our acquisition strategy, we intend to continue product research and development activities at each of the acquired companies to further enhance our existing product lines and expand distribution channels where feasible. Our spending on research and development and distribution channel expansion is contingent upon receiving sufficient funding to support such expenditures.

Excluding acquisitions, we expect to increase the number of employees by about 1 to 3 individuals in the areas of accounting, operational management and administrative support during fiscal 2006, provided we complete the acquisition of one to two companies.

Off Balance Sheet Arrangements

We do not have any material off balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

Critical Accounting Policies

A summary of significant accounting policies is included in Note 1 to the audited financial statements included in our Annual Report on Form 10-KSB for the year ended December 31, 2005 as filed with the Securities and Exchange Commission. We believe that the application of these policies on a consistent basis has enabled us to provide useful and reliable financial information about our operating results and financial condition.

Item 3. Controls and Procedures

Under the supervision and with participation of our management, including our principal executive officer and principal financial officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures pursuant to Exchange Act Rule 15d-15(e) as of the end of the period covered by this quarterly report. Based upon this evaluation and as a result of the material weakness discussed below, our management, including the Chief Executive Officer and Principal Financial Officer, has concluded that our disclosure controls and procedures were not effective as of March 31, 2006. Management nevertheless has concluded that the consolidated condensed financial statements included in this Form 10-QSB present fairly, in all material respects, the results of our operations and our financial position for the periods presented in conformity with generally accepted accounting principles.

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A material weakness is a control deficiency, or combination of control deficiencies, that result in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected in a timely basis by management or employees in the normal course of performing their assigned functions. As of December 31, 2005, we identified the following material weakness in our internal controls:

· We have a material weakness in the adequacy of our closing process and our preparation of adjusting entries to effectively prepare accurate financial statements with the necessary level of review and supervision.

During the three month period ended March 31, 2006, there was no change in the Company’s internal control over financial reporting that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Part II - Other Information

Item 1. Legal Proceedings

In the ordinary course of its business, Low Carb Creations and Sunset may be subject to legal claims or proceedings relating to employment matters, customer complaints or other matters. Neither Sunset, Low Carb Creations nor Sunset California is currently a party to any litigation or other legal proceeding, which could reasonably be expected to have a material adverse effect on Low Carb Creations or Sunset except for the following pending or threatened claims against Low Carb Creations:

Amico Public Relations has threatened to bring an action against Low Carb Creations in the amount of $7,091 alleged to be due under a "Letter of Contract Agreement" dated September 13, 2003 for unpaid invoiced charges for public relations services.

Chef Warren. CJW Productions vs. Low Carb Creations is an action brought in Circuit Court of the Thirteenth Judicial Circuit in and for Hillsborough County, State of Florida, Case#04-08908 on a contract between Low Carb Creations and Chef Jerry Warren's production company, providing for Chef Warren's representation of Low Carb Creation brands at 25 consumer food shows throughout the country. Chef Warren is claiming at least $25,000 plus attorney fees and unspecified contract damages to be proven at trial. Since receiving service of the complaint on October 9, 2004, Low Carb Creations has attempted to settle this lawsuit. The normal response deadline was waived pending settlement negotiations.

Food Product Laboratory. Food Products Laboratory v. Low Carb Creations, Inc. is an action brought in the Circuit Court of Multnomah County, State of Oregon, Case # 0411-11787 on a disputed bill for food ingredient testing services. The amount claimed in litigation is $13,335. The Summons is dated November 17, 2004. The normal deadline for responsive filing by Low Carb Creations was waived pending settlement negotiations.

F.G.H. F.G.H. Consulting, Inc. vs. Low Carb Creations, Inc. is an action brought in the Superior Court for Clark County, Washington in November, 2004. The normal response date was waived pending settlement negotiations. This is a complaint based on several claimed brokerage arrangements with Low Carb Creations and unpaid accounts for ingredients and food products. The original amounts claimed in the pleadings were in excess of $72,000. However, Low Carb Creations disputes many portions of the claim.

AdGroup. Ad Group, Inc. vs. Low Carb Creations, Inc. is an action brought in the Circuit Court of the State of Oregon for Lane County in April 2005. The amount claimed in litigation is $36,769 for unpaid amounts due them. The Company is in the process of responding to the action.

Puentes Brothers vs. Low Crab Creations, Inc. is an action brought in the Circuit Court of the State of Oregon for Marion County in April 2005. The amount claimed in litigation is $27,266 for unpaid amount due them.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

During the quarter ended March 31, 2006, the Company issued an aggregate of 364,542 shares of its common stock to several consultants for services rendered. The issuance of these securities was deemed to be exempt from registration under Section 4(2) of the Securities Act of 1933 or Regulation D thereunder as a transaction by an issuer not involving a public offering.

Information regarding the unregistered sales of equity securities issued in connection with the Mergers described elsewhere in this report was included in the report on Form 8-K filed on October 4, 2004.

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Item 3. Defaults upon Senior Securities

Not applicable

Item 4. Submission of Matters to a Vote of Security Holder

Not applicable

Item 5. Other Information

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits

31.1 Certification of the CEO and President

31.2 Certification of the Chief Financial Officer

32.1 Certificate of the CEO and President pursuant to 18 U.S.C.§1350

32.2 Certificate of the Chief Financial Officer pursuant to 18 U.S.C.§1350

(b) Reports on Form 8-K

Not applicable

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date: June 20, 2006	Sunset Brands, Inc.
	By:	/s/ Todd Sanders
		Todd Sanders, CEO and President (principal executive officer)
	By:	/s/ Stephen K. Radusch
		Stephen K. Radusch, Chief Financial Officer
		(principal accounting and financial officer)

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