SECURITIES
AND EXCHANGE COMMISSION
 Washington,
DC 20549
 ________________
  FORM
10-Q
 
 [X]           QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
 
 For the
quarterly period ended June 30, 2008
 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 0-26395
 
 SALON
MEDIA GROUP, INC.
 (Exact
name of Registrant as specified in its charter)
 
 Delaware
              94-3228750(State
      or other jurisdiction of
              (IRS
      Employerincorporation
      or organization)
              Identification
      Number)
 
 101
Spear Street, Suite 203
 San
Francisco, CA 94105
 (Address
of principal executive offices)
 
 (415)
645-9200
 (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, $0.001 Par Value
 (Title
of Class)
 
 Indicate by check mark
whether the Registrant (1) has filed all reports required to be filed by
Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the Registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes [X]  No [  ]
  Indicate by check mark
whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company.  See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large
accelerated filer o   Accelerated
filer oNon-accelerated filer þSmaller reporting
company o
  Indicate
by check mark whether the Registrant is a shell company as defined by Rule 12b-2
of the act.
 Yes [
]  No [X]
  The
number of outstanding shares of the Registrant's Common Stock, par value $0.001
per share, on August 5, 2008 was 1,941,105 shares.
  
  
 
 
 FORM
10-Q
 SALON
MEDIA GROUP, INC.
 INDEX
 
   PageNumberPART
      I
                FINANCIAL
      INFORMATIONITEM 1:
                Condensed
      Consolidated Financial StatementsCondensed
      Consolidated
      Balance Sheets as of June 30, 2008 (unaudited) and March 31,
      2008
                3Condensed
      Consolidated Statements of Operations for the three months ended June 30,
      2008 and 2007 (unaudited)
                4Condensed
      Consolidated Statements of Cash Flows for the three months ended June 30,
      2008 and 2007 (unaudited)
                5Notes to Condensed
      Consolidated Financial Statements (unaudited)
                6ITEM
    2:
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                15ITEM
    3:
                Quantitative and
      Qualitative Disclosures About Market Risk
                21ITEM
    4:
                Controls and
      Procedures
                21PART
      II
                OTHER
      INFORMATIONITEM
    1:
                Legal
      Proceedings
                22ITEM
    1a:
                Risk
      Factors
                22ITEM
    2.
                Unregistered Sales
      of Equity Securities and Use of Proceeds
                32ITEM
    3.
                Defaults upon Senior
      Securities
                32ITEM
    4.
                Submission of
      Matters to a Vote of Security Holders
                32ITEM
    5.
                Other
      Information
                32ITEM
    6:
                Exhibits
                32Signatures
                33
   2
 
 PART
I:  FINANCIAL INFORMATION
 ITEM
1.  CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 
 SALON
      MEDIA GROUP, INC.CONDENSED
      CONSOLIDATED BALANCE SHEETS(in
      thousands, except share and per share
amounts)
  June
      30,
              
              
              March
      31,2008
              
              
              2008Assets
              
              (Unaudited)Current assets:Cash and cash
      equivalents
              
              $
              633
              
              
              $
              818Accounts receivable,
      net
              
              
              1,210
              
              
              
              864Prepaid expenses and
      other current assets
              
              
              221
              
              
              
              185Total current
      assets
              
              
              2,064
              
              
              
              1,867Property and
      equipment, net
              
              
              505
              
              
              
              412Prepaid advertising
      rights
              
              
              2,131
              
              
              
              2,131Goodwill
              
              
              200
              
              
              
              200Other
      assets
              
              
              39
              
              
              
              6Total
      assets
              
              $
              4,939
              
              
              $
              4,616Liabilities
      and Stockholders' EquityCurrent
      liabilities:Short-term
      borrowing
              
              $
              1,000
              
              
              $
              1,000Accounts payable and
      accrued liabilities
              
              
              1,250
              
              
              
              1,294Deferred
      revenue
              
              
              626
              
              
              
              705Total current
      liabilities
              
              
              2,876
              
              
              
              2,999Long-term
      liabilities:Convertible notes
      payable
              
              
              1,500
              
              
              
              500Other long-term
      liabilities
              
              
              13
              
              
              
              44Capital leases, less
      current portion
              
              
              49
              
              
              
              56Total
      liabilities
              
              
              4,438
              
              
              
              3,599Stockholders’
      equity:Preferred stock,
      $0.001 par value, 5,000,000 sharesauthorized, 9,475
      shares issued and outstanding atJune 30, 2008 and
      March 31, 2008 (liquidation valueof
      $23,701 at June 30, 2008)
              
              
              -
              
              
              
              -Common stock, $0.001
      par value, 30,000,000 sharesauthorized,
      1,941,105 shares issued and outstandingat
      June 30, 2008 and 1,940,172 shares issued andoutstanding at March
      31, 2008
              
              
              2
              
              
              
              2Additional
      paid-in-capital
              
              
              97,368
              
              
              
              97,302Accumulated
      deficit
              
              
              (96,869
              )
              
              
              (96,287
              )Total stockholders'
      equity
              
              
              501
              
              
              
              1,017Total liabilities
      and stockholders' equity
              
              $
              4,939
              
              
              $
              4,616
  The
      accompanying notes are an integral part of these condensed consolidated
      unaudited financial statements.
 
 3
 SALON
      MEDIA GROUP, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF OPERATIONS(in
      thousands, except per share data)(Unaudited)
  Three
      Months EndedJune
      30,2008
              
              
              2007Net
      revenues
              
              $
              1,907
              
              
              $
              1,974Operating
      expenses:Production and
      content
              
              
              1,354
              
              
              
              1,320Sales and
      marketing
              
              
              511
              
              
              
              1,076Information
      technology support
              
              
              183
              
              
              
              176General and
      administrative
              
              
              402
              
              
              
              398Total operating
      expenses
              
              
              2,450
              
              
              
              2,970Loss from
      operations
              
              
              (543
              )
              
              
              (996
              )Interest expense,
      net
              
              
              (39
              )
              
              
              -Net
      loss
              
              $
              (582
              )
              
              $
              (996
              )Basic and diluted
      net loss per share
              
              $
              (0.30
              )
              
              $
              (0.51
              )Weighted average
      shares of common stock used in computing basicand
      diluted net loss per share
              
              
              1,941
              
              
              
              1,940
  The
      accompanying notes are an integral part of these condensed consolidated
      unaudited financial statements.
 
 
 4
 
 SALON
      MEDIA GROUP, INC.CONDENSED
      CONSOLIDATED STATEMENTS OF CASH FLOWS(in
      thousands)(Unaudited)
  Three
      Months EndedJune
      30,2008
              
              
              2007Cash
      flows from operating activities:Net
      loss
              
              $
              (582
              )
              
              $
              (996
              )Adjustments to
      reconcile net loss to net cash used in operating
    activities:Depreciation and
      amortization
              
              
              35
              
              
              
              24Share-based
      compensation
              
              
              100
              
              
              
              60Amortization of
      prepaid advertising rights
              
              
              -
              
              
              
              644Changes in assets
      and liabilities:Accounts
      receivable
              
              
              (346
              )
              
              
              (422
              )Prepaid expenses,
      other current assets and other assets
              
              
              (63
              )
              
              
              6Accounts payable,
      accrued liabilities and other long-term liabilities
              
              
              (110
              )
              
              
              (63
              )Deferred
      revenue
              
              
              (79
              )
              
              
              (2
              )Net
      cash used in operating activities
              
              
              (1,045
              )
              
              
              (749
              )Cash
      flows from investing activities:Purchase of property
      and equipment
              
              
              (129
              )
              
              
              (33
              )Purchase of
      intangible assets
              
              
              (5
              )
              
              
              -Net
      cash used in investing activities
              
              
              (134
              )
              
              
              (33
              )Cash
      flows from financing activities:Net
      proceeds from long-term borrowings
              
              
              1,000
              
              
              
              300Net
      proceeds from issuance of common stock
              
              
              1
              
              
              
              -Capital lease
      payments
              
              
              (7
              )
              
              
              -Net
      cash provided by financing activities
              
              
              994
              
              
              
              300Net
      decrease in cash and cash equivalents
              
              
              (185
              )
              
              
              (482
              )Cash
      and cash equivalents at beginning of period
              
              
              818
              
              
              
              829Cash
      and cash equivalents at end of period
              
              $
              633
              
              
              $
              347Amount
      paid for interest
              
              $
              -
              
              
              $
              -
  The accompanying
      notes are an integral part of these condensed consolidated unaudited
      financial statements.
  
 5
  SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
 1.
              The
      Company and Significant Accounting
Policies
  The
Company:
  Salon
Media Group, Inc (“Salon”) is an Internet news and social networking company
that produces Salon.com, a content Website, and related online
communities.  Salon was originally incorporated in July 1995 in the
State of California and reincorporated in Delaware in June
1999.  Salon operates in one business segment.
  Basis
of Presentation:
 
 These
interim condensed consolidated financial statements are unaudited and have been
prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments necessary to present fairly Salon's consolidated financial
position, consolidated results of operations and consolidated cash flows for the
periods presented.  The condensed consolidated balance sheet data as
of March 31, 2008 is derived from and should be read in conjunction with the
audited financial statements, which are included in Salon’s Annual Report on
Form 10-K filed with the Securities and Exchange Commission.  Pursuant
to the rules of the Securities and Exchange Commission, these financial
statements do not include all disclosures required by generally accepted
accounting principles. The results for the three months ended June 30, 2008 are
not necessarily indicative of the expected results for any other interim period
or for the fiscal year ending March 31, 2009.
  These
condensed consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of
business.  Salon has incurred losses and negative cash flows from
operations since inception and has an accumulated deficit at June 30, 2008 of
$96,869.  In addition, Salon expects to incur a net loss from
operations for its year ending March 31, 2009.  Because of past
losses, and a history of negative cash flows from operations, Salon’s
independent registered public accounting firm for the years ended March 31,
2006, March 31, 2007 and March 31, 2008 have included a paragraph in its reports
indicating substantial doubt as to Salon’s ability to continue as a going
concern.
  Based
on cash projections for the remainder of the fiscal year ending March 31, 2009,
which contemplate a smaller operating loss than the prior fiscal year and
attaining positive cash flow during the fourth quarter, Salon estimates it will
require as much as $1.0 million in additional financing to meet its operating
needs.  If planned revenues are less than expected, or if planned
expenses are more than expected, the cash shortfall may be higher, which will
result in a commensurate increase in required financing.  Salon is in
discussions with potential investors, including related parties, to obtain
additional funding through incurring additional indebtedness or raising
additional working capital through the sale of equity securities in a private
placement.  However, Salon does not currently have an agreement in
place to provide such financing, and there is no certainty that Salon will be
able to enter into definitive agreements for such financing on commercially
reasonable terms.
  
 6
 SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
  Concentration
of Credit Risk
 
 No
customer accounted for more than 10% of total revenue for the three-month
periods ended June 30, 2008 and June 30, 2007.  One customer accounted
for 10% of total accounts receivable as of June 30, 2008 and one customer
accounted for 11% of total accounts receivable as of June 30, 2007.
 
 Stock-Based
Compensation
 
 Salon
accounts for stock-based compensation expenses pursuant to the provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004), Share-Based
Payment, or SFAS 123R, which requires that all share-based payments,
including grants of employee stock options, be recognized as an expense in the
statement of operations based on their grant date fair values and vesting
periods, which is 4 years.
  The
fair value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions and fair value
per share:
 
 Three Months Ended
      June 30,2008
              
              2007Risk-free interest
      rates
              3.09%
              
              5.00%Expected term (in
      years)
              4
              
              4Expected
      volatility
              92%
              
              116%Dividend
      yield
              0%
              
              0%
 
 The
expected term of the options of four years represents the estimated period of
time until exercise and is based on historical experience of similar awards,
including the contractual terms, vesting schedules and expectations of future
employee behavior.  The expected stock price volatility is based on
historical volatility of Salon’s stock.  The risk-free interest rate
is based on the implied yield available on U.S. Treasury securities with a term
equivalent to the service period of the stock options, or four
years.  Salon has not paid dividends in the past.
 
 Stock-based compensation
expense recognized under SFAS 123R for the three months ended June 30, 2008 and
2007 was $100 and $60, respectively.  As of June 30, 2008, the
aggregate stock compensation remaining to be amortized to expenses was $1,177.
Salon expects this stock compensation balance to be amortized as follows: $331
during the remainder of fiscal 2009; $442 during fiscal 2010; $278 during fiscal
2011; $121 during fiscal 2012; and $5 during fiscal 2013.  The
expected amortization reflects only outstanding stock awards as of June 30,
2008.
 
 7
 SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
  Recent
Accounting Pronouncements
 
 In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
141 (revised 2007), “Business Combinations,” (“SFAS 141R”) and No. 160,
“Noncontrolling Interests in Consolidated Financial Statements,” an amendment of
ARB No. 51 (“SFAS 160”.)  SFAS 141R establishes principles and
requirements during business combinations for how the acquirer:
 
 a.
              Recognizes and
      measures in its financial statements the identifiable assets acquired, the
      liabilities assumed, and any noncontrolling interest in the
      acquiree,
 b.
              Recognizes and
      measures the goodwill acquired in the business combination or a gain from
      a bargain purchase, and
 c.
              Determines what
      information to disclose to enable users of the financial statements to
      evaluate the nature and financial effects of the business
      combination.
  SFAS
160 sets parameters as to how to report noncontrolling interest in consolidated
financial statements.  SFAS 141R and SFAS 160 are effective for fiscal
years beginning after December 15, 2008. Salon believes that the adoption of
SFAS 141R and SFAS 160 will not impact Salon’s results of operations, financial
position, or cash flows.
  In
March 2008, the FASB issued SFAS No. 161, “Disclosures about Derivative
Instruments and Hedging Activities,” (SFAS 161).  SFAS 161 amends and
expands the disclosure requirements of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities, and requires entities to provide enhanced
qualitative disclosures about objectives and strategies for using derivatives,
quantitative disclosures about fair values and amounts of gains and losses on
derivative contracts, and disclosures about credit-risk-related contingent
features in derivative agreements.  This statement applies to all
entities and all derivative instruments. SFAS 161 is effective for financial
statements issued for fiscal years and interim periods beginning after November
15, 2008.  Salon is currently evaluating the impact of SFAS 161 and
does not expect this statement to have a material impact on its financial
position and results of operations.
  In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (SFAS 162).  SFAS 162 establishes the GAAP
hierarchy and identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial
statements.  SFAS 162 is effective 60 days following the Securities and
Exchange Commission’s approval of the Public Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles.  We have not yet determined
the impact, if any, that implementation of SFAS 162 will have on our results of
operations and financial condition.
  In May
2008, the FASB also issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts – an interpretation of FASB Statement No. 60,” (SFAS
163).  SFAS 163 requires that an insurance enterprise recognize a claim
liability prior to an event of default (insured event) when there is evidence
that credit deterioration has occurred in an insured financial obligation. 
This Statement also clarifies how Statement 60 applies to financial guarantee
insurance contracts, including the recognition and measurement to be used to
account for premium revenue and claim liabilities.  Those
clarifications will increase comparability in financial reporting of financial
guarantee insurance contracts by insurance
  8
 SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
  enterprises.  This
Statement requires expanded disclosures about financial guarantee insurance
contracts. The accounting and disclosure requirements of the Statement will
improve the quality of information provided to users of financial
statements.  SFAS 163 will be effective for financial statements issued for
fiscal years beginning after December 15, 2008.  Salon does not expect
the adoption of SFAS 163 will have a material impact on its financial condition
or results of operation.
 
 Reclassifications
  Certain reclassifications,
not affecting previously reported net income or loss, have been made to the
previously issued condensed consolidated financial statements to conform to the
current period presentation.
 
 2.
              Goodwill
      Amortization and Intangible Assets
 
 In
accordance with FASB No. 142, “Goodwill and Other Intangible Assets” (SFAS No.
142), goodwill amortization was discontinued as of March 31,
2002.  The carrying value of goodwill at June 30, 2008 and March 31,
2007 was $200 and has been found not to be impaired.
 
 3.
              Borrowing
      Agreements
  Short-term
borrowings
  In May
2007, Salon finalized a borrowing agreement with Deutsche Bank Securities, Inc.
that allows Salon to borrow up to $1,000 at a rate of prime less
0.25%.  Salon’s obligations under this agreement are guaranteed in its
entirety by Salon’s Chairman.The
line of credit has been fully drawn as of June 30, 2008.  Salon and
its Chairman have agreed to lift previously agreed restrictions on the timing of
borrowing to permit borrowing to continue under the agreement with the guarantee
of the Chairman until March 31, 2009.  Though Deutsche Bank Securities
may demand repayment of amounts borrowed at any time, based on conversations
with its Chairman, Salon does not believe that repayment is likely until March
31, 2009.  As of June 30, 2008, accrued interest on bank debt totals
$49.
  Convertible
notes payable
 
 On
April 4, 2008, Salon sold and issued to its Chairman and the father of a
director each a convertible promissory note with a principal amount of $500 as
part of a series of financing transactions in which Salon has generated gross
proceeds of approximately $1,500.  Each note bears an interest rate of
7.50 percent per annum, payable semi-annually, in cash or in kind, and matures
on March 31, 2012.  Each note may convert at the election of the
holder at any time into a number of shares of Salon’s common stock equal to the
aggregate amount of the note obligations divided by (1) $1.68 or (2) the
subsequent closing price if the holder participated in a subsequent
closing.
 
 On May
15, 2008, Salon sold and issued to another investor a convertible promissory
note with a principal amount of $500 as part of the above-referenced financing
transaction.  The note bears an interest rate of 7.50 percent per
annum, payable semi-annually, in cash or in kind, and matures on March 31,
2012.  The note may convert at the election of the holder at any time
into a number of shares of Salon’s
 
 9
 SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
 common
stock equal to the aggregate amount of the note obligations divided by
$1.45.  As of June 30, 2008, aggregate accrued interest on convertible
debt totals $23.
 
 In the
event Salon, at any time prior to the payment in full of the notes, or
conversion thereof, shall (a) issue and sell shares of its common or preferred
stock or an instrument convertible into its common or preferred stock or (b)
issue and sell debentures or enter into any new indebtedness, then the holders
of the first $1,000 in principal of the notes may choose to exchange the
outstanding principal balance and accrued interest due under the notes for new
securities issued on the same terms and conditions of the
financing.  If Salon completes a financing in excess of $500, then
this right of exchange will terminate 30 days following notice of such financing
being given to the holders.
 
 4.
              Stock-Based
      Compensation
 
 Salon has
adopted certain equity incentive plans as described in Note 7, “Employee Stock
Option Plan,” of the notes to consolidated financial statements in Salon’s
Annual Report on Form 10-K for the fiscal year ended March 31,
2008.
  
 10
 SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
 The
following table summarizes activity under Salon’s plans for the three months
ended June 30, 2008:
 
 WeightedOutstanding
              
              
              Average
              
              
              AggregateStock
              
              
              Exercise
              
              
              IntrinsicOptions
              
              
              Price
              
              
              ValueBalance as of April
      1, 2008
              
              
              2,530,000
              
              
              
              $4.02Options granted
      under all plans
              
              
              189,000
              
              
              
              $1.30Exercised
              
              
              (1,000
              )
              
              
              $1.05Expired and
      forfeited
              
              
              (184,000
              )
              
              
              $2.00Outstanding at June
      30, 2008
              
              
              2,534,000
              
              
              
              $3.96
              
              
              
              $182Exercisable at June
      30, 2008
              
              
              1,488,000
              
              
              
              $5.59
              
              
              
              -Vested and expected
      to vest
              
              
              1,071,000
              
              
              
              $1.82
              
              
              
              $148
 
 The
weighted average fair value per share of the stock option awards in the three
months ended June 30, 2008 and 2007 was $0.86 and $1.06,
respectively.  The weighted average fair value of options vested
during the three months ended June 30, 2008 was $1.44 per share.  A
total of 933 shares of options were exercised during the period ended June 30,
2008.
 
 5.
              Net
      Loss Per Share
  Basic
loss per share is computed using the weighted average number of shares of common
stock outstanding during the period.  Diluted loss per share is
computed using the weighted average number of common stock and common stock
equivalents outstanding during the period, as follows:
  Three
      Months EndedJune
      30,2008
              
              
              2007Numerator:Net
      loss
              
              $
              (582
              )
              
              $
              (996
              )Denominator:Weighted average
      shares used in computingbasic and diluted
      net loss per share
              
              
              1,941,000
              
              
              
              1,940,000Basic and diluted
      net loss per share
              
              $
              (0.30
              )
              
              $
              (0.51
              )Antidilutive
      securities including options, warrants and convertiblenotes and preferred
      stock not included in net loss per share calculation
              
              
              13,651,000
              
              
              
              11,914,000
 
 11
 SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
  6.
              Warrants
  During
the three months ended June 30, 2008, no warrants have expired.  The
following are the remaining outstanding warrants as of June 30,
2008:
 
 Warrant
              
              
              Exercise
              
              Grant
              ExpirationWarrant
      Holder
              
              Shares
              
              
              Price
              
              Date
              DateDotcom
      Ventures
              
              
              1,568
              
              
              
              $10.400
              
              09/01/98
              09/01/08Adobe Systems,
      Inc.
              
              
              7,058
              
              
              
              $10.400
              
              09/23/98
              09/23/08Nancy and Timothy
      Armstrong
              
              
              20,225
              
              
              
              $9.598
              
              12/21/05
              12/21/08The
      Hambrecht 1980 Revocable Trust
              
              
              9,097
              
              
              
              $3.013
              
              07/27/06
              07/27/09John
      Warnock
              
              
              6,040
              
              
              
              $3.013
              
              07/27/06
              07/27/09John
      Warnock
              
              
              3,056
              
              
              
              $3.013
              
              07/27/06
              07/27/09The
      Hambrecht 1980 Revocable Trust
              
              
              17,599
              
              
              
              $2.215
              
              09/21/06
              09/21/09John
      Warnock
              
              
              17,494
              
              
              
              $2.215
              
              09/21/06
              09/21/09Silicon Valley
      Bank
              
              
              2,214
              
              
              
              $0.862
              
              10/17/02
              10/17/09John
      Warnock
              
              
              8,244
              
              
              
              $1.494
              
              12/18/06
              12/18/09John
      Warnock
              
              
              24,536
              
              
              
              $1.494
              
              12/18/06
              12/18/09The
      Hambrecht 1980 Revocable Trust
              
              
              35,040
              
              
              
              $1.786
              
              11/19/07
              11/19/10152,171
 
 7.
              Preferred
      Stock
  The conversion rate and common
equivalent shares of Salon’s preferred stock as of June 30, 2008 are as
follows:
  Per
      share
              
              
              CommonShares
              
              
              Purchase
              
              
              Conversion
              
              
              EquivalentPreferred
      Stock
              
              Outstanding
              
              
              Price
              
              
              Rate
              
              
              SharesSeries
    A
              
              
              683
              
              
              
              $4,000
              
              
              
              1.935
              
              
              
              1,411,975Series
    B
              
              
              125
              
              
              
              $4,000
              
              
              
              1.588
              
              
              
              314,860Series
    C
              
              
              6,582
              
              
              
              $800
              
              
              
              0.800
              
              
              
              6,582,000Series
      D-1
              
              
              417
              
              
              
              $1,200
              
              
              
              1.820
              
              
              
              275,013Series
      D-2
              
              
              417
              
              
              
              $1,200
              
              
              
              2.118
              
              
              
              236,258Series
      D-3Issued on
      12/21/05
              
              
              209
              
              
              
              $1,200
              
              
              
              1.820
              
              
              
              137,837Issued on
      07/27/06
              
              
              208
              
              
              
              $1,200
              
              
              
              2.358
              
              
              
              105,854Series
      D-4Issued on
      07/27/06
              
              
              42
              
              
              
              $1,200
              
              
              
              2.358
              
              
              
              21,374Issued on
      09/21/06
              
              
              333
              
              
              
              $1,200
              
              
              
              1.685
              
              
              
              237,198Issued on
      12/18/06
              
              
              42
              
              
              
              $1,200
              
              
              
              0.917
              
              
              
              54,961Series
      D-5Issued on
      12/18/06
              
              
              125
              
              
              
              $1,200
              
              
              
              0.917
              
              
              
              163,576Issued on
      11/19/07
              
              
              292
              
              
              
              $1,200
              
              
              
              1.499
              
              
              
              233,796Total
              
              
              9,475
              
              
              
              
              
              
              
              
              
              
              
              9,774,702
 
 
 12
 
 SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
 The
Series A, B, C and D preferred stock conversion rates are subject to a downward
adjustment anti-dilution provision under certain circumstances related to
subsequent Salon securities issuances.
 
 Warrants outstanding as of June 30,
2008 that have been issued to holders of Series D preferred stock are as
follows:
 
 Exercise
              
              
              WarrantPrice
              
              
              SharesSeries
      D-3Issued on
      12/21/05
              
              
              $9.598
              
              
              
              20,225Issued on
      07/27/06
              
              
              $3.013
              
              
              
              15,137Series
      D-4Issued on
      07/27/06
              
              
              $3.013
              
              
              
              3,056Issued on
      09/21/06
              
              
              $2.215
              
              
              
              35,093Issued on
      12/18/06
              
              
              $1.494
              
              
              
              8,244Series
      D-5Issued on
      12/18/06
              
              
              $1.494
              
              
              
              24,536Issued on
      11/19/07
              
              
              $1.786
              
              
              
              35,040141,331
 
 The
exercise price of warrants issued in conjunction with the issuance of Series D
Preferred stock are subject to a downward adjustment anti-dilution provision
under certain circumstances related to subsequent Salon securities
issuances.
 
 The
holders of the Series D preferred stock are entitled to dividends of 5.0%, as
and if declared by the Board of Directors.  In event of a liquidation,
the holders of Series D preferred stock and the holders of the Series C
preferred stock rank in parity, and are entitled to receive, prior and in
preference to any distribution of any assets or property of Salon to the holders
of common stock, and the holders of Series A and B preferred
stock,  and in the case of the Series D preferred stock, an amount per
share equal to $1,200 plus an amount equal to all declared but unpaid dividends,
and in the case of the Series C preferred stock, $1,600 per share, plus an
amount equal to all declared but unpaid dividends, based on an annual rate of
8%.  If the assets and funds available for distribution are
insufficient to permit the payment to the holders of Series C and D preferred
stock of their full preferential amounts, then the entire assets and funds of
Salon legally available for distribution to stockholders will be distributed
among the holders of Series C and D preferred stock ratably in proportion to the
full preferential amounts which they are entitled to receive.  After
an initial distribution to the holders of Series C and D preferred stock, the
holders of the Series A and B preferred stock, who rank in parity, are entitled
to receive, prior and in preference to any distribution of any assets or
property of Salon to the holders of common stock, an amount per share equal to
$8,000 plus an amount equal to all declared but unpaid dividends, based on
an
 
 13
 SALON
MEDIA GROUP, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 (amounts
in thousands, except share and per share data)
 (unaudited)
 
 annual
rate of 8%.  If, after the initial distribution to holders of Series C
and D preferred stock, the remaining assets and funds available for distribution
are insufficient to permit the payment to the holders of Series A and B
preferred stock of the full preferential amounts, then the entire remaining
assets and funds of Salon legally available for distribution to stockholders
will be distributed among the holders of Series A and B preferred stock ratably
in proportion to the full preferential amounts which they are entitled to
receive. As of June 30, 2008, no dividend has been declared to the holders of
preferred stock.
 
 If,
after initial preferential liquidation payments to the holders of Series A, B, C
and D preferred stock, any assets remain available for distribution, such assets
are to be distributed ratably among the holders of common stock and preferred
stock, based on the shares of common stock then held by them and issuable upon
conversion of the shares of preferred stock then held by them, until aggregate
distributions per share reach $12,000 for the holders of Series A and B
preferred stock, $2,400 for the holders of Series C Preferred Stock and $3,600
for the holders of Series D preferred stock.  Salon has currently
outstanding 683 shares of Series A preferred stock, 125 shares of Series B
preferred stock, 6,582 shares of Series C preferred stock and 2,085 shares of
Series D preferred stock.
 
 If,
after payment has been made to the holders of common stock and holders of
preferred stock mentioned above, any assets remain available for distribution,
such assets are to be distributed ratably among the holders of common stock and
the holders of Series C preferred stock, based on the number of shares of common
stock then held by them and issuable upon conversion of the Series C preferred
stock then held by them.  Based on available information, Salon
estimates that the holders of Series C preferred stock account for approximately
90% of this group of shareholders.
 
 The
holders of preferred stock are entitled to vote together with the holders of
Salon’s common stock as though part of that class, and are entitled to vote on
all matters and to that number of votes equal to the largest number of whole
shares of common stock into which the shares of preferred stock could be
converted.  Preferred stockholders as a group own approximately 92% of
the outstanding shares of common stock and common stock issuable upon conversion
of the shares of preferred stock, all with voting rights.
 
 The
aggregate liquidation preferences of all preferred stockholders as of June 30,
2008 were $19,497 excluding the effect of undeclared dividends, and $23,701
including the effect of undeclared dividends.
 
 Neither the Series A, B, C
or D preferred stock, the associated warrants, nor the underlying shares of
common stock have been registered for sale under the Securities Act of 1933, as
amended, and may not be offered or sold in the United States absent registration
under such act or an applicable exemption from registration
requirements.
  
 14
 Item
2.    Management’s Discussion and Analysis of Financial
Condition and Results of Operations
  Thissection
and other parts of this Form 10-Q contain “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, as amended (“Exchange Act”) that involve risks
and uncertainties, including, but not limited to, statements regarding our
strategy, plans, objectives, expectations, forecasts, intentions, financial
performance, cash-flow breakeven timing, financing, economic conditions, on-line
advertising, market performance, subscription service plans, and revenue
sources.  Although Salon Media Group, Inc. (Salon) believes its plans,
intentions and expectations reflected in such forward-looking statements are
reasonable, Salon gives no assurance those plans, intentions or expectations
will be achieved.  Our actual results may differ significantly from
those anticipated or implied in these forward-looking statements as a result of
the factors set forth above and in Salon’s public filings.  Salon
assumes no obligation to update any forward-looking statements as circumstances
change.
  Salon’s actual results may
differ significantly from those anticipated or implied in these forward-looking
statements as a result of the factors set forth below and in "Management's
Discussion and Analysis of Financial Conditions and Results of Operations" and
"Factors That May Affect Our Future Results and Market Price of
Stock."  In this report, the words “anticipates,” “believes,”
“expects,” “estimates,” “forecast,” “projection,” “future,” and similar
expressions identify forward-looking statements.  Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date hereof.
 
 Overview
  Salon
is an online news and social networking company and an Internet publishing
pioneer.  Salon’s award-winning journalism combines original
investigative stories and provocative personal essays along with quick-take
commentary and staff-written Weblogs about politics, technology, culture and
entertainment.  Committed to interactivity, the Website also hosts two
online communities, Table Talk and The Well, and has recently launched Open
Salon, a social network for bloggers.  In its editorial product Salon
balances two crucial missions: (1) providing original and provocative content on
topics that the mainstream media overlook, and (2) filtering through the media
chatter and clutter to help readers find the stories that matter.
 
 This
section and other parts of this Form 10-Q should be considered in conjunction
with the audited financial statements, which are included in Salon’s Annual
Report on Form 10-K filed with the Securities and Exchange
Commission.  Matters of interest therein include, but are not limited
to, Salon’s disclosure of critical accounting policies.
 
 Sources
of Revenue
  The
most significant portion of Salon’s revenues is derived from the sale of
advertising and promotional space on its Website.  The sale of
promotional space is generally less than ninety days in
duration.  Advertising units sold include “rich media” streaming
advertisements, as well as traditional banner and pop-up
advertisements.
 
 Salon
also derives a significant portion of its revenues from its Salon Premium
subscription program.  Salon Premium revenue is recognized ratably
over the period that services are provided.  This source of revenue
has been decreasing since Salon’s quarter ended December 31, 2004 when paid
subscriptions peaked at approximately 89,100 and decreased to approximately
31,200 as of June 30, 2008.  Salon expects this downward trend to
continue, as it is placing greater emphasis on its advertising sales to generate
revenue.
  15
 Salon
offers The Well online discussion forums as a monthly subscription
service.  Revenue is recognized ratably over the subscription
period.  Salon also generates nominal revenue from the licensing of
content that previously appeared in Salon’s Website and for hosting links to a
third party’s personals/dating Website.
  Expenses
  Production and content
expenses consist primarily of salaries and related expenses for Salon’s
editorial, artistic, and production staff, online communities’ staff, payments
to freelance writers and artists, bandwidth costs associated with serving pages
and hosting our online communities on our Website, credit card transaction costs
andadserving
costs.
  Sales
and marketing expenses consist primarily of salaries, commissions and related
personnel costs, travel, and other costs associated with Salon’s sales force,
business development efforts and its subscription service.  It also
includes advertising, promotions and the amortization of prepaid advertising
rights.
  Information technology
support expenses consist primarily of salaries and related personnel costs
associated with the development, testing and enhancement of Salon’s software to
manage its Website, and to maintain and enhance the software utilized in
managing Salon Premium, as well as supporting marketing and sales
efforts.
  General and
administrative expenses consist primarily of salaries and related personnel
costs, accounting and legal fees, and other fees associated with operating a
publicly traded company.  Certain shared overhead expenses are
allocated to other departments.
  In
accordance with Statement of Financial Accounting Standards No. 123
(revised 2004), Share-Based
Payment, or SFAS 123R, Salon’s expenses include stock-based compensation
expenses related to stock option and restricted stock grants to employees,
non-employee Directors and consultants.
 
 Salon
has incurred significant net losses and negative cash flows from operations
since its inception.  As of June 30, 2008, Salon had an accumulated
deficit of $96.9 million.  These losses have been funded primarily
through the issuance of common stock from Salon’s initial public offering in
June 1999, issuances of preferred stock and convertible notes, and bank
debt.
 
 Burr,
Pilger & Mayer LLP, Salon’s independent accountants for the years ended
March 31, 2008, March 31, 2007 and March 31, 2006 have included a paragraph in
their report indicating that substantial doubt exists as to Salon’s ability to
continue as a going concern because of Salon’s recurring operating losses,
negative cash flow and accumulated deficit.
 
 Critical
Accounting Policies
 
 The preparation of financial statements
in conformity with generally accepted accounting principles requires Salon to
utilize accounting policies and make estimates and assumptions that affect our
reported amounts.  Salon’s significant accounting policies are
described in Note 2 to the consolidated financial statements of Salon’s Annual
Report on Form 10-K as filed with the Securities and Exchange
Commission.  Salon believes accounting policies and estimates related
to revenue recognition, prepaid advertising rights and share-based compensation
are the most critical to Salon’s financial statements.  Future results
may differ from current estimates if different assumptions or conditions were to
prevail.
 
 16
 Revenue
Recognition
 
 Salon
recognizes revenues once persuasive evidence of an arrangement exists, delivery
has occurred, the fee is fixed or determinable and collectibility is reasonably
assured.  Revenues are recognized ratably in the period over which
Salon’s obligations are fulfilled.  Payments received before Salon’s
obligations are fulfilled are classified as “Deferred revenue” in Salon’s
consolidated balance sheet.
 
 Advertising revenues,
derived from the sale of promotional space on its Website, comprised 76%, and
72% of Salon’s revenues, respectively for the three month periods ended June 30,
2008 and 2007.  The duration of the advertisements are generally short
term, usually less than ninety days.  Revenues derived from such
arrangements are recognized during the period the advertising space is
provided.  Salon’s obligations typically include a guaranteed minimum
number of impressions, a set number of Site Pass advertisement viewed, or a set
number of days that a Site Pass advertisement will run.  To the extent
minimum guaranteed amounts are not achieved, Salon defers recognition of the
corresponding revenue until the remaining guaranteed amounts are provided, if
mutually agreeable to an advertiser.  If these “make good” impressions
are not agreeable to an advertiser, no further revenue is
recognized.
 
 Salon
Premium, a pay-for-online content service, provides unrestricted access to
Salon’s content with no banners, pop-ups or site pass advertisements, and
includes free magazine subscriptions, free access to Table Talk, an on-line
forum, and the ability to download easily content in text or PDF format, a
convenience that enables readers to view Salon’s content when not connected to
the Internet.  The subscription duration for Salon Premium is
generally one year.  Non Salon Premium subscribers can gain access to
Salon’s content after viewing some form of advertisement.
  Salon
offers The Well as a monthly subscription service for access to on-line
discussion forums.  Revenue is recognized ratably over the
subscription period.
  Prepaid
Advertising Rights
 
 In
January 2000, Salon sold 1,125,000 shares of common stock to Rainbow Media
Holdings (“Rainbow”) and received $11.8 million of advertising credits that were
to be utilized by December 31, 2009.  As the per share price of
Salon’s common stock declined from the time the agreement was made and the date
the agreement was finalized and signed, the advertising credits were valued for
financial reporting purposes at $8.1 million.  As of June 30, 2008,
Salon has $3.1 million advertising credits resulting from the transaction,
valued at $2.1 million for financial reporting purposes.  Of the $3.1
million of advertising credits, approximately $1.8 million remain with Rainbow
and approximately $1.3 million are with NBC.  Salon believes that it
should be able to utilize all the credits before they expire on December 31,
2009.  Salon is currently exploring additional ways of fully utilizing
the credits, including supporting the launch of Open Salon, its new blogging
network, before they expire.  Salon expects to recover the full value
of all the advertising credits through usage or settlement in cash, per the
terms of the agreement, but there can be no absolute assurance as to any
potential cash settlement or full utilization thereof.
 
 Accounting
for Share-Based Compensation
 
 Salon accounts for share-based
compensation under SFAS 123R and recognizes the fair value of stock awards on a
straight-line basis over the requisite service period of the award, which is the
vesting term of four years.
 
 17
 Salon
recognized stock-based compensation expense of $100,000 and $60,000 during the
three months ended June 30, 2008 and June 30, 2007, respectively.  As
of June 30, 2008, Salon had an aggregate of $1,177,000 of stock compensation
remaining to be amortized to expense over the remaining requisite service period
of the underlying awards.  Salon currently expects this stock
compensation balance to be amortized as follows: $331,000 during the remainder
of fiscal 2009; $442,000 during fiscal 2010; $278,000 during fiscal 2011;
$121,000 during fiscal 2012; and $5,000 during fiscal 2013.  The
expected amortization reflects only outstanding stock awards as of June 30,
2008.  Salon expects to continue to issue share-based awards to our
employees in future periods.
 
 The
full impact of SFAS 123R in the future is dependent upon, among other things,
the timing of when Salon hires additional employees, the effect of new long-term
incentive strategies involving stock awards in order to continue to attract and
retain employees, the total number of stock awards granted, the fair value of
the stock awards at the time of grant and the tax benefit that Salon may or may
not receive from stock-based expenses.  Additionally, the application
of SFAS 123R requires the use of an option-pricing model to determine the
fair value of stock option awards.  This determination of fair value
is affected by Salon’s stock price as well as assumptions regarding a number of
highly complex and subjective variables.  These variables include, but
are not limited to, Salon’s expected stock price volatility over the term of the
awards.
 
 
 Results
of Operations for the
Three Months Ended June 30, 2008 Compared To the Three Months Ended June 30,
2007
  Net
revenues:
  Net
revenues decreased 3% to $1.9 million for the three months ended June 30, 2008
from $2.0 million for the three months ended June 30, 2007.
 
 Advertising revenues
increased marginally to $1.44 million for the three months ended June 30, 2008
from $1.43 million for the three months ended June 30, 2007.  The
increase in advertising revenues continues to reflect a greater number of
advertisers willing to advertise on Salon’s Website.  Salon has
consequently been increasing its sales staff to capitalize on this
trend.  A significant factor contributing to advertisers’ willingness
to advertise on Salon’s Website is its increasing number of monthly unique
Website visitors.  The number of monthly unique Website visitors for
the three months ended June 30, 2008 averaged 4.6 million, an increase of 11%
from the same time period a year ago.  Increasing the number of unique
Website visitors is critical to Salon, as they facilitate the generation of ad
impressions sold to advertisers.
 
 Salon
Premium subscription revenues decreased to $284,000 for the three months ended
June 30, 2008 from $351,000 for the three months ended June 30,
2007.  The decrease reflects Salon’s shift in emphasis to its more
lucrative advertising business from its subscription business.  Salon
expects this decrease to continue as the number of paid subscriptions has
declined from approximately 33,900 as of March 31, 2008 to approximately 31,200
as of June 30, 2008.
 
 Revenues from all other
sources were $0.2 million for the three months ended June 30, 2008 and for the
three months ended June 30, 2007.  Approximately half of this revenue
was derived from The Well, an on-line discussion forum.
 
 18
 Production
and content:
  Production and content
expenses were $1.4 million for the three months ended June 30, 2008 compared to
$1.3 million for the three months ended June 30, 2007, with no material change
in expense categories within the two time periods.
 
 Sales
and marketing:
  Sales
and marketing expenses were $0.5 million for the three months ended June 30,
2008 compared to $1.1 million for the three months ended June 30,
2007.  The substantial decrease primarily reflects the lack of
utilization of advertising credits thus far this year compared to utilization of
$0.6 million of advertising credits last year for Web based
advertisements.  Salon is currently exploring additional ways of fully
utilizing the credits, including supporting the launch of Open Salon, its new
blogging network, before they expire.
 
 Information
technology support:
  Information technology
support expenses were $0.2 million for the three months ended June 30, 2008 and
for the three months ended June 30, 2007, with no material change in expense
categories within the two time periods.  Expenses in the current
quarter are net of $0.1 million in capitalized software development costs in
connection with Open Salon.
 
 General
and administrative:
  General and administrative
expenses were $0.4 million for the three months ended June 30, 2008 and for the
three months ended June 30, 2007, with no material change in expense categories
within the two time periods.
 
 Liquidity
and capital resources:
  Net cash used in
operations was $1.0 million for the three months ended June 30, 2008 and $0.7
million for the three months ended June 30, 2007.  The principal uses
of cash during the three months ended June 30, 2008 were to fund the $0.6
million net loss for the period, $0.3 million increase in accounts receivable,
and $0.1 million of various working capital items.  The principal uses
of cash during the three months ended June 30, 2007 were to fund the $1.0
million net loss for the period and the $0.4 million increase in accounts
receivable, offset by $0.7 million of non-cash charges.  The accounts
receivable, net as of June 30, 2008 of $1.2 million, representing primarily
advertising sales during the quarter, are expected to be collected within the
next four months.  No material account receivable balance is
delinquent as of this filing.
  Net cash used in investing
activities was $0.1 million during the three months ended June 30, 2008 compared
to an immaterial amount for the three months ended June 30, 2007.  The
increase primarily reflects funding for the acquisition of computer equipment,
furniture, leasehold improvements and internal software
development.
 
 The net cash from financing activities
of $1.0 million for the three months ended June 30, 2008 primarily reflects
proceeds received from convertible promissory notes issued and sold during the
period.  The net cash from financing activities of $0.3 million for
the three months ended June 30, 2007 reflected amounts received under a
borrowing agreement with Deutsche Bank Securities during the
period.
 
 19
 Based
on cash projections for the remainder of the fiscal year ending March 31, 2009,
which contemplate a smaller operating loss than the prior fiscal year and
attaining positive cash flow during the fourth quarter, Salon estimates it will
require as much as $1.0 million in additional financing to meet its operating
needs.  If planned revenues are less than expected, or if planned
expenses are more than expected, the cash shortfall may be higher, which will
result in a commensurate increase in required financing.  Salon is in
discussions with potential investors, including related parties, to obtain
additional funding through incurring additional indebtedness or raising
additional working capital through the sale of equity securities in a private
placement. However, Salon does not currently have an agreement in place to
provide such financing, and there is no certainty that Salon will be able to
enter into definitive agreements for such financing on commercially reasonable
terms.
  Off-Balance-Sheet
Arrangements
 
 Salon
has no off-balance-sheet arrangements.
 
 Contractual
Obligations
 
 As of
June 30, 2008, Salon has two outstanding capital leases on computer equipment
and does not anticipate entering into similar debt instruments during its year
ending March 31, 2009.  Also, during the quarter, Salon entered into a
real estate lease for its new office facility in New York. The following
summarizes Salon’s contractual obligations as of June 30, 2008, and the effect
these contractual obligations are expected to have on Salon’s liquidity and cash
flows in future periods (in thousands):
 
 Payments Due By
      PeriodTotal
              
              
              1
      Year or Less
              
              
              1
      - 3 Years
              
              
              More than 3
      YearsOperating
      leases
              
              $
              760
              
              
              $
              359
              
              
              $
              355
              
              
              $
              46Capital
      leases
              
              
              75
              
              
              
              26
              
              
              
              49
              
              
              
              -Capital lease
      interest
              
              
              17
              
              
              
              10
              
              
              
              7
              
              
              
              -Short-term
      borrowings
              
              
              1,000
              
              
              
              1,000
              
              
              
              -
              
              
              
              -Short-term borrowing
      interest
              
              
              49
              
              
              
              49
              
              
              
              -
              
              
              
              -Total
              
              $
              1,901
              
              
              $
              1,444
              
              
              $
              411
              
              
              $
              46
  
 20
 Item
3.  Quantitative and Qualitative Disclosure About Market
Risk
 
 Salon
maintains all of its cash in immediately available cash deposits at its
bank.  These funds are not subject to market risk and no interest is
paid on such funds.  In May 2007, Salon entered into a credit
agreement with Deutsche Bank Securities, Inc. that allows Salon to borrow up to
$1.0 million at a rate of prime less 0.25% which will subject Salon to interest
rate risk.  Salon feels that the risk of a rate change is not material
as Salon contemplates having a maximum of only $1.0 million of variable rate
debt outstanding during its fiscal year ending March 31, 2009.  As of
June 30, 2008, Salon has $1.0 million plus accrued interest outstanding under
this agreement, with repayment anticipated to occur by March 31,
2009.  As Salon conducts all of its business in the United States,
Salon is not subject to foreign exchange risk.
 
 Item
4.  Controls and Procedures
 
 Evaluation
of Our Disclosure Controls and Internal Controls
 
 Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
quarterly Form 10-Q report (June 30, 2008), as is defined in
Rule 13a-15(e) promulgated under the Exchange Act.  Our
disclosure controls and procedures are intended to ensure that the information
we are required to disclose in the reports that we file or submit under
the  Exchange Act is (i) recorded, processed, summarized and
reported within the time periods specified in the Securities and Exchange
Commission's rules and forms and (ii) accumulated and communicated to
our management, including the Chief Executive Officer and Chief Financial
Officer, as the principal executive and financial officers, respectively, to
allow timely decisions regarding required disclosures.
 
 Based
on that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this quarterly Form 10-Q
report, our disclosure controls and procedures were effective.
 
 Our
management has concluded that the financial statements included in this
Form 10-Q present fairly, in all material respects our financial position,
results of operations and cash flows for the periods presented in conformity
with generally accepted accounting principles.
 
 It
should be noted that any system of controls, however well designed and operated,
can provide only reasonable, and not absolute, assurance that the objectives of
the system will be met.  In addition, the design of any control system
is based in part upon certain assumptions about the likelihood of future
events.
 
 Changes
in Internal Controls Over Financial Reporting
 
 There
was no change in our internal controls over financial reporting that occurred
during the period covered by this Quarterly Report on Form 10-Q that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.
 
 21
  
 PART
II: OTHER INFORMATION
 
 
 Item 1.  Legal Proceedings.
 
 Not applicable.
 
 Item
1a.  Risk Factors.
 
 
 Factors
That May Affect Salon’s Future Results and Market Price of Stock
 
 Salon’s business faces
significant risks.  The risks described below may not be the only
risks Salon faces.  Additional risks that are not yet known or that
are currently immaterial may also impair its business operations or have a
negative impact on its stock price.  If any of the events or
circumstances described in the following risks actually occurs, its business,
financial condition or results of operations could suffer, and the trading price
of its common stock could decline.
 
 Salon’s
projected cash flows may not meet expectations
 
 Salon
relies on cash projections to run its business and changes such projections as
new information is made available or events occur.  The most
significant component of Salon’s cash projections is cash to be generated from
advertising sales and, to a lesser extent, cash to be generated from Salon
Premium.  Forecasting advertising revenues and resulting cash receipts
for an extended period of time is problematic due to the short duration of most
advertising sales contracts.  If projected cash inflows and outflows
do not meet expectations, Salon’s ability to continue as a going concern may be
adversely affected.
 
 If
Salon forecasts or experiences periods of limited, or diminishing cash
resources, Salon may need to sell additional securities or borrow additional
funds.  There is no guarantee that Salon will be able to issue
additional securities in future periods or borrow additional funds on
commercially reasonable terms to meet its cash needs.  Salon’s ability
to continue as a going concern will be adversely affected if it is unable to
raise additional cash from sources it has relied upon in the past or new
sources.
 
 Salon
has relied on related parties for significant investment capital
 
 Salon has been relying on cash
infusions from related parties to fund operations.  The related
parties are primarily John Warnock, Chairman of the Board of Salon, and William
Hambrecht.  William Hambrecht is the father of Salon’s former
President and Chief Executive Officer, Elizabeth Hambrecht, a director of Salon.
During the quarter ended June 30, 2008, these related parties further invested
$1.0 million in Salon.
 
 Curtailment of cash
investments and borrowing guarantees by related parties could detrimentally
impact Salon’s cash availability and its ability to fund its
operations.
  22
 Salon’s
principal stockholders can exercise a controlling influence over Salon’s
business affairs and may make business decisions with which non-principal
stockholders disagree and may affect the value of their investment
  Based
on information available to Salon, the holders of Salon’s Series A, B, C and D
preferred stock collectively own approximately 92% of all voting securities.
These stockholders therefore own a controlling interest in Salon.  Of
this amount, approximately 72% is held by former Directors and related parties,
of which approximately 22% is controlled directly or indirectly by William
Hambrecht and approximately 41% by Chairman and Director John
Warnock.  Therefore, related parties by themselves own a controlling
interest in Salon.
  If
these stockholders were to act together, they would be able to exercise control
over all matters requiring approval by other stockholders, including the
election of Directors and approval of significant corporate transactions. This
concentration of ownership could also have the effect of accelerating, delaying
or preventing a change in control of Salon, which could cause Salon’s stock
price to decline.
  Future
sales of significant number of shares of Salon’s common stock by principal
stockholders could cause its stock price to decline
 
 Salon’s preferred
stockholders can convert their 9,475 shares of preferred stock to approximately
9.8 million shares of common stock at any time.  As Salon’s common
stock is normally thinly traded, if these stockholders were to convert their
shares of preferred stock to common stock and sell the resulting shares, the per
share price of Salon’s common stock may be adversely affected.  For
example, effective July 31, 2006, a Series A preferred stockholder converted 62
shares of Series A preferred stock to 124,536 shares of common stock, and
shortly thereafter converted a warrant to 7,840 shares of common stock, for a
total of 132,376 shares of common stock.  Between July 31, 2006 and
October 30, 2006, the shareholder sold approximately 84,460 of these shares, and
during the same period of time, Salon’s common stock dropped from $3.20 to $1.80
per share.
 
 Salon
may not be able to receive the full value of its advertising
credits
 
 As of
June 30, 2008, Salon has $3.1 million of advertising credits for which it has
valued at $2.1 million that expire on December 31, 2009.  Of the $3.1
million, approximately $1.8 million are the obligation of Rainbow Media Holdings
(“Rainbow”) and approximately $1.3 million are the obligation of
NBC.  Based on ongoing discussions, Salon feels that it should be able
to fully utilize the credits with both Rainbow and NBC, but may not be able to
fully utilize the credits prior to expiration.  Salon expects to
recover the full value of all the advertising credits through usage or
settlement in cash, per the terms of the agreement, but there can be no absolute
assurance as to any potential cash settlement.
  Salon’s
stock has been and will likely continue to be subjected to substantial price and
volume fluctuations due to a number of factors, many of which will be beyond its
control and may prevent its stockholders from reselling its common stock at a
profit
  The
securities markets have experienced significant price and volume
fluctuations.  This market volatility, as well as general economic,
market or political conditions, have and may continue to reduce the market price
of its common stock, regardless of its operating performance.  In
addition, Salon’s stock is thinly traded and operating results could be below
the expectations of public market analysts and investors, and in response, the
market price of its common stock could decrease significantly.
 
 23
 Salon’s
preferred stockholders are entitled to potentially significant liquidation
preferences of Salon’s assets over common stockholders in the event of such an
occurrence
  Salon’s Series A, B, C and
D preferred stockholders have liquidation preferences over common stockholders
of the first approximately $23.7 million in potential sales proceeds as of June
30, 2008, which includes the effect of undeclared dividends of $4.2
million.  If a liquidation event were to occur, and preferred stock
dividends were declared, the holders of preferred stock would be entitled to the
first $23.7 million of cash distributions, while the holders of common stock
would receive none of this amount.  If a liquidation event were to
occur in excess of $23.7 million and if preferred stock dividends were to be
declared, the holders of preferred stock would be entitled to receive a
relatively larger distribution than the holders of common stock would be
entitled to receive.
 
 Salon
has historically lacked significant revenues and has a history of
losses
  Salon
has a history of significant losses and expects to incur a loss from operations,
based on generally accepted accounting principals, for its fiscal year ending
March 31, 2009 and potentially in future years.  Once Salon attains
profitability, it may not be able to sustain or increase profitability on a
quarterly or annual basis in the future. If revenues grow slower than Salon
anticipates or operating expenses exceed expectations, financial results will
most likely be severely harmed and the ability of Salon to continue its
operations will be seriously jeopardized.
  Burr,
Pilger & Mayer LLP, Salon’s independent registered public accounting firm
for the years ended March 31, 2006, March 31, 2007, and March 31, 2008, included
a “going-concern” audit opinion on the consolidated financial statements for
those years.  The audit opinions report substantial doubt about
Salon’s ability to continue as a going concern, citing issues such as the
history of losses and absence of current profitability.  As a result
of the “going-concern” opinions, Salon’s stock price and investment prospects
have been and will continue to be adversely affected, thus limiting financing
choices and raising concerns about the realization of value on assets and
operations.
  Salon
Premium memberships have been declining and will most likely continue to
decline, adversely affecting revenues and available cash
 
 Salon
has been relying on the revenues and cash generated from Salon Premium
subscriptions since its implementation in April 2002.  Salon Premium
subscriptions grew from nothing to a high of approximately 89,100 as of December
31, 2004.  However, since the high experienced in December 31, 2004,
subscriptions have been declining to approximately 33,900 as of March 31, 2008
and to approximately 31,200 as of June 30, 2008.  Salon forecasts that
these memberships will continue to decline to approximately 23,000 as of March
31, 2009.  If the decline were to be in excess of anticipated amounts,
Salon’s operations and available cash could be adversely affected.
  24
 Salon
has depended on advertising sales for much of its revenues, and its inability to
maintain or increase advertising revenues could harm its business
  Maintaining or increasing
Salon’s advertising revenues depends upon many factors, including whether it
will be able to:
  ·
              successfully sell
      and market its Website auto start Site Pass or other rich media
      advertisements;
  ·
              entice non Salon
      Premium Website visitors to view and advertisers to sell new ad units and
      formats;
  ·
              maintain a
      significant number of unique Website visitors and corresponding
      significant reach of Internet
users;
  ·
              maintain a
      significant number of sellable impressions generated from Website visitors
      available to advertisers;
  ·
              successfully sell
      and market its network to
advertisers;
  ·
              increase the dollar
      amount of the advertising orders it
receives;
  ·
              increase awareness
      of the Salon brand;
  ·
              improve the
      technology for serving advertising on its
  Website;
  ·
              handle temporary
      high volume traffic spikes to its
Website;
  ·
              accurately measure
      the number and demographic characteristics of its users;
    and
  ·
              attract and retain
      key sales personnel.
 
 Legislative
action and potential new accounting pronouncements are likely to cause its
general and administrative expenses and other operating expenses to
increase
  To
comply with the Sarbanes-Oxley Act of 2002 and proposed accounting changes by
the Securities and Exchange Commission, Salon may be required to hire additional
personnel and utilize additional outside legal, accounting and advisory
services, all of which will cause its general and administrative costs to
increase.
 
 Hackers
may attempt to penetrate Salon’s security system; online security breaches could
harm its business
 
 Consumer and supplier
confidence in Salon’s Website depends on maintaining relevant security
features.  Security breaches also could damage its reputation and
expose it to a risk of loss or litigation.  Experienced programmers or
“hackers” have successfully penetrated sectors of its systems and Salon expects
that these attempts will continue to occur from time to time.  Because
a hacker who is able to penetrate network security could misappropriate
proprietary information or cause interruptions in its products and services,
Salon may have to expend significant capital and resources to protect against or
to alleviate problems caused by these hackers.  Additionally, Salon
may not have a timely remedy against a hacker who is able to penetrate its
network security.  Such security breaches could materially affect
Salon.  In addition, the transmission of computer viruses resulting
from hackers or otherwise could expose it to significant
liability.  Salon’s insurance policies may not be adequate to
reimburse it for losses caused by security breaches.  Salon also faces
risks associated with security breaches affecting third parties with whom it has
relationships.
  25
 With a
volatile share price, Salon may be the target of securities litigation, which is
costly and time-consuming to defend
  In the
past, following periods of market volatility in the price of a company’s
securities, security holders have instituted class action litigation. Salon’s
share price has in the past experienced price volatility, and may continue to do
so in the future.  Many companies have been subjected to this type of
litigation. If the market value of its common stock experiences adverse
fluctuations and it becomes involved in this type of litigation, regardless of
the merits or outcome, Salon could incur substantial legal costs and its
management’s attention could be diverted, causing its business, financial
condition and operating results to suffer.  To date, Salon has not
been subjected to such litigation.
  Salon’s
quarterly operating results are volatile and may adversely affect its common
stock price
  Salon’s future revenues
and operating results, both GAAP and non GAAP, are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside
Salon’s control, and any of which could severely harm Salon’s business. These
factors include:
  ·
              Salon’s ability to
      attract and retain advertisers and
subscribers;
  ·
              Salon’s ability to
      attract and retain a large number of
users;
  ·
              the introduction of
      new Websites, services or products by Salon or by its
      competitors;
  ·
              the timing and
      uncertainty of Salon’s advertising sales
cycles;
  ·
              the mix of
      advertisements sold by Salon or its
competitors;
  ·
              the economic and
      business cycle;
  ·
              Salon’s ability to
      attract, integrate and retain qualified
  personnel;
  ·
              technical
      difficulties or system downtime affecting the Internet generally or the
      operation of Salon’s Website; and
  ·
              the amount and
      timing of operating costs.
  Due to
the factors noted above and the other risks discussed in this section, one
should not rely on quarter-to-quarter comparisons of Salon’s results of
operations as an indication of future performance.  It is possible
that some future periods’ results of operations may be below the expectations of
public market analysts and investors.  If this occurs, the price of
its common stock may decline.
  26
 The
controversial content of Salon’s Website may limit its revenues
  Salon’s Website contains,
and will continue to contain, content that is politically and culturally
controversial.  As a result of this content, current and potential
advertisers, potential Salon Premium subscribers, or third parties who
contemplate aggregating content, may refuse to do business with
Salon.  Salon’s outspoken stance on political issues has and may
continue to result in negative reactions from some users, commentators and other
media outlets.  From time to time, certain advocacy groups have
successfully targeted Salon’s advertisers in an attempt to persuade such
advertisers to cease doing business with Salon.  These efforts may be
a material impediment to Salon’s ability to grow and maintain advertising
revenue.
  Salon’s
promotion of the Salon brand must be successful to attract and retain users as
well as advertisers and strategic partners
  The
success of the Salon brand depends largely on its ability to provide high
quality content and services.  If Internet users do not perceive
Salon’s existing content and services to be of high quality, or if Salon
introduces new content and services or enters into new business ventures that
are not favorably perceived by users, Salon may not be successful in promoting
and maintaining the Salon brand.  Any change in the focus of its
operations creates a risk of diluting its brand, confusing consumers and
decreasing the value of its user base to advertisers.  If Salon is
unable to maintain or grow the Salon brand, its business could be severely
harmed.
  Salon
needs to hire, integrate and/or retain qualified personnel because these
individuals are important to its growth
  Salon’s success
significantly depends on key personnel.  In addition, because Salon’s
users must perceive the content of Salon’s Website as having been created by
credible and notable sources, Salon’s success also depends on the name
recognition and reputation of its editorial staff.  Due to Salon’s
history of losses, Salon may experience difficulty in hiring and retaining
highly skilled employees with appropriate qualifications.  Salon may
be unable to retain its current key employees or attract, integrate or retain
other qualified employees in the future.  If Salon does not succeed in
attracting new personnel or retaining and motivating its current personnel, its
business could be harmed.
 
 Salon
may expend significant resources to protect its intellectual property rights or
to defend claims of infringement by third parties, and if Salon is not
successful it may lose rights to use significant material or be required to pay
significant fees
  Salon’s success and
ability to compete are significantly dependent on its proprietary
content.  Salon relies exclusively on copyright law to protect its
content.  While Salon actively takes steps to protect its proprietary
rights, these steps may not be adequate to prevent the infringement or
misappropriation of its content, which could severely harm its
business.  Salon also licenses content from various freelance
providers and other third-party content providers.  While Salon
attempts to ensure that such content may be freely licensed to it, other parties
may assert claims of infringement against it relating to such
content.
 
 Salon
may need to obtain licenses from others to refine, develop, market and deliver
new services.  Salon may not be able to obtain any such licenses on
commercially reasonable terms or at all or rights granted pursuant to any
licenses may not be valid and enforceable.
 
 27
 In
April 1999 Salon acquired the Internet address www.salon.com.  Because
www.salon.com is the address of the main home page to its Website and
incorporates Salon’s name, it is a vital part of its intellectual property
assets.  Salon does not have a registered trademark on the address,
and therefore it may be difficult for it to prevent a third party from
infringing on its intellectual property rights to the address.  If
Salon fails to adequately protect its rights to the Website address, or if a
third party infringes its rights to the address, or otherwise dilutes the value
of www.salon.com, its business could be harmed.
 
 Salon’s
technology development efforts may not be successful in improving the
functionality of its network, which could result in reduced traffic on its
Website, reduced advertising revenues, or a loss of Salon Premium
subscribers
 
 Salon
is constantly upgrading its technology to manage its Website and its Salon
Premium program.  In addition, it is creating technology for new
products that Salon expects to launch during the current fiscal
year.  If these systems do not work as intended, or if Salon is unable
to continue to develop these systems to keep up with the rapid evolution of
technology for content delivery and subscription management, its Website or
subscription management systems may not operate properly, which could harm
Salon’s business.  Additionally, software product design, development
and enhancement involve creativity, expense and the use of new development tools
and learning processes.  Delays in software development processes are
common, as are project failures, and either factor could harm Salon’s
business.  Moreover, complex software products such as its online
publishing and subscription management systems frequently contain undetected
errors or shortcomings, and may fail to perform or scale as
expected.  Although Salon has tested and will continue to test its
systems, errors or deficiencies may be found in these systems that may adversely
impact its business.
 
 Salon
relies on software, purchased from an independent supplier, to deliver and
report some of its advertising, the failure of which could impair its
business
 
 Salon
uses software, purchased from an independent supplier, to manage and measure the
delivery of advertising on its Website.  The software is essential to
Salon whenever an advertiser does not stipulate ad serving from a third party
such as Doubleclick.  This type of software may fail to perform as
expected.  If this software malfunctions, advertisements may not be
served correctly on its Website, or if the software does not accurately capture
impression information, then Salon’s advertising revenues could be reduced, and
its business could be harmed.
 
 Salon
may be held liable for content or third party links on its Website or content
distributed to third parties
 
 As a
publisher and distributor of content over the Internet, including user-generated
content, links to third party Websites that may be accessible through Salon.com,
or content that includes links or references to a third party’s Website, Salon
faces potential liability for defamation, negligence, copyright, patent or
trademark infringement and other claims based on the nature, content or
ownership of the material that is published on or distributed from its
Website.  These types of claims have been brought, sometimes
successfully, against online services, Websites and print publications in the
past.  Other claims may be based on errors or false or misleading
information provided on linked Websites, including information deemed to
constitute professional advice such as legal, medical, financial or investment
advice.  Other claims may be based on links to sexually explicit
Websites.  Although Salon carries general liability and media
insurance, its insurance may not be adequate to indemnify Salon for all
liabilities imposed.  Any liability that is not covered by its
insurance or is in excess of its insurance coverage could severely harm its
financial condition and business.  Implementing measures to reduce its
exposure to these forms of liability may require Salon to spend substantial
resources and limit the attractiveness of Salon’s service to users.
 
 28
 Concerns
about transactional security may hinder electronic commerce on Salon’s Website
and may expose Salon to potential liability
 
 A
significant barrier to sale of subscriptions and electronic commerce is the
secure transmission of confidential information over public
networks.  Any breach in Salon’s security could expose it to a risk of
loss or litigation and possible liability.  Salon relies on encryption
and authentication technology licensed from third parties to provide secure
transmission of confidential information.  As a result of advances in
the capabilities of Internet hackers, or other developments, a compromise or
breach of the algorithms Salon uses to protect customer transaction data may
occur.  A compromise of Salon’s security could severely harm its
business.  A party who is able to circumvent Salon’s security measures
could misappropriate proprietary information, including customer credit card
information, or cause interruptions in the operation of its
Website.
 
 Salon
may be required to expend significant capital and other resources to protect
against the threat of security breaches or to alleviate problems caused by these
breaches.  Protection may not be available at a reasonable price or at
all.
 
 Salon’s
internally developed software and software platforms provided by a third party
to manage Salon’s subscription business might fail resulting in lost
subscription income
 
 Salon’s software to manage
its subscription business was developed internally to interface with the
software provided by a third party.  The third party’s software
provides a gateway to authenticate credit card transactions.  Even
though Salon’s system to manage its Salon Premium program is Payment Card
Industry (PCI) compliant, if this system were to fail or not function as
intended, credit card transactions might not be processed and Salon’s cash
resources and revenues would therefore be harmed.
 
 Salon’s
systems may fail due to natural disasters, telecommunications failures and other
events, any of which would limit user traffic
 
 Substantially all of
Salon’s communications hardware and computer hardware operations for its Website
are in a facility in Sacramento, California that has been extensively
retrofitted to withstand a major earthquake.  Fire, floods,
earthquakes, power loss, telecommunications failures, break-ins, supplier
failure to meet commitments, and similar events could damage these systems and
cause interruptions in its services.  Computer viruses, electronic
break-ins or other similar disruptive problems could cause users to stop
visiting Salon’s Website and could cause advertisers to terminate any agreements
with Salon.  In addition, Salon could lose advertising revenues during
these interruptions and user satisfaction could be negatively impacted if the
service is slow or unavailable.If any
of these circumstances occurred, Salon’s business could be
harmed.  Salon’s insurance policies may not adequately compensate it
for losses that may occur due to any failures of or interruptions in its
systems.  Salon does not presently have a formal disaster recovery
plan.
 
 Salon’s Website must
accommodate a high volume of traffic and deliver frequently updated
information.  It is possible that Salon will experience systems
failures in the future and that such failures could harm its
business.  In addition, its users depend on Internet service
providers, online service providers and other Website operators for access to
its Website.  Many of these providers and operators have experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to its systems.  Any of
these system failures could harm its business.
 
 29
 Privacy
concerns could impair Salon’s business
 
 Salon
has a policy against using personally identifiable information obtained from
users of its Website and services without the user’s permission.  In
the past, the Federal Trade Commission has investigated companies that have used
personally identifiable information without permission or in violation of a
stated privacy policy.  If Salon uses personal information without
permission or in violation of its policy, Salon may face potential liability for
invasion of privacy for compiling and providing information to its corporate
customers and electronic commerce merchants.  In addition, legislative
or regulatory requirements may heighten these concerns if businesses must notify
Internet users that the data may be used by marketing entities to direct product
promotion and advertising to the user.  Other countries and political
entities, such as the European Union, have adopted such legislation or
regulatory requirements. The United States may adopt similar legislation or
regulatory requirements.  If consumer privacy concerns are not
adequately addressed, its business, financial condition and results of
operations could be materially harmed.
 
 Possible
state sales and other taxes could adversely affect Salon’s results of
operations
 
 Salon
does not collect sales or other taxes from individuals who sign up for Salon
subscriptions.  During the year ended March 31, 2003, the State of
California audited Salon’s sales tax returns and found Salon in compliance with
its filings and did not object to the fact that it did not collect sales tax on
subscriptions.  However, one or more other states may seek to impose
sales tax collection obligations on out-of-state companies, including Salon,
which engage in or facilitate electronic commerce.  State and local
governments have discussed and made proposals imposing taxes on the sale of
goods and services through the Internet.  Such proposals, if adopted,
could substantially impair the growth of electronic commerce and could reduce
Salon’s ability to derive revenue from electronic commerce.  Moreover,
if any state or foreign country were to assert successfully that Salon should
collect sales or other taxes on the exchange of merchandise on its network or to
tax revenue generated from Salon subscriptions, its financial results could be
harmed.
 
 Provisions
in Delaware law and Salon’s charter, stock option agreements and offer letters
to executive officers may prevent or delay a change of control
 
 Salon
is subject to the Delaware anti-takeover laws regulating corporate
takeovers.  These anti-takeover laws prevent Delaware corporations
from engaging in a merger or sale of more than 10% of its assets with any
stockholder, including all affiliates and associates of the stockholder, who
owns 15% or more of the corporation’s outstanding voting stock, for three years
following the date that the stockholder acquired 15% or more of the
corporation’s assets unless:
 
 ·
              the Board of
      Directors approved the transaction in which the stockholder acquired 15%
      or more of the corporation’s
assets;
 
 ·
              after the
      transaction in which the stockholder acquired 15% or more of the
      corporation’s assets, the stockholder owned at least 85% of the
      corporation’s outstanding voting stock, excluding shares owned by
      directors, officers and employee stock plans in which employee
      participants do not have the right to determine confidentially whether
      shares held under the plan will be tendered in a tender or exchange offer;
      or
 
 ·
              on or after this
      date, the merger or sale is approved by the Board of Directors and the
      holders of at least two-thirds of the outstanding voting stock that is not
      owned by the stockholder.
 
 30
 A
Delaware corporation may opt out of the Delaware anti-takeover laws if its
certificate of incorporation or bylaws so provide. Salon has not opted out of
the provisions of the anti-takeover laws. As such, these laws could prohibit or
delay mergers or other takeover or change of control of Salon and may discourage
attempts by other companies to acquire Salon.
 
 Salon’s certificate of
incorporation and bylaws include a number of provisions that may deter or impede
hostile takeovers or changes of control or management. These provisions
include:
 
 ·
              Salon’s Board is
      classified into three classes of Directors as nearly equal in size as
      possible with staggered three year-terms;
and
 
 ·
              special meetings of
      the stockholders may be called only by the Chairman of the Board, the
      Chief Executive Officer or the Board of
  Directors.
 
 These
provisions may have the effect of delaying or preventing a change of
control.
 
 Salon’s certificate of
incorporation and bylaws provide that it will indemnify officers and Directors
against losses that they may incur in investigations and legal proceedings
resulting from their services to Salon, which may include services in connection
with takeover defense measures. These provisions may have the effect of
preventing changes in Salon’s management.
 
 In
addition, an employment agreement with an executive officer provides for the
payment of severance and acceleration of the vesting of options in the event of
termination of the executive officer following a change of control of
Salon.  These provisions in offer letters could have the effect of
discouraging potential takeover attempts.
 
 
 31
 
 Item 2.  Unregistered Sales of Equity Securities and Use
of Proceeds.
 
 Not
applicable.
 
 Item 3.  Defaults Upon Senior Securities.
 
 Not
applicable.
 
 Item
4.  Submission of Matters to a Vote of Security Holders.
 
 Not
applicable.
 
 Item 5.  Other Information.
 
 Not
applicable.
 
 Item
6.  Exhibits
 
 (a)      Exhibits.
 
 31.1
              Certification of
      Christopher Neimeth, Chief Executive Officer of the Registrant pursuant to
      Section 302, as adopted pursuant to the Sarbanes-Oxley Act of
      2002
 
 31.2
              Certification of
      Norman Blashka, Chief Financial Officer and Secretary of the Registrant
      pursuant to Section 302, as adopted pursuant to the Sarbanes-Oxley Act of
      2002
 
 32.1
              Certification of
      Christopher Neimeth, Chief Executive Officer of the Registrant pursuant to
      Section 906, as adopted pursuant to the Sarbanes-Oxley Act of
      2002
 
 32.2
              Certification of
      Norman Blashka, Chief Financial Officer and Secretary of the Registrant
      pursuant to Section 906, as adopted pursuant to the Sarbanes-Oxley Act of
      2002
 
 
 32
 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.
 
 SALON MEDIA GROUP,
      INC.Dated:  August 14, 2008
                By:
                /s/ Christopher NeimethChristopher Neimeth

                  Chief Executive
      OfficerDated:  August 14, 2008
                
                /s/ Norman BlashkaExecutive Vice
      President and
                  Chief Financial
      Officer