<PAGE>

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


                       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 September 30, 2000
                                       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.COM
             (Exact name of Registrant as specified in its charter)

              Delaware                                  94-3228750
  (State or other jurisdiction of                      (IRS Employer
   incorporation or organization)                  Identification Number)

                         22 Fourth Street, 16th Floor
                            San Francisco, CA 94103
                    (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 [_]

The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on October 25, 2000 was 13,939,449 shares.

================================================================================
<PAGE>

--------------------------------------------------------------------------------
FORM 10-Q
SALON.COM
INDEX
--------------------------------------------------------------------------------

<TABLE>
<CAPTION>

                                                                                                                     Page
PART I            FINANCIAL INFORMATION                                                                             Number

<S>                                                                                                                 <C>
ITEM 1:           Financial Statements

                  Condensed Consolidated Balance Sheets as of September 30, 2000 (unaudited) and March 31, 2000.....      3

                  Consolidated  Statements of Operations  for the three months and six months ended  September 30,
                  2000 and 1999 (unaudited) ........................................................................      4

                  Condensed  Consolidated  Statements  of Cash Flows for the three months ended  September 30, 2000
                  and 1999 (unaudited) .............................................................................      5

                  Notes to the Condensed Consolidated Financial Statements..........................................      6

ITEM 2:           Management's Discussion and Analysis of Financial Condition and Results of Operations.............      9

ITEM 3:           Quantitative and Qualitative Disclosures About Market Risk........................................     28

PART II           OTHER INFORMATION

ITEM 1:           Legal Proceedings.................................................................................     29

ITEM 2.           Changes in Securities and Use of Proceeds.........................................................     29

ITEM 3.           Defaults upon Senior Securities...................................................................     29

ITEM 4.           Submission of Matters to a Vote of Security Holders...............................................     29

ITEM 5.           Other Information.................................................................................     29

ITEM 6:           Exhibits and Reports on Form 8-K..................................................................     29

                  Signatures........................................................................................     30

                  Exhibits..........................................................................................     31
</TABLE>

                                       2
<PAGE>

--------------------------------------------------------------------------------
PART I:  FINANCIAL INFORMATION
ITEM 1.  FINANCIAL STATEMENTS
--------------------------------------------------------------------------------

                                   Salon.Com
                     CONDENSED CONSOLIDATED BALANCE SHEETS
         (in thousands, except share and per share amounts, unaudited)

<TABLE>
<CAPTION>
                                                                                     September 30,               March 31,
                                                                                          2000                      2000
                                                                                     --------------              -------------
<S>                                                                                  <C>                         <C>
Assets
  Current assets:
     Cash and cash equivalents                                                       $        9,391              $      17,982
     Accounts receivable, net                                                                 1,603                      2,425
     Inventories                                                                                  -                         16
     Prepaid expenses and other current assets                                                  600                        391
                                                                                     --------------              -------------
      Total current assets                                                                   11,594                     20,814
  Property and equipment, net                                                                 2,731                      2,312
  Other assets                                                                                  328                        186
  Intangible assets, net                                                                      5,439                      4,088
                                                                                     --------------              -------------
      Total assets                                                                   $       20,092              $      27,400
                                                                                     ==============              =============
Liabilities and stockholders' equity
   Current liabilities:
     Accounts payable and accrued liabilities                                        $        3,086              $       4,303
     Deferred revenue                                                                           146                        210
     Short-term borrowings                                                                       30                         90
                                                                                     --------------              -------------
      Total current liabilities                                                               3,262                      4,603
  Long-term liabilities                                                                         470                        473
                                                                                     --------------              -------------
     Total liabilities                                                                        3,732                      5,076
Stockholders' equity:
  Common stock, $0.001 par value, 50,000,000 shares authorized,
     13,937,258 and 12,546,569 shares issued and outstanding at
     September 30, 2000  (unaudited) and March 31, 2000                                          14                         13
  Additional paid-in-capital                                                                 78,594                     78,448
  Advertising receivable from stockholder                                                    (7,479)                    (7,884)
  Unearned compensation                                                                        (590)                    (2,098)
  Accumulated deficit                                                                       (54,179)                   (46,155)
                                                                                     --------------              -------------
     Total stockholders' equity                                                              16,360                     22,324
                                                                                     --------------              -------------
     Total liabilities and stockholders' equity                                      $       20,092              $      27,400
                                                                                     ==============              =============
</TABLE>

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

                                       3
<PAGE>

                                    SALON.COM
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)
                                   (Unaudited)



<TABLE>
<CAPTION>
                                                                   Three Months Ended                    Six Months Ended
                                                                      September 30,                        September 30,
                                                                ------------------------           ----------------------------
                                                                  2000            1999               2000                1999
                                                                --------        --------           --------            --------
<S>                                                             <C>             <C>                <C>                 <C>
Net revenues                                                    $  2,197        $  1,378           $  3,956            $  2,383
                                                                --------        --------           --------            --------
Operating expenses:
          Production, content and product                          2,425           2,118              5,126               4,220
          Sales and marketing                                      1,639           2,637              4,073               4,467
          Research and development                                   441             304                827                 534
          General and administrative                                 918             551              1,543               1,127
          Amortization of intangibles                                356             256                679                 511
          Stock-based compensation                                   107             602                124               1,233
                                                                --------        --------           --------            --------
              Total operating expenses                             5,886           6,468             12,372              12,092
                                                                --------        --------           --------             -------

Loss from operations                                              (3,689)         (5,090)            (8,416)             (9,709)
Other income, net                                                    185             393                392                 447
                                                                --------        --------           --------            --------
              Net loss                                            (3,504)         (4,697)            (8,024)             (9,262)


Preferred deemed dividend                                             --              --                 --              11,515
                                                                --------        --------           --------            --------
Net loss attributable to common stockholders                    $ (3,504)       $ (4,697)          $ (8,024)           $ 20,777)
                                                                ========        ========           ========            ========

Basic and diluted net loss per share attributable               $  (0.27)       $  (0.41)          $  (0.63)           $  (3.16)
              to common stockholders


Weighted average shares used in computing                         13,012          11,319             12,834               6,575
             basic and diluted net loss per share
             attributable to common stockholders
</TABLE>


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

                                       4
<PAGE>

                                   SALON.COM
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                (in thousands)
                                 (unaudited)

<TABLE>
<CAPTION>
                                                                                         Six Months Ended
                                                                                           September 30,
                                                                                    -----------------------------
                                                                                         2000             1999
                                                                                    -------------     -----------
<S>                                                                                 <C>               <C>
Cash flows from operating activities:
Net loss                                                                            $      (8,024)    $    (9,262)
Adjustments to reconcile net loss to net
   cash used in operating activities:
      Stock-based compensation                                                                124           1,233
      Depreciation and amortization                                                         1,100             607
      Amortization of discount on short-term borrowings                                        --              13
      Amortization of advertising receivable from stockholder                                 405              --
      Changes in working capital:
         Accounts receivable                                                                  822            (222)
         Inventories                                                                           16               8
         Prepaid expenses and other assets                                                   (358)             67
         Accounts payable and accrued liabilities                                          (1,413)          2,192
         Deferred revenue                                                                     (64)           (387)
                                                                                    -------------     -----------
            Net cash used in operating activities                                          (7,392)         (5,751)
                                                                                    -------------     -----------
Cash flows from investing activities:
   Purchase of property and equipment                                                        (744)           (158)
   Net purchase of investments                                                                 --         (10,255)
   Acquisition of MP3lit                                                                     (400)             --
                                                                                    -------------     -----------
            Net cash used in investing activities                                          (1,144)        (10,413)
                                                                                    -------------     -----------
Cash flows from financing activities:
   Proceeds from issuance of preferred stock and common stock warrants, net                    --          10,936
   Proceeds from issuance of common stock, net                                                 --          24,929
   Proceeds from exercise of stock options                                                     73              86
   Principal payments under capital leases                                                    (68)             --
   Repayments of short-term borrowings                                                        (60)           (331)
                                                                                    -------------     -----------
            Net cash (used in) provided by financing activities                               (55)         35,620
                                                                                    -------------     -----------
Net (decrease) increase in cash and cash equivalents                                       (8,591)         19,456

Cash and cash equivalents - beginning of period                                            17,982             754
                                                                                    -------------     -----------
Cash and cash equivalents - end of period                                           $       9,391     $    20,210
                                                                                    =============     ===========
Non-cash investing and financing activities:
     Conversion of preferred stock to common stock                                  $          --     $    25,301
     Preferred deemed dividend                                                                 --          11,515
     Unearned compensation in connection with the issuance of stock options                 1,210           3,487
     Issuance of stock and warrants in connection with acquisition                          1,469              --
     Issuance of warrants in connection with agreements                                        47             244
     Value assigned to reciprocal advertising agreements                                       63             477
     Property and equipment purchased under capital lease                                      90              --
</TABLE>

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

                                       5
<PAGE>

                                   SALON.COM
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS


1.  The Company

     Salon.com (Salon) is an Internet media company that produces a network of
eleven primary subject-specific, demographically targeted Web sites, an audio
streaming web site and a variety of online communities designed to attract
Internet advertisers and electronic commerce partners. Salon.com was originally
incorporated in July 1995 in the State of California and reincorporated in
Delaware in June 1999. The Company operates in one business segment.

2.  Basis of Presentation

     The accompanying consolidated financial statements as of September 30, 2000
and for the three months and six months ended September 30, 2000 and 1999 are
unaudited. The unaudited interim consolidated financial statements 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 financial position,
results of operations and cash flows as of September 30, 2000 and for the three
months and six months ended September 30, 2000 and 1999. These consolidated
financial statements and notes thereto are unaudited and should be read in
conjunction with Salon's audited financial statements, filed with the Securities
and Exchange Commission on Form 10-K, as amended, as of March 31, 2000. The
results for the three months and six months ended September 30, 2000 are not
necessarily indicative of the expected results for any other interim period or
the fiscal year ending March 31, 2001.

     These consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business.
Salon has incurred operating losses since inception and has an accumulated
deficit. Management's plans to decrease operating losses are to increase
revenues while controlling costs. If Salon is unable to generate adequate cash
flows from operations, Salon may need to seek additional sources of capital.
There can be no assurance that Salon will be able to obtain such funding, if
necessary, on acceptable terms or at all.

3.  Acquisition of MP3Lit

     On May 5, 2000, Salon acquired MP3Lit.com (MP3Lit), a web site dedicated to
offering spoken word and audio literature recordings in the MP3 format.

     The acquisition of MP3Lit consisted of: (i) 380,400 shares of common stock
valued at $3.375 per share; (ii) $400,000 of cash consideration; (iii) warrants
to purchase 100,000 shares of common stock over a five-year period at a price of
$10.50 per share. These shares were valued at $185,000 using the Black-Scholes
option-pricing model, applying an expected life of five years, a weighted risk-
free rate of 6.73%, an expected dividend yield of 0%, a volatility of 90% and a
deemed fair value of common stock of $1.85; and (iv) acquisition costs of
$135,000. An additional 887,600 shares have been issued and are held in escrow.
These shares are contingent upon the meeting of certain business benchmarks over
a three-year period. If the business benchmarks are met, the shares will be
released to certain former stockholders of MP3Lit. When the contingencies are
resolved, the shares will be recorded at their fair value on the respective

                                       6
<PAGE>

                                   SALON.COM
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

dates, as either an additional cost of the acquisition or as compensation
expense of the appropriate period.

     Salon's acquisition of MP3Lit has been accounted for under the purchase
method of accounting, which requires the results of MP3Lit to be included in the
consolidated financial statements since the date of acquisition and also
requires the purchase price to be allocated to the acquired assets and
liabilities of MP3Lit on the basis of their estimated fair values as of the date
of acquisition. The assets acquired consist of net tangible assets, identifiable
intangible assets and goodwill. Net tangible assets include primarily accounts
receivable, property and equipment and accounts payable. A preliminary review of
the identifiable intangible assets indicates the purchase of audio streaming
technology which will serve as the platform for Salon Audio, a website and
associated traffic, trade and domain names, an acquired workforce and non-
compete agreements. Salon is in the process of determining the fair values of
the identifiable intangible assets acquired and will allocate the purchase price
accordingly.

     The excess of the purchase price over the fair value of the net tangible
and identifiable intangible assets acquired will be recorded as goodwill.
Identifiable intangible assets and goodwill are anticipated to be amortized on a
straight-line basis over the estimated period of benefit of five years.

     The following unaudited pro forma financial information presents the
consolidated results of Salon as if the MP3Lit acquisition had occurred on April
1, 2000 or April 1, 1999 and includes adjustments for amortization of goodwill
and other intangible assets. There was no activity for MP3Lit for the period
April 1, 1999 to August 31, 1999 as the date of inception of MP3Lit was not
until September 1, 1999. This pro forma financial information is not intended to
be indicative of the results of operations that would have been achieved if the
acquisition had been consummated at these dates or of Salon's actual or future
results. Unaudited pro forma consolidated results of operations are as follows:

<TABLE>
<CAPTION>
                                                           (in thousands, except per share data)
                                                          Three Months Ended       Six Months Ended
                                                             September 30,           September 30,
                                                          --------------------    --------------------
                                                              2000        1999        2000        1999
                                                          --------    --------    --------    --------
<S>                                                      <C>        <C>        <C>          <C>
Net revenues                                              $  2,197    $  1,378    $  3,956    $  2,383
Net loss attributable to common stockholders                (3,504)     (4,731)     (8,058)    (20,811)
Basic and diluted net loss per share attributable
      to common stockholders                                 (0.27)      (0.40)      (0.62)      (2.99)
</TABLE>

4.  Net Loss Per Share

     Basic earnings per share is computed using the weighted average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted average number of common and common stock
equivalents outstanding during the period.

                                       7
<PAGE>

                                   SALON.COM
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

     Diluted net loss per share attributable to common stockholders for the
three months and six months ended September 30, 2000 and 1999 does not include
the effect of common stock equivalent shares, comprised of stock options, common
stock warrants and contingently issuable shares of 4,765,665 and 2,754,630,
respectively, as the effect of their inclusion is anti-dilutive during each
period.

5.  Inventories

     Inventories, which consist solely of finished goods, are stated at the
lower of cost or market. Cost is determined by the first in, first out method.

6.  Concentrations

     One customer accounted for more than 10% of total revenues for the three
months ended September 30, 2000 and one customer accounted for more than 10% of
total revenue for the six months ended September 30, 2000. No customer accounted
for more than 10% of revenues for the three months or six months ended September
30, 1999. Barter revenues accounted for only $18,000 or 1% of total revenues for
the three months ended September 30, 2000 and $363,000 or 26% of revenues for
the three months ended September 30, 1999. Barter revenues accounted for $63,000
or 2% of total revenues for the six months ended September 30, 2000 and $478,000
or 20% of revenues for the six months ended September 30, 1999. No customer
accounted for more than 10% of the total accounts receivable balance at either
September 30, 2000 or September 30, 1999.

     Salon relies on a number of third party suppliers for various services,
including web hosting, banner advertising, delivery software, internet traffic
measurement software and electronic commerce fulfillment services. While Salon
believes it could obtain these services from other qualified suppliers on
similar terms and conditions, a short-term disruption in the provision of these
services by the current suppliers could have a materially adverse effect on the
business.

7.  Stock-Based Compensation

     If the stock-based compensation for the three months and six months ended
September 30, 2000 and 1999 had been allocated across the relevant functional
expense categories within operating expenses, it would be allocated as follows:

<TABLE>
<CAPTION>
                                                                   (in thousands)
                                                Three Months Ended                Six Months Ended
                                                  September 30,                     September 30,
                                           -----------------------------  ----------------------------------
                                                   2000            1999              2000              1999
                                           -------------   -------------  ----------------   ---------------
<S>                                       <C>             <C>            <C>               <C>
Production, content, and product           $          24   $         222   $            32   $           454
Sales and marketing                                   75             174                81               356
Research and development                               1              28                 3                59
General and administrative                             7             178                 8               364
                                           -------------   -------------  ----------------   ---------------
        Total                              $         107   $         602   $           124    $        1,233
                                           -------------   -------------  ----------------   ---------------
</TABLE>

                                       8
<PAGE>

                                   SALON.COM
             NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

8.  Short-Term Borrowings

       The Company has a revolving loan agreement with a bank which provides a
maximum amount of $2,000,000 and expires in December 2000. Availability under
the agreement is determined based on 80% of eligible accounts receivable. As of
September 30, 2000, $445,000 was available under the agreement, net of $921,000
in standby letters of credit

--------------------------------------------------------------------------------
PART I:   FINANCIAL INFORMATION
ITEM 2.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
          CONDITION AND RESULTS OF OPERATIONS

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


          This section and other parts of this Form 10-Q contains forward-
looking statements within the meaning of Section 27A of the Securities Act of
1933, as amended, and Section 21E of the Securities Exchange Act, as amended,
that involve risks and uncertainties, including but not limited to statements
regarding our strategy, plans, objectives, expectations, intentions, financial
performance, and revenue sources. Our 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 Operating Results and Market Price of Stock." In this report, the
words "anticipates," "believes," "expects," "intends," "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.com (Salon) is a leading Internet media company that produces a
network of eleven primary subject-specific, demographically-targeted Web sites,
and hosts two online communities -- Table Talk, a free interactive forum and The
Well, a paid subscription service. In May 2000, Salon acquired MP3Lit.com, a
pioneering Web site offering quality spoken word and audio literature recordings
in MP3 and Real Audio formats. MP3Lit was incorporated into Salon's web site as
Salon Audio. Salon believes that its network of Web sites combines the
thoughtfulness of print, the timeliness of television and the interactivity of
talk radio.

       The main entry and navigation point to Salon's eleven content sites is
Salon's home page at www.salon.com. The sites provide news, features, interviews
and regular columnists on specific topics, from politics and arts and
entertainment to parenting and health, while Salon's online communities allow
users to interact and discuss Salon content and other topics via electronic
messaging. Because of Salon's reputation for community building, Salon also has
agreed with third parties to host communities within its network. Salon's users
can access Table Talk or The Well through www.salon.com or through Salon's
eleven content Web sites.

                                       9
<PAGE>

          Salon believes that its original, award-winning content and highly
regarded interactive communities allow Salon to attract and retain users who are
younger, more affluent, better educated and more likely to make online purchases
than typical Internet users. Salon believes its user profile makes its network
of Web sites and online communities a valuable media property for advertisers
and retailers who are increasingly allocating marketing resources to target
consumers online.

Results of Operations For The Three And Six Months Ended September 30, 2000
Compared To The Three And Six Months Ended September 30, 1999

Net Revenues:

          Net revenues increased 59% to $2.2 million for the three months ended
September 30, 2000 from $1.4 million for the three months ended September 30,
1999 and increased 66% to $4.0 million for the six months ended September 30,
2000 from $2.4 million for the six months ended September 30, 1999. The increase
was primarily due to Salon's ability to generate significantly higher
sponsorship and advertising revenues based on an increase in the number of
impressions sold and an increase in the number of sponsors advertising on
Salon's Web sites. Sponsorship and advertising revenues accounted for
approximately 87% and 62% of net revenues for the three months ended September
30, 2000 and 1999, respectively. For the six months ended September 30, 2000 and
1999, these percentages were 86% and 65% respectively. Barter transactions,
included in sponsorship and advertising revenues, significantly decreased during
the three months ended September 30, 2000 versus September 30, 1999, to $18,000,
or 1% of total revenues, from $363,000, or 26% of total revenues, respectively.
For the six months ended September 30, 2000 and 1999, these percentages were 2%
and 20%, respectively. Salon anticipates that overall sales will increase in the
future but cannot determine to what extent.

          One customer accounted for more than 10% of total revenues for the
three months ended September 30, 2000 and one customer accounted for more than
10% of total revenue for the six months ended September 30, 2000. No customer
accounted for more than 10% of revenues for the three or six months ended
September 30, 1999.

          Salon has an agreement in principle to convert an advertising
receivable from the generation of $168,000 in sales to an investment in Content
Commerce LP.

Production, Content and Product:

          Production, content and product costs consist primarily of payroll and
related costs for Salon's editorial, artistic, and production staffs, The Well
and Salon Audio staffs, payments to freelance writers and artists, and
telecommunications and computer related expenses for the support and delivery of
Salon's Web sites and online communities. Production, content and product costs
during the three months ended September 30, 2000 were $2.4 million or 110% of
net revenues versus $2.1 million or 154% of net revenues for the three months
ended September 30, 1999, a decline of 44 percentage points. Production, content
and product costs during the six months ended September 30, 2000 were $5.1
million or 130% of net revenues versus $4.2 million or 177% of net revenues for
the six months ended September 30, 1999, a decline of 47 percentage points. Of
the 14% increase in production, content and product costs for the three months
ended September 30, 2000 versus September 30, 1999, 6% is primarily attributable
to increased costs relating to growth in Salon's editorial and art staff, and 8%
to additional Salon Audio program costs. Salon anticipates costs staying
relatively constant in the near future.

                                       10
<PAGE>

Sales and Marketing:

        Sales and marketing expenses consist of payroll and related expenses,
including commissions, travel expenses and other costs associated with Salon's
advertising and sponsorship sales force, as well as advertising, promotional and
distribution costs. Sales and marketing expenses were $1.6 million, or 75% of
revenues and $2.6 million or 191% of total revenues for the three months ended
September 30, 2000 and 1999, respectively. Sales and marketing expenses were
$4.1 million, or 103% of revenues and $4.5 million or 187% of total revenues for
the six months ended September 30, 2000 and 1999, respectively. The $998,000 or
38% decrease in sales and marketing expenses over the quarter is primarily
attributable to reduced marketing program expenses and adjustments to accruals
which fell quicker than the growth of payroll and associated expenses of
expanded sales staffs. Salon anticipates sales and marketing expenses to
increase next quarter.

        Included in sales and marketing expenses are non-cash advertising
expenses of $203,000 and none for the three months ended September 30, 2000 and
1999, respectively. Non-cash advertising expenses were $405,000 and none for the
six months ended September 30, 2000 and 1999, respectively. These expenses are
part of the investment in Salon by Rainbow Media Holdings, Inc. which closed on
January 2000.

Research and Development:

        Research and development expenses consist of costs associated with the
development and maintenance of technology, including Salon's publishing platform
software and archival database, as well as technical support for Salon's Web
sites and online communities. Research and development expenses increased 45% to
$441,000 in the three months ended September 30, 2000 from $304,000 in the three
months ended September 30, 1999. Research and development expenses increased 55%
to $827,000 in the six months ended September 30, 2000 from $534,000 in the six
months ended September 30, 1999. Research and development expenses as a
percentage of total revenue decreased to 20% for the three months ended
September 30, 2000 from 22% for the three months ended September 30, 1999.
Research and development expenses as a percentage of total revenue decreased to
21% for the six months ended September 30, 2000 from 22% for the six months
ended September 30, 1999. The increase in research and development expenses over
the three- and six-month comparison periods is primarily attributable to salary
and payroll related expenses for the technical support of Salon's web sites and
online communities. Salon does not expect research and development costs to
change substantially in the coming quarter.

General and Administrative:

        General and administrative expenses consist primarily of salaries,
payroll taxes, benefits and related costs for the general corporate functions
including executive management, finance, human resources, and legal and other
professional fees. General and administrative expenses increased to $918,000 in
the three months ended September 30, 2000 from $551,000 in the three months
ended September 30, 1999. General and administrative expenses increased to $1.5
million in the six months ended September 30, 2000 from $1.1 million in the six
months ended September 30, 1999. General and administrative expenses as a
percentage of total revenue increased to 42% for the three months ended
September 30, 2000 from 40% for the three months ended September 30, 1999, a two
percentage point increase. General and administrative expenses as a percentage
of total revenue decreased to 39% for the six months ended September 30, 2000
from 47% for the six months ended September 30, 1999, an eight percentage point
decrease. Of

                                       11
<PAGE>

the 67% increase in general and administrative costs for the three months ended
September 30, 2000 versus September 30, 1999, 23% is primarily attributable to
increased costs relating to growth in Salon's general and administrative
personnel expense, 18% to bad debt expense, 17% to recruiting costs and 9% to
all other costs. Salon anticipates general and administrative costs to decline
in the coming quarter.

Amortization of Intangibles:

        Amortization of intangibles consists of the costs associated with the
amortization of intangibles and goodwill associated with the acquisitions of The
Well and MP3Lit. The acquisitions of The Well and MP3Lit are being accounted for
using the purchase method of accounting and are being amortized on a straight-
line basis over 60 months. Amortization expenses were $356,000, or 16% of net
revenue, and $256,000, or 19% of net revenue, for the three months ended
September 30, 2000 and 1999, respectively. Amortization expenses were $679,000,
or 17% of net revenue, and $511,000, or 21% of net revenue, for the six months
ended September 30, 2000 and 1999, respectively. The increase in this expense
category is due to the MP3Lit acquisition in the first quarter of fiscal year
2001.

Stock-based Compensation:

        Stock-based compensation consists of expenses associated with the
issuance of stock options and warrants. Stock-based compensation charges were
$107,000, or 5% of net revenue for the three months ended September 30, 2000,
compared to $602,000, or 44% of net revenue for the three months ended September
30, 1999. Stock-based compensation charges were $124,000, or 3% of net revenue
for the six months ended September 30, 2000, compared to $1.2 million, or 52% of
net revenue for the six months ended September 30, 1999. The decrease in stock-
based compensation is primarily attributable to the drop in Salon's stock price
during the current fiscal year and reflects a credit of $232,000 from the
departure of a senior manager.

Other Income, Net:

        Other income, net consists primarily of interest earned on Salon's cash
and cash equivalents, offset by interest expense on borrowings. Other income,
net decreased to $185,000 in the three months ended September 30, 2000 from
$393,000 for the three months ended September 30, 1999. Other income, net
decreased to $392,000 in the six months ended September 30, 2000 from $447,000
for the six months ended September 30, 1999. The decrease in other income, net
is primarily attributable to decrease in the amount of interest earned by Salon
due to the relatively lower Salon cash balance in 2000.

Net Loss:

        As a result of the above factors, Salon recorded a net loss of $3.5
million, or $0.27 per share loss for the three months ended September 30, 2000
compared to a net loss of $4.7 million, or $0.41 per share loss for three months
ended September 30, 1999. Salon recorded a net loss of $8.0 million, or $0.63
per share loss for the six months ended September 30, 2000 compared to a net
loss of $9.3 million, or $1.41 per share loss for the six months ended September
30, 1999.

                                       12
<PAGE>

Liquidity and Capital Resources:

        Since its inception, Salon has primarily financed its operations through
the private placement of its convertible preferred stock and its initial public
offering of common stock. As of September 30, 2000, Salon had approximately $9.4
million in cash and cash equivalents which was obtained through Salon's initial
public offering in June 1999 and the sale of additional stock in July 1999.

        Net cash used in operations was $7.4 million for the six months ended
September 30, 2000, compared to $5.8 million for the six months ended September
30, 1999. The principal use of cash during the six months ended September 30,
2000 was to fund the $8.0 million net loss for the period, offset by non-cash
charges of $1.6 million. Also impacting operating activities was a reduction in
accounts receivable generating $822,000 in cash and a decrease in accounts
payable and accrued liabilities reducing cash by $1.4 million.

        Net cash used in investing activities totaled $1.1 million for the six
months ended September 30, 2000, compared to $10.4 million for the six months
ended June 30, 1999. During the six months ended September 30, 2000, the net
cash used for investing activities consisted primarily of the cash consideration
of the MP3Lit acquisition and property and equipment purchases. Investment
activities for the six months ended September 30, 1999 included $10.3 million
for the purchase of investments and $158,000 for the purchase of property and
equipment.

        Net cash from financing activities decreased from an inflow of $35.6
million for the six months ended September 30, 1999 to an outflow of $55,000 for
the six months ended September 30, 2000. The cash used in financing activities
during the six months ended September 30, 2000 was primarily for the repayment
of leases and bank borrowings of $68,000 and $60,000, respectively, which was
offset by cash generated from options exercises. The cash provided by financing
activities during the six months ended September 30, 1999 was primarily from the
net proceeds from the issuance of preferred stock and common stock warrants and
the net proceeds from the issuance of common stock during the Company's initial
public offering.

        Salon's capital requirements depend on numerous factors, including the
success of Salon's strategies for generating revenues and the amount of
resources it devotes to investments in its network, sales, marketing and brand
promotion. Salon's expenditures have substantially increased since inception as
its operations and staff have grown and Salon anticipates that its expenditures
may increase for the foreseeable future but will decrease as a percentage of
sales. In addition, Salon will continue to evaluate possible investments in
businesses, products and technologies complementary to its existing business.
Salon does not anticipate any significant capital expenditures in the near
future except for capitalizing certain costs related to software development.

        Salon currently anticipates that its available cash resources will be
sufficient to meet its anticipated needs for working capital and capital
expenditures for at least the next six to twelve months, depending on the rate
of revenue growth. Salon may need to raise additional funds, however, in order
to fund more rapid expansion, to continue operations, to develop new or enhance
existing services, to respond to competitive pressures or to acquire
complementary businesses, products or technologies. If Salon raises additional
funds by selling equity securities, the percentage ownership of Salon's
stockholders will be reduced and its stockholders may experience additional
dilution. Salon cannot be sure that additional financing will be available on
terms favorable to Salon, or at all. If adequate funds are not available on
acceptable terms, Salon's ability to fund expansion, continue operations, react
to competitive pressures, or take advantage of unanticipated opportunities would

                                       13
<PAGE>

be substantially limited. If this occurred, Salon's business would be
significantly adversely affected.

RISK FACTORS

Factors That May Affect Our Future Results and Market Price of Stock:

Because we have a limited operating history, it is difficult to evaluate our
business and prospects

     We originally incorporated in July 1995 and launched our initial Web sites
in November 1995. Because we have a limited operating history, you must consider
the risks and difficulties frequently encountered by early-stage companies like
us in new and rapidly evolving markets, including the market for advertising and
commerce on the Internet. Any future growth and success in our business will
depend substantially upon our ability to attract a larger number of users to our
Web sites and online communities, to increase advertising and sponsorship sales
based on that audience and to meet the challenges described in the risk factors
set forth below.

We lack significant revenues, we have a history of losses and we anticipate
continued losses

     We have not achieved profitability and expect to incur operating losses for
the foreseeable future. We incurred net losses attributable to common
stockholders of $8.0 million in the six months ended September 30, 2000 and
$33.4 million in the fiscal year ended March 31, 2000. As of September 30, 2000,
our accumulated deficit was $54 million. We expect these operating losses to
continue for the foreseeable future. We will need to generate significant
revenues to achieve and maintain profitability, and we may not be able to do so.
Even if we do achieve profitability, we may not be able to sustain or increase
profitability on a quarterly or annual basis in the future. If our revenues grow
more slowly than we anticipate or if our operating expenses exceed our
expectations, our financial results would be severely harmed.

Our quarterly operating results are volatile and may adversely affect our stock
price

     Our future revenues and operating results are likely to vary significantly
from quarter to quarter due to a number of factors, many of which are outside
our control, and any of which could severely harm our business. These factors
include:

     .  our ability to attract and retain banner advertisers, advertising
        sponsors and electronic commerce sponsors;

     .  our ability to attract and retain a large number of users;

     .  the introduction of new Web sites, services or products by us or by our
        competitors;

     .  the timing and uncertainty of our advertising and sponsorship sales
        cycles;

     .  the mix of banner advertisements and sponsorships sold by us or our
        competitors;

     .  seasonal declines in advertising sales, which typically occur in the
        first and third calendar quarters;

                                       14
<PAGE>

         .  the level of Internet usage;

         .  our ability to attract, integrate and retain qualified personnel;

         .  our ability to successfully integrate operations and technologies
            from acquisitions or other business combinations;

         .  technical difficulties or system downtime affecting the Internet
            generally or the operation of our Web sites; and

         .  the amount and timing of operating costs and capital expenditures
            relating to the expansion of our business operations and
            infrastructure.

         In order to attract and retain a larger user base, we may increase
expenditures on sales and marketing, content development, technology and
infrastructure. Many of these expenditures are planned or committed in advance
and in anticipation of future revenues. If our revenues in a particular quarter
are lower than we anticipate, we may be unable to reduce spending in that
quarter. As a result, any shortfall in revenues would likely harm our quarterly
operating results.

         Due to the factors noted above and the other risks discussed in this
section, you should not rely on quarter-to-quarter comparisons of our results of
operations as an indication of future performance. It is possible that in some
future periods our results of operations may be below the expectations of public
market analysts and investors. If this occurs, the price of our common stock may
decline.

We depend on banner advertising and sponsorship sales for substantially all of
our revenues, and our inability to increase banner advertising and sponsorship
revenues would harm our business

         Our revenues for the foreseeable future will depend substantially on
sales of advertising and sponsorships. In the three months ended September 30,
2000, advertising and sponsorship sales accounted for 87% of our net revenues,
and in the fiscal year ended March 31, 2000 they accounted for 72% of our net
revenues. In order to increase our revenues, we will need to attract additional
significant banner advertisers, advertising sponsors and electronic commerce
sponsors on an ongoing basis. We may not be able to attract or retain a
sufficient number of banner advertisers or advertising sponsors in the future,
and if we cannot, our business would likely be severely harmed. If we do not
sell a sufficient number of advertisements or sponsorships or do not engage a
sufficient number of advertisers or sponsors during a particular period, our
business could be severely harmed.

         Increasing our advertising and sponsorship revenues depends upon many
factors, including whether we will be able to:

         .  successfully sell and market our network to advertisers and
            sponsors;

         .  increase our user base;

         .  increase the amount of revenues we receive per sponsorship;

         .  increase awareness of the Salon brand;

                                       15
<PAGE>

         .  target advertisements and electronic commerce opportunities to users
            with appropriate interests;

         .  accurately measure the number and demographic characteristics of our
            users; and

         .  attract and retain sales personnel.

Our revenues depend on a limited number of advertisers and sponsors who are not
subject to long-term agreements, and the loss of a number of these advertisers
and sponsors could harm our operating results

         Historically, we have relied on a small number of banner advertisers
and advertising sponsors for a significant percentage of our revenues. In the
six months ended September 30, 2000 three customers accounted for approximately
23% of our revenue. The loss of any of our significant banner advertisers or
advertising sponsors could harm our business. We anticipate that our financial
results in any given period will continue to significantly depend on revenues
from a small number of banner advertisers and advertising sponsors. In addition,
particularly because few banner advertisers and advertising sponsors are
contractually obligated to purchase any advertising in the future, we are unable
to anticipate our mix of banner advertisers and advertising sponsors in future
fiscal periods.

The length of our sales cycles is uncertain and variable and may lead to
shortfalls in revenues and fluctuations in our operating results

         Our dependence on banner advertising and sponsorships subjects us to
the risk of revenue shortfalls because the sales cycles for advertising and
sponsorships vary significantly, and during these cycles we may expend
substantial funds and management resources while not obtaining advertising or
sponsorship revenues. If sales are delayed or do not occur, our financial
results for a particular period may be harmed. The time between the date of
initial contact with a potential banner advertiser or sponsor and receipt of a
purchase order from the advertiser may range from as little as one week to up to
nine months. Sales of banner advertising and sponsorships are subject to factors
over which we have little or no control, including:

         .  advertisers' and sponsors' budgets;

         .  internal acceptance reviews by advertisers and their agencies;

         .  the timing of completion of advertisements and sponsorships; and

         .  the possibility of cancellation or delay of projects by advertisers
            or sponsors.

We must increase our user base to attract advertisers and sponsors and to
generate additional revenue

         Increasing the size of our user base is critical to selling advertising
and sponsorships and to increasing our revenues. If we cannot increase the size
of our user base we may not be able to generate additional revenues, which could
leave us unable to maintain or grow our business. To increase our user base, we
must:

         .  expand our content and communities;

                                       16
<PAGE>

         .  expand our network of distribution partners;

         .  grow Salon brand recognition through advertising and syndication;

         .  enhance our technology to improve the functionality of our network
            of Web sites; and


         .  offer attractive electronic commerce opportunities to electronic
            commerce sponsors and users.

         If we do not achieve these objectives to increase our user base, our
business could be severely harmed. Additionally, a significant element of our
business strategy is to build loyal online communities because we believe
communities help retain actively engaged users. However, the concept of
developing these communities on the Web is unproven, and if it is not
successful, then it may be more difficult to increase the size of our user base.

We must establish and maintain distribution relationships to attract more users
to our network

         We depend on establishing and maintaining distribution relationships
with high-traffic Web sites to increase our user base. There is intense
competition for relationships with these sites, and we may not be able to enter
into such relationships on favorable terms or at all. Even if we enter into
distribution relationships with these Web sites, their sites may not attract
significant numbers of users, and our Web sites may not attract additional users
from these relationships. Moreover, we have paid and may in the future pay
significant fees to establish these relationships.

We must continually develop compelling content to attract Internet users

         Our success depends upon our ability to attract and retain a large
number of users by delivering original and compelling Internet content and
services. If we are unable to develop content and services that allow us to
attract, retain and expand a loyal user base possessing high-value demographic
characteristics, we will be unable to generate advertising revenues or enter
into sponsorships, and our revenues and operating results will be severely
harmed. The content and services we provide on our Web sites may not appeal to a
sufficient number of Internet users to generate banner-advertising revenues or
attract sponsorships. Our ability to develop compelling content depends on
several factors, including:

         .  the quality and number of writers and artists who create content for
            Salon;

         .  the quality of our editorial staff; and

         .  the technical expertise of our production staff.

         Consumer tastes and preferences change rapidly and we may not be able
to anticipate, monitor, and successfully respond to these changes to attract and
retain a sufficient number of users for our network of Web sites. Internet users
can freely navigate and instantly switch among a large number of Web sites, many
of which offer content and services that compete with Salon. In addition, many
Web sites offer very specific, highly targeted content that could have greater
appeal than our network to particular subsets of our target user base.

                                       17
<PAGE>

The controversial content of our Web sites may limit our revenues from banner
advertising, advertising sponsorships or electronic commerce sponsorships

      Many of our Web sites contain, and will continue to contain, content that
is politically and culturally controversial. As a result of this content,
current and potential advertisers and sponsors may refuse to do business with
us. Our outspoken stance on political issues has and may continue to result in
negative reactions from some users, commentators and other media outlets.

Our promotion of the Salon brand must be successful in order to attract and
retain users as well as advertisers, sponsors and strategic partners

      The success of the Salon brand depends largely on our ability to provide
high quality content and services. If Internet users do not perceive our
existing content and services to be of high quality, or if we introduce new
content and services or enter into new business ventures that are not favorably
perceived by users, we may not be successful in promoting and maintaining our
brand. Any expansion of the focus of our operations creates a risk of diluting
our brand, confusing consumers and decreasing the value of our user base to
advertisers. In order to attract and retain users, and to promote the Salon
brand, we may need to increase our budgets for content and services or otherwise
substantially increase our financial commitment to establishing and maintaining
loyalty for the Salon brand name. If we are unable to establish the Salon brand
or are forced to substantially increase our expenditures to promote the Salon
brand, our business could be severely harmed.

We need to hire, integrate and/or retain qualified personnel because these
individuals are important to our growth

      Our success significantly depends on key editorial and design personnel.
In addition, because our users must perceive the content of our Web as having
been created by credible and notable sources, our success also depends on the
name recognition and reputation of our editorial staff, in particular David
Talbot, Salon's founder and editor-in-chief.

      Our future success depends to a significant extent on the continued
services of key personnel, particularly, David Talbot, Salon's editor-in-chief
and Michael O'Donnell, Chief Executive Officer. We currently have no employment
agreement with Mr. Talbot and we do not maintain "key person" life insurance for
any of our personnel. The loss of the services of Mr. Talbot, Mr. O'Donnell, or
other key employees would likely have a significantly adverse effect on our
business.

      Competition for personnel in the Internet industry is intense. We have
from time to time experienced, and we expect to continue to experience,
difficulty in hiring and retaining highly skilled employees with appropriate
qualifications as a result of our rapid growth and expansion. Early in fiscal
year 2001, our Vice President of Sales and Chief Financial Officer each resigned
in order to join other companies. We may be unable to retain our current key
employees or attract, integrate or retain other qualified employees in the
future. Additionally, it is often more difficult to attract employees once a
company's stock is publicly traded because the exercise price of equity awards
such as stock options are based on the public market, which is highly volatile.
If we do not succeed in attracting new personnel or integrating, retaining and
motivating our current personnel, our business could be harmed.

                                       18
<PAGE>

The integration of new management personnel may interfere with our operations

  We have recently hired new management personnel, including a new Vice
President of Sales and Chief Financial Officer. To integrate into Salon, these
individuals must spend a significant amount of time learning our business model
and management system in addition to performing their regular duties.
Accordingly, the integration of new personnel has resulted in and will continue
to result in some disruption to our ongoing operations.

We may expend significant resources to protect our intellectual property rights
or to defend claims of infringement by third parties, and if we are not
successful we may lose rights to use significant material or be required to pay
significant fees

     Our success and ability to compete are significantly dependent on our
proprietary content. We rely exclusively on copyright law to protect our
content. While we actively take steps to protect our proprietary rights, these
steps may not be adequate to prevent the infringement or misappropriation of our
content. Infringement or misappropriation of our content or intellectual
property could severely harm our business. We also license content from various
freelance providers and other third-party content providers. While we attempt to
insure that this content may be freely licensed to us, other parties may assert
claims of infringement against us relating to this content.

     We may need to obtain licenses from others to refine, develop, market and
deliver new services. We 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.

     In April 1999 we acquired the Internet address www.salon.com. Because
www.salon.com is the address of the main home page to our network of Web sites
and incorporates our company name, it is a vital part of our intellectual
property assets. We do not have a registered trademark on the address, and
therefore it may be difficult for us to prevent a third party from infringing
our intellectual property rights in the address.  If we fail to adequately
protect our rights in the address, or if a third party infringes our rights in
the address or otherwise dilutes the value of www.salon.com, our business could
be harmed.

Our technology development efforts may not be successful in improving the
functionality of our network which could result in reduced traffic on our
network

     We have developed a proprietary online publishing system. If this system
does not work as intended, or if we are unable to continue to develop this
system to keep up with the rapid evolution of technology for content delivery on
the Internet, our network of Web sites may not operate properly which could harm
our business. Additionally, software product design, development and enhancement
involves 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 our business. Moreover, complex software
products like our online publishing system frequently contain undetected errors
or shortcomings, and may fail to perform or scale as expected. Although we have
tested and will continue to test our publishing system, errors or deficiencies
may be found in the system.

We rely on third parties for several critical functions relating to delivery of
advertising and our Web site performance, and the failure of these third parties
to supply these services in an efficient manner could limit our growth and
impair our business

                                       19
<PAGE>

     We rely on a number of third party suppliers for various services,
including Web hosting, banner advertising delivery software, Internet traffic
measurement software and electronic commerce fulfillment services. While we
believe that we could obtain these services from other qualified suppliers on
similar terms and conditions, a disruption in the supply of these services by
our current suppliers could severely harm our business.

     We use third-party software to manage and measure the delivery of banner
advertising on our network of Web sites. This type of software is new and
unproven and so may fail to perform as expected.  If this software malfunctions
or does not deliver the correct banner advertisements to our network, our
advertising revenues could be reduced, and our business could be harmed.

     We use third-party software to measure traffic on our network of Web sites.
This type of software is new and unproven and so may fail to perform as
expected.  If this software malfunctions or does not accurately measure our user
traffic, we may not be able to justify our advertising rates, and our
advertising revenues could be reduced.

Growth in our operations is placing a strain on our resources, and failure to
manage growth effectively could harm our business

     We have experienced a period of significant growth. In the fiscal year
ended March 31, 2000 the number of employees increased 112%. In the fiscal year
ended March 31, 2000 our total revenues increased approximately 174% and our
total operating expenses increased approximately 236% compared to the fiscal
year ended March 31, 1999. In the six months ended September 30, 2000 our total
revenues increased approximately 66% and our total operating expenses increased
approximately 2% compared to the six months ended September 30, 1999.

We may not be able to successfully integrate our acquisitions, and any failure
to integrate could diminish the value of an acquired business or cause
disruptions in our ongoing operations

     Acquisitions and business combinations entail numerous operational risks,
including:

     .  difficulty in the assimilation of acquired operations, technologies or
        products;

     .  diversion of management's attention from other business operations;

     .  risks of entering markets in which we have limited or no experience; and

     .  potential loss of key employees of acquired businesses.

     We acquired MP3Lit, a web site dedicated to offering spoken word and audio
literature recordings in the MP3 format, in May 2000. We may not be able to
successfully integrate MP3Lit or any businesses, products, technologies or
personnel that we might acquire in the future, and if we cannot, our business
could be harmed.

We will need more working capital to expand our network and achieve our business
objectives, and securing financing may be difficult because of the condition of
our business or the uncertain nature of the financial markets

                                       20
<PAGE>

     We believe that our current cash resources will meet our anticipated
working capital and capital expenditure requirements for at least the coming six
to twelve months. We may need to raise additional capital to do the following:

     .  expand our network of Web sites and interactive communities;

     .  increase our electronic commerce opportunities;

     .  aggressively promote awareness of the Salon brand;

     .  make payments under distribution relationships;

     .  respond to competitive pressures; or

     .  acquire complementary businesses or technologies.

     If we raise additional capital by issuing equity or convertible debt
securities, the percentage ownership of our then-current stockholders will be
reduced, and such securities may have rights, preferences or privileges senior
to those of our current stockholders. Additionally, we may not be able to obtain
additional financing on favorable terms, or at all. If adequate capital is not
available on acceptable terms, our ability to expand, take advantage of
unanticipated opportunities, develop or enhance services or otherwise respond to
competitive pressures would be significantly limited. This limitation could harm
our business.

Acceptance and effectiveness of Internet advertising and electronic commerce is
unproven and, to the extent it does not continue to grow, our market may not
develop adequately and our business could be harmed

     Our success is highly dependent on an increase in the use of the Internet
for advertising and electronic commerce. If the markets for Internet advertising
or electronic commerce do not develop, our business may be severely harmed.

     Currently, demand and market acceptance for Internet advertising is
uncertain and may not increase as necessary for our business to grow or succeed.
Many advertisers have little or no experience using the Internet for advertising
purposes. The adoption of Internet advertising, particularly by companies that
have historically relied on traditional media, requires the acceptance of a new
way of conducting business, exchanging information and advertising products and
services. Potential advertisers may believe Internet advertising to be
undesirable or less effective for promoting their products and services relative
to traditional advertising media. If the Internet advertising market fails to
develop or develops more slowly than we expect, our business could be harmed.

     Different pricing models are used to sell Internet advertising. It is
difficult to predict which pricing models, if any, will emerge as the industry
standard. This uncertainty makes it difficult to project our future advertising
rates and revenues. Any failure to adapt to pricing models that develop or
respond to competitive pressures could reduce our advertising revenues.
Moreover, "filter" software programs that limit or prevent advertising from
being delivered to an Internet user's computer are commonly available.
Widespread use of this software could adversely affect the commercial viability
of Internet advertising and our business.

                                       21
<PAGE>

     Many retailers have little or no experience using the Internet for
electronic commerce. The adoption of electronic commerce, particularly by
companies that have historically relied on traditional channels to sell their
products and services, requires the acceptance of a new way of conducting
business, exchanging information and completing commercial transactions.
Potential electronic commerce partners may believe electronic commerce to be
undesirable or less effective for selling their products and services relative
to traditional channels. If the electronic commerce market fails to develop or
develops more slowly than we expect, our business could be harmed.

Tracking and measurement standards for advertising may not evolve to the extent
necessary to support Internet advertising, thereby creating uncertainty about
the viability of our business model

     There are currently no standards for the measurement of the effectiveness
of advertising on the Internet, and the industry may need to develop standard
measurements in order to sustain advertising volume or attract new advertisers.
Standardized measurements may not develop and if they do not, our business could
be harmed. In addition, currently available software programs that track
Internet usage and other tracking methodologies are rapidly evolving. The
development of such software or other methodologies may not keep pace with our
information needs, particularly to support our internal business requirements
and those of our advertisers and sponsors. The absence or insufficiency of this
information could limit our ability to attract and retain advertisers and
sponsors.

     It is important to our advertisers and sponsors that we accurately measure
the demographics of our user base and the delivery of advertisements on our Web
sites. We depend on third parties to provide certain of these measurement
services. If they are unable to provide these services in the future, we would
need to perform them ourselves or obtain them from another provider, if
available. This could cause us to incur additional costs or cause interruptions
in our business while we are replacing these services. Companies may choose to
not advertise on Salon or may pay less for advertising or sponsorships if they
do not perceive our measurements or measurements made by third parties to be
reliable.

If use of the Internet does not grow, our business could be harmed

     Our success is highly dependent upon continued growth in the use of the
Internet generally and in particular as a medium for content, advertising and
electronic commerce. If Internet usage does not grow, we may not be able to
increase revenues from advertising and sponsorships and this may harm our
business. Internet use by consumers is in an early stage of development, and
market acceptance of the Internet as a medium for content, advertising and
electronic commerce is highly uncertain. A number of factors may inhibit the
growth of Internet usage, including the following. If these or any other factors
cause use of the Internet to slow or decline, our results of operations could be
harmed.

     .  inadequate network infrastructure;

     .  security concerns;

     .  inconsistent quality of service; and

     .  limited availability of cost-effective, high-speed access.

                                       22
<PAGE>

Increasing competition among Internet content providers could reduce our
advertising sales or market share, thereby harming our business

     The market for Internet content is relatively new, rapidly changing and
intensely competitive. We expect competition for Internet content to continue to
increase and if we cannot compete effectively our business could be harmed.
Additionally, we expect the number of Web sites competing for the attention and
spending of users, advertisers and sponsors to continue to increase, because
there are so few barriers to entry on the Internet.

     Increased competition could result in advertising or sponsorship price
reductions, reduced margins or loss of market share, any of which could harm our
business. Competition is likely to increase significantly as new companies enter
the market and current competitors expand their services. Many of our present
and potential competitors are likely to enjoy substantial competitive advantages
over us. If we do not compete effectively or if we experience any pricing
pressures, reduced margins or loss of market share resulting from increased
competition, our business could be harmed.

If the Internet infrastructure continues to be unreliable, access to our network
may be impaired and our business may be harmed

     Our success depends in part on the development and maintenance of the
Internet infrastructure. If this infrastructure fails to develop or be
adequately maintained, our business would be harmed because users may not be
able to access our network of Web sites. Among other things, development and
maintenance of a reliable infrastructure will require a reliable network
backbone with the necessary speed, data capacity, security and timely
development of complementary products for providing reliable Internet access and
services.

     The Internet has experienced, and is expected to continue to experience,
significant growth in number of users and amount of traffic. If the Internet
continues to experience increased numbers of users, frequency of use or
increased bandwidth requirements, the Internet infrastructure may not be able to
support these increased demands or perform reliably. The Internet has
experienced a variety of outages and other delays as a result of damage to
portions of its infrastructure, and could face additional outages and delays in
the future. These outages and delays could reduce the level of Internet usage
and traffic on our network of Web sites. In addition, the Internet could lose
its viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of activity. If the Internet infrastructure
is not adequately developed or maintained, use of our network of Web sites may
be reduced.

     Even if the Internet infrastructure is adequately developed and maintained,
we may incur substantial expenditures in order to adapt our services and
products to changing Internet technologies. Such additional expenses could
severely harm our financial results.

We may be held liable for content on our Web sites

     As a publisher and distributor of content over the Internet, including
user-generated content on our online communities, we face potential liability
for defamation, negligence, copyright, patent or trademark infringement and
other claims based on the nature and content of the material that is published
or distributed on our network of Web sites. These types of claims have been
brought, sometimes successfully, against online services, Web sites and print
publications in the past. Although we carry general liability insurance, our
insurance may not be adequate to indemnify us for all liability that may be
imposed. Any liability that is not covered by our

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<PAGE>

insurance or is in excess of our insurance coverage could severely harm our
financial condition and business.

We may be liable for our links to third-party web sites

     We could be exposed to liability with respect to the selection of third-
party Web sites that may be accessible through Salon.com. These claims might
include, among others, that by linking to Web sites operated by third parties,
we may be liable for copyright or trademark infringement or other unauthorized
actions by these third-party Web sites. Other claims may be based on errors or
false or misleading information provided on linked sites, including information
deemed to constitute professional advice such as legal, medical, financial or
investment advice. Other claims may be based on our links to sexually explicit
Web sites and our provision of sexually explicit advertisements when this
content is displayed. Our business could be seriously harmed due to the cost of
investigating and defending these claims, even to the extent these claims do not
result in liability. Implementing measures to reduce our exposure to this
liability may require us to spend substantial resources and limit the
attractiveness of our service to users.

Concerns about transactional security may hinder our electronic commerce
strategy by subjecting us to liability or by discouraging commercial
transactions over the Internet

     A significant barrier to electronic commerce is the secure transmission of
confidential information over public networks. Any breach in our security could
expose us to a risk of loss or litigation and possible liability. We rely on
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information. As a result of advances in
computer capabilities, new discoveries in the field of cryptography or other
developments, a compromise or breach of the algorithms we use to protect
customer transaction data may occur. A compromise of our security could severely
harm our business. A party who is able to circumvent our security measures could
misappropriate proprietary information, including customer credit card
information, or cause interruptions in the operation of our network of Web
sites.

     We 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. However, protection may not be available at a reasonable
price or at all. Concerns over the security of electronic commerce and the
privacy of users may also inhibit the growth of the Internet as a means of
conducting commercial transactions.

Our efforts to engage in electronic commerce may expose us to product liability
claims

     We have and continue to foster relationships with manufacturers or other
companies to offer certain products to users through our network of Web sites.
We have very limited experience in the sale of products online and the
development of relationships with manufacturers or suppliers of these products.
Users who purchase products may sue us if any of the products sold on our
network are defective, fail to perform properly or injure the user. Liability
claims could require us to spend significant time and money in litigation or to
pay significant damages. As a result, any such claims, whether or not
successful, could severely harm our business.

Our systems may fail due to natural disasters, telecommunications failures and
other events, any of which would limit user traffic

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<PAGE>

     Substantially all of our communications hardware and computer hardware
operations for our Web sites are located at Frontier GlobalCenter's facilities
in Sunnyvale, California. Fire, floods, earthquakes, power loss,
telecommunications failures, break-ins and similar events could damage these
systems and cause interruptions in our services. Computer viruses, electronic
break-ins or other similar disruptive problems could cause users to stop
visiting our network of Web sites and could cause advertisers and sponsors to
terminate any agreements with us.  In addition, we 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, our business could be harmed. Our insurance policies may not
adequately compensate us for any losses that may occur due to any failures of or
interruptions in our systems. We do not presently have a formal disaster
recovery plan.

     Our Web sites must accommodate a high volume of traffic and deliver
frequently updated information. It is possible that we will experience systems
failures in the future and that such failures could harm our business. In
addition, our users depend on Internet service providers, online service
providers and other Web site operators for access to our Web sites. 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 our systems. Any of these system failures could harm our
business.

Hackers may attempt to penetrate our security system; online security breaches
could harm our business

  Consumer and supplier confidence in our web sites depends on maintaining
relevant security features. Security breaches also could damage our reputation
and expose us to a risk of loss or litigation. Experienced programmers or
"hackers" have successfully penetrated sectors of our systems and we expect that
these attempts will continue to occur from time to time. Because a hacker who is
able to penetrate our network security could misappropriate proprietary
information or cause interruptions in our products and services, we may have to
expend significant capital and resources to protect against or to alleviate
problems caused by these hackers. Additionally, we may not have a timely remedy
against a hacker who is able to penetrate our network security. Such security
breaches could materially adversely affect our company. In addition, the
transmission of computer viruses resulting from hackers or otherwise could
expose us to significant liability. Our insurance policies may not be adequate
to reimburse us for losses caused by security breaches. We also face risks
associated with security breaches affecting third parties with whom we have
relationships.

Governmental regulation and legal uncertainties of the Internet may restrict our
business or raise its costs

     There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues including content, copyrights,
distribution, antitrust matters, user privacy, pricing, and the characteristics
and quality of products and services. An increase in regulation or the
application of existing laws to the Internet could significantly increase our
costs of operations and harm our business. For example, the Communications
Decency Act of 1996 sought to prohibit the transmission of certain types of
information and content over the Web. Additionally, several telecommunications
companies have petitioned the Federal Communications Commission to regulate
Internet service providers and online service providers in a manner similar to
long distance telephone carriers and to impose access fees on these companies.
Imposition of access fees could increase the cost of transmitting data over the
Internet.  Moreover, it may take years to

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<PAGE>

determine the extent to which existing laws relating to issues such as property
ownership, obscenity, libel and personal privacy are applicable to the Internet
or the application of laws and regulations from jurisdictions whose laws do not
currently apply to our business.

Privacy concerns could impair our business

  We have a policy against using personally identifiable information obtained
from users of our site 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 we use this information without permission or in
violation of our policy, we may face potential liability for invasion of privacy
for compiling and providing information to our corporate customers and
electronic commerce merchants.  We  voluntarily register members in order to
tailor content to them and assist advertisers in fulfilling advertising
campaigns. However, privacy concerns may cause users to resist providing the
personal data necessary to support this capability. Even the perception of
security and privacy concerns, whether or not valid, may indirectly inhibit use
of registration at our site.  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 Economic Community, 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, our business, financial condition and results of operations could be
materially harmed.

Possible state sales and other taxes could adversely affect our results of
operations

     We generally do not collect sales or other taxes in respect of goods sold
to users on our network of Web sites. However, one or more states may seek to
impose sales tax collection obligations on out-of-state companies, including
Salon, which engage in or facilitate electronic commerce. A number of proposals
have been made at the state and local level that would impose additional 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 our ability to derive revenue from electronic commerce. Moreover, if any
state or foreign country were to successfully assert that we should collect
sales or other taxes on the exchange of merchandise on our network, our
financial results could be harmed.

Our stock could become less marketable

     The shares of our Common Stock are currently listed on the Nasdaq National
Market. Due to the decline in the price of our Common Stock, our Common Stock
could be suspended or delisted from the Nasdaq due to their minimum trading
requirements, particularly if our stock price falls below $1.00 per share or
certain financial requirements imposed by Nasdaq are not met. If the shares of
our Common Stock were to be suspended or delisted from the Nasdaq system, it
would be much more difficult to dispose of our Common Stock or obtain accurate
quotations as to the price of our securities.

Provisions in Delaware law and our charter, stock option agreements and offer
letters to executive officers may prevent or delay a change of  control

     We are 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

                                       26
<PAGE>

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 where the stockholder
acquired 15% or more of the corporation's assets;


     .  after the transaction where 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.

     A Delaware corporation may opt out of the Delaware anti-takeover laws if
its certificate of incorporation or bylaws so provide. We have 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 us.

     Our 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:

     .  our 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.

These provisions may have the effect of delaying or preventing a change of
control.

     Our certificate of incorporation and bylaws provide that we will indemnify
officers and directors against losses that they may incur in investigations and
legal proceedings resulting from their services to us, which may include
services in connection with takeover defense measures. These provisions may have
the effect of preventing changes in our management.

     In addition, offer letters with executive officers provide for the payment
of severance and acceleration of options upon the termination of these executive
officers following a change of control of Salon. These provisions in offer
letters could have the effect of discouraging potential takeover attempts.

Salon's stock price may fluctuate significantly regardless of Salon's actual
operating performance

     Salon common stock is listed for trading on the Nasdaq National Market. The
trading price of Salon common stock may be highly volatile. Salon's stock price
may be subject to wide fluctuations in response to a variety of factors,
including:

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<PAGE>

     .  actual or anticipated variations in quarterly operating results and
        announcements of technological innovations;

     .  new products or services offered by Salon or its competitors;

     .  changes in financial estimates by securities analysts;

     .  conditions or trends in the Internet services industry and the online
        content segment in particular;

     .  Salon's announcement of significant acquisitions, strategic
        partnerships, joint ventures or capital commitments;

     .  additions or departures of key personnel;

     .  sales of common stock; and

     .  other events that may be beyond Salon's control.

     In addition, the Nasdaq National Market, where most publicly held Internet
companies are traded, has recently experienced extreme price and volume
fluctuations. These fluctuations often have been unrelated or disproportionate
to the operating performance of these companies. These broad market and industry
factors may materially adversely affect the market price of Salon's common
stock, regardless of Salon's actual operating performance. In the past,
following periods of volatility in the market price of an individual company's
securities, securities class action litigation often has been instituted against
that company. This type of litigation, if instituted, could result in
substantial costs and a diversion of management's attention and resources.

--------------------------------------------------------------------------------
PART I:  FINANCIAL INFORMATION
ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
--------------------------------------------------------------------------------

     The Company's exposure to market risk for changes in interest rates relates
primarily to the Company's investment portfolio. The Company places its
investments with high credit issuers in short-term securities with maturities of
less than three months. The portfolio includes only marketable securities with
active secondary or resale markets to ensure portfolio liquidity. The Company
has no investments denominated in foreign country currencies and therefore is
not subject to foreign exchange risk.

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<PAGE>

--------------------------------------------------------------------------------
PART II: OTHER INFORMATION
--------------------------------------------------------------------------------

Item 1.  Legal Proceedings.

     Salon has been named as a party in Kathleen Willey Schwicker vs. William
Jefferson Clinton, et. al., filed with the U.S. District Court for the District
of Columbia.  This matter is at an early stage and Salon's position is currently
being studied.  Salon believes it has meritorious defenses and plans to
vigorously defend ourselves in this matter, and while the results of such claim
cannot be predicted with certainty, Salon believes that the resolution of this
matter will not have a material adverse effect on our statement of operation or
on our cash flow.

Item 2.  Changes in Securities and Use of Proceeds.

     Not Applicable

Item 3.  Default 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 and Reports on Form 8-K.

(a)  Exhibits.

     10.6.1   Employment Agreement between Robert O'Callahan and the Company
dated June 26, 2000

     10.18   Amendment No. 2 To Anchor Tenant Agreement between America Online,
Inc. and the Company.

(b)  Reports on Form 8-K.

     The Company filed one report on Form 8-K during the three months ended June
30, 2000 and one report on Form 8-K/A subsequent to that period. These filings
related to the acquisition of MP3Lit. The report on Form 8-K was filed on May
22, 2000 and reported under Item 2 -Acquisition or Disposition of Assets. The
report on Form 8-K/A was filed on July 19, 2000 and reported under Item 7 -
Financial Statements, Pro Forma Financial Information and Exhibits.

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<PAGE>

Signatures

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

                         SALON.COM

Dated: 11/13/00          /s/ Michael O'Donnell
                         --------------------------------------------
                         Michael O'Donnell, Chief Executive Officer
                         and President


Dated: 11/13/00         /s/ Robert O'Callahan
                        ---------------------------------------------
                        Robert O'Callahan, Chief Financial Officer

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