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SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 FORM 10-KSB (Mark One) þ
    
    ANNUAL REPORT UNDER SECTION 13 OR 15(d ) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2004o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 Commission File Number 0-12346 IRONSTONE GROUP, INC.  Delaware
(State or other jurisdiction of
incorporation or organization)
    
    95-2829956
(IRS Employer Identification No.)
 539 Bryant Street, San Francisco, California 94107
(Address of principal executive offices, including zip code) (415) 551-3260
(Registrants telephone number, including area code) Securities registered under Section 12(b) of the Exchange Act:None Securities registered under Section 12(g) of the Exchange Act:Common Stock, $0.01 par value Check whether the Registrant (1) filed all reports required to be filed by Section 13 or 15(d) of
the Exchange Act during the past 12 months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes
þ     No o Check if disclosure of delinquent filers in response to Item 405 of Regulation S-B is not contained
in this form, and no disclosure will be contained, to the best of the Registrants knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB.     þ Check whether the Registrant has filed all documents and reports required to be filed by Section
12, 13 or 15 (d) of the Exchange Act after the distribution of securities under a plan confirmed by
a court. Yes þ     No o The Registrants revenues for the fiscal year ended December 31, 2004 were $11. The approximate aggregate market value of voting stock held by non-affiliates of the Registrant was
$441,745 as of March 1, 2005 based on the closing bid price on March 1, 2005. Shares of voting
stock held by each officer and director and by each person who owns 5% or more of the outstanding
voting stock have been excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive. As of December 31, 2004, 742,108 shares of Common Stock, $0.01 par value, were outstanding. Transitional Small Business Disclosure Format: Yes o     No þ




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TABLE OF CONTENTS PagePART I:Item 1. Business
    
    
    3Item 2. Properties
    
    
    3Item 3. Legal Proceedings
    
    
    3Item 4. Submission of Matters to a Vote of Security Holders
    
    
    3PART II:Item 5. Market for Registrants Common Equity and Related Stockholder Matters
    
    
    4Item 6. Managements Discussion and Analysis or Plan of Operations
    
    
    4Item 7. Financial Statements
    
    
    5Item 8. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
    
    
    5Item 8A. Controls and Procedures
    
    
    5Item 8B. Other Information
    
    
    6PART III:Item 9. Directors and Executive Officers of the Registrant
    
    
    7Item 10. Executive Compensation
    
    
    8Item 11. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
    
    
    10Item 12. Certain Relationships and Related Transactions
    
    
    10PART IV:Item 13. Exhibits
    
    
    11Item 14. Principal Accountant Fees and Services
    
    
    11SIGNATURES
    
    
    12EXHIBIT 21.1EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
 2




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PART 1 
 ITEM 1. BUSINESS BACKGROUND Ironstone Group, Inc, (Ironstone) a Delaware corporation, was incorporated in 1972. Since 1986,
a majority of Ironstones outstanding shares has been owned by Hambrecht & Quist Group, a San
Francisco-based investment banking and venture capital firm, and its affiliates (collectively
H&Q). In September 2003, Ironstone repurchased all of these shares. Such repurchased shares are
currently being held as treasury stock. The Hambrecht 1980 Revocable Trust presently owns over 50%
of Ironstones outstanding voting shares. BUSINESS STRATEGY Currently, the Company is reviewing options and new business opportunities. At December 31, 2004,
the Company had $8,970 in marketable securities, $7,360 in cash, an investment in Salon Media
Group, Inc. valued at $1,854,600, warrants to purchase Salon Media Group, Inc. common stock valued
at $136,500 and tax loss carry-forwards at its disposal. There can be no assurance that the Company will acquire businesses, form additional alliances, or
expand its existing services. Failure to expand the scope of services provided by the Company may
have an adverse effect on the Companys results of operations. EMPLOYEES As of December 31, 2004, the Company had two part-time employees. These employees received no
compensation and are not subject to a collective bargaining agreement. 
 ITEM 2. PROPERTIES The Companys principal executive offices are located at 539 Bryant Street, San Francisco,
California and its telephone number is (415) 551-3260 . 
 ITEM 3. LEGAL PROCEEDINGS None. 
 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to a vote of stockholders during 2004. 3




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PART II 
 ITEM 5. MARKET FOR REGISTRANTS COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information regarding the recent trading activity of the Companys Common Stock is reported on
the OTC Bulletin Board and the Company is not aware of any recent material trading activity in
shares of its Common Stock. As of December 31, 2004, there were approximately 800 holders of
record of the Companys Common Stock. The Company has not paid cash dividends on its Common Stock
since its inception and does not intend to pay cash dividends on its Common Stock in the
foreseeable future. 
 ITEM 6. MANAGEMENTS DISCUSSION AND ANALYSIS OR PLAN OF OPERATIONS CRITICAL ACCOUNTING POLICIES While the Company continues to evaluate business opportunities, its sole source of revenue is from
the sale of marketable securities. Management has classified these marketable securities, in
accordance with SFAS No. 115, as available for sale. These securities are recorded at fair market
value, and any unrealized gains and losses are reported as a separate component of shareholders
equity. For marketable securities for which there is an other-than-temporary impairment, an
impairment loss is recognized as a realized loss. Ironstones primary expenses are generated from maintaining regulatory reporting compliance, such
as quarterly review and annual audit of the financial statements, seeking legal counsel when
appropriate, and consulting fees. RESULTS OF OPERATIONS Year ended December 31, 2004 Revenues for 2004 were $11, a decrease of $121,629 as compared to 2003. The revenue decrease was
due to a sale of marketable securities and lower interest and other income and the return on
investment of the proceeds in 2003. Costs and expenses for 2004 totaled $216,036, an increase of $78,638 or 57% as compared to 2003.
The increase was primarily due to a $157,365 impairment loss on marketable securities in 2004,
offset by a decrease in legal and professional fees of $68,792. Year ended December 31, 2003 Revenues for 2003 were $121,640, a decrease of $591,222 as compared to 2002. The revenue decrease
was due to the sale of certain marketable securities and the return on investment of the proceeds. Costs and expenses for 2003 totaled $137,398, an increase of $25,943 or 23% as compared to 2002.
This increase was primarily due to higher professional fees related to higher costs for operations
and legal counsel associated with SEC and tax filings in 2003. On September 17, 2003, the Company repurchased 745,536 shares of its outstanding common stock (the
Shares) at a purchase price of $0.70 per share for an aggregate purchase price of $521,875.20.
Prior to such repurchase, the Shares represented 50.12% of the issued and outstanding shares of
common stock of the registrant. The selling shareholders  Hambrecht & Quist California, a
California corporation, Hambrecht & Quist Venture Partners, a California limited partnership,
Hamquist, a California limited partnership, H&Q Ventures IV, a California limited partnership,
Venture Associates (BVI) Limited, a British Virgin Islands company, and J.P. Morgan Securities
Inc., a Delaware corporation  are all affiliates of J.P. Morgan  Chase. The Company holds the
Shares as treasury stock. 4




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LIQUIDITY AND CAPITAL RESOURCES Net cash used in operating activities for the year ended December 31, 2004 was $66,217. Working
capital at December 31, 2004 was $1,987,017, an increase of $1,231,738 from 2003. The increase is
primarily due to the valuation of Salon Media Group, Inc. Series C Preferred, at fair value
conversion price. Cash decreased by $45,967 from $53,327 at the end of 2003 to $7,360 at the end of 2004. The
decrease is due to the use of available cash for operating expenses. The Company has entered into
a line of credit agreement with First Republic Bank to meet its cash needs over the next 12 months
(see Note 5). While the Company explores new business opportunities, the primary capital resource of the Company
is 843 shares of Series C Preferred Stock of Salon Media Group, Inc. (Salon). These shares were
converted on December 31, 2003 from Convertible Promissory Notes purchased by the Company and are
convertible to common stock at any time. The Series C Preferred Stock is convertible into common
stock of Salon at the conversion rate determined by dividing the Series C Preferred Stock per share
price of $800 by the Series C Conversion Price of $0.04, or at the rate of one share of Series C
Preferred Stock to 20,000 shares of common stock. If converted, the Companys shares of Series C
Preferred Stock represent 16,860,000 shares or 8.7% of Salons common stock outstanding as of
December 31, 2004. The investment in Salon is valued at the converted common stock value of $0.11
per share, or $1,854,600, at December 31, 2004. Additionally, in conjunction with making the investment in Salon, the Company received warrants to
purchase 1,950,000 shares of common stock in Salon at prices from $0.04182-$0.05256 per share. The
warrants are under anti-dilution protection and in February 2004 were revalued downward to a range
of $0.04169-$0.05181 in conjunction with the issuance of Series C Preferred Stock. The warrants
have a weighted average price of $0.04, are fully exercisable and expire three years from issuance.
The warrants were valued at $0.07 per share, or $136,500, at December 31, 2004. The investment and warrants with Salon are classified as available for sale and, therefore, a
related unrealized gain of $1,290,570 has been included in comprehensive income in 2004. As of March 11, 2005, Salons common stock was trading at $0.33 per share. There can be no
assurance that a market will continue to exist for either the Series C Preferred Stock currently
owned by the Company or the common stock of Salon should it be converted or the warrants exercised. The Company may obtain additional equity or working capital through additional bank borrowings and
public or private sales of equity securities and exercises of outstanding stock options. There can
be no assurance, however, that such additional financing will be available on terms favorable to
the Company, or at all. 
 ITEM 7. FINANCIAL STATEMENTS The financial statements required to be filed herewith begin on page F-1. 
 ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 
 ITEM 8A. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES As of December 31, 2004, the Company carried out an evaluation, under the supervision and with
the participation of the Companys management, including the Companys Chief Executive Officer and
Chief Financial Officer, of the effectiveness of the design and operation of the Companys
disclosure controls and procedures pursuant to Rule 13a-14 of the Securities Exchange Act of 1934
(the Exchange Act). Based upon that evaluation, the Companys principal executive and financial
officers concluded that as of December 31, 2004 there were material weaknesses in the Companys 5




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disclosure controls and procedures that effected the timely providing of material information
relating to the Company, as required to be disclosed by the Company in the reports that it files or
submits under the Exchange Act, within the time periods specified in the Securities and Exchange
Commissions rules and forms. These items are described in the next two paragraphs. Through the audit process, the Company determined that it had an other-than-temporary
impairment in marketable securities. Following recent accounting guidelines, at December 31, 2004,
the Company recorded an impairment loss on marketable securities. The Companys system of internal
controls did not identify this adjustment through the course of operations or through the process
of preparing the financial statements. Accordingly, this constitutes a material weakness in the
Companys system of internal controls. The Company does not have an audit committee. The absence of that important oversight
constitutes a material weakness in the Companys corporate governance structure. Changes in internal controls There were no significant changes in the Companys internal controls or other factors that
could significantly affect those controls subsequent to the date of the Companys evaluation,
including any corrective actions with regard to significant deficiencies and material weaknesses. 
 ITEM 8B. OTHER INFORMATION None. 6




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PART III 
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT DIRECTORS Name
    
    Age
    
    Director SinceEdmund H. Shea, Jr.
    
    
    73
    
    
    
    1993William R. Hambrecht
    
    
    69
    
    
    
    2003Robert H. Hambrecht
    
    
    38
    
    
    
    2003
 Edmund H. Shea, Jr. has served as director of the Company since October 1993. He is a co-founder
of J. F. Shea Co., Inc., a diversified construction, land development and venture capital
investment company, and has served as its Executive Vice President and a director since 1954. He
holds a B. S. degree from M. I. T. William R. Hambrecht is the Chairman and Co-Chief Executive Officer of WR Hambrecht + Co which he
founded in January 1998. He was co-founder of Hambrecht & Quist in 1968 where he held various
executive management positions until he resigned in December 1997. He holds a B.S. from Princeton
University. Robert H. Hambrecht was a founding partner of W.R. Hambrecht + Co., an investment banking firm,
founded in January 1998, and is presently a Managing Director. From 1996 through January 1998, Mr.
Hambrecht was Vice President of H&Q Venture Partners, a venture capital firm. From 1994 to 1996,
Mr. Hambrecht was employed by Unterberg Harris, an investment banking firm. Mr. Hambrecht earned a
masters degree in public administration from Columbia University in 1993. Mr. Hambrecht also
serves on the Board of Directors of four privately-held companies. EXECUTIVE OFFICERS The following table sets forth the names, ages and positions of the Companys executive officers as
of December 31, 2004. A summary of the background and experience of each of these individuals is
set forth after the table. Name
    
    Age
    
    PositionRobert H. Hambrecht
    
    
    38
    
    
    Chief Executive Officer and SecretaryAnna-Marie E. Schweizer
    
    
    56
    
    
    Chief Financial Officer
 Nicholas J. Giordano served as Chief Executive Officer, Chief Financial Officer and Secretary from
June 2001 until January 2004, when he tendered his resignation which was accepted by the Board of
Directors. Thereafter, the Board of Directors appointed Robert H. Hambrecht to the position of
Chief Executive Officer, Chief Financial Officer, and Secretary. Mr. Hambrecht was previously
appointed as Director to the Board of Directors in 2003. In July 2004, Anna-Marie E. Schweizer was
appointed Chief Financial Officer, replacing Mr. Hambrecht in this position. The appointment was
approved by the Board. Ms. Schweizer is currently the Controller for W.R. Hambrecht + Co., LLC.
From 1978 to 1998 Ms. Schweizer was employed by Bank of America. Ms. Schweizer holds a masters
degree in business administration from Stanford University. Code of Ethics The Company has adopted a Code of Business Conduct and Ethics (the Code) that applies to all
of the Companys employees (including its executive officers) and directors. The Company shall
provide to any person without charge, upon request, a copy of the Code. Any such request must be
made in writing to the Company, c/o Robert H. Hambrecht, 530 Bryant Street, Suite 100, San
Francisco, CA 94107. 7




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ITEM 10. EXECUTIVE COMPENSATION COMPENSATION OF DIRECTORS Each non-employee director of the Company is entitled to receive a fee for each meeting attended in
person (plus $500 for each committee meeting attended by committee members on a day other than a
Board meeting date). The members of the Board of Directors are also eligible for reimbursement for
their expenses incurred in connection with attendance at Board meetings in accordance with Company
policy. Outside directors may also receive stock option grants under the Companys 1993 Non-Employee
Directors Stock Option Plan (the Directors Plan). Only non-employee directors of the Company
or an affiliate of such directors (as defined in the Internal Revenue Code of 1986, as amended from
time to time, hereinafter the Code) are eligible to receive options under the Directors Plan.
Options granted under the Directors Plan are not intended to qualify as incentive stock options
under the Code. Options under the Directors Plan have a ten-year term; however, each option will terminate prior
to the expiration date if the optionees service as a non-employee director, or, subsequently, as
an employee, of the Company terminates. The exercise price of each option under the Directors
Plan must be equal to the fair market value of the Common Stock on the date of grant. All options
issued pursuant to the Directors Plan vest at a rate of 1/36 per month for 36 months following the
date of the grant of the option, or in the event the grant was delayed pending compliance by the
Company with certain securities law requirements, the date from which the grant was delayed. 8




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COMPENSATION OF EXECUTIVE OFFICERS SUMMARY OF COMPENSATION The following table shows that, for the fiscal year ended December 31, 2004, no compensation was
awarded or paid to, or earned by, the Companys Chief Executive Officer or the Companys Chief
Financial Officer. NAME AND PRINCIPAL
    
    
    
    
    
    
    
    
    
    OTHER ANNUALPOSITION
    
    YEAR
    
    SALARY ($)
    
    BONUS
    
    COMPENSATION ($)Robert H. Hambrecht
    
    
    2004
    
    
    
    
    
    
    Chief Executive
Officer and SecretaryAnna-Marie E. Schweizer
    
    
    2004
    
    
    
    
    
    
    Chief Financial Officer
 STOCK OPTION GRANTS AND EXERCISES The 1994 Equity Incentive Plan (the Plan) provides for the grant of (i) both incentive and
non-statutory stock options and (ii) rights to purchase restricted stock, together Stock Awards,
to the Companys directors, officers and employees. Directors who are not salaried employees of or
consultants to the Company or to any affiliate of the Company are not eligible to participate in
the Plan. As of December 31, 2004, options to purchase a total of 7,600 shares were outstanding
under the Plan, no shares had been purchased pursuant to the Plan and 331,680 shares remained
available for future issuance there under. The Plan is administered by the Board of Directors of the Company. The Board has the power to
construe and interpret the Plan and, subject to the provisions of the Plan, to determine the number
of persons to whom and the dates on which Stock Awards will be granted, the number of shares that
may be exercised, the type or types of such Stock Awards to be granted, the exercise price of such
Stock Award when appropriate and other terms of the Stock Award. The maximum term of options under the Plan is typically ten years; however, in the event that an
optionees service to the Company terminates, that optionees options will expire 90 days after the
optionees service to the Company terminates. Option grants under the Plan typically vest over a
five-year period at the rate of 1/10 on the date six months after the date of grant and 1/60 per
month thereafter. The exercise price of non-statutory options may not be less than 85% of the fair
market value of the Common Stock subject to the option on the date of grant; the exercise price of
incentive options may not be less than 100% of the fair market value of the Common Stock subject to
the option on the date of the grant. No options or rights to purchase restricted stock were granted to the Companys executive officer
during the fiscal year ended December 31, 2004. 9




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ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS The following table sets forth certain information regarding the ownership of the Companys
Common Stock as of December 31, 2004 by: (i) each director and nominee for director; (ii) all
officers and directors of the Company as a group; and (iii) all those known by the Company to be
beneficial owners of more than five percent of its Common Stock. BENEFICIAL OWNERSHIP (1) BENEFICIAL OWNER
    
    NUMBER OF SHARESOF COMMON STOCK
    
    PERCENT TOTAL (2)William R. Hambrecht
    
    
    381,254
    
    
    
    51.4539 Bryant StreetSan Francisco, CA 94107Edmund H. Shea, Jr. and related entities
    
    
    113,173
    
    
    
    15.2655 Brea Canyon RoadWalnut, CA 91789Emmett R. DeMoss Jr.
    
    
    51,350
    
    
    
    6.91321 Butterfield RoadSan Anselmo, CA 94960All executive officers and directorsas a group (3 persons)
    
    
    545,777
    
    
    
    73.5
   (1)
    
    This table is based upon information supplied by officers, directors and principal
stockholders and Schedules 13D and 13G, if any, filed with the Securities and Exchange
Commission (the SEC). Unless otherwise indicated in the footnotes to this table and subject
to community property laws where applicable, the Company believes that each of the
stockholders named in this table has sole voting and investment power with respect to the
shares indicated as beneficially owned.(2)
    
    Applicable percentages are based on 742,108 shares outstanding on December 31, 2004 adjusted
as required by rules promulgated by the SEC. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Commencing February 11, 2003, the Company executed a series of convertible promissory notes
with Salon Media Group that converted to 843 shares of Series C Preferred Stock on December 30,
2003. In April 2003 Salon announced the appointment of Elizabeth Hambrecht as its Chief Financial
Officer, Treasurer and Secretary. In October 2003 she was appointed President of Salon Media Group
and in February 2004 she was appointed Chief Executive Officer. Ms. Hambrecht is the daughter of
William R. Hambrecht and the sister of Robert H. Hambrecht. 10




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PART IV 
 ITEM 13. EXHIBITS ExhibitNumber
    
    Description21.1
    
    Subsidiaries of Ironstone Group, Inc.31.1
    
    Certification of Chief Executive
Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the
Securities Exchange Act of 193431.2
    
    Certification of Chief Financial
Officer pursuant to Rules 13a-14 and 15d-14 promulgated under the
Securities Exchange Act of 193432.1
    
    Certification of Chief Executive
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    Certification of Chief Financial
Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to
Section 906 of the Sarbanes-Oxley Act of 2002
 
 ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES The following table shows the aggregate amounts of audit fees and audit-related fees that the
principal accountant billed in each of the last two fiscal years. There were no tax fees or other
fees paid to the accountant in the last two fiscal years. 2004
    
    
    2003Annual Audit
    
    $
    14,000
    
    
    $
    8,000Review of condensed quarterly consolidated
financial statements
    
    
    8,850
    
    
    
    7,875Totals
    
    $
    22,850
    
    
    $
    15,875
 Since the Board of Directors does not have an audit committee, the principal auditor is engaged by
the Chief Executive Officer and the Chief Financial Officer on behalf of the Companys Board of
Directors. 11




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SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report on Form 10-KSB to be signed on its behalf by the
undersigned, thereunto duly authorized. IRONSTONE GROUP, INC.
a Delaware corporationDate: March 24, 2005
    By:
    /s/  Robert H. HambrechtRobert H. HambrechtChief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed
below by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated. Signature
    
    Title
    
    Date/s/ Robert H. Hambrecht

Robert H. Hambrecht
    
    Director, Chief Executive Officer,
and Secretary
(Principal Executive Officer)
    
    March 24, 2005/s/ Anna-Marie E. Schweizer

Anna-Marie E. Schweizer
    
    Chief Financial Officer (Principal
Financial Officer)
    
    March 24, 2005/s/ Edmund H. Shea, Jr.

Edmund H. Shea, Jr.
    
    Director
    
    March 24, 2005/s/ William R. Hambrecht

William R. Hambrecht
    
    Director
    
    March 24, 2005
 12




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IRONSTONE GROUP, INC. AND SUBSIDIARIES INDEX TO CONSOLIDATED FINANCIAL STATEMENTS PageReport of Independent Registered Public Accounting Firm
    
    F-2Consolidated balance sheet at December 31, 2004
    
    F-3Consolidated statements of operations and comprehensive income for the years ended December 31, 2004 and 2003
    
    F-4Consolidated statements of shareholders equity for the years ended December 31, 2004 and 2003
    
    F-5Consolidated statements of cash flows for the years ended December 31, 2004 and 2003
    
    F-6Notes to consolidated financial statements
    
    F-7 to F-10
 F-1




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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders of
Ironstone Group, Inc. We have audited the accompanying consolidated balance sheet of Ironstone Group, Inc. and
Subsidiaries as of December 31, 2004, and the related consolidated statements of operations and
comprehensive income, shareholders equity and cash flows for each of the two years in the period
ended December 31, 2004. These financial statements are the responsibility of the Companys
management. Our responsibility is to express an opinion on these financial statements based on our
audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Ironstone Group, Inc. and Subsidiaries as of December
31, 2004, and their results of operations and cash flows for each of the two years in the period
ended December 31, 2004, in conformity with accounting principles generally accepted in the United
States of America. /s/ J. H. Cohn LLP San Diego, California
February 14, 2005
 F-2




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IRONSTONE GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEET
 December 31, 2004
 ASSETS:Current assets:Cash
    
    $
    7,360Marketable securities available for sale, at fair value
    
    
    8,970Investment in Salon Media Group, Inc. Series C Preferred, at fair value
    
    
    1,854,600Warrants to purchase Salon Media Group, Inc. common stock, at fair value
    
    
    136,500Total assets
    
    $
    2,007,430LIABILITIES AND SHAREHOLDERS EQUITY:Liabilities:Line of credit borrowings
    
    $
    20,250Accounts payable
    
    
    163Total liabilities
    
    
    20,413Shareholders equity:Preferred stock, $0.01 par value; 5,000,000 shares authorized of
which there are no issued and outstanding shares
    
    
    Common stock, $0.01 par value; 25,000,000 shares authorized of
which 1,487,644 shares are issued
    
    
    14,878Additional paid-in capital
    
    
    21,170,385Accumulated deficit
    
    
    (19,973,711
    )Accumulated other comprehensive income
    
    
    1,297,3402,508,892Less: Treasury stock, 745,536 shares repurchased
    
    
    (521,875
    )Total shareholders equity
    
    
    1,987,017Total liabilities and shareholders equity
    
    $
    2,007,430
 The accompanying notes are an integral part of these consolidated financial statements. F-3




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IRONSTONE GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME
 Years Ended December 31, 2004 and 2003
 2004
    
    
    2003Revenues:Gain on sale of marketable securities
    
    $
    
    
    
    $
    94,976Interest and other income
    
    
    11
    
    
    
    26,664Total revenues
    
    
    11
    
    
    
    121,640Costs and expenses:Impairment loss on marketable securities
    
    
    157,365
    
    
    
    Legal and other professional fees
    
    
    56,915
    
    
    
    125,707Miscellaneous expenses
    
    
    1,756
    
    
    
    11,691Total costs and expenses
    
    
    216,036
    
    
    
    137,398Loss from operations
    
    
    (216,025
    )
    
    
    (15,758
    )Other income (expense):Warrants received, at fair value
    
    
    
    
    
    
    19,500Interest expense
    
    
    (172
    )
    
    
    Total other income (expense)
    
    
    (172
    )
    
    
    19,500Net income (loss)
    
    $
    (216,197
    )
    
    $
    3,742COMPREHENSIVE INCOME, NET OF TAX:Net income (loss)
    
    $
    (216,197
    )
    
    $
    3,742Unrealized holding gain arising during the year:Unrealized holding gain arising during the period
    
    
    1,290,570
    
    
    
    106,036Reclassification adjustment for gain and impairment loss included in net income (loss)
    
    
    157,365
    
    
    
    (94,976
    )Comprehensive income
    
    $
    1,231,738
    
    
    $
    14,802Basic and diluted income (loss) per share:Net income (loss) per share
    
    $
    (0.29
    )
    
    $
    0.00Weighted average shares
    
    
    742,209
    
    
    
    1,273,378
 The accompanying notes are an integral part of these consolidated financial statements. F-4




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##### Table of Contents



IRONSTONE GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
 Years Ended December 31, 2004 and 2003
 AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Paid In
    
    
    Accumulated
    
    
    Comprehensive
    
    
    Treasury StockShares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income/(Loss)
    
    
    Shares
    
    
    Amount
    
    
    TotalBalances,
January 1, 2003
    
    
    1,487,847
    
    
    $
    14,878
    
    
    $
    21,170,385
    
    
    $
    (19,761,256
    )
    
    $
    (161,655
    )
    
    
    
    
    
    $
    
    
    
    $
    1,262,352Repurchase of stock
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    745,536
    
    
    
    (521,875
    )
    
    
    (521,875
    )Other comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,060
    
    
    
    
    
    
    
    
    
    
    
    11,060Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,742
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,742Balances,
December 31, 2003
    
    
    1,487,847
    
    
    
    14,878
    
    
    
    21,170,385
    
    
    
    (19,757,514
    )
    
    
    (150,595
    )
    
    
    745,536
    
    
    
    (521,875
    )
    
    
    755,279Retirement of stock
    
    
    (203
    )Other comprehensive
income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,447,935
    
    
    
    
    
    
    
    
    
    
    
    1,447,935Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (216,197
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (216,197
    )Balances,
December 31, 2004
    
    
    1,487,644
    
    
    $
    14,878
    
    
    $
    21,170,385
    
    
    $
    (19,973,711
    )
    
    $
    1,297,340
    
    
    
    745,536
    
    
    $
    (521,875
    )
    
    $
    1,987,017
 The accompanying notes are an integral part of these consolidated financial statements. F-5




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##### Table of Contents



IRONSTONE GROUP, INC. AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS
 Years Ended December 31, 2004 and 2003
 2004
    
    
    2003CASH FLOWS FROM OPERATING ACTIVITIES:Net income (loss)
    
    $
    (216,197
    )
    
    $
    3,742Adjustments to reconcile net income (loss) to net cash
used in operating activities:Impairment loss on marketable securities
    
    
    157,365
    
    
    
    Realized gain from sale of marketable securities
    
    
    
    
    
    
    (94,976
    )Warrants received, at fair value
    
    
    
    
    
    
    (19,500
    )Changes in operating assets and liabilities:Interest receivable
    
    
    
    
    
    
    (24,978
    )Other assets
    
    
    578Accounts payable
    
    
    (7,963
    )
    
    
    8,126Income tax payable
    
    
    
    
    
    
    (52,364
    )Net cash used in operating activities
    
    
    (66,217
    )
    
    
    (179,950
    )CASH FLOWS FROM INVESTING ACTIVITIES:Proceeds from the sale of marketable securities
    
    
    
    
    
    
    388,795Purchase of marketable securities
    
    
    
    
    
    
    (293,679
    )Issuance of notes receivable
    
    
    
    
    
    
    (650,000
    )Net cash used in investing activities
    
    
    
    
    
    
    (554,884
    )CASH FLOWS FROM FINANCING ACTIVITIES:Proceeds from line of credit
    
    
    20,250
    
    
    
    Purchase of treasury stock
    
    
    
    
    
    
    (521,875
    )Net cash provided by (used in) financing activities
    
    
    20,250
    
    
    
    (521,875
    )Net decrease in cash
    
    
    (45,967
    )
    
    
    (1,256,709
    )Cash at beginning of year
    
    
    53,327
    
    
    
    1,310,036Cash at end of year
    
    $
    7,360
    
    
    $
    53,327Supplemental disclosure of cash flow information:Cash paid during the year for interest
    
    $
    172
    
    
    $
    Supplemental disclosure of non-cash investing activities:Conversion of notes receivable of $650,000 and interest receivable of $24,400 into
Series C Preferred Stock
    
    $
    
    
    
    $
    674,400
 The accompanying notes are an integral part of these consolidated financial statements. F-6




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##### Table of Contents



IRONSTONE GROUP, INC. AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Years Ended December 31, 2004 and 2003
 1. BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Business Activities Ironstone Group, Inc. (the Company) was incorporated in 1972. Since 1986, a majority of the
Companys outstanding shares have been owned by Hambrecht & Quist Group, a San Francisco based
investment banking and venture capital firm. In September 2003, Ironstone repurchased all these
shares. Since that time, the Company has actively sought appropriate business combination
opportunities. In the alternative, the Company is looking for an investment opportunity for some
or all of its remaining liquid assets. Marketable Securities Marketable securities have been classified by management as available for sale in accordance with
Statement of Financial Accounting Standard No. 115, Accounting for Certain Investments in Debt and
Equity Securities (SFAS No. 115). In accordance with SFAS No. 115, marketable securities are
recorded at fair value and any unrealized gains and losses are excluded from earnings and reported
as a separate component of shareholders equity until realized. The fair value of the Companys
marketable securities at December 31, 2004 is based on quoted market prices. For the purpose of
computing realized gains and losses, cost is identified on a specific identification basis. For
marketable securities for which there is an other-than-temporary impairment, an impairment loss is
recognized as a realized loss. Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted
in the United States of America requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates. Income Taxes The Company and its wholly owned subsidiaries file a consolidated federal income tax return.
Income taxes are provided for the tax effects of transactions reported in the financial statements
and consist of taxes currently due plus deferred income taxes. Deferred income taxes are
recognized for differences between the financial statement and tax bases of assets and liabilities
that will result in taxable or deductible amounts in the future. Deferred income taxes are also
recognized for net operating loss carryforwards that are available to offset future taxable income.
Valuation allowances are established when necessary to reduce deferred tax assets to the amount
expected to be realized. Earnings <Loss> per share Basic EPS excludes dilution from common stock equivalents and is computed by dividing net income
(loss) applicable to common shareholders by the weighted average number of common shares actually
outstanding during the period. Diluted EPS reflects the potential dilution from common stock
equivalents, except where inclusion of such common stock equivalents would have an anti-dilutive
effect, using only the average stock price during the period in the computation. Options to purchase 7,600 shares of the Companys common stock were outstanding during 2004, but
were not included in the computation of diluted EPS as their effect would be anti-dilutive. During
2003, 11,175 options were outstanding, but were not included in the computation of diluted EPS. F-7




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##### Table of Contents



IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003 2. MARKETABLE SECURITIES Marketable securities are classified as available for sale as of December 31, 2004. The cost and
fair value of marketable securities at December 31, 2004 are as follows: ImpairmentCost
    
    
    Loss
    
    
    Fair ValueCorporate Equity Securities:Flexi International Software, Inc.
    
    $
    166,335
    
    
    $
    (157,365
    )
    
    $
    8,970
 At December 31, 2004, the Company determined that the loss on its position in Flexi International
Software, Inc., is a significant and other-than-temporary impairment and, therefore, has recorded
an impairment on the marketable security as a realized loss in 2004. 3. INVESTMENT IN SALON MEDIA GROUP, INC. The Company owns 843 shares of Series C Preferred Stock of Salon Media Group, Inc. (Salon).
These shares resulted from the December 31, 2003 conversion of Convertible Promissory Notes
purchased by the Company and are convertible to common stock at any time. The Series C Preferred
Stock is convertible into common stock of Salon at the conversion rate determined by dividing the
Series C Preferred Stock per share price of $800 by the Series C Conversion Price of $0.04, or at
the rate of one share of Series C Preferred Stock to 20,000 shares of common stock. If converted,
the Companys shares of Series C Preferred Stock represent 16,860,000 common shares of Salon or
8.7% of Salons common stock outstanding as of December 31, 2004. The investment in Salon is
valued at the converted common stock value of $0.11 per share, or $1,854,600 at December 31, 2004. Additionally, in conjunction with making the investment in Salon, the Company received 1,950,000
warrants to purchase common stock in Salon at prices ranging from $0.04182 - $0.05256 per share.
The warrants are under anti-dilution protection and in February 2004 were revalued downward to a
range of $0.01469 - $0.05181 in conjunction with the issuance of Series C Preferred Stock. The
warrants have a weighted average price of $0.04, are fully exercisable and expire three years from
issuance. The warrants were valued at $0.07 per share, or $136,500, at December 31, 2004. 4. RELATED PARTY TRANSACTIONS The President and Chief Executive Officer of Salon is the daughter of a member of the Board of
Directors and the sister of the Chief Executive Officer. 5. LINE OF CREDIT With Board approval, on September 23, 2004, the Company entered into a line of credit arrangement
with First Republic Bank (the lender). The line of credit has a borrowing limit of $100,000 with
interest based upon the lenders prime rate, with a floor rate of 4.25%. Interest is payable
monthly and was 5.25% at December 31, 2004. The line expires on September 23, 2005, and will renew
upon review by the lender. The line is guaranteed by an officer and a member of the Board of
Directors. At December 31, 2004, the outstanding balance under the line was $20,250. F-8




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##### Table of Contents



IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003 6. INCOME TAXES SFAS No. 109 requires the recognition of deferred tax assets and liabilities for the expected
future consequences of events that have been recognized in the financial statements or tax returns.
Deferred income taxes reflect the net tax effects of (i) temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and the amounts used
for income tax purposes and (ii) operating loss and tax credit carryforwards. The tax effects of
significant items comprising the Companys deferred income taxes at December 31, 2004 and 2003 are
as follows: 2004
    
    
    2003Deferred tax assets:Operating loss carryforward
    
    $
    9,505,000
    
    
    $
    10,081,000Impairment of marketable securities
    
    
    67,000
    
    
    
    Less valuation allowance
    
    
    (9,008,000
    )
    
    
    (10,081,000
    )Deferred tax assets  net
    
    
    564,000
    
    
    
    Deferred tax liability  unrealized gain on marketable securities
    
    
    (564,000
    )
    
    
    Deferred income taxes  net
    
    $
    
    
    
    $
    
 The valuation allowance decreased by approximately $1,073,000 from 2003 to 2004 due to the
expiration of net operating loss carryforwards. As of December 31, 2004, the Company has Federal
net operating loss carryforwards for tax purposes of approximately $27,359,000 and California net
operating loss carryforwards of approximately $2,297,000. These carryforwards will expire in the
years 2005 to 2024. Section 382 of the Internal Revenue Code of 1986, as amended, imposes an annual limitation on the
availability of net operating loss carryforwards to offset taxable income when an ownership change
occurs. Due to the redemption of shares of common stock in 2003, the Company underwent such an
ownership change. Therefore, the Companys use of losses incurred through the date of the
ownership change will be limited to approximately $48,000 per year. In the opinion of management, based on the Section 382 limitation discussed above, and the
remaining carryover period, the realization of such carryforwards is not likely and, accordingly, a
valuation allowance has been recorded to offset such amount in its entirety. 7. SHAREHOLDERS EQUITY Treasury Stock  On September 15, 2003, the Board of Directors authorized the Company to
purchase 745,536 shares of Company common stock at $0.70 per share for an aggregate purchase price
of $521,875. The repurchase represented 50.11% of the issued and outstanding shares of the
Company. As of December 31, 2004, the treasury shares are held by the Company. Preferred Stock  The Company is authorized to issue up to five million shares of preferred
stock without further shareholder approval; the rights, preferences and privileges of which would
be determined at the time of issuance. No shares have ever been issued. Stock Option Plans  The Company has adopted a 1989 Equity Incentive Plan, a 1993
Non-Employee Directors Stock Option Plan and a 1994 Equity Incentive Plan (collectively, the
Plans). In March 1994, the 1989 Equity Incentive Plan was amended to reduce the number of shares
reserved there under and the Board of Directors determined that no further grants would be made
under this plan. As of December 31, 2004 and 2003, 331,680 and 328,105 shares, respectively, were
available for grant under the Plans. The Plans provide for incentive stock options to be granted
at times and prices determined by the Companys Board of Directors, to be granted at not less than
100% of the fair value of the Companys common stock on the date of grant. Options are generally
subject to a three or four-year vesting schedule. Options issued under the Plans expire at the
earlier of the end of the exercise period of no more than ten years from the date of grant or 90
days following the grantees end of service to the Company. F-9




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##### Table of Contents



IRONSTONE GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Years Ended December 31, 2004 and 2003 SHAREHOLDERS EQUITY(continued) Stock Option Plans (continued) During 2004 and 2003, no options were granted, exercised or forfeited. A summary of the status of the options issued under the Plan for the two years ended December 31,
2004 and 2003 is presented below: AveragePrice perShares
    
    
    ShareOutstanding at January 1, 2003
    
    
    11,175
    
    
    $
    1.71Expired
    
    
    
    
    
    
    Outstanding at December 31, 2003
    
    
    11,175
    
    
    $
    1.71Expired
    
    
    (3,575
    )
    
    $
    3.55Outstanding at December 31, 2004
    
    
    7,600
    
    
    $
    0.85
 The following table summarizes information about fixed price stock options outstanding at December
31, 2004: Options Outstanding and ExercisableWeighted Ave.Range of Exercise
    
    Number Outstanding
    
    
    Remaining
    
    
    Weighted-AveragePrices
    
    12/31/04
    
    
    Contractual Life
    
    
    Exercise Price$0.50
    
    
    3,200
    
    
    3.1 years
    
    $
    0.50$1.06 - $1.13
    
    
    4,400
    
    
    
    3.3
    
    
    $
    1.10$0.50 - $1.13
    
    
    7,600
    
    
    
    3.2
    
    
    $
    0.85
 F-10