<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 June 30, 2001
                                       or

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

                   For the transition period from         to

                        Commission file number 0-26395

                            SALON MEDIA GROUP, INC.
            (Exact name of Registrant as specified in its charter)

                 Delaware                               94-3228750
         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 August 8, 2001 was 14,155,276 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 June 30, 2001 (unaudited) and
          March 31, 2001.........................................................................................   3

          Condensed Consolidated Statements of Operations for the three months ended
          June 30, 2001 and 2000 (unaudited).....................................................................   4

          Condensed Consolidated Statements of Cash Flows for the three months ended
          June 30, 2001 and 2000 (unaudited).....................................................................   5

          Notes to Unaudited 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.............................................  26

PART II   OTHER INFORMATION

ITEM 1:   Legal Proceedings......................................................................................  26

ITEM 2.   Changes in Securities and Use of Proceeds..............................................................  26

ITEM 3.   Defaults upon Senior Securities........................................................................  26

ITEM 4.   Submission of Matters to a Vote of Security Holders....................................................  26

ITEM 5.   Other Information......................................................................................  26

ITEM 6:   Exhibits and Reports on Form 8-K.......................................................................  27

          Signatures.............................................................................................  27
</TABLE>

                                       2
<PAGE>

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

                            SALON MEDIA GROUP, INC.
                     CONDENSED CONSOLIDATED BALANCE SHEETS
              (in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                     June 30,         March 31,
                                                                       2001             2001
                                                                   (unaudited)
                                                                   -----------       ----------
<S>                                                                <C>               <C>
Assets
    Current assets:
       Cash and cash equivalents                                    $   1,362         $   3,047
       Accounts receivable, net                                           427               474
       Prepaid expenses and other current assets                          156               201
                                                                    ---------         ---------
        Total current assets                                            1,945             3,722
    Property and equipment, net                                         1,867             2,731
    Other assets                                                        1,286             1,375
    Intangible assets, net                                              1,282             1,395
                                                                    ---------         ---------
        Total assets                                                $   6,380         $   9,223
                                                                    =========         =========
Liabilities and stockholders' equity
    Current liabilities:
       Accounts payable and accrued liabilities                     $   2,379         $   2,720
       Deferred revenue                                                   347               223
                                                                    ---------         ---------
        Total current liabilities                                       2,726             2,943
    Long-term liabilities                                                 414               478
                                                                    ---------         ---------
        Total liabilities                                               3,140             3,421
                                                                    ---------         ---------
Stockholders' equity:
    Common stock, $0.001 par value, 50,000,000 shares
       authorized, 14,155,276 and 14,139,626 shares
       issued and outstanding at June 30, 2001
       and March 31, 2001                                                  14                14
    Additional paid-in-capital                                         78,518            78,404
    Advertising receivable from stockholder                            (6,873)           (7,075)
    Unearned compensation                                                (189)             (231)
    Accumulated deficit                                               (68,230)          (65,310)
                                                                    ---------         ---------
        Total stockholders' equity                                      3,240             5,802
                                                                    ---------         ---------
        Total liabilities and stockholders' equity                  $   6,380         $   9,223
                                                                    =========         =========
</TABLE>

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

                                       3
<PAGE>

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


<TABLE>
<CAPTION>
                                                                                   Three Months Ended
                                                                                        June 30,
                                                                           -----------------------------------
                                                                               2001                   2000
                                                                           -----------            ------------
<S>                                                                        <C>                    <C>
Net revenues                                                               $       973            $      1,759
                                                                           -----------            ------------
Operating expenses:
     Production, content and product                                             1,527                   2,709
     Sales and marketing                                                           800                   2,440
     Research and development                                                      218                     388
     General and administrative                                                    464                     626
     Amortization of intangibles                                                   113                     323
     Write-down of long-lived assets                                               782                       -
                                                                           -----------            ------------
         Total operating expenses                                                3,904                   6,486
                                                                           -----------            ------------

Loss from operations                                                            (2,931)                 (4,727)
Other income, net                                                                   11                     207
                                                                           -----------            ------------
Net loss                                                                   $    (2,920)           $     (4,520)
                                                                           ===========            ============

Basic and diluted net loss per share attributable to                       $     (0.22)           $      (0.36)
     common stockholders

Weighted average shares used in computing basic                                 13,434                  12,638
     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 MEDIA GROUP, INC.
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                           (in thousands, unaudited)

<TABLE>
<CAPTION>
                                                                                              Three Months Ended
                                                                                                   June 30,
                                                                                         ----------------------------
                                                                                            2001              2000
                                                                                         ---------         ----------
<S>                                                                                      <C>               <C>
Cash flows from operating activities:
   Net loss                                                                              $  (2,920)        $   (4,520)
   Adjustments to reconcile net loss to net cash used in operating activities:

     Write-down of long lived assets                                                           782                  -
     Stock-based compensation and warrant amortization                                          63                 17
     Depreciation and amortization                                                             309                521
     Allowance for doubtful accounts                                                            30                 18
     Amortization of advertising receivable from stockholder                                   202                202
     Changes in assets and liabilities:
        Accounts receivable                                                                     17                987
        Prepaid expenses, other current assets and other assets                                113                 67
        Accounts payable and accrued liabilities                                              (333)              (759)
        Deferred revenue                                                                       124                122
                                                                                         ---------         ----------
           Net cash used in operating activities                                            (1,613)            (3,345)
                                                                                         ---------         ----------

Cash flows from investing activities:
   Purchase of property and equipment                                                           (6)              (317)
   Acquisitions, net of liabilities assumed                                                      -               (400)
                                                                                         ---------         ----------
           Net cash used in investing activities                                                (6)              (717)
                                                                                         ---------         ----------

Cash flows from financing activities:
   Proceeds from exercise of stock options                                                       6                 20
   Principal payments under capital leases                                                     (72)               (45)
   Repayment of short-term borrowings                                                            -                (30)
                                                                                         ---------         ----------
           Net cash used in financing activities                                               (66)               (55)
                                                                                         ---------         ----------

Net decrease in cash and cash equivalents                                                   (1,685)            (4,117)
Cash and cash equivalents at beginning of period                                             3,047             17,982
                                                                                         ---------         ----------
Cash and cash equivalents at end of period                                               $   1,362         $   13,865
                                                                                         =========         ==========

Amount paid for interest                                                                 $      22         $       23
Supplemental schedule of non-cash investing and financing activities:
   Unearned compensation in connection with cancellation of stock options                        -               (859)
   Issuance of stock and warrants in connection with acquisition                               108              1,469
   Value assigned to reciprocal advertising agreements                                           -                 45
   Property and equipment purchased under capital lease                                          -                 94
</TABLE>


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

                                       5
<PAGE>

                            SALON MEDIA GROUP, INC.
        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                 (amounts in thousands, except per share data)

1. The Company

     Salon Media Group, Inc. (Salon) is an Internet media company that produces
a total network of ten subject-specific websites, of which one is an audio
streaming website, and hosts two online communities designed to attract Internet
advertisers and electronic commerce partners. Salon was originally incorporated
in July 1995 in the State of California and reincorporated in Delaware in June
1999. Salon operates in one business segment.

2. Basis of Presentation

     The interim consolidated financial statements are unaudited and have been
prepared on the same basis as the annual financial statements and, in the
opinion of management, reflect all adjustments, which include only normal
recurring adjustments, necessary to present fairly Salon's consolidated
financial position, consolidated results of operations and consolidated cash
flows as of June 30, 2001 and for the three months ended June 30, 2001 and 2000.
The condensed consolidated balance sheet data as of March 31, 2001 is derived
from the audited financial statements which are included in Salon's report on
Form 10-K. These consolidated financial statements and notes thereto 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,
2001. Within the rules of the Securities and Exchange Commission, these
financial statements do not include all disclosures required by generally
accepted accounting principles. The results for the three months ended June 30,
2001 are not necessarily indicative of the expected results for any other
interim period or the fiscal year ending March 31, 2002.

     These consolidated financial statements contemplate the realization of
assets and the satisfaction of liabilities in the normal course of business.
Salon has incurred losses and negative cash flow from operations since inception
and has an accumulated deficit at June 30, 2001 of $68,230. These factors raise
substantial doubt about Salon's ability to continue as a going concern.

     Salon plans on reducing expenses to match anticipated revenues to reach
cash-flow breakeven during the fiscal year ending March 31, 2002. However, until
cash-flow breakeven is reached, Salon will continue to use its current cash on
hand, working capital, and cash flows from operations. If Salon is unable to
generate sufficient cash flows from operations or should management determine it
to be prudent, Salon may seek additional sources of capital. There can be no
assurance that Salon will be able to obtain such financing, if necessary, on
terms which are favorable or at all.

     In the event that Salon is unable to increase revenues or financing is
unavailable, management is developing alternative plans which will entail a
further reduction of expenses to levels that could be financed by revenues
generated. There can be no assurance that a further cost cutting exercise will
be successful in completely eliminating the difference between expenditures and
revenues or that such actions would not have a harmful effect on Salon's
business and results of operations. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.

3. Salon Premium

     In April 2001, Salon began Salon Premium, a paid subscription service.
Salon Premium offers readers who pay either $30 for a one year subscription or
$50 for a two year subscription, access to exclusive new content; the option to
view Salon content without advertising banners and pop-ups; access

                                       6
<PAGE>

                            SALON MEDIA GROUP, INC.
        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                 (amounts in thousands, except per share data)

to select unabridged content that is currently offered for free (abridged
versions will continue to be available free for non-subscribers) and the ability
to easily download content in text format, a convenience that will enable
readers to view additional Salon articles when not connected to the Internet.
Revenue is recognized ratably over the period that services are provided.

4. Net Loss Per Share

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

     Diluted net loss per share attributable to common stockholders for the
three months ended June 30, 2001 and 2000 does not include the effect of common
stock equivalent shares, comprised of stock options, common stock warrants and
contingently issuable shares, of 5,143,525 and 4,103,275 respectively, as the
effect of their inclusion is anti-dilutive during each period.

5. Concentrations

     One customer, who acquired Salon's website publishing software, accounted
for 16% of total revenues for the three months ended June 30, 2001 and no
customer accounted for more than 10% of total revenue for the three months ended
June 30, 2000. Salon did not record any barter revenues for the three months
ended June 30, 2001 and recorded $45 of barter revenue or 3% of total revenues
for the three months June 30, 2000. Two customers accounted for 14% and 13% of
the total accounts receivable balance at June 30, 2001, respectively, and one
customer accounted for 10% of the total accounts receivable balance at June 30,
2000.

6. Software Development Costs

     During the fiscal year ended March 31, 2001 Salon capitalized $674 of
expenditures incurred to enhance Salon's proprietary software as Salon
contemplated marketing the software. During the period ended June 30, 2001 Salon
discontinued all development and dedicated internal marketing efforts to focus
efforts on its core content, production and maintenance. Accordingly, Salon
determined that this asset was impaired and recorded an impairment charge of
$674 in the three months ended June 30, 2001.

                                       7
<PAGE>

                            SALON MEDIA GROUP, INC.
        NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                 (amounts in thousands, except per share data)


7. Stock-Based Compensation

     Salon has elected to follow the accounting provisions of APB 25 for stock-
based compensation. Accordingly, compensation expense is recognized only when
options are granted with a discounted exercise price from fair market value at
the time of the grant. Any compensation expense is recognized ratably over the
associated service period, which is generally the option vesting term.
Accordingly, Salon recognized the following compensation expense associated with
discounted options issued prior to Salon's initial public offering:

                                          For the three months ended June 30,
                                          -----------------------------------
                                              2001                       2000
                                          --------                   --------
Production, content and product           $     21                   $      8
Sales and marketing                             15                          6
Research and development                         -                          2
General and administrative                       6                          1
                                          --------                   --------
                                          $     42                   $     17
                                          ========                   ========

8. Recent Accounting Pronouncements

     In June 2001, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 141 (SFAS No. 141), "Business
Combinations." This standard eliminates the pooling-of-interests method of
accounting for business combinations, except for qualifying business
combinations that were initiated prior to July 1, 2001, and applies to all
business combinations accounted for under the purchase method that are completed
after June 30, 2001. The implementation of this standard is not expected to have
a significant impact on Salon's financial condition or results of operations.

     In June 2001, the FASB issued Statement of Financial Accounting Standards
No. 142 (SFAS No. 142), "Goodwill and Other Intangible Assets." This standard
eliminates the amortization of goodwill, and requires goodwill to be reviewed at
least annually for impairment, the useful lives of previously recognized
intangible assets to be reassessed and the remaining amortization periods to be
adjusted accordingly. This standard is effective for fiscal years beginning
after December 15, 2001. The implementation of this standard is not expected to
have a significant impact on Salon's financial condition or results of
operations.

     In June 1998, the FASB issued SFAS No.133, "Accounting for Derivatives and
Hedging Activities." (SFAS No. 133), SFAS No.133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities,
SFAS No.133, requires that all derivative instruments be recognized at fair
value as either assets or liabilities in the statement of financial position.
The accounting for changes in the fair value (i.e., gains or losses) of a
derivative instrument depends on whether it has been designated and qualifies as
a part of a hedging relationship and further, on the type of hedging
relationship. Salon adopted SFAS No. 133, as amended, effective April 1, 2001
with no impact on its consolidated financial statements. To date, Salon has not
engaged in derivative or hedging activities.

                                       8
<PAGE>

--------------------------------------------------------------------------------
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 and
Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange
Act") that involve risks and uncertainties, including, but not limited to,
statements regarding our strategy, plans, objectives, expectations, intentions,
financial performance, cash-flow breakeven timing, financing, economic
conditions, on-line advertising, market performance, subscription service plans,
and revenue sources. Although Salon Media Group, Inc. believes its plans,
intentions and expectations reflected in such forward-looking statements are
reasonable, they can give no assurance that such plans, intentions or
expectations will be achieved. Our actual results may differ significantly from
those anticipated or implied in these forward-looking statements as a result of
the factors set forth above and in Salon's public filings. Salon assumes no
obligation to update any forward-looking statements as circumstances change.

     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 Future Results and
Market Price of Stock." In this report, the words "anticipates," "believes,"
"expects," "estimates," "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 Media Group, Inc. (Salon) is an Internet media company that produces
a total network of ten subject-specific websites, of which one is an audio
streaming website, and hosts two online communities -- Table Talk, a free
interactive forum and The Well, a paid subscription service. Subsequent to June
30, 2001, Table Talk was converted to a paid subscription service. Salon
believes that its network of websites combines the thoughtfulness of print, the
timeliness of television and the interactivity of talk radio.

     The main entry and navigation point to Salon's ten websites 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. Salon's
users can access Table Talk or The Well through www.salon.com or through Salon's
ten content web sites.

     Salon believes that its original, award-winning content allows 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 websites and online communities a valuable
media property for advertisers and retailers who are allocating marketing
resources to target consumers online.

                                       9
<PAGE>

Results of Operations For The Three Months Ended June 30, 2001 Compared To The
Three Months Ended June 30, 2000

Net Revenues:

     Net revenues decreased 45% to $1.0 million for the three months ended June
30, 2001 from $1.8 million for the three months ended June 30, 2000. The
decrease in revenue was attributable to an overall contraction in the United
States economy and the fact that e-commerce or Internet businesses cut
advertising without compensating increases from more established advertisers.
For the three months ended June 30, 2001 Salon recognized $0.2 million of
website management software sales and no comparable amounts last year. Salon
cannot predict when or if it may generate additional software sales.

     In April 2001, Salon began Salon Premium, a paid subscription service.
Salon Premium offers readers who pay either $30 for a one year subscription or
$50 for a two year subscription, access to exclusive new content; the option to
view Salon content without advertising banners and pop-ups; access to select
unabridged content that is currently offered for free (abridged versions will
continue to be available free for non-subscribers) and the ability to easily
download content in text format, a convenience that will enable readers to view
additional Salon articles when not connected to the Internet. Revenue is
recognized ratably over the period that services are provided. Salon recognized
$0.1 million of Salon Premium revenue and deferred $0.3 million of revenue for
the three months ended June 30, 2001 based on approximately 9,000 subscribers.
Salon estimates that it may generate annual revenue of $0.9 to $1.8 million from
Salon Premium.

     Sponsorship and banner advertising revenues accounted for approximately 52%
and 88% of net revenues for the three months ended June 30, 2001 and 2000,
respectively. Barter transactions, included in sponsorship and advertising
revenues, were 3% of net revenues for the three months ended June 30, 2000.
There were no barter transactions for the three months ended June 30, 2001.

     One customer, who acquired Salon's website publishing software, accounted
for 16% of total revenues for the three months ended June 30, 2001 and no
customer accounted for more than 10% of total revenue for the three months ended
June 30, 2000.

Production, Content and Product:

     Production, content and product expenses during the three months ended June
30, 2001 were $1.5 million versus $2.7 million for the three months ended June
30, 2000, a decline of $1.2 million or 44%. The 44% decrease in production,
content and product costs for the three months ended June 30, 2001 versus June
30, 2001, is primarily attributable to a $0.7 million decrease in salaries and
benefits from staff lay-offs between periods and the effect of a 15% salary
reduction this year and $0.3 from reduced purchases of freelance articles.
Subsequent to March 31, 2001, Salon eliminated eight staff positions to conserve
cash.

Sales and Marketing:

Sales and marketing expenses during the three months ended June 30, 2001 were
$0.8 million versus $2.4 million for the three months ended June 30, 2000, a
decline of $1.6 million or 67%. The decrease in sales and marketing is primarily
attributable to staff reductions between periods and the effect of a 15% salary
reduction this year which reduced expenses by $0.7 million and the curtailment
of advertising and marketing expenditures which resulted in saving of an
additional $0.9 million. Subsequent to March 31, 2001, Salon eliminated three
staff positions to conserve cash.

                                       10
<PAGE>

     Included in sales and marketing expenses are non-cash advertising expenses
related to an investment in Salon by Rainbow Media Holdings, Inc. of $8.1
million which is being amortized over a ten year period. Amortized amounts were
$0.2 million for both the three months ended June 30, 2001 and 2000.

Research and Development:

     Research and development expenses during the three months ended June 30,
2001 were $0.2 million versus $0.4 million for the three months ended June 30,
2000, a decline of $0.2 million or 44%. The 44% decrease is primarily
attributable to staff reductions between periods and the effect of a 15% salary
reduction this year. Subsequent to March 31, 2001, Salon eliminated three staff
positions to conserve cash and has ceased work on non-essential projects.

General and Administrative:

     General and administrative expenses during the three months ended June 30,
2001 were $0.5 million versus $0.6 million for the three months ended June 30,
2000, a decline of $0.1 million or 26%. The 26% decrease is primarily
attributable to staff reductions between periods and the effect of a 15% salary
reduction this year.

Amortization of Intangibles:

     Amortization of intangible expenses during the three months ended June 30,
2001 were $0.1 million versus $0.3 million for the three months ended June 30,
2000, a decline of $0.2 million or 65%. During the fiscal year ended March 31,
2001 goodwill resulting from the acquisition of The Well and MP3Lit.com was
written-off as impaired. The resulting reduction in this class of asset as a
component of intangible assets is attributable for the $0.2 million decline in
amortization expense between periods.

Write-down of Long-Lived Assets:

     During the fiscal year ended March 31, 2001 Salon capitalized $0.7 million
of expenditures to enhance Salon's proprietary software as Salon contemplated
marketing the software. During the period ended June 30, 2001 Salon discontinued
all development and dedicated internal marketing efforts to focus efforts on its
core content, production and maintenance. Accordingly, Salon determined that
this asset was impaired and recorded an impairment charge of $0.7 million.

     In May 2000, Salon acquired MP3Lit.com with contingently issueable common
stock. As a consequence, Salon issued 317,000 shares of common stock valued at
$0.1 million in May 2001 resulting in additional purchase consideration
classified as goodwill. As determined during the fiscal year ended March 31,
2001, all the goodwill associated with the acquisition was impaired, and as a
result the additional goodwill resulting from this additional stock award was
immediately written off.

Other Income, Net:

     Other income, net decreased to zero in the three months ended June 30, 2001
from $0.2 million for the three months ended June 30, 2000. The decrease in
other income, net is primarily attributable to a decrease in cash between
periods as Salon has been utilizing its cash to fund operations.

                                       11
<PAGE>

Net Loss:

     As a result of the above factors, Salon recorded a net loss of $2.9
million, or $0.22 per share loss for the three months ended June 30, 2001
compared to a net loss of $4.5 million, or $0.36 per share loss for three months
ended June 30, 2000.

Liquidity and Capital Resources:

     Since its inception Salon has primarily financed its operations through
private placement of convertible preferred stock and its initial public offering
of common stock. As of June 30, 2001, Salon had approximately $1.4 million in
cash and cash equivalents which was obtained through Salon's initial public
offering in June 1999 and the sale of additional common stock in July 1999. In
addition, Salon has $1.0 of restricted cash held as deposits for various lease
arrangements.

     Net cash used in operations was $1.6 million for the three months ended
June 30, 2001, compared to $3.3 million for the three months ended June 30,
2000. The principal use of cash during the three months ended June 30, 2001 was
to fund the $2.9 million net loss for the period and a decrease in liabilities,
offset mostly by non-cash charges of $1.4 million.

     Net cash used in investing activities totaled zero for the three months
ended June 30, 2001, compared to $0.7 million for the three months ended June
30, 2000. Salon does not expect any significant capital expenditures during the
current fiscal year. During the three months ended June 30, 2000, net cash used
for investing activities consisted of $0.4 million for an acquisition and $0.3
million for the purchase of property and equipment.

     Net cash from financing activities was $0.1 million for the three month
periods ended June 30, 2001 and June 30, 2000. The cash used in financing
activities was primarily for nominal payments for debt related obligations.

     As of June 30, 2001 Salon's available cash resources was sufficient to meet
working capital needs for approximately two to three months. Subsequent to June
30, 2001, Salon finalized a private placement of 622 shares of Series A
Preferred Stock and warrants to acquire 4,976,000 shares of common stock at
$0.2875 per share, generating approximately $2.5 million in cash before
transaction expenses. The 622 shares of Series A Preferred Stock is convertible
to approximately 9.9 million shares of common stock, subject to shareholder
approval. Salon believes that the amounts generated from the sale of preferred
stock, elimination of fourteen positions, recent attrition in staff which will
not be filled, the effect of a 15% reduction in employee salaries which took
place on April 1, 2001, and other measures to reduce expenditures, will be
sufficient to fund working capital needs and for Salon to reach cash flow break
even for the quarter ending December 31, 2001. Salon may continue to raise
additional funds, for which additional Series A Preferred Stock may be issued,
to fund its operations. If Salon raises additional funds by selling equity
securities, or securities which convert into equity securities, the percentage
ownership of Salon's stockholders will be reduced and its stockholders will most
likely experience additional dilution. Given Salon's recent low stock price, any
dilution will likely be very substantial for existing shareholders. 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, if at all,
Salon's ability to continue operations, react to competitive pressures, or take
advantage of unanticipated opportunities will be more limited than if additional
capital was available. Liquidity continues to be a constraint on business
operations.

                                       12
<PAGE>

RISK FACTORS

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

Salon lacks significant revenues, and has a history of losses

     Salon has not achieved profitability and expects to incur operating losses
in the near future. If and when Salon does 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, financial results will most likely be severely
harmed and the ability of Salon to continue its operations will be seriously
jeopardized.

Additional financing may not be available

     Subsequent to June 30, 2001 Salon raised approximately $2.5 million before
transaction expenses in the private placement of preferred stock. Salon believes
that the amounts generated from the sale of preferred stock, elimination of
fourteen positions, recent attrition in staff which will not be filled, the
effect of a 15% reduction in employee salaries which took place on April 1,
2001, and other measures to reduce expenditures, will be sufficient to fund
working capital needs and for Salon to reach cash flow break even for the
quarter ending December 31, 2001. Salon may need to raise additional funds to
fund operations after December 31, 2001, or if additional funds are required,
before December 31, 2001. If Salon raises additional funds by selling equity
securities, or securities which convert into equity securities, the percentage
ownership of Salon's stockholders will be reduced and its stockholders will most
likely experience additional dilution. Given Salon's recent low stock price, any
dilution will likely be very substantial for existing shareholders. 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, if at all,
Salon's ability to continue operations, react to competitive pressures, or take
advantage of unanticipated opportunities will be substantially limited. In
addition, Salon's business could be significantly adversely affected. In the
event that Salon is unable to increase revenue levels or financing is
unavailable, management will have to reduce its workforce, reduce discretionary
costs, and reduce the size of its website and corresponding website offerings to
match revenue levels.

Our stock may be delisted from the NASDAQ National Market

     In connection with our listing on The NASDAQ National Market (NASDAQ) we
must maintain compliance with several requirements related to the trading price
of our stock, our financial condition and our periodic reporting with the
Securities and Exchange Commission (SEC) among other issues. In the event that
we are not able to comply with the NASDAQ requirements we may be delisted from
the NASDAQ. On June 13, 2001, we received a notice from NASDAQ that our common
stock would be delisted in connection with our failure to maintain a minimum bid
price of $1.00.

     We have appealed the NASDAQ determination and that appeal was heard July
26, 2001. In addition to the minimum bid price requirements, the appeal covered
our ability to comply with the net tangible assets, revenue and market value of
public float requirements. During the appeal we described a plan for long term
compliance with the requirements for continued listing on NASDAQ, including the
anticipated shareholder approval of a reverse stock split, which would have the
effect of raising our stock price to above $1.00 per share. We also discussed an
additional equity investment in Salon in the form of a private placement.
Pending the outcome of the appeal, our common stock will continue to be listed
on NASDAQ; however, we cannot predict the outcome of the appeal.

                                       13
<PAGE>

     If the market price for our common stock remains below $1.00 per share, our
common stock may be deemed to be penny stock. If our common stock is considered
penny stock, it would be subject to rules that impose additional sales practices
on broker-dealers who sell our securities. For example, broker dealers must make
a special suitability determination for the purchaser, receive the purchaser's
written consent to the transaction prior to sale, and make special disclosures
regarding sales commissions, current stock price quotations, recent price
information and information on the limited market in penny stock. Because of
these additional obligations, some brokers may not effect transactions in penny
stocks, which could adversely affect the liquidity of our common stock.

     If our stock is delisted from NASDAQ, it will likely be traded on the over-
the-counter bulletin board (OTCBB). If our stock is traded on the OTCBB, its
value may be negatively impacted because stocks which trade over-the-counter
tend to be less liquid and trade with larger variations between the bid and ask
price.

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

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

     . 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 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.

                                       14
<PAGE>

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

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

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 advertisers, sponsors, subscribers and
       electronic commerce sponsors;

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

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

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

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

     . the economic and business cycle and the recovery speed;

     . 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 Websites; and

     . the amount and timing of operating costs.

     In order to attract and maintain our user base, we may incur expenditures
on sales and marketing, content development, technology and infrastructure.
These types of 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, one 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 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.

                                       15
<PAGE>

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

     Revenues for the foreseeable future depend substantially on sales of
advertising. In order to increase revenues, Salon needs to attract additional
significant advertisers on an ongoing basis. We may not be able to attract or
retain a sufficient number of advertisers 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 do not engage a sufficient number of advertisers during a
particular period, our business could be severely harmed.

     Increasing our advertising 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 advertisement;

     .  increase awareness of the Salon brand;

     .  successfully sell new ad units and formats;

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

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

     .  retain sales personnel; and

     .  convince advertisers that Salon will continue as a going concern.


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 will harm our operating results

     Historically, we have relied on a small number of advertisers and
advertising sponsors for a significant percentage of our revenues. The loss of
any of our significant 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 advertisers
and sponsors.

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 advertising subjects us to the risk of revenue shortfalls
because the sales cycles for advertising vary significantly, and during these
cycles we may expend substantial funds and management resources while not
obtaining advertising 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

                                       16
<PAGE>

potential customer and the signing of an advertising order may range from as
little as one week to up to nine months. Sales of advertising are subject to
factors over which we have little or no control, including:

     .  advertisers' budgets;

     .  internal acceptance reviews by advertisers and their agencies;

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

We must determine whether to establish or maintain distribution relationships to
attract more users to our network

     In past periods we have depended on distribution relationships with high-
traffic Websites to increase our user base. There has been intense competition
for relationships with these sites, and we may not be able to, or want to, enter
into such relationships on favorable terms or at all. Even if we enter into
distribution relationships with these Websites, their sites may not attract
significant numbers of users, and our Websites 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, and our revenues and
operating results will be severely harmed. The content and services we provide
on our Websites may not appeal to a sufficient number of Internet users to
generate advertising revenues. 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;

     .  the technical expertise of our production staff; and

     .  working capital constraints of Salon.

     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 Websites. Internet users
can freely navigate and instantly switch among a large number of Websites, many
of which offer content and services that compete with Salon. In addition, many
Websites offer very specific, highly-targeted content that could have greater
appeal than our network to particular subsets of our target user base.

The controversial content of our Websites may limit our revenues

     Many of our Websites 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.

                                       17
<PAGE>

Our promotion of the Salon brand must be successful in order to attract and
retain users as well as advertisers 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 change in the focus of our operations creates a risk of diluting our
brand, confusing consumers and decreasing the value of our user base to
advertisers. If we are unable to maintain or increase 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 Websites 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.

     Due to recurring operating losses, our current financial position and
potential NASDAQ delisting, we may experience difficulty in hiring and retaining
highly skilled employees with appropriate qualifications. We may be unable to
retain our current key employees or attract, integrate or retain other qualified
employees in the future. If we do not succeed in attracting new personnel or
integrating, retaining and motivating our current personnel, our business could
be harmed.

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 Websites
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

                                       18
<PAGE>

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 Websites 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 that may impact our business adversely.

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

     We rely on a number of third party suppliers for various services,
including Web hosting, 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
advertising on our network of Websites. This type of software may fail to
perform as expected. If this software malfunctions or does not deliver the
correct 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 Websites.
This type of software does not always 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.

Acceptance and effectiveness of Internet advertising is evolving and, to the
extent it does not 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 continue to 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

                                       19
<PAGE>

than we expect, our business could be harmed. Within the industry, our
advertising audience may be low and inhibit our ability to sell advertising.

     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.

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 that we accurately measure the
demographics of our user base and the delivery of advertisements on our
Websites. 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 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 this may harm our business. 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;

     .  charging for content;

     .  inconsistent quality of service; and

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

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<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 Websites competing for the attention and
spending of users and advertisers to continue to increase.

     Increased competition could result in advertising 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 Websites. 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 Websites. 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 Websites 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 Websites

     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 Websites. These types of claims have been
brought, sometimes successfully, against online services, Websites 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 insurance or is in excess of
our insurance coverage could severely harm our financial condition and business.

                                       21
<PAGE>

We may be liable for our links to third-party Websites

     We could be exposed to liability with respect to the selection of third-
party Websites that may be accessible through Salon.com. These claims might
include, among others, that by linking to Websites operated by third parties, we
may be liable for copyright or trademark infringement or other unauthorized
actions by these third-party Websites. 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
Websites 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 any electronic commerce
programs 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 Websites.

     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 may continue to foster relationships with manufacturers or
other companies to offer certain products or services to users through our
network of Websites. 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

     Substantially all of our communications hardware and computer hardware
operations for our Websites are located at Exodus facilities in Sunnyvale,
California. Fire, floods, earthquakes, power loss, telecommunications failures,
break-ins, supplier failure to meet commitments, and similar events could damage
these systems and cause interruptions in our services. Computer viruses,
electronic break-ins or other similar disruptive problems could cause users to
stop visiting our network of Websites and could cause advertisers to terminate
any agreements with us. In addition, we could lose advertising revenues

                                       22
<PAGE>

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 Websites 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 Website operators for access to our Websites. 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 Websites 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 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

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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. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Internet
users that the data may be used by marketing entities to direct product
promotion and advertising to the user. Other countries and political entities,
such as the European Union, have adopted such legislation or regulatory
requirements. The United States may adopt similar legislation or regulatory
requirements. If consumer privacy concerns are not adequately addressed, 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 Websites or individuals who sign up for Salon
Premium. 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 or to tax revenue
generated from Salon Premium, our financial results could be harmed.

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 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:

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     .    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.

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

     Salon's exposure to market risk for changes in interest rates relates
primarily to Salon's investment portfolio. Salon 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. Salon has no investments
denominated in foreign country currencies and therefore is not subject to
foreign exchange risk.


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

PART II: OTHER INFORMATION

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

Item 1.   Legal Proceedings.

         Salon is not a party to any pending legal proceedings which it
believes will materially affect its financial condition or results of
operations.

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

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Item 6.   Exhibits and Reports on Form 8-K.

(a)      Exhibits.

          None

(b)      Reports on Form 8-K.

          On April 30, 2001 Salon filed a Form 8-K under Item 9. Regulation FD
Disclosure. The filing included as an exhibit a Business Summary Version 2
utilized by Salon in connection with a proposed private placement of securities
with institutional investors. The business summary contained significant
modifications from a version filed in a Form 8-K on March 20, 2001, including
disclosure regarding the research and development efforts of Registrant's
CreationWare content management technology.

          On June 8, 2001, Salon filed a Form 8-K stating that effective May 16,
2001, Salon changed its name from Salon.com to Salon Media Group, Inc. The
change in name was effected in accordance with the provisions of Section 253(b)
of the Delaware General Corporation Law.


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 MEDIA GROUP, INC.

Dated: 08/14/01     /s/ Michael O'Donnell
                    --------------------------------------------
                    Michael O'Donnell, Chief Executive Officer and President


Dated: 08/14/01     /s/ Robert O'Callahan
                    --------------------------------------------
                    Robert O'Callahan, Chief Financial Officer

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