SECURITIES
AND EXCHANGE COMMISSION


Washington,
DC 20549





FORM
10-K





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


For
the fiscal year ended March 31, 2008


or


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


For
the transition period
from                to


Commission
file number 0-26395





SALON
MEDIA GROUP, INC.


(Exact
name of Registrant as specified in its charter)


Delaware
            94-3228750(State
      of Incorporation)
            (IRS
      Employer Identification No.)





101
Spear Street, Suite 203


San
Francisco, CA 94105


(Address
of principal executive offices)




(415)
645-9200


(Registrant's
telephone number, including area code)




Securities
registered pursuant to Section 12(b) of the Act:


None


Securities
registered pursuant to Section 12(g) of the Act:


Common
Stock, $0.001 Par Value


(Title
of Class)





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.  Yes [  ]  No
[X]





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.  Yes
[  ]  No [X]





Indicate
by check mark whether the Registrant (1) has filed all reports required to be
filed by Sections 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. Yes [X]  No [  ]





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments to
this Form 10-K. [  ]





Indicate
by check mark whether the registrant is an accelerated filer as defined in
Rule 12b-2 of the Act.


Large
Accelerated Filer o         
Accelerated Filer o          Non-Accelerated
Filer þ





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





The
aggregate market value of the voting stock held by non-affiliates of the
registrant was approximately $1,048,000 based on the closing sale price of the
registrant’s common stock on June 10, 2008.  Shares of common stock
held by each then current executive officer and director and by each person who
is known by the registrant to own 5% or more of the outstanding common stock
have been excluded from this computation in that such persons may be deemed to
have been affiliates of Salon. This determination of affiliate status is not a
conclusive determination for other purposes.





The
number of outstanding shares of the Registrant's Common Stock, par value $0.001
per share, on June 10, 2008 was 1,941,105 shares.











FORM
10-K


SALON
MEDIA GROUP, INC.


INDEX





PagePART
      I
                
                NumberITEM
      1.
                Business
                4ITEM
      1A.
                Risk
      Factors
                12ITEM
      1B.
                Unresolved
      Staff Comments
                21ITEM
      2.
                Properties
                21ITEM
      3.
                Legal
      Proceedings
                21ITEM
      4.
                Submission
      of Matters to a Vote of Security Holders
                21PART
      IIITEM
      5.
                Market
      for Registrant’s Common Equity and Related Stockholder
    Matters
                22ITEM
      6.
                Selected
      Consolidated Financial Data
                25ITEM
      7.
                Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                26ITEM
      7A.
                Quantitative
      and Qualitative Disclosures about Market Risk
                36ITEM
      8.
                Financial
      Statements and Supplementary Data
                37ITEM
      9.
                Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosures
                68ITEM
      9A.
                Controls
      and Procedures
                68ITEM
      9B.
                Other
      Information
                69PART
      IIIITEM
      10.
                Directors
      and Executive Officers of the Registrant
                70ITEM
      11.
                Executive
      Compensation
                74ITEM
      12.
                Security
      Ownership of Certain Beneficial Owners and Management and Related
      Stockholder Matters
                84ITEM
      13.
                Certain
      Relationships and Related Transactions
                91ITEM
      14.
                Principal
      Accountant Fees and Services
                93
  
  FORM
10-K
 SALON
MEDIA GROUP, INC.
 INDEX
– (continued)
  PART
      IVITEM
      15.
                Exhibits,
      Financial Statement Schedules and Reports on Form 8-K
                94SIGNATURES
                103


3


PART
I




This
report 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, Internet advertising market performance,
subscription service plans, non-web opportunities and revenue
sources.  Although Salon Media Group, Inc. (Salon) believes its plans,
intentions and expectations reflected in such forward-looking statements are
reasonable, it can give no assurance that such plans, intentions or expectations
will be achieved.  Salon’s actual results may differ significantly
from those anticipated or implied in these forward-looking statements as a
result of the factors set forth above and in Salon’s public
filings.  Salon assumes no obligation to update any forward-looking
statements as circumstances change.




Salon’s
actual results may differ significantly from those anticipated or implied in
these forward-looking statements as a result of the factors set forth below and
in "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Factors That May Affect Salon’s 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.





ITEM
1.  Business




Overview





Salon was
originally incorporated in July 1995 in the State of California and
reincorporated in Delaware in June 1999.  On June 22, 1999, Salon had
its initial public offering, with its common stock quoted on the NASDAQ National
Market under the symbol SALN.  Effective May 16, 2001, Salon adopted
the name Salon Media Group, Inc.  Due to Salon’s inability to meet the
continued listing requirements of the NASDAQ Market, on November 21, 2002,
Salon’s common stock began trading in the OTC (Over-The-Counter) Bulletin Board
marketplace under the symbol SALN.OB.   Following a 20:1 reverse
split on November 15, 2006, the Company’s stock ticker symbol became
SLNM.OB.





Salon is
an online news and social networking company and an Internet publishing
pioneer.  Salon’s award-winning journalism combines original
investigative stories and provocative personal essays along with quick-take
commentary and staff-written Weblogs about politics, technology, culture and
entertainment.  Committed to interactivity, the Website also hosts two
online communities, Table Talk and The Well.  Salon sponsors a daily
blog by the independent blogger Glenn Greenwald, a weekly column by founding
member Gary Kamiya, brought back culture writer Camille Paglia to do a monthly
column, Literary Guide to the World, and a daily blog by Editor-in-Chief Joan
Walsh.   In its editorial product Salon balances two crucial
missions: (1) providing original and provocative content on topics that the
mainstream media overlook, and (2) filtering through the media chatter and
clutter to help readers find the stories that matter.




4




The main
entry and navigation point to Salon's tenprimary subject-specific
sections is Salon's home page at www.salon.com.  Built around multiple
daily features – War Room, Machinist, Five Things, the Blog Report, King
Kaufman’s Sports Daily, Since you Asked, Broadsheet, How the World Works, Video
Dog and daily blogs by Glenn Greenwald and Joan Walsh, Salon provides a
constantly updated array of news, features, interviews, columnists and blogs,
including the following:





News
      & Politics
            Salon
      News & Politics features breaking stories, investigative journalism
      and commentary, as well as interviews with newsmakers, politicians and
      pundits.  News features Salon’s War Room, a daily politics
      blog.Opinion
            Opinion
      features provocative commentary on timely issues, including daily blogs by
      Glenn Greenwald and Joan Walsh, and weekly columns by Gary Kamiya, Joe
      Conason and Garrison Keillor. It also features the Blog Report, an
      opinionated guide to the blogosphere, and a monthly column by Camille
      Paglia.Technology
      & Business
            Technology
      & Business provides smart, opinionated coverage of Internet news and
      digital culture from today's best technology writers, along with in-depth
      features about the business world and the economy. It features Patrick
      Smith's regular Ask the Pilot column, Andrew Leonard’s How the World Works
      blog, and Machinist by Farhad Manjoo.Arts
      & Entertainment
            Arts
      & Entertainment stages music and television reviews and interviews.
      The section includes frequent television and music features. In 2006 the
      Website added Video Dog, a video blog comprised of user generated video
      clips, as well as regular podcasts.  It is anchored by
      television critic Heather Havrilesky.Movie
      Page
            Launched
      in May 2007, Salon’s Movie Page spotlights film reviews, especially
      critics’ picks, and provides readers an ability to check movie show times,
      buy tickets or rent DVDs. In 2008, Salon added I Like to Watch, featuring
      film critics Andrew O’Hehir and Stephanie Zacharek.Life
            Life
      features articles by thought-provoking writers about family life,
      motherhood and women's lives and issues, as well as the women’s news
      digest Broadsheet. Cary Tennis' popular advice column, Since You Asked,
      appears daily.Books
            Books
      includes ahead-of-the-curve daily book reviews and interviews with today's
      most interesting writers. Nationally renowned critics Laura Miller and
      Andrew O’Hehir anchor this site.  During the year ended March
      31, 2007, Salon launched the Literary Guide to the World which features
      books by geographical destinations.Comics
            The
      Comics section features the works of comic luminaries Tom Tomorrow, Ruben
      Bolling, Carol Lay and Keith Knight.Sports
            King
      Kaufman’s Sports Daily provides sports news and commentary with an
      edge.







5




Salon has
two online communities, The Well and Table Talk, which allow users to discuss
Salon content and interact with other users.  The Well, a subscription
member-only discussion community in which members use their real names to post
and only members can view the postings, had approximately 2,700 paying
subscribers as of May 31, 2008.  Table Talk is available to all
Internet users.




Salon
believes that its original, award-winning content allows Salon to attract and
retain users who are more affluent, better educated and more likely to make
online purchases than typical Internet users. Salon believes its user profile
makes its Website a valuable media property for advertisers and retailers who
are allocating marketing resources to target consumers online.




Revenue
Sources




No
customer accounted for over 10% of either total revenue or advertising revenue
for the years ended March 31, 2008, March 31, 2007, or March 31, 2006, which
were as follows (in thousands):





Year
      Ended March 31,2008
            
            
            2007
            
            
            2006Amount
            
            
            %
            
            
            Amount
            
            
            %
            
            
            Amount
            
            
            %Advertising
            
            $
            5,434
            
            
            
            72%
            
            
            $
            5,409
            
            
            
            70%
            
            
            $
            3,685
            
            
            
            57%Salon
      Premium
            
            
            1,333
            
            
            
            18%
            
            
            
            1,546
            
            
            
            20%
            
            
            
            2,036
            
            
            
            31%All
      Other
            
            
            746
            
            
            
            10%
            
            
            
            793
            
            
            
            10%
            
            
            
            795
            
            
            
            12%Total
            
            $
            7,513
            
            
            
            100%
            
            
            $
            7,748
            
            
            
            100%
            
            
            $
            6,516
            
            
            
            100%





Salon has
generated Internet advertising revenues since its inception.  To
offset the precipitous drop in advertising revenues experienced in 2000 from the
downturn in the economy and the bursting of the dot-com bubble, the company
launched Salon Premium, a subscription service, in April 2001.  Since
that time, the market for Internet advertising has improved; according to the
Interactive Advertising Bureau, online advertising revenues have grown from $9.6
billion in 2004 to $21.2 billion in 2007. The market for Internet advertising is
expected to continue to grow to over $42 billion by 2011 according to a report
by MarketingCharts.  Central to Salon’s strategy is to capitalize on
the expected continued growth in Internet advertising as advertising budgets are
shifted to the Web in response to increased online usage.





An
important factor in increasing advertising revenues in future periods, including
Salon’s peak third quarter ending December 31, is growing Salon’s
audience.  Attracting more unique Website visitors is important to
Salon as they generate page views, and each page view becomes a potential
platform for serving advertisements.  Ultimately, Salon charges
advertisers for a set number of ad impressions viewed by a Website
visitor.  Due to various factors, including concerted efforts to make
Salon’s content more accessible to readers by automatically launching its Site
Pass advertisement, formatting content to maximize the potential for Salon’s
content to show up in search engine results, and marketing campaigns with a
select few Websites, the average number of unique monthly Website visitors for
the year ended March 31, 2008 increased 33% to approximately 4.4 million from
the year ended March 31, 2007, and attained a record high of 6.5 million in
March 2008.  Aiding the continued growth in unique visitors to Salon’s
Website is the general migration of readers to the Internet from print
newspapers.  The table in the following page reflects unique monthly
visitors to Salon’s Website.





6









Salon has
evaluated the balance between its subscription and advertising businesses and
has shifted emphasis toward advertising.  Until recently, a Website
visitor was given a choice of: (1) becoming a Salon Premium subscriber to avoid
having to view advertisements on future visits to Salon’s Website or (2) viewing
an advertisement to gain access to all of Salon’s content.  This
strategy has been found to impede access to Salon’s Website and its ability to
generate advertising impressions.  During the quarter ended December
31, 2006, Salon changed its Site Pass model to automatically serve
advertisements, enabling a Website visitor to gain more seamless access to
Salon’s content.  This change has produced an increase in the number
of ad impressions that Salon can serve and improved Salon’s potential to
generate an even greater amount of advertising revenues, offsetting a drop in
Salon Premium subscriptions that traditionally were solicited from the Site Pass
and the relatively smaller amount of revenue they generate.





Most
advertising campaigns are of short duration, generally less than ninety
days.  Salon’s obligations may include a guaranteed minimum number of
impressions, or views by Website visitors of an advertisement, a set number of
“Site Pass” advertisements viewed by Website visitors or a set number of days
that a Site Pass advertisement is to run.  To the extent the minimum
guaranteed amounts are not achieved, Salon defers recognition of the
corresponding revenue until the remaining guaranteed amounts are provided, if
mutually agreeable with an advertiser.  If these “make good” amounts
are not agreeable with an advertiser, no further revenue is
recognized.





Generally,
subscriptions to Salon Premium with no advertisement were $35 for an annual
subscription through March 2007 and $45 thereafter.  Benefits of Salon
Premium include unrestricted access to Salon’s content with no banners, pop-ups
or site pass advertisements, free magazine subscriptions, free access to the
Table Talk on-line discussion forum, and the ability to download content in text
or PDF format.





Salon
Premium revenue is recognized ratably over the period that services are
provided.  For the year ended March 31, 2008, Salon received $1.2
million in cash and recognized $1.3 million of revenue for this service
primarily from approximately 27,900 paid new and renewed one year subscriptions
and from approximately 4,400 monthly subscriptions.  For the year
ended March 31, 2007, Salon received $1.5 million in cash and recognized $1.5
million of revenue for this service primarily from approximately 44,200 paid new
and renewed one year subscriptions and from approximately 5,000 monthly
subscriptions.  For the year ended March 31, 2006, Salon received $1.8
million in cash and recognized $2.0 million of revenue for this service
primarily from approximately 58,700 paid new and renewed one year subscriptions
and from approximately 3,900 monthly subscriptions.




7


Due to
reader interest in Salon’s political coverage during the 2004 presidential
campaign, which created opportunities to promote membership drives, either
singly or in conjunction with third parties, Salon reached a peak of
approximately 89,100 paid subscribers in December 2004.  Since that
time, paid subscriptions have continued to decline, to approximately 47,200 as
of March 31, 2007 and approximately 33,900 as of March 31, 2008.  The
drop is expected to continue during the next year as Salon emphasizes
advertising revenue over Salon Premium revenues as previously
mentioned.




The other
sources of revenue are primarily from The Well, an on-line discussion
forum.  Revenue is recognized ratably over the subscription
period.  The revenues recognized were $0.4 million each for the years
ended March 31, 2008 and March 31, 2007, and $0.5 million for the year ended
March 31, 2006.   Salon generates nominal revenue from the
licensing of content that previously appeared in Salon and for providing links
to a third party’s Website.  The third party’s Website offers
personals/dating services.





Sales
and Marketing




Salon has
sales offices in New York City and San Francisco with ten active advertising
sales and operations employees as of March 31, 2008, of which four actively
solicit orders.  As of March 31, 2008, Salon has one employee
associated with Salon Premium membership activities.




Salon
incurred advertising expenses of $1.1 million, $0.4 million and $0.3 million for
the years ended March 31, 2008, 2007, and 2006, respectively.  These
advertising expenses primarily represent non-cash expenses from the utilization
of advertising credits which Salon acquired in January 2000 from the sale of
common stock to Rainbow Media Holdings (“Rainbow”).  During the year
ended March 31, 2003, Rainbow transferred a portion of its obligation to provide
Salon with advertising credits to NBC’s Bravo channel, while still retaining a
portion of the overall obligation.  The transfer occurred due to the
sale by Cablevision, which owns Rainbow Media Holdings, of its Bravo channel to
NBC.  As of March 31, 2008, Salon has $3.1 million in advertising
credits, of which approximately $1.8 million remain with Rainbow and
approximately $1.3 million are with NBC, all of which will expire in December
2009. Since their acquisition, Salon has used the advertising credits for
television advertisements, which were determined to be ineffective in driving
traffic to its Website.  As a result, during the last quarter of its
year ended March 31, 2007, Salon began using its NBC credits for banner type ads
on NBC’s Websites, and contemplates using a portion of its remaining NBC credits
in a similar fashion.  Salon intends to utilize the NBC and Rainbow
credits to continue to promote its website as well as the launch of its new
social network, Open Salon.  Salon expects to recover the full value
of all the advertising credits through usage or settlement in cash, per the
terms of the agreement, but there can be no absolute assurance as to any
potential cash settlement.




Competition




Salon
competes for advertising revenues with numerous Websites, with the 50 largest
companies attracting an estimated 94% of all the advertising dollars according
to a recent study by PricewaterhouseCoopers LLC and sponsored by the Interactive
Advertising Bureau.  These companies have Websites that include major
portals such as Yahoo, major search engines such as Google, major social
networks such as MySpace, and major online media publications such as
CNN.com.




8


Salon
competes with many news–oriented Websites, for paid subscribers in particular
and audience visitation in general.  In addition to traditional
news-oriented websites such as CNN, NBC, ABC and CBS, Salon also competes with
sites such as the Huffington Post, Slate, Mother Jones and Politico for staff,
audience and ad dollars.




Salon’s
Strategy




Continued
focus on growing Salon’s audience





Increasing unique visitors to Salon’s
Website and the resulting page views that serve as a platform for advertising
impressions is key to Salon’s revenue growth. In addition to the revenue
generated from advertising, an increase in unique visitors could increase
revenue from subscriptions as each new visitor to Salon’s Website is a potential
new subscriber to Salon Premium.  As a result, audience growth will
continue to be a primary business goal for Salon in FY09.




Salon
plans to continue its rapid audience growth through a combination of editorial
enhancements, new products, and more effective use of
technology.  Salon has continued to add new writers, and enhance or
create new content areas and features for its readers.  Salon has been
developing a new social networking service for its users, “Open Salon”, which
will allow them to post user profiles; contribute blogs and other content; and
collect all their contributions to Salon, including Letters to the Editor, in
one place.  Management believes Open Salon will attract and retain
unique users, increase advertising inventory and lower its incremental editorial
costs.  Salon plans to launch Open Salon in fiscal
2009.  Salon’s strategy to continue to grow its audience also
encompasses partnership formation to deliver Salon’s content to a broader
audience, a search engine optimization plan, and an integrated marketing plan
that includes mostly online advertising.  In the last several years
Salon has not allocated, and does not currently contemplate in its next fiscal
year allocating any significant cash resources towards such efforts; however,
Salon has formed and continues to form partnerships and alliances to deliver
Salon’s award-winning, unique, and compelling content to a broader
audience.





Focus
on advertising revenue opportunity while Premium subscriber base
declines





Salon
generates most of its revenue from advertising on its Website, as well as
through subscribers who pay to read its content without ads.  However,
as Salon increased its number of readers to its Website, Salon has determined
that if its advertising sales team can sell most of its inventory, it will be
more profitable for Salon to drive its readers to its advertising supported
Website rather than to a subscription, without-ads Website.  Salon
recognizes that its subscription model will continue to be preferred by a
minority of its readers, and will therefore continue the subscription program,
with emphasis on “Premium with ads” as a means of increasing potential ad
impressions.  Additionally, Salon will continue efforts to increase
the average value per subscriber by bundling third-party services with
subscriptions, and intends to offer other products and services to current
subscribers.




Salon
increased emphasis on advertising revenues during FY08 and will continue to do
so in FY09.  In FY09, Salon plans to increase the size of its sales
team, focus on broadening its advertiser base to include luxury items, apparel,
home furnishings and packaged goods, and intends to expand into other
advertising categories as well.  It will also expand the use of ad
networks to fully monetize any unsold remnant inventory.




Develop
Web 2.0 site and additional interactive functionality to increase reader
participation





As previously mentioned, Salon has
plans to launch a new user generated social network, to be called Open
Salon.  This site will be an extension to Salon’s highly popular
“Letters to the Editor” function, which allows readers to react to a story and
begin a conversation with both the writer and the audience who is reading the
story.  It is also intended as a home for bloggers who can take
advantage of its larger, aggregated audience. This site will be rolled out
during the course of FY09.





9


Salon
also plans to engage readers with Web 2.0 tools that enhance their experience on
the main Salon Website.  As an example, one social media application
under development is the Sphere “widget,” a configurable pop-up feature
activated by links embedded in articles on Salon.com.  These widgets
will contain links to related stories on Salon and on other
sites.   Sphere widgets contain ad inventory that Salon’s sales
team will bundle with other advertising opportunities.  This feature
is not expected to generate significant revenue, but is likely to drive
additional page views to archived content, increase the average time spent on
our Website and streamline the editorial process by obviating the need to
hand-select related stories.





Overall,
Salon is working to integrate social media applications with Salon’s
content.  A “share this article” link will expose users to a variety
of single-click tools that permit content to be shared, tagged and distributed
outside Salon’s domain.





Develop
content partnerships





Salon
believes it needs fresh content and new ideas to continue to attract readers to
its Website.  To this end, Salon has made efforts to initiate
partnerships to create content particularly in areas where Salon does not have
facilities or experience, such as video content.  Additionally, Salon
has made efforts to identify bloggers who might have a strong affinity with its
readers, and who might be interested in moving their sites to Salon in order to
gain a greater reach of readership, and to gain infrastructure
support.





New
Channels of Content Distribution





To meet
the growing demand for mobile content, Salon has revamped its presence on
AvantGo, the largest mobile content platform.  Salon’s new AvantGo
presence will be featured on the top level of the service’s Technology channel,
one of its most popular feeds.   Even though increased mobile
usage is expected to generate minimal additional revenue, this channel is
primarily an opportunity for Salon to extend its presence beyond a Web
browser.





Infrastructure
and Operations




Salon has
created a flexible publishing structure that enables it to develop its content
while responding quickly to news events and take advantage of the ease of
distribution provided by the Internet. Salon content is deployed on its
proprietary software platform and captured in a database for reuse in Web and
other formats.  In the last year, the content on Salon’s Website has
been structured to facilitate being found by search engines, a key driver in
increasing traffic to Salon’s Website.  During the last two years,
Salon has improved the look and feel of its Website to increase appeal to its
audience and contemplates continued changes to its Website.





Salon’s
Website is supported by a variety of servers using the Solaris and Linux
operating systems.  Salon’s top technical priority is the fast
delivery of pages to its users.  Salon’s systems are designed to
handle traffic growth by balancing the amount of traffic among multiple
servers.  Salon relies on server redundancy to help achieve its goal
of 24 hours, seven-days-a-week Website availability.  Regular
automated backups protect the integrity of Salon’s data.   Salon
servers are maintained at a third-party facility in Sacramento, in a building
capable of withstanding a major earthquake.  The third-party facility
provides continuous monitoring of the servers.





10


Software
to maintain and manage Salon Premium was created in-house and upgraded in 2003
and again during the year ended March 31, 2007.





Proprietary
Rights




Salon’s
success and ability to compete is dependent in part on the goodwill associated
with its trademarks, trade names, service marks and other proprietary rights and
on its ability to use U.S. laws to protect its intellectual property, including
its original content, content provided by third parties, and content provided by
columnists.   Salon has a registered trademark on its name and is
securing a registered trademark on its logo.





Salon
owns the Internet address www.salon.com.  Because
www.salon.com is the
address of the main home page to Salon’s Website and incorporates Salon’s
company name, it is a vital part of Salon’s intellectual property
assets.  Salon does not have a registered trademark on the address,
and therefore it may be difficult for Salon to prevent a third party from
infringing its intellectual property rights to the address.





Employees




As of
March 31, 2008, Salon has 63 full-time employees.  Salon believes its
employee relations are good.  No employees of Salon are represented by
a labor union or are subject to a collective bargaining agreement. Salon’s
future success is highly dependent on the ability to attract, hire, retain and
motivate qualified personnel.







11




ITEM
1A.  Risk Factors




Factors
That May Affect Salon’s Future Results and Market Price of Stock





Salon’s
business faces significant risks.  The risks described below may not
be the only risks Salon faces.  Additional risks that are not yet
known or that are currently immaterial may also impair its business operations
or have a negative impact on its stock price.  If any of the events or
circumstances described in the following risks actually occurs, its business,
financial condition or results of operations could suffer, and the trading price
of its common stock could decline.





Salon’s
projected cash flows may not meet expectations





Salon
relies on cash projections to run its business and changes such projections as
new information is made available or events occur.  The most
significant component of Salon’s cash projections is cash to be generated from
advertising sales and, to a lesser extent, cash to be generated from Salon
Premium.  Forecasting advertising revenues and resulting cash receipts
for an extended period of time is problematic due to the short duration of most
advertising sales.  If projected cash inflows and outflows do not meet
expectations, Salon’s ability to continue as a going concern may be adversely
affected.





If Salon
forecasts or experiences periods of limited, or diminishing cash resources,
Salon may need to issue additional securities.  These newly issued
securities could be highly dilutive to existing common
shareholders.  However, there is no guarantee that Salon will be able
to issue additional securities in future periods to meet cash needs and, if it
is unable to raise additional cash, Salon’s ability to continue as a going
concern may be adversely affected.





Salon
has relied on related parties for significant investment capital





Salon has been relying on cash
infusions from primarily related parties to fund operations.  The
related parties are generally John Warnock, Chairman of the Board of Salon, and
William Hambrecht.  William Hambrecht is the father of Salon’s former
President and Chief Executive Officer, Elizabeth Hambrecht, a Director of the
Company.  During the year ended March 31, 2008, related parties
provided and/or guaranteed $1.9 million in loans and equity
investments.





Curtailment
of cash investments and borrowing guarantees by related parties could
detrimentally impact Salon’s cash availability and its ability to fund its
operations.




Salon’s
principal stockholders can exercise a controlling influence over Salon’s
business affairs and may make business decisions with which non-principal
stockholders disagree and may affect the value of their investment




Based on
information available to Salon, the holders of Salon’s Series A, B, C and D
preferred stock collectively own approximately 92% of all voting securities.
These stockholders therefore own a controlling interest in Salon.  Of
this amount, approximately 72% is held by former Directors and related parties,
approximately 22% is controlled directly or indirectly by William Hambrecht and
approximately 41% by Chairman and Director John Warnock.  Therefore,
related parties by themselves own a controlling interest in Salon.




If these
stockholders were to act together, they would be able to exercise control over
all matters requiring approval by other stockholders, including the election of
Directors and approval of significant corporate transactions. This concentration
of ownership could also have the effect of accelerating, delaying or preventing
a change in control of Salon, which could cause Salon’s stock price to
decline.




12


Future
sales of significant number of shares of Salon’s common stock by principal
stockholders could cause its stock price to decline





Salon’s
preferred stockholders can convert their 9,475 shares of preferred stock to
approximately 9.7 million shares of common stock.  As Salon’s common
stock is normally thinly traded, if these stockholders were to convert their
shares of preferred stock to common stock and sell the resulting shares, the per
share price of Salon’s common stock may be adversely affected.  For
example, effective July 31, 2006, a Series A preferred stockholder converted 62
shares of Series A preferred stock to 124,536 shares of common stock, and
shortly thereafter converted a warrant to 7,840 shares of common stock, for a
total of 132,376 shares of common stock.  Between July 31, 2006 and
October 30, 2006, the shareholder sold approximately 84,460 of these shares, and
during the same period of time, Salon’s common stock dropped from $3.20 to $1.80
per share.





Salon
may not be able to receive the full value of its advertising
credits





As of
March 31, 2008, Salon has $3.1 million of advertising credits for which it has
valued at $2.1 million that expire on December 31, 2009.  Of the $3.1
million, approximately $1.8 million are the obligation of Rainbow Media Holdings
(“Rainbow”) and approximately $1.3 million are the obligation of
NBC.  Salon feels that it should be able to fully utilize the credits
with both Rainbow and NBC, but may not be able to fully utilize the credits
prior to expiration.  Salon expects to recover the full value of all
the advertising credits through usage or settlement in cash, per the terms of
the agreement, but there can be no absolute assurance as to any potential cash
settlement.




Salon’s
stock has been and will likely continue to be subjected to substantial price and
volume fluctuations due to a number of factors, many of which will be beyond its
control and may prevent its stockholders from reselling its common stock at a
profit




The
securities markets have experienced significant price and volume
fluctuations.  This market volatility, as well as general economic,
market or political conditions, have and may continue to reduce the market price
of its common stock, regardless of its operating performance.  In
addition, Salon’s stock is thinly traded and operating results could be below
the expectations of public market analysts and investors, and in response, the
market price of its common stock could decrease significantly.





Salon’s
preferred stockholders are entitled to potentially significant liquidation
preferences of Salon’s assets over common stockholders in the event of such an
occurrence




Salon’s
Series A, B, C and D preferred stockholders have liquidation preferences over
common stockholders of the first approximately $23.5 million in potential sales
proceeds as of March 31, 2008, which includes the effect of undeclared dividends
of $4 million.  If a liquidation event were to occur, and preferred
stock dividends were declared, the holders of preferred stock would be entitled
to the first $23.5 million of cash distributions, while the holders of common
stock would receive none of this amount.  If a liquidation event were
to occur in excess of $23.5 million and if preferred stock dividends were to be
declared, the holders of preferred stock would be entitled to receive a
relatively larger distribution than the holders of common stock would be
entitled to receive.





13


Salon
has historically lacked significant revenues and has a history of
losses




Salon has
a history of significant losses and expects to incur a loss from operations,
based on generally accepted accounting principals, for its fiscal year ending
March 31, 2009 and potentially in future years.  Once Salon attains
profitability, it may not be able to sustain or increase profitability on a
quarterly or annual basis in the future. If revenues grow slower than Salon
anticipates or operating expenses exceed expectations, financial results will
most likely be severely harmed and the ability of Salon to continue its
operations will be seriously jeopardized.




Burr,
Pilger & Mayer LLP, Salon’s independent registered public accounting firm
for the years ended March 31, 2006, March 31, 2007, and March 31, 2008, included
a “going-concern” audit opinion on the consolidated financial statements for
those years.  The audit opinions report substantial doubt about
Salon’s ability to continue as a going concern, citing issues such as the
history of losses and absence of current profitability.  As a result
of the “going-concern” opinions, Salon’s stock price and investment prospects
have been and will continue to be adversely affected, thus limiting financing
choices and raising concerns about the realization of value on assets and
operations.




Salon
Premium memberships have been declining and may continue to decline, adversely
affecting revenues and available cash





Salon has
been relying on the revenues and cash generated from Salon Premium subscriptions
since its implementation in April 2002.  Salon Premium subscriptions
grew from nothing to a high of approximately 89,100 as of December 31,
2004.  However, since the high experienced in December 31, 2004,
subscriptions have been declining to approximately 33,900 as of March 31,
2008.  Salon forecasts that these memberships will continue to decline
to approximately 23,000 as of March 31, 2009.  If the decline were to
be in excess of anticipated amounts, Salon’s operations and available cash could
be adversely affected.




Salon
has depended on advertising sales for much of its revenues, and its inability to
maintain or increase advertising revenues could harm its business




Maintaining
or increasing Salon’s advertising revenues depends upon many factors, including
whether it will be able to:




·
            successfully
      sell and market its Website auto start Site Pass or other rich media
      advertisements;




·
            entice
      non Salon Premium Website visitors to view and advertisers to sell new ad
      units and formats;




·
            maintain
      a significant number of unique Website visitors and corresponding
      significant reach of Internet
users;




·
            maintain
      a significant number of sellable impressions generated from Website
      visitors available to advertisers;




·
            successfully
      sell and market its network to
advertisers;




·
            increase
      the dollar amount of the advertising orders it
  receives;




·
            maintain
      pricing levels of the advertising it
sells;




14


·
            increase
      awareness of the Salon brand;




·
            improve
      the technology for serving advertising on its
  Website;




·
            handle
      temporary high volume traffic spikes to its
  Website;




·
            accurately
      measure the number and demographic characteristics of its users;
      and




·
            attract
      and retain key sales personnel.





Legislative
action and potential new accounting pronouncements are likely to cause its
general and administrative expenses and other operating expenses to
increase




To comply
with the Sarbanes-Oxley Act of 2002 and proposed accounting changes by the
Securities and Exchange Commission, Salon may be required to hire additional
personnel and utilize additional outside legal, accounting and advisory
services, all of which will cause its general and administrative costs to
increase.





Hackers
may attempt to penetrate Salon’s security system; online security breaches could
harm its business





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




With
a volatile share price, Salon may be the target of securities litigation, which
is costly and time-consuming to defend




In the
past, following periods of market volatility in the price of a company’s
securities, security holders have instituted class action litigation. Salon’s
share price has in the past experienced price volatility, and may continue to do
so in the future.  Many companies have been subjected to this type of
litigation. If the market value of its common stock experiences adverse
fluctuations and it becomes involved in this type of litigation, regardless of
the merits or outcome, Salon could incur substantial legal costs and its
management’s attention could be diverted, causing its business, financial
condition and operating results to suffer.  To date, Salon has not
been subjected to such litigation.




15




Salon’s
quarterly operating results are volatile and may adversely affect its common
stock price




Salon’s
future revenues and operating results, both GAAP and non GAAP, are likely to
vary significantly from quarter to quarter due to a number of factors, many of
which are outside Salon’s control, and any of which could severely harm Salon’s
business. These factors include:




·
            Salon’s
      ability to attract and retain advertisers and
  subscribers;




·
            Salon’s
      ability to attract and retain a large number of
  users;




·
            the
      introduction of new Websites, services or products by Salon or by its
      competitors;




·
            the
      timing and uncertainty of Salon’s advertising sales
  cycles;




·
            the
      mix of advertisements sold by Salon or its
  competitors;




·
            the
      economic and business cycle;




·
            Salon’s
      ability to attract, integrate and retain qualified
    personnel;




·
            technical
      difficulties or system downtime affecting the Internet generally or the
      operation of Salon’s Website; and




·
            the
      amount and timing of operating
costs.




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




The
controversial content of Salon’s Website may limit its revenues




Salon’s
Website contains, and will continue to contain, content that is politically and
culturally controversial.  As a result of this content, current and
potential advertisers, potential Salon Premium subscribers, or third parties who
contemplate aggregating content, may refuse to do business with
Salon.  Salon’s outspoken stance on political issues has and may
continue to result in negative reactions from some users, commentators and other
media outlets.  From time to time, certain advocacy groups have
successfully targeted Salon’s advertisers in an attempt to persuade such
advertisers to cease doing business with Salon.  These efforts may be
a material impediment to Salon’s ability to grow and maintain advertising
revenue.




Salon’s
promotion of the Salon brand must be successful to attract and retain users as
well as advertisers and strategic partners




The
success of the Salon brand depends largely on its ability to provide high
quality content and services.  If Internet users do not perceive
Salon’s existing content and services to be of high quality, or if Salon
introduces new content and services or enters into new business ventures that
are not favorably perceived by users, Salon may not be successful in promoting
and maintaining the Salon brand.  Any change in the focus of its
operations creates a risk of diluting its brand, confusing consumers and
decreasing the value of its user base to advertisers.  If Salon is
unable to maintain or grow the Salon brand, its business could be severely
harmed.




16


Salon
needs to hire, integrate and/or retain qualified personnel because these
individuals are important to its growth




Salon’s
success significantly depends on key personnel.  In addition, because
Salon’s users must perceive the content of Salon’s Website as having been
created by credible and notable sources, Salon’s success also depends on the
name recognition and reputation of its editorial staff.  Due to
Salon’s history of losses, Salon may experience difficulty in hiring and
retaining highly skilled employees with appropriate
qualifications.  Salon may be unable to retain its current key
employees or attract, integrate or retain other qualified employees in the
future.  If Salon does not succeed in attracting new personnel or
retaining and motivating its current personnel, its business could be
harmed.





Salon
may expend significant resources to protect its intellectual property rights or
to defend claims of infringement by third parties, and if Salon is not
successful it may lose rights to use significant material or be required to pay
significant fees





Salon’s
success and ability to compete are significantly dependent on its proprietary
content.  Salon relies exclusively on copyright law to protect its
content.  While Salon actively takes steps to protect its proprietary
rights, these steps may not be adequate to prevent the infringement or
misappropriation of its content, which could severely harm its
business.  Salon also licenses content from various freelance
providers and other third-party content providers.  While Salon
attempts to ensure that such content may be freely licensed to it, other parties
may assert claims of infringement against it relating to such
content.





Salon may
need to obtain licenses from others to refine, develop, market and deliver new
services.  Salon may not be able to obtain any such licenses on
commercially reasonable terms or at all or rights granted pursuant to any
licenses may not be valid and enforceable.





In April
1999 Salon acquired the Internet address www.salon.com.  Because
www.salon.com is the address of the main home page to its Website and
incorporates its company name, it is a vital part of its intellectual property
assets.  Salon does not have a registered trademark on the address,
and therefore it may be difficult for it to prevent a third party from
infringing on its intellectual property rights to the address.  If
Salon fails to adequately protect its rights to the Website address, or if a
third party infringes its rights to the address, or otherwise dilutes the value
of www.salon.com, its business could be harmed.





Salon’s
technology development efforts may not be successful in improving the
functionality of its network, which could result in reduced traffic on its
Website, reduced advertising revenues, or a loss of Salon Premium
subscribers





Salon is
constantly upgrading its technology to manage its Website and its Salon Premium
program, and during the last year redesigned its Website homepage.  In
addition, it is creating technology for new products that Salon hopes to launch
during its next fiscal year.  If these systems do not work as
intended, or if Salon is unable to continue to develop these systems to keep up
with the rapid evolution of technology for content delivery and subscription
management, its Website or subscription management systems may not operate
properly, which could harm Salon’s business.  Additionally, software
product design, development and enhancement involve creativity, expense and the
use of new development tools and learning processes.  Delays in
software development processes are common, as are project failures, and either
factor could harm Salon’s business.  Moreover, complex software
products such as its online publishing and subscription management systems
frequently contain undetected errors or shortcomings, and may fail to perform or
scale as expected.  Although Salon has tested and will continue to
test its systems, errors or deficiencies may be found in these systems that may
adversely impact its business.





17


Salon
relies on software, purchased from an independent supplier, to deliver and
report some of its advertising, the failure of which could impair its
business





Salon
uses software, purchased from an independent supplier, to manage and measure the
delivery of advertising on its Website.  The software is essential to
Salon whenever an advertiser does not stipulate ad serving from a third party
such as Doubleclick.  This type of software may fail to perform as
expected.  If this software malfunctions, advertisements may not be
served correctly on its Website, or if the software does not accurately capture
impression information, then Salon’s advertising revenues could be reduced, and
its business could be harmed.





Salon
may be held liable for content or third party links on its Website or content
distributed to third parties





As a
publisher and distributor of content over the Internet, including user-generated
content, links to third party Websites that may be accessible through Salon.com,
or content that includes links or references to a third party’s Website, Salon
faces potential liability for defamation, negligence, copyright, patent or
trademark infringement and other claims based on the nature, content or
ownership of the material that is published on or distributed from its
Website.  These types of claims have been brought, sometimes
successfully, against online services, Websites and print publications in the
past.  Other claims may be based on errors or false or misleading
information provided on linked Websites, including information deemed to
constitute professional advice such as legal, medical, financial or investment
advice.  Other claims may be based on links to sexually explicit
Websites.  Although Salon carries general liability and media
insurance, its insurance may not be adequate to indemnify Salon for all
liabilities imposed.  Any liability that is not covered by its
insurance or is in excess of its insurance coverage could severely harm its
financial condition and business.  Implementing measures to reduce its
exposure to these forms of liability may require Salon to spend substantial
resources and limit the attractiveness of Salon’s service to users.





Concerns
about transactional security may hinder electronic commerce on Salon’s Website
and may expose Salon to potential liability





A
significant barrier to sale of subscriptions and electronic commerce is the
secure transmission of confidential information over public
networks.  Any breach in Salon’s security could expose it to a risk of
loss or litigation and possible liability.  Salon relies on encryption
and authentication technology licensed from third parties to provide secure
transmission of confidential information.  As a result of advances in
the capabilities of Internet hackers, or other developments, a compromise or
breach of the algorithms Salon uses to protect customer transaction data may
occur.  A compromise of Salon’s security could severely harm its
business.  A party who is able to circumvent Salon’s security measures
could misappropriate proprietary information, including customer credit card
information, or cause interruptions in the operation of its
Website.





Salon may
be required to expend significant capital and other resources to protect against
the threat of security breaches or to alleviate problems caused by these
breaches.  Protection may not be available at a reasonable price or at
all.





18





Salon’s
internally developed software and software platforms provided by a third party
to manage Salon’s subscription business might fail resulting in lost
subscription income





Salon’s
software to manage its subscription business was developed internally to
interface with the software provided by a third party.  The third
party’s software provides a gateway to authenticate credit card
transactions.  Even though Salon’s system to manage its Salon Premium
program is Payment Card Industry (PCI) compliant, if this system were to fail or
not function as intended, credit card transactions might not be processed and
Salon’s cash resources and revenues would therefore be harmed.





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





Substantially
all of Salon’s communications hardware and computer hardware operations for its
Website are in a facility in Sacramento, California that has been extensively
retrofitted to withstand a major earthquake.  Fire, floods,
earthquakes, power loss, telecommunications failures, break-ins, supplier
failure to meet commitments, and similar events could damage these systems and
cause interruptions in its services.  Computer viruses, electronic
break-ins or other similar disruptive problems could cause users to stop
visiting Salon’s Website and could cause advertisers to terminate any agreements
with Salon.  In addition, Salon could lose advertising revenues during
these interruptions and user satisfaction could be negatively impacted if the
service is slow or unavailable.If
any of these circumstances occurred, Salon’s business could be
harmed.  Salon’s insurance policies may not adequately compensate it
for losses that may occur due to any failures of or interruptions in its
systems.  Salon does not presently have a formal disaster recovery
plan.





Salon’s
Website must accommodate a high volume of traffic and deliver frequently updated
information.  It is possible that Salon will experience systems
failures in the future and that such failures could harm its
business.  In addition, its users depend on Internet service
providers, online service providers and other Website operators for access to
its Website.  Many of these providers and operators have experienced
significant outages in the past, and could experience outages, delays and other
difficulties due to system failures unrelated to its systems.  Any of
these system failures could harm its business.





Privacy
concerns could impair Salon’s business





Salon has
a policy against using personally identifiable information obtained from users
of its Website and services without the user’s permission.  In the
past, the Federal Trade Commission has investigated companies that have used
personally identifiable information without permission or in violation of a
stated privacy policy.  If Salon uses personal information without
permission or in violation of its policy, Salon may face potential liability for
invasion of privacy for compiling and providing information to its corporate
customers and electronic commerce merchants.  In addition, legislative
or regulatory requirements may heighten these concerns if businesses must notify
Internet users that the data may be used by marketing entities to direct product
promotion and advertising to the user.  Other countries and political
entities, such as the European Union, have adopted such legislation or
regulatory requirements. The United States may adopt similar legislation or
regulatory requirements.  If consumer privacy concerns are not
adequately addressed, its business, financial condition and results of
operations could be materially harmed.





Possible
state sales and other taxes could adversely affect Salon’s results of
operations





Salon
does not collect sales or other taxes from individuals who sign up for Salon
subscriptions.  During the year ended March 31, 2003, the State of
California audited Salon’s sales tax returns and found Salon in compliance with
its filings and did not object to the fact that it did not collect sales tax on
subscriptions.  However, one or more other states may seek to impose
sales tax collection obligations on out-of-state companies, including Salon,
which engage in or facilitate electronic commerce.  State and local
governments have discussed and made proposals imposing taxes on the sale of
goods and services through the Internet.  Such proposals, if adopted,
could substantially impair the growth of electronic commerce and could reduce
Salon’s ability to derive revenue from electronic commerce.  Moreover,
if any state or foreign country were to assert successfully that Salon should
collect sales or other taxes on the exchange of merchandise on its network or to
tax revenue generated from Salon subscriptions, its financial results could be
harmed.





19


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





Salon is
subject to the Delaware anti-takeover laws regulating corporate
takeovers.  These anti-takeover laws prevent Delaware corporations
from engaging in a merger or sale of more than 10% of its assets with any
stockholder, including all affiliates and associates of the stockholder, who
owns 15% or more of the corporation’s outstanding voting stock, for three years
following the date that the stockholder acquired 15% or more of the
corporation’s assets unless:





·
            the
      Board of Directors approved the transaction in which the stockholder
      acquired 15% or more of the corporation’s
  assets;





·
            after
      the transaction in which the stockholder acquired 15% or more of the
      corporation’s assets, the stockholder owned at least 85% of the
      corporation’s outstanding voting stock, excluding shares owned by
      directors, officers and employee stock plans in which employee
      participants do not have the right to determine confidentially whether
      shares held under the plan will be tendered in a tender or exchange offer;
      or





·
            on
      or after this date, the merger or sale is approved by the Board of
      Directors and the holders of at least two-thirds of the outstanding voting
      stock that is not owned by the
stockholder.





A
Delaware corporation may opt out of the Delaware anti-takeover laws if its
certificate of incorporation or bylaws so provide. Salon has not opted out of
the provisions of the anti-takeover laws. As such, these laws could prohibit or
delay mergers or other takeover or change of control of Salon and may discourage
attempts by other companies to acquire Salon.





Salon’s
certificate of incorporation and bylaws include a number of provisions that may
deter or impede hostile takeovers or changes of control or management. These
provisions include:





·
            Salon’s
      Board is classified into three classes of Directors as nearly equal in
      size as possible with staggered three year-terms;
  and





·
            special
      meetings of the stockholders may be called only by the Chairman of the
      Board, the Chief Executive Officer or the Board of
    Directors.





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





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




In
addition, employment agreements with certain executive officers provide for the
payment of severance and acceleration of the vesting of options in the event of
termination of the executive officer following a change of control of
Salon.  These provisions could have the effect of discouraging
potential takeover attempts.





20




ITEM
1B.  Unresolved Staff Comments




None.




ITEM
2.   Properties




Salon
leases 8,623 square feet of office space at 101 Spear Street, San Francisco,
California.  Less than one year remains on the lease, which terminates
in February 2009.




Salon
leases office space at 41 East 11th Street,
11th
Floor, New York, NY and at 3417 1⁄2 M Street NW, Washington, DC.  The
lease for the New York office will terminate on June 30, 2008.  Salon
has signed a new lease for its New York office at 15 West 37th Street,
New York, NY which commenced on June 1, 2008 and will expire on August 31,
2011.  Salon also rents minimal space to host its servers in
Sacramento, California.




Salon
believes that its existing properties are in good condition and are suitable for
the conduct of its business.




ITEM
3.   Legal Proceedings




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




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




No
matters were submitted to a vote of security holders during the fourth quarter
of the fiscal year ended March 31, 2008.




21


PART II




ITEM
5.    Market for Registrant’s Common Equity and Related
Stockholder Matters




Information
with respect to the quarterly high and low sales prices for Salon’s common
stock, ticker symbol SLNM.OB, for its fiscal years 2008 and 2007, based on sales
transactions reported by the OTC (Over-The-Counter) Bulletin Board is provided
below:




Fiscal
      Year Ended
            
            Fiscal
      Year EndedMarch
      31, 2008
            
            March
      31, 2007For
      the quarter ended
            
            High
            
            Low
            
            High
            
            LowJune
      30
            
            1.70
            
            1.10
            
            5.80
            
            3.20September
      30
            
            1.70
            
            1.20
            
            3.60
            
            1.40December
      31
            
            2.00
            
            1.50
            
            2.55
            
            0.90March
      31
            
            1.90
            
            1.40
            
            2.45
            
            1.20




There were 174 holders of record of
Salon common stock as of June 12, 2008.  This number was derived from
Salon’s stockholder records, and does not include beneficial owners of Salon’s
voting common stock whose shares are held in the names of various dealers,
clearing agencies, banks, brokers, and other fiduciaries.  The closing
price of Salon’s common stock on June 12, 2008 was $1.40 per share.




Salon has never declared or paid any
cash dividends on its capital stock and does not expect to pay any cash
dividends in the foreseeable future.




Salon has
never repurchased any of its equity securities.




22


Equity
Compensation Plan Information




The
following table provides information about Salon’s common stock that may be
issued upon the exercise of options, warrants and rights under all of Salon’s
existing equity compensation plans as of March 31, 2008, including the
Salon Internet, Inc. 1995 Stock Option Plan, the Salon Media Group, Inc. 2004
Stock Plan, the Salon Media Group, Inc. Non-Plan Stock Agreement and the 1999
Employee Stock Purchase Plan.




Plan
      category
            Number
      of securities to
            Weighted-average
            Number
      of securitiesbe
      issued upon exercise
            exercise
      price of
            remaining
      available forof
      outstanding options,
            outstanding
      options,
            future
      issuance underwarrants
      and rights
            warrants
      and rights
            equity
      compensationplans,
      excludingsecurities
      reflected incolumn
      (a)(a)
            (b)
            (c)Equity
      compensation plans
            2,405,324
            $4.09
            240,888approved
      by securityholdersEquity
      compensation plans
            125,000
            $2.61
            Nonenot
      approved by securityholdersTotal
            2,530,324
            N/A
            240,888




Equity
Compensation Plans Not Approved by Security Holders





In
February 2005, Salon entered into a Non-Plan Stock Agreement with its then
Chairman, pursuant to which Salon granted such person non-qualified options to
purchase 50,000 shares of common stock at an exercise price of $2.80 per
share.  Such option grant did not receive stockholder
approval.  50% of the shares subject to the option vested on the date
of grant and 50% of the shares subject to the option vested in February
2006.




In June
2006, Salon entered into a Non-Plan Stock Agreement with its then Senior Vice
President – Publisher, pursuant to which Salon granted such person non-qualified
options to purchase 50,000 shares of common stock at an exercise price of $3.20
per share.  Such option grant did not receive stockholder
approval.  25% of the shares subject to the option vested after one
year and 1/48th vests
per month thereafter.  In December 2006, Salon entered into another
Non-Plan Stock Agreement with its then Senior Vice President – Publisher,
pursuant to which Salon granted such person non-qualified options to purchase
25,000 shares of common stock at an exercise price of $1.05 per
share.  Such option grant did not receive stockholder
approval.  25% of the shares subject to the option vested after one
year and 1/48th vests
per month thereafter.




23


Stock
Performance Graph




The graph
below matches Salon Media Group Inc.'s cumulative 5-year total shareholder
return on common stock with the cumulative total returns of the NASDAQ Composite
index, and a customized peer group of six companies that includes: Answers
Corporation, CNET Networks, Inc., Planetout, Inc., Quepasa Corporation,
Thestreet.com Inc. and Tucows Inc. The graph assumes that the value of the
investment in our common stock, in the peer group, and the index (including
reinvestment of dividends) was $100 on March 31, 2003 and tracks it through
March 31, 2008.









The stock
price performance included in this graph is not necessarily indicative of future
stock price performance.




Companies
      in the New Self-Determined Peer Group:
              Companies
      in Old Self-Determined Peer Group:CNET
      Networks, Inc.
              CNET
      Networks, Inc.Planetout,
      Inc.
              Planetout,
      Inc.Thestreet.com
      Inc.
              Thestreet.com
      Inc.Answers
      Corporation
              Answers
      CorporationQuepasa
      Corporation
              Quepasa
      CorporationTucows
      Inc.
              Tucows
      Inc.Audible
      Inc.




24


ITEM
6.   Selected Consolidated Financial Data




Dollar
      amounts in thousands, except per shareYear
      Ended March 31,
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Net
      revenues
            
            $
            7,513
            
            
            $
            7,748
            
            
            $
            6,516
            
            
            $
            6,628
            
            
            $
            4,499Net
      loss
            
            $
            3,409
            
            
            $
            1,566
            
            
            $
            1,122
            
            
            $
            518
            
            
            $
            6,046Net
      loss attributable to commonstockholders
      (1)
            
            $
            3,463
            
            
            $
            1,861
            
            
            $
            1,349
            
            
            $
            358
            
            
            $
            6,982Basic
      and diluted net loss per shareattributable
      to commonstockholders
      (2)
            
            $
            1.79
            
            
            $
            1.10
            
            
            $
            1.67
            
            
            $
            0.50
            
            
            $
            9.90Weighted
      average common sharesoutstanding
      used in computingper
      share amounts (thousands)(2)
            
            
            1,940
            
            
            
            1,692
            
            
            
            809
            
            
            
            720
            
            
            
            705Cash
      and cash equivalents
            
            $
            818
            
            
            $
            829
            
            
            $
            441
            
            
            $
            686
            
            
            $
            696Prepaid
      advertising rights
            
            $
            2,131
            
            
            $
            3,267
            
            
            $
            3,718
            
            
            $
            3,970
            
            
            $
            4,430Total
      assets
            
            $
            4,616
            
            
            $
            5,605
            
            
            $
            5,304
            
            
            $
            6,069
            
            
            $
            6,270Capital
      leases – long-term portion
            
            $
            56
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -
            
            
            $
            -Total
      long-term liabilities (3)
            
            $
            600
            
            
            $
            85
            
            
            $
            120
            
            
            $
            82
            
            
            $
            2,621




(1)           The
net loss attributable to common stockholders for the year ended March 31, 2008
includes a preferred deemed dividend charge of $54 from the issuance of Series D
preferred stock. The charge represents the difference between the offering price
of Salon’s Series D preferred stock and the fair value of Salon’s common stock
into which the preferred stock was convertible on the date of the transaction
and the value of the warrants issued in the transaction.  The net loss
attributable to common stockholders for the year ended March 31, 2007 includes a
preferred deemed dividend charge of $295 from the issuance of Series D preferred
stock. The charge represents the difference between the offering price of
Salon’s Series D preferred stock and the fair value of Salon’s common stock into
which the preferred stock was convertible on the date of the transaction and the
value of the warrants issued in the transaction. The net loss attributable to
common stockholders for the year ended March 31, 2006 includes a preferred
deemed dividend charge of $227 from the issuance of Series D preferred stock.
The charge represents the difference between the offering price of Salon’s
Series D preferred stock and the fair value of Salon’s common stock into which
the preferred stock was convertible on the date of the transaction and the value
of the warrants issued in the transaction. The net loss attributable to common
stockholders for the fiscal year ended March 31, 2005 includes a net preferred
deemed dividend benefit of $160 derived from a benefit of $470 from a decrease
in value of warrants previously issued to preferred stockholders and a charge of
$310 from the issuance of Series D-1 and D-2 preferred stock during the
year.  The charge represents the difference between the offering price
of Salon’s Series D preferred stock and the fair value of Salon’s common stock
into which the preferred stock was convertible on the date of the transaction
and the value of the warrants issued in the transaction.  The net loss
attributable to common stockholders for the fiscal year ended March 31, 2004
includes a preferred deemed dividend of $936 that included $361 resulting from
the difference between the offering price of Salon’s Series C preferred stock
and warrants sold in February 2004 and the deemed fair value of Salon’s common
stock on the date of the transaction and $575 from the change in value during
the year ended March 31, 2004 of warrants issued to preferred
stockholders.





25


(2)           The
share and per share results for the years ended prior to March 31, 2007 reflect
a reverse stock split effective as of November 15, 2006.  In the
reverse stock split, each 20 outstanding shares common stock (“old common
stock”) was automatically reduced into one share of new common
stock.





(3)           From
July 2003 through November 2004, Salon has had an insufficient number of
authorized shares to satisfy all obligations under convertible instruments,
warrant agreements and options.  As a consequence, the value of
warrants issued was classified as a long-term liability, with the fair value
re-measured at each balance sheet period.  The March 31, 2004 balance
of $2,621 shown under long-term liabilities on the balance sheet represents such
value and $354 was the value of the warrants as of March 31, 2003.  In
November 2004, Salon amended its Certificate of Incorporation, increasing the
number of authorized shares from 50,000,000 to 600,000,000, thereby relieving
the requirement for Salon to record the value of warrants as a long-term
liability.





ITEM
7.Management’s
Discussion and Analysis of Financial Condition and Results of
Operations





Overview




Salon is
an online news and social networking company and an Internet publishing
pioneer.  Salon’s award-winning journalism combines original
investigative stories and provocative personal essays along with quick-take
commentary and staff-written Weblogs about politics, technology, culture and
entertainment.  Committed to interactivity, the Website also hosts two
online communities, Table Talk and The Well, and is developing Open Salon, a
social network for bloggers.  In its editorial product Salon balances
two crucial missions: (1) providing original and provocative content on topics
that the mainstream media overlook, and (2) filtering through the media chatter
and clutter to help readers find the stories that matter.





Sources
of Revenue




The most
significant portion of Salon’s revenues is derived from advertising from the
sale of promotional space on its Website.  The sale of promotional
space is generally less than ninety days in duration.  Advertising
units sold include “rich media” streaming advertisements, as well as traditional
banner and pop-up advertisements.





Salon
also derives a significant portion of its revenues from its Salon Premium
subscription program.  Prior to March 2007, subscriptions to Salon
Premium were generally $35 for one year with no ads, and during March 2007, the
rate was increased to $45. Salon Premium revenue is recognized ratably over the
period that services are provided.  This source of revenue has been
decreasing since Salon’s quarter ended December 31, 2004 when paid subscriptions
peaked at approximately 89,100 and decreased to approximately 33,900 as of March
31, 2008.  Salon expects this downward trend to continue, as it is
placing greater emphasis on its advertising sales to generate revenue. Revenue
from the on-line discussion forum The Well has been recognized ratably over the
subscription period.  Salon also generates nominal revenue from the
licensing of content that previously appeared in Salon’s Website and for hosting
links to a third party’s personals/dating Website.




26


Expenses




Production
and content expenses consist primarily of salaries and related expenses for
Salon’s editorial, artistic, and production staff, online communities’ staff,
payments to freelance writers and artists, bandwidth costs associated with
serving pages and hosting our online communities on our Website, credit card
transaction costs andadserving
costs.




Sales and
marketing expenses consist primarily of salaries, commissions and related
personnel costs, travel, and other costs associated with Salon’s sales force,
business development efforts and its subscription service.  It also
includes advertising, promotions and the amortization of prepaid advertising
rights.




Information
technology support expenses consist primarily of salaries and related personnel
costs associated with the development, testing and enhancement of Salon’s
software to manage its Website, and to maintain and enhance the software
utilized in managing Salon Premium, as well as supporting marketing and sales
efforts.




General
and administrative expenses consist primarily of salaries and related personnel
costs, accounting and legal fees, and other fees associated with operating a
publicly traded company.  Certain shared overhead expenses are
allocated to other departments.




On
April 1, 2006 Salon adopted the provisions of Statement of Financial
Accounting Standards No. 123 (revised 2004), Share-Based Payment, or SFAS
123R, which requires companies to expense their stock option
awards.  Salon adopted SFAS 123R using the modified prospective
transition method and therefore did not restate results for prior
periods.  Salon’s expenses include stock-based expenses related to
stock option grants to employees, non-employee Directors and
consultants.





Salon has
incurred significant net losses and negative cash flows from operations since
its inception.  As of March 31, 2008, Salon had an accumulated
deficit of $96.3 million.  These losses have been funded primarily
through the issuance of common stock from Salon’s initial public offering in
June 1999, issuances of preferred stock, bank debt and from the issuance of
convertible notes payable.





Burr,
Pilger & Mayer LLP, Salon’s independent accountants for the years ended
March 31, 2008, March 31, 2007 and March 31, 2006 have included a paragraph in
their report indicating that substantial doubt exists as to Salon’s ability to
continue as a going concern because of Salon’s recurring operating losses,
negative cash flow and accumulated deficit.





Salon has
not recorded a provision for federal or state income taxes since inception due
to recurring operating losses.  At March 31, 2008 Salon had net
operating loss carryforwards of $69.1 million for federal income tax purposes
that begin to expire in March 2016, and $32.8 million for California income tax
purposes.  As Salon has been incurring tax losses, $3.3 million of
California net operation loss carryforwards expired as of March 31, 2008, and if
Salon were to incur a tax loss for the year ending March 31, 2009, an additional
$2.3 million operating loss carryforward will expire.  Utilization of
Salon’s net operating loss carryforwards may be subject to a substantial annual
limitation due to ownership change limitations provided by the Internal Revenue
Code and similar California State provisions.  Such an annual
limitation could result in the expiration of the net operating loss
carryforwards before utilization.  A valuation allowance has been
established and, accordingly, no benefit has been recognized for such operating
losses and other deferred tax assets.  The net valuation allowance
increased $1.0 million during the year ended March 31, 2008 to $26.5
million.  Salon believes that, based on a number of factors, the
availability of objective evidence creates sufficient uncertainty regarding the
realization of the deferred tax assets such that a full valuation allowance has
been recorded.  These factors include Salon’s history of net losses
since inception and expected near-term future losses.





27


Critical
Accounting Policies





The preparation of financial statements
in conformity with generally accepted accounting principles requires Salon to
utilize accounting policies and make estimates and assumptions that affect our
reported amounts.  Salon’s significant accounting policies are
described in Note 2 to the Consolidated Financial Statements.  Salon
believes accounting policies and estimates related to revenue recognition and
prepaid advertising rights are the most critical to Salon’s financial
statements.  Future results may differ from current estimates if
different assumptions or conditions were to prevail.




Revenue
Recognition




Salon
recognizes revenues once persuasive evidence of an arrangement exists, delivery
has occurred, the fee is fixed or determinable and collectibility is reasonably
assured.  Revenues are recognized ratably in the period over which
Salon’s obligations are fulfilled.  Payments received before Salon’s
obligations are fulfilled are classified as “Deferred revenue” in Salon’s
consolidated balance sheet.





Advertising
revenues, derived from the sale of promotional space on its Website, comprised
72%, 70% and 57% of Salon’s revenues, respectively for the years ended March 31,
2008, 2007 and 2006.  The duration of the advertisements are generally
short term, usually less than ninety days.  Revenues derived from such
arrangements are recognized during the period the advertising space is
provided.  Salon’s obligations typically include a guaranteed minimum
number of impressions, a set number of Site Pass advertisements viewed, or a set
number of days that a Site Pass advertisement will run.  To the extent
minimum guaranteed amounts are not achieved, Salon defers recognition of the
corresponding revenue until the remaining guaranteed amounts are provided, if
mutually agreeable to an advertiser.  If these “make good” impressions
are not agreeable to an advertiser, no further revenue is
recognized.





Salon
Premium, a pay-for-online content service, provides unrestricted access to
Salon’s content with no banners, pop-ups or site pass advertisements, and
includes free magazine subscriptions, free access to Table Talk, an on-line
forum, and the ability to easily download content in text or PDF format, a
convenience that enables readers to view Salon’s content when not connected to
the Internet.  The subscription duration for Salon Premium is
generally one year.  Non Salon Premium subscribers can gain access to
Salon’s content after viewing some form of advertisement.




Salon
offers The Well as a monthly subscription service for access to on-line
discussion forums.  Revenue is recognized ratably over the
subscription period.




Prepaid
Advertising Rights




In
January 2000, Salon sold 1,125,000 shares of common stock to Rainbow Media
Holdings (“Rainbow”) and received $11.8 million of advertising credits that were
to be utilized by December 2009.  As the per share price of Salon’s
common stock declined from the time the agreement was made and the date the
agreement was finalized and signed, the advertising credits were valued for
financial reporting purposes at $8.1 million.  As of March 31, 2008,
Salon has $3.1 million advertising credits resulting from the transaction,
valued at $2.1 million for financial reporting purposes.  Of the $3.1
million of advertising credits, approximately $1.8 million remain with Rainbow
and approximately $1.3 million are with NBC.  Salon believes that it
should be able to utilize all the credits with Rainbow and NBC before they
expire on December 31, 2009. Salon is currently exploring ways of fully
utilizing the credits, including supporting the launch of Open Salon, before
they expire.  Salon expects to recover the full value of all the
advertising credits through usage or settlement in cash, per the terms of the
agreement, but there can be no absolute assurance as to any potential cash
settlement or full utilization thereof.





28


Reclassifications




Certain
reclassifications, not affecting previously reported net income or loss, have
been made to the previously issued consolidated financial statements to conform
to the current period presentation.





Goodwill





Salon has
$0.2 million of goodwill remaining from a purchase in March
1999.  This asset is tested for impairment at least annually and has
been found not to be impaired.




Results
of Operations




Fiscal
Years Ended March 31, 2008 and 2007





Net
Revenues





Salon’s
net revenue decreased 3% to $7.5 million in the year ended March 31, 2008 from
$7.7 million in the year ended March 31, 2007.





Advertising
revenues remained flat from one year ago at $5.4 million for the year ended
March 31, 2008, as sales trailed off in the fourth quarter, despite record
audiences, due to sales force turnover.





Salon
Premium subscription revenues decreased by 14% to $1.3 million for the year
ended March 31, 2008 from $1.5 million for the year ended March 31,
2007.  The drop in Salon Premium revenues recognized for the year
ended March 31, 2008 compared to the year ended March 31, 2007 is attributable
to a substantial reduction in the number of new subscribers.  Salon
acquired approximately 27,900 paid one-year subscriptions for the year ended
March 31, 2008 compared to approximately 44,200 for the year ended March 31,
2007.  As a result, the number of paid subscribers decreased from
approximately 47,200 at March 31, 2007 to approximately 33,900 at March 31,
2008.  As of June 1, 2008, Salon had approximately 32,000 paid
subscribers.





An
important factor in increasing advertising revenues in future periods, including
Salon’s peak third quarter ending December 31, is attracting more unique
visitors to Salon’s Website.  Attracting more unique Website visitors
is important to Salon as they generate page views, and each page view becomes a
potential platform for serving advertisements.  Ultimately, Salon
charges advertisers based on a set number of impressions viewed by a Website
visitor.  Due to various factors, including concerted efforts to make
Salon’s content more accessible to readers by auto launching the site pass, a
better optimized Website to facilitate appearance in search engine results, and
marketing campaigns with select Websites, the average number of unique monthly
Website visitors for the year ended March 31, 2008 increased 33% to 4.4 million
from the year ended March 31, 2007, and attained a record high of 6.5 million in
March 2008.  Aiding the continued growth in unique visitors to Salon’s
Website is the migration of readers to the Internet from print
newspapers.





Salon has
evaluated the balance between its subscription and advertising businesses and
has shifted emphasis toward advertising.  Until recently, a Website
visitor was given a choice of: (1) becoming a Salon Premium subscriber to avoid
having to view advertisements on Salon’s Website or (2) viewing an advertisement
to gain access to all of Salon’s content.  This strategy was found to
impede access to Salon’s Website and its ability to generate advertising
impressions.  During the quarter ended December 31, 2006, Salon
changed its Site Pass model to automatically serve advertisements, enabling a
Website visitor to gain a more seamless access to Salon’s
content.  This change has produced an increase in the number of ad
impressions that Salon can serve and improved Salon’s potential to generate an
even greater amount of advertising revenues, offsetting a drop in Salon Premium
subscriptions that traditionally were solicited from the Site Pass and the
relatively small revenue they generate.





29


All other
sources of revenue were $0.8 million each for the years ended March 31, 2008 and
March 31, 2007.  Approximately half of this revenue was derived from
the Well, an online discussion forum.





Production
and Content




Production
and content expenses during the year ended March 31, 2008 were $5.5 million
versus $5.2 million for the year ended March 31, 2007, an increase of $0.3
million.  The 6% increase primarily reflects an increase in staff and
benefit costs.





Sales
and Marketing Expenses





Sales and marketing expenses during the
year ended March 31, 2008 were $2.8 million versus $2.0 million for the year
ended March 31, 2007, an increase of $0.8 million.  The 40% increase
primarily reflects utilizing an additional $0.7 million advertising credits this
year compared to last year.





Information
Technology Support Expenses




Information
technology support expenses during the year ended March 31, 2008 remained flat
from one year ago at $0.8 million.  The 29% increase in salary costs
was offset by capitalized development costs for the Open Salon
project.





General
and Administrative Expenses




General
and administrative expenses during the year ended March 31, 2008 were $1.8
million versus $1.3 million for the year ended March 31, 2007, an increase of
$0.5 million.  The 38% increase is primarily attributable to increased
staff salaries, stock-based compensation expenses, professional fees, severance
costs and directors fees.





Preferred
Deemed Dividend





Salon
sold 292 shares of Series D-5 preferred stock on November 19,
2007.  All the shares sold are convertible to common stock at an
effective price less than the fair market value of Salon’s common stock on the
commitment date of the respective transaction.  Salon valued the
beneficial conversion feature of these shares of preferred stock at $0.05
million.  As the shares of preferred stock sold were immediately
convertible, Salon recorded a total of $0.05 million non-cash preferred deemed
dividend for the year ended March 31, 2008, representing the value of the
beneficial conversion feature of the shares issued.





During
the year ended March 31, 2007, Salon sold 208 shares of Series D-3 preferred
stock and 42 shares of Series D-4 preferred stock on July 27, 2006, 333 shares
of Series D-4 preferred on September 21, 2006, and 42 shares of Series D-4
preferred stock and 125 shares of Series D-5 preferred stock on December 18,
2006 that were convertible to common stock at an effective price less than the
fair market value of Salon’s common stock on the commitment
date.  Salon valued the beneficial conversion feature of the preferred
stock sold at $0.3 million.  As the shares of preferred stock were
immediately convertible, for its year ended March 31, 2007, Salon recorded a
$0.3 million non-cash preferred deemed dividend, representing the value of the
beneficial conversion feature of the shares issued.





30


Fiscal
Years Ended March 31, 2007 and 2006





Net
Revenues





Salon’s
net revenue increased 19% to $7.7 million in the year ended March 31, 2007 from
$6.5 million in the year ended March 31, 2006.





Advertising
revenues increased 47% to $5.4 million for the year ended March 31, 2007 from
$3.7 million for the year ended March 31, 2006.  The increase in
advertising sales reflects an industry wide trend of corporations earmarking
more funds for Internet advertising.





Salon
Premium subscription revenues decreased by 24% to $1.5 million for the year
ended March 31, 2007 from $2.0 million for the year ended March 31,
2006.  The drop in Salon Premium revenues recognized for the year
ended March 31, 2007 compared to the year ended March 31, 2006 is attributable
to a substantial reduction in the number of new subscribers.  Salon
acquired approximately 44,200 paid one-year subscriptions for the year ended
March 31, 2007 compared to approximately 58,700 for the year ended March 31,
2006.  As a result, the number of paid subscribers decreased from
approximately 65,500 at March 31, 2006 to approximately 47,200 at March 31,
2007.  As of June 1, 2007, Salon had approximately 44,900 paid
subscribers.





An
important factor in increasing advertising revenues in future periods, including
Salon’s peak third quarter ending December 31, is attracting more unique
visitors to Salon’s Website.  Attracting more unique Website visitors
is important to Salon as they generate page views, and each page view becomes a
potential platform for serving advertisements.  Ultimately, Salon
charges advertisers based on a set number of impressions viewed by a Website
visitor.  Due to various factors, including concerted efforts to make
Salon’s content more accessible to readers by auto launching the site pass, a
better optimized Website to facilitate appearance in search engine results, and
marketing campaigns with select Websites, the average number of unique monthly
Website visitors for the year ended March 31, 2007 increased 43% to 3.3 million
from the year ended March 31, 2006, and attained a record high of 4.4 million in
March 2007.  Aiding the continued growth in unique visitors to Salon’s
Website is the migration of readers to the Internet from print
newspapers.





Salon has
evaluated the balance between its subscription and advertising businesses and
has shifted emphasis toward advertising.  Until recently, a Website
visitor was given a choice of: (1) becoming a Salon Premium subscriber to avoid
having to view advertisements on Salon’s Website or (2) viewing an advertisement
to gain access to all of Salon’s content.  This strategy was found to
impede access to Salon’s Website and its ability to generate advertising
impressions.  During the quarter ended December 31, 2006, Salon
changed its Site Pass model to automatically serve advertisements, enabling a
Website visitor to gain a more seamless access to Salon’s
content.  This change has produced an increase in the number of ad
impressions that Salon can serve and improved Salon’s potential to generate an
even greater amount of advertising revenues, offsetting a drop in Salon Premium
subscriptions that traditionally were solicited from the Site Pass and the
relatively small revenue they generate.





All other
sources of revenue were $0.8 million each for the years ended March 31, 2007 and
March 31, 2006.  Approximately half of this revenue was derived from
the Well, an online discussion forum.




31


Production
and Content




Production
and content expenses during the year ended March 31, 2007 were $5.2 million
versus $4.5 million for the year ended March 31, 2006, an increase of $0.7
million.  The 16% increase primarily reflects an increase in staff and
benefit costs.





Sales
and Marketing Expenses





Sales and marketing expenses during the
year ended March 31, 2007 were $2.0 million versus $1.5 million for the year
ended March 31, 2006, an increase of $0.5 million.  The 31% increase
primarily reflects utilizing an additional $0.2 million advertising credits this
year compared to last year and a $0.2 million increase in commission
expenses.





Information
Technology Support Expenses




Information
technology support expenses during the year ended March 31, 2007 were $0.8
million versus $0.7 million for the year ended March 31, 2006, an increase of
$0.1 million.  The 22% increase primarily reflects the temporary
retention of contractors to augment Salon’s salaried staff.





General
and Administrative Expenses




General
and administrative expenses during the year ended March 31, 2007 were $1.3
million versus $1.0 million for the year ended March 31, 2006, an increase of
$0.3 million.  The 33% increase is primarily attributable to hiring a
Publisher in June 2006 with no comparable position in the prior year period and
a raise awarded an officer in October 2005.





Preferred
Deemed Dividend





Salon
sold 208 shares of Series D-3 preferred stock and 42 shares of Series D-4
preferred stock on July 27, 2006, 333 shares of Series D-4 preferred on
September 21, 2006, and 42 shares of Series D-4 preferred stock and 125 shares
of Series D-5 preferred stock on December 18, 2006.  All the shares
sold are convertible to common stock at an effective price less than the fair
market value of Salon’s common stock on the commitment date of the respective
transaction.  Salon valued the beneficial conversion feature of these
shares of preferred stock at $0.3 million.  As the shares of preferred
stock sold were immediately convertible, Salon recorded a total of $0.3 million
non-cash preferred deemed dividend for the year ended March 31, 2007,
representing the value of the beneficial conversion feature of the shares
issued.





During
the year ended March 31, 2006, Salon sold 209 shares of Series D-3 preferred
stock that were convertible to common stock at an effective price less than the
fair market value of Salon’s common stock on the commitment
date.  Salon valued the beneficial conversion feature of the preferred
stock sold at $0.2 million.  As the shares of preferred stock were
immediately convertible, for its year ended March 31, 2006, Salon recorded a
$0.2 million non-cash preferred deemed dividend, representing the value of the
beneficial conversion feature of the shares issued.





Liquidity
and Capital Resources





Net cash
used in operations was $1.5 million for the year ended March 31, 2008, $1.2
million for the year ended March 31, 2007, and $0.6 million for the year ended
March 31, 2006.  The principal use of cash during the year ended March
31, 2008 was to meet its operating deficit.  The principal use of cash
during the year ended March 31, 2007 was to fund the $1.6 million net loss and
reflects accounts receivable increasing by $0.5 million, less $0.8 million of
non-cash charges.  The principal use of cash during the year ended
March 31, 2006 was to fund the $1.1 million net loss, less $0.5 million of
non-cash charges, and a $0.2 million decrease in deferred revenue, all offset by
a reduction of $0.2 million of accounts receivable, prepaid expenses and other
current assets and other assets.





32


Net cash used in investing activities
was $0.3 million for the year ended March 31, 2008 to fund the acquisition of
computer equipment and internal software development.  Net cash used
in investing activities was immaterial for the years ended March 31, 2007 and
March 31, 2006.





For the
year ended March 31, 2008, net cash provided from financing activities was $1.9
million, which included $1.0 million in short term borrowings, $0.5 million in
long term borrowing and $0.4 million from the issuance of 292 shares of
preferred stock.   For the year ended March 31, 2007, net cash
provided from financing activities was $1.7 million, which included $0.8 million
from the exercise of warrants and $0.9 million from the issuance of 750 shares
of preferred stock.  For the year ended March 31, 2006, net cash
provided from financing activities was $0.4 million from the issuance of Series
D preferred stock, and the exercise of common stock options and
warrants.





Salon, as
permitted under Delaware law and in accordance with its Bylaws, indemnifies its
officers and directors for certain events or occurrences, subject to certain
limits, while the officer is or was serving at Salon’s request in such
capacity.  The term of the indemnification period is for the
officer's, or director's lifetime.  The maximum amount of potential
future indemnification is unlimited; however, Salon does have a Director and
Officer Insurance Policy that limits Salon's exposure and enables Salon to
recover a portion of any future amounts paid.  As a result of the
insurance policy coverage, Salon believes the fair value of these
indemnification agreements is minimal.





As of
March 31, 2008, Salon has two outstanding capital leases on computer equipment
and does not anticipate entering into similar debt instruments during its year
ending March 31, 2009.  The following summarizes Salon’s contractual
obligations as of March 31, 2008, and the effect these contractual obligations
are expected to have on Salon’s liquidity and cash flows in future periods (in
thousands):





Payments
      Due By PeriodTotal
            
            
            1
      Year or Less
            
            
            1 -
      3 Years
            
            
            More
      than 3 YearsOperating
      leases
            
            $
            340
            
            
            $
            329
            
            
            $
            11
            
            
            $
            -Capital
      leases
            
            
            81
            
            
            
            25
            
            
            
            56
            
            
            
            -Capital
      lease interest
            
            
            19
            
            
            
            11
            
            
            
            8
            
            
            
            -Total
            
            $
            440
            
            
            $
            365
            
            
            $
            75
            
            
            $
            -





Capital
requirements





Salon has
a history of significant losses and expects to incur a net loss from operations
for its year ending March 31, 2009.  Because of past losses, an
anticipated loss next year and a history of negative cash flows from operations,
Salon’s independent registered public accounting firm for the years ended March
31, 2008, March 31, 2007 and March 31, 2006 have included a paragraph in its
reports indicating substantial doubt as to Salon’s ability to continue as a
going concern.  During the last three years, Salon has relied on cash
from bank debt, the issuance of convertible notes and preferred stock and from
the exercise of warrants to meet its cash requirements.




33


Based
on current cash projections for next year, which contemplate a smaller operating
loss, positive cash flow generation in the second half of the year, and takes
into account $1.5 million in convertible debt raised subsequent to year end,
Salon estimates it will require up to an additional $1.0 million cash inflow to
meet operating needs.  If planned revenues are less than expected, the
cash shortfall may be higher.  Salon is in discussions with potential
investors, including related parties, as well as its commercial bank, to obtain
additional funding.





Off-Balance
Sheet Arrangements





Salon has
no off-balance sheet arrangements.





Recent
Accounting Pronouncements





In June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109” (FIN
48).  FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes,” and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return.  FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.  FIN 48 is effective for fiscal years
beginning after December 15, 2006.  Adoption of FIN 48 in fiscal 2008
has not had a material impact on its results of operations, financial position,
or cash flows.





In
September 2006, the FASB issued Statement of Financial Accounting Standard No.
157, “Fair Value Measurements,” (SFAS 157).  SFAS 157 addresses how
companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under generally accepted
accounting principles, and expands disclosures about fair value
measurements.  SFAS 157 is effective for fiscal years beginning after
November 15, 2007.  Salon adopted SFAS 157 as of April 1,
2007.  It did not have a material impact on its results of operations,
financial position or cash flows.





In
September 2006, the FASB issued Statement of Financial Accounting Standard No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R),” (SFAS
158).  SFAS 158 improves financial reporting by requiring an
employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization.  SFAS 158 also improves financial reporting by requiring
an employer to measure the funded status of a plan as of the date of its
year-end statement of financial position, with limited
exceptions.  SFAS 158 is effective for fiscal years ending after
December 15, 2006.  Salon does not have such funds addressed by this
statement.





In
September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 108 on Quantifying Financial Statement Misstatements
(SAB 108).  SAB 108 sets forth the SEC staff's views that registrants
should quantify errors using both a balance sheet and an income statement
approach, and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material.  SAB108 is effective the first fiscal year
ending after November 15, 2006.  Adoption has not had a material
impact on its results of operations, financial position, or cash
flows.





34


In
February 2007, the FASB issued Statement of Financial Accounting Standard No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an Amendment to FASB Statement No. 115,” (SFAS 159).  Under
SFAS 159entities
will be permitted to measure financial instruments and certain other assets and
liabilities at fair value on an instrument-by-instrument basis (the fair value
option).  SFAS 159 is effective for fiscal years beginning after
December 15, 2007 and allows for early adoption.  Salon adopted SFAS
159 as of April 1, 2007.  Its adoption of SFAS159 has not had a
material impact on its results of operations, financial position, or cash
flows.





In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
141 (revised 2007), “Business Combinations,” (“SFAS 141R”) and No. 160,
“Noncontrolling Interests in Consolidated Financial Statements,”an
amendment of ARB No. 51(“SFAS
160”.) SFAS 141R establishes principles and requirements during business
combinations for how the acquirer:





a.
            Recognizes
      and measures in its financial statements the identifiable assets acquired,
      the liabilities assumed, and any noncontrolling interest in the
      acquiree,


b.
            Recognizes
      and measures the goodwill acquired in the business combination or a gain
      from a bargain purchase, and


c.
            Determines
      what information to disclose to enable users of the financial statements
      to evaluate the nature and financial effects of the business
      combination.





SFAS 160
sets parameters as to how to report noncontrolling interest in consolidated
financial statements.  SFAS 141R and SFAS 160 are effective for fiscal
years beginning after December 15, 2008. Salon believes that the adoption of
SFAS 141R and SFAS 160 will not impact Salon’s results of operations, financial
position, or cash flows.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities,” (SFAS 161).  SFAS 161 amends and expands the
disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, and requires entities to provide enhanced qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair values and amounts of gains and losses on derivative
contracts, and disclosures about credit-risk-related contingent features in
derivative agreements.  This statement applies to all entities and all
derivative instruments. SFAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15,
2008.  The Company is currently evaluating the impact of SFAS 161 and
does not expect this statement to have a material impact on its financial
position and results of operations.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (SFAS 162).  SFAS 162 establishes the GAAP
hierarchy and identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial
statements.  SFAS 162 is effective 60 days following the Securities and
Exchange Commission’s approval of the Public Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles.  We have not yet determined
the impact, if any, that implementation of SFAS 162 will have on our results of
operations and financial condition.





In May
2008, the FASB also issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts – an interpretation of FASB Statement No. 60,” (SFAS
163).  SFAS 163 requires that an insurance enterprise recognize a claim
liability prior to an event of default (insured event) when there is evidence
that credit deterioration has occurred in an insured financial obligation. 
This Statement also clarifies how Statement 60 applies to financial guarantee
insurance contracts, including the recognition and measurement to be used to
account for premium revenue and claim liabilities.  Those
clarifications will increase comparability in financial reporting of financial
guarantee insurance contracts by insurance enterprises.  This
Statement requires expanded disclosures about financial guarantee insurance
contracts. The accounting and disclosure requirements of the Statement will
improve the quality of information provided to users of financial
statements.  SFAS 163 will be effective for financial statements issued for
fiscal years beginning after December 15, 2008.  The Company does not
expect the adoption of SFAS 163 will have a material impact on its financial
condition or results of operation.





35


ITEM
7A.  Quantitative and Qualitative Disclosures About Market
Risk




Salon
maintains all of its cash in immediately available cash deposits at its
bank.  These funds are not subject to market risk and no interest is
paid on such funds.  In May 2007, Salon entered into a credit
agreement with Deutsche Bank Securities, Inc. that allows Salon to borrow up to
$1.0 million at a rate of prime less 0.25% which will subject Salon to interest
rate risk.  This line of credit is fully drawn.  Rates
declined throughout most of fiscal 2008.  Salon feels that the impact
of the risk of future rate increases will not have a material
impact.  As Salon conducts all of its business in the United States,
Salon is not subject to foreign exchange risk.







36


ITEM 8.  Consolidated Financial Statements and
Supplementary Data




PageReports
      of Independent Registered Public Accounting Firm
              38Consolidated
      Balance Sheets as of March 31, 2008 and 2007
              39Consolidated
      Statements of Operations for the years ended March 31,
20082007,
      and 2006
              40Consolidated
      Statements of Stockholders’ Equity for the years ended March 31,
      20082007,
      and 2006
              41Consolidated
      Statements of Cash Flows for the years ended March 31,
20082007,
      and 2006
              42Notes
      to Consolidated Financial Statements
              43Selected
      Quarterly Financial Data (unaudited)
              67






37


Report
Of Independent Registered Public Accounting Firm








To the
Board of Directors and Stockholders


Salon
Media Group, Inc.





We have
audited the accompanying consolidated balance sheets of Salon Media Group, Inc.
and its subsidiaries (the “Company”) as of March 31, 2008 and 2007, and the
related consolidated statements of operations, stockholders’ equity, and cash
flows for each of the three years in the period ended March 31,
2008.  These consolidated financial statements are the responsibility
of the Company’s management.  Our responsibility is to express an
opinion on these consolidated 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 consolidated financial statements are free of material
misstatement.  The Company is not required to have, nor have we been
engaged to perform an audit of the Company’s internal control over financial
reporting.  Our audits included consideration of internal control over
financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an
opinion on the effectiveness of the Company's internal control over financial
reporting. Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the consolidated financial statements, 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 Salon Media Group, Inc. and
its subsidiaries as of March 31, 2008 and 2007, and the results of their
operations and their cash flows for each of the of the three years in the period
ended March 31, 2008 in conformity with accounting principles generally accepted
in the United States of America.





The
accompanying consolidated financial statements have been prepared assuming that
the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has suffered recurring losses and
negative cash flows from operations and has an accumulated deficit of $96.3
million at March 31, 2008. These conditions raise substantial doubt about its
ability to continue as a going concern. Management’s plans regarding those
matters also are described in Note 2. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.








/s/ Burr,
Pilger & Mayer LLP


San
Francisco, California


June 25,
2008





38




SALON
      MEDIA GROUP, INC.CONSOLIDATED
      BALANCE SHEETS(in
      thousands, except share and per share amounts)March
      31,2008
            
            
            2007AssetsCurrent
      assets:Cash
      and cash equivalents
            
            $
            818
            
            
            $
            829Accounts
      receivable, net
            
            
            864
            
            
            
            1,007Prepaid
      expenses and other current assets
            
            
            185
            
            
            
            53Total
      current assets
            
            
            1,867
            
            
            
            1,889Property
      and equipment, net
            
            
            412
            
            
            
            115Prepaid
      advertising rights
            
            
            2,131
            
            
            
            3,267Goodwill,
      net
            
            
            200
            
            
            
            200Other
      assets
            
            
            6
            
            
            
            134Total
      assets
            
            $
            4,616
            
            
            $
            5,605Liabilities
      and stockholders’ equityCurrent
      liabilities:Short-term
      borrowings
            
            $
            1,000
            
            
            $
            -Accounts
      payable and accrued liabilities
            
            
            1,294
            
            
            
            762Deferred
      revenue
            
            
            705
            
            
            
            792Total
      current liabilities
            
            
            2,999
            
            
            
            1,554Long-term
      liabilities:Notes
      payable
            
            
            500
            
            
            
            -Other
      long-term liabilities
            
            
            44
            
            
            
            85Capital
      lease, less current portion
            
            
            56
            
            
            
            -Total
      liabilities
            
            
            3,599
            
            
            
            1,639Commitments
      and contingencies (Note 9)Stockholders’
      equity:Preferred
      stock, $0.001 par value, 5,000,000 shares authorized, 9,475
      sharesissued
      and outstanding at March 31, 2008 and 9,183 shares issued
    andoutstanding
      at March 31, 2007 (aggregate liquidation preference of
    $23,498at March 31, 2008 and $22,344 at March 31, 2007)
            
            
            -
            
            
            
            -Common
      stock, $0.001 par value, 30,000,000 shares authorized,
      1,940,172shares
      issued and outstanding at March 31, 2008 and 1,939,572
    sharesissued
      and outstanding at March 31, 2007
            
            
            2
            
            
            
            2Additional
      paid-in capital
            
            
            97,302
            
            
            
            96,788Accumulated
      deficit
            
            
            (96,287
            )
            
            
            (92,824
            )Total
      stockholders’ equity
            
            
            1,017
            
            
            
            3,966Total
      liabilities and stockholders’ equity
            
            $
            4,616
            
            
            $
            5,605See
      accompanying notes to consolidated financial statements.





39





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




Year
      Ended March 31,2008
            
            
            2007
            
            
            2006Net
      revenues
            
            $
            7,513
            
            
            $
            7,748
            
            
            $
            6,516Operating
      expenses:Production
      and content
            
            
            5,544
            
            
            
            5,223
            
            
            
            4,505Sales
      and marketing
            
            
            2,756
            
            
            
            1,978
            
            
            
            1,515Information
      technology support
            
            
            829
            
            
            
            828
            
            
            
            676General
      and administrative
            
            
            1,756
            
            
            
            1,286
            
            
            
            964Total
      operating expenses
            
            
            10,885
            
            
            
            9,315
            
            
            
            7,660Loss
      from operations
            
            
            (3,372
            )
            
            
            (1,567
            )
            
            
            (1,144
            )Interest
      and other income (expense)
            
            
            (37
            )
            
            
            1
            
            
            
            22Net
      loss
            
            
            (3,409
            )
            
            
            (1,566
            )
            
            
            (1,122
            )Preferred
      deemed dividend
            
            
            (54
            )
            
            
            (295
            )
            
            
            (227
            )Net
      loss attributable to common stockholders
            
            $
            (3,463
            )
            
            $
            (1,861
            )
            
            $
            (1,349
            )Basic
      and diluted net loss per share attributable tocommon
      stockholders
            
            $
            (1.79
            )
            
            $
            (1.10
            )
            
            $
            (1.67
            )Weighted
      average shares used in computing basicand
      diluted net loss per share attributableto
      common stockholders
            
            
            1,940
            
            
            
            1,692
            
            
            
            809




See
      accompanying notes to consolidated financial
  statements.





40


SALON
MEDIA GROUP, INC.


CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY


(in
thousands, except Preferred Stock Shares)




Preferred
            
            
            Common
            
            
            Additional
            
            
            
            
            
            
            
            
            TotalStock
            
            
            Stock
            
            
            Paid-In
            
            
            Unearned
            
            
            Accumulated
            
            
            Stockholders’Shares
            
            
            Amount
            
            
            Shares
            
            
            Amount
            
            
            Capital
            
            
            Compensation
            
            
            Deficit
            
            
            EquityBalance,
      March 31, 2005
            
            
            8,386
            
            
            $
            -
            
            
            
            749
            
            
            $
            1
            
            
            $
            93,765
            
            
            $
            -
            
            
            $
            (89,614
            )
            
            $
            4,152Shares
      issued under employee stock plans
            
            
            -
            
            
            
            -
            
            
            
            26
            
            
            
            -
            
            
            
            73
            
            
            
            -
            
            
            
            -
            
            
            
            73Shares
      issued under warrant agreements
            
            
            -
            
            
            
            -
            
            
            
            144
            
            
            
            -
            
            
            
            65
            
            
            
            -
            
            
            
            -
            
            
            
            65Value
      of warrants issued
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            55
            
            
            
            -
            
            
            
            -
            
            
            
            55Preferred
      stock converted to common stock
            
            
            (37
            )
            
            
            -
            
            
            
            38
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Share-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            183
            
            
            
            (40
            )
            
            
            -
            
            
            
            143Series
      D convertible preferred stock andcommon
      stock warrants issued for cash
            
            
            209
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            251
            
            
            
            -
            
            
            
            -
            
            
            
            251Preferred
      deemed dividend from revaluationSeries
      D Convertible preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            227
            
            
            
            -
            
            
            
            (227
            )
            
            
            -Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,122
            )
            
            
            (1,122
            )Balance,
      March 31, 2006
            
            
            8,558
            
            
            
            -
            
            
            
            957
            
            
            
            1
            
            
            
            94,619
            
            
            
            (40
            )
            
            
            (90,963
            )
            
            
            3,617Shares
      issued under employee stock plans
            
            
            -
            
            
            
            -
            
            
            
            2
            
            
            
            -
            
            
            
            6
            
            
            
            -
            
            
            
            -
            
            
            
            6Shares
      issued under warrant agreements
            
            
            -
            
            
            
            -
            
            
            
            730
            
            
            
            1
            
            
            
            778
            
            
            
            -
            
            
            
            -
            
            
            
            779Preferred
      stock converted to common stock
            
            
            (125
            )
            
            
            -
            
            
            
            251
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -Share-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            190
            
            
            
            40
            
            
            
            -
            
            
            
            230Series
      D convertible preferred stock andcommon
      stock warrants issued for cash
            
            
            750
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            900
            
            
            
            -
            
            
            
            -
            
            
            
            900Preferred
      deemed dividend on issuance ofSeries
      D Convertible preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            295
            
            
            
            -
            
            
            
            (295
            )
            
            
            -Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (1,566
            )
            
            
            (1,566
            )Balance, March 31,
      2007
            
            
            9,183
            
            
            
            -
            
            
            
            1,940
            
            
            
            2
            
            
            
            96,788
            
            
            
            -
            
            
            
            (92,824
            )
            
            
            3,966Shares
      issued under employee stock plans
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            1
            
            
            
            -
            
            
            
            -
            
            
            
            1Series
      D convertible preferred stock andcommon
      stock warrants issued for cash
            
            
            292
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            350
            
            
            
            -
            
            
            
            -
            
            
            
            350Preferred
      deemed dividend on issuance ofSeries
      D Convertible preferred stock
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            54
            
            
            
            -
            
            
            
            (54
            )
            
            
            -Share-based
      compensation
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            109
            
            
            
            -
            
            
            
            -
            
            
            
            109Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (3,409
            )
            
            
            (3,409
            )Balance,
      March 31, 2008
            
            
            9,475
            
            
            $
            -
            
            
            
            1,940
            
            
            $
            2
            
            
            $
            97,302
            
            
            $
            -
            
            
            $
            (96,287
            )
            
            $
            1,017




See
accompanying notes to consolidated financial statements.





41




SALON
      MEDIA GROUP, INC.CONSOLIDATED
      STATEMENTS OF CASH FLOWS(in
      thousands)




Year
      Ended March 31,2008
            
            
            2007
            
            
            2006Cash
      flows from operating activities:Net
      loss
            
            $
            (3,409
            )
            
            $
            (1,566
            )
            
            $
            (1,122
            )Adjustments
      to reconcile net loss to net cash used in operating
      activities:Share-based
      compensation
            
            
            313
            
            
            
            230
            
            
            
            143Depreciation
      and amortization
            
            
            102
            
            
            
            89
            
            
            
            143Allowance
      for (recovery of) doubtful accounts
            
            
            -
            
            
            
            -
            
            
            
            (1
            )Prepaid
      advertising rights usage
            
            
            1,136
            
            
            
            451
            
            
            
            252Changes
      in assets and liabilities:Accounts
      receivable
            
            
            143
            
            
            
            (505
            )
            
            
            122Prepaid
      expenses, other current assets and other assets
            
            
            (4
            )
            
            
            101
            
            
            
            111Accounts
      payable, accrued liabilities and other long-term
    liabilities
            
            
            262
            
            
            
            (21
            )
            
            
            (3
            )Deferred
      revenue
            
            
            (87
            )
            
            
            (28
            )
            
            
            (227
            )Net
      cash used in operating activities
            
            
            (1,544
            )
            
            
            (1,249
            )
            
            
            (582
            )Cash
      flows from investing activities:Purchase
      of property and equipment
            
            
            (313
            )
            
            
            (48
            )
            
            
            (52
            )Net
      cash used in investing activities
            
            
            (313
            )
            
            
            (48
            )
            
            
            (52
            )Cash
      flows from financing activities:Net
      proceeds from short-term borrowings
            
            
            1,000
            
            
            
            -
            
            
            
            -Net
      proceeds from long-term borrowings
            
            
            500
            
            
            
            -
            
            
            
            -Capital
      lease payments
            
            
            (5
            )
            
            
            -
            
            
            
            -Proceeds
      from issuance of preferred stock, net
            
            
            350
            
            
            
            900
            
            
            
            251Proceeds
      from issuance of common stock, net
            
            
            1
            
            
            
            785
            
            
            
            138Net
      cash provided by financing activities
            
            
            1,846
            
            
            
            1,685
            
            
            
            389Net
      increase (decrease) in cash and cash equivalents
            
            
            (11
            )
            
            
            388
            
            
            
            (245
            )Cash
      and cash equivalents at beginning of period
            
            
            829
            
            
            
            441
            
            
            
            686Cash
      and cash equivalents at end of period
            
            $
            818
            
            
            $
            829
            
            
            $
            441Amount
      paid for interest
            
            $
            -
            
            
            $
            -
            
            
            $
            -Amount
      paid for taxes
            
            
            -
            
            
            
            -
            
            
            
            -Supplemental
      schedule of non-cash investing and financing activities:Issuance
      of warrants in connection with agreements
            
            $
            -
            
            
            $
            -
            
            
            $
            55Preferred
      deemed dividend
            
            $
            54
            
            
            $
            295
            
            
            $
            227Property
      and equipment purchased with capital lease
            
            $
            86
            
            
            $
            -
            
            
            $
            -Stock
      compensation liability
            
            $
            204
            
            
            $
            -
            
            
            $
            -See
      accompanying notes to consolidated financial statements.




42


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Note
1.  The Company




Salon
Media Group, Inc (“Salon”) is an Internet media company that produces a content
Website with ten subject-specific sections, which includes two online
communities.  The Website also allows for audio downloads and video
clips.  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.




Pursuant
to the authority granted to the Board of Directors (the “Board”) by the
stockholders of Salon at its Annual Meeting of Stockholders held on October 20,
2005, the Board on November 14, 2006 approved a reverse stock split of Salon’s
authorized and outstanding shares of common stock at a ratio of
20:1.  The reverse stock split was effective November 15, 2006, the
date Salon’s Certificate of Amendment of Restated Certificate of Incorporation
was filed with the Delaware Secretary of State and Salon’s stock trading symbol
was changed to SLNM.OB from SALN.OB.  Accordingly all issued and
outstanding shares and per share amounts in the accompanying consolidated
financial statements have been retroactively restated to reflect the reverse
stock split.




Note
2.   Summary of Significant Accounting Policies




Basis
of presentation




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 flows from operations since inception and
has an accumulated deficit at March 31, 2008 of $96,287.  In addition,
Salon expects to incur a net loss from operations for its year ending March 31,
2009.  Because of past losses, an anticipated loss next year and a
history of negative cash flows from operations, Salon’s independent registered
public accounting firm for the years ended March 31, 2006, March 31, 2007 and
March 31, 2008 have included a paragraph in its reports indicating substantial
doubt as to Salon’s ability to continue as a going concern.  During
the last three years, Salon has relied on cash from the issuance of bank debt,
convertible notes and preferred stock and from the exercise of warrants to meet
its cash requirements.  Based on current
cash projections for next year, which contemplate a smaller full year operating
loss, and positive cash flow in the second half of fiscal 2009, and takes into
account $1.5 million in convertible debt raised subsequent to year end, Salon
estimates it will require up to an additional $1.0 million cash inflow to meet
working capital needs.  If planned revenues are less than expected,
the cash shortfall may be higher.  Salon is in discussions with
potential investors, including related parties, as well as its commercial bank,
to obtain additional funding.





Principles
of consolidation




The
consolidated financial statements include the accounts of Salon and its wholly
owned subsidiaries, which are not active.  All material intercompany
accounts and transactions have been eliminated in the consolidated financial
statements.




43


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Segment
and enterprise-wide reporting




Salon
discloses segment enterprise-wide information in accordance with Statement of
Financial Accounting Standard (SFAS) No. 131 “Disclosures about Segments of
Enterprises and Related Information.”  Based upon definitions
contained within SFAS No. 131, management has determined that Salon operates in
one segment.  In addition, virtually all revenues are in United
States, and all of the long-lived assets are located within the United
States.




Use
of estimates




The
preparation of financial statements in conformity with generally accepted
accounting principles 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 revenue and expenses during the reporting
period.  Actual results could differ from those
estimates.




Accounts
receivable, net




Accounts
receivable are stated net of doubtful accounts.  Salon estimates the
uncollectibility of the accounts receivable balance and maintains allowances for
estimated losses.  Salon analyzes accounts receivable, historical bad
debts, receivable aging, customer credit-worthiness, and current economic trends
when evaluating the adequacy of the allowance for doubtful
accounts.




Property
and equipment, net




Property
and equipment are recorded at cost.  Maintenance, repairs and minor
renewals are expensed as incurred.  Depreciation is provided on a
straight-line basis over the useful lives of the asset, principally three years
for computer hardware and software, and five years for furniture and office
equipment.  Depreciation of leasehold improvements is provided on a
straight-line basis over the useful life of the asset or the term of the lease,
whichever is shorter.  When property and equipment is retired or
otherwise disposed of, the cost and accumulated depreciation are relieved from
the accounts and the net gain or loss is included in the determination of
income.




Software
Development Costs





Information
technology support expenses to develop new product offerings for internal use,
such as Open Salon, are capitalized as software development
costs.  Salon has capitalized $141 of expenditures through March 31,
2008 and is included with property and equipment.  Such capitalized
development activity did not occur in prior fiscal years.




Prepaid
advertising rights




Prepaid advertising rights are carried
at cost less accumulated amortization, with amortization commensurate to the
usage of such rights, and expire on December 31, 2009.  In the event
that the rights are not fully utilized prior to their expiration, Salon has the
right to receive cash for the unused value.




44




SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Reclassifications




Certain
reclassifications, not affecting previously reported net loss, have been
made to the previously issued consolidated financial statements to conform to
the current period presentation.




Goodwill




Goodwill
is not amortized, but instead is tested for impairment at least annually during
the quarter ending March 31, or earlier as warranted by events or changes in
circumstances.




Impairment
of long-lived assets




Salon
periodically evaluates the potential impairment of its long-lived assets
whenever events or changes in circumstances indicate that the carrying amount of
the asset may not be recoverable.  At the occurrence of an event or
change in circumstances, Salon evaluates the potential impairment of an asset
based on the estimated future undiscounted cash flows attributable to such
assets.  In the event impairment exists, Salon will measure the amount
of such impairment based on the present value of the estimated future cash flows
using a discount rate commensurate with the risks involved.




Revenue
recognition




Salon’s
revenues are primarily from the sale of advertising space on its Website and the
sale of subscriptions to individuals.  Salon recognizes revenue once
persuasive evidence of an arrangement exists, delivery has occurred, the fee is
fixed or determinable and collectibility is reasonably
assured.  Revenues are recognized ratably in the period over which
Salon’s obligations are fulfilled.  Payments received before Salon’s
obligations are fulfilled are classified as “Deferred revenue” in Salon’s
consolidated balance sheet.





Advertisement
sales agreements are generally short-term agreements, usually less than ninety
days.  Revenues derived from such arrangements are recognized during
the period the advertising space is provided, as long as no significant
obligations remain at the end of the period.  Salon’s obligations may
include a fixed number of days that a Salon Site Pass advertisement is run, the
guarantee of a minimum number of times that an advertisement appears in a page
viewed by a visitor to Salon’s Website, or a set number of Site Pass
advertisements viewed by a Website visitor.  To the extent the minimum
guaranteed amounts are not delivered, Salon defers recognition of the
corresponding revenue until the remaining guaranteed amounts are achieved, if
mutually agreeable with an advertiser.  If these “make good”
impressions are not agreeable to an advertiser, no further revenue is
recognized.





Revenue
from Salon’s subscription services from Salon Premium and The Well are
recognized ratably over the subscription period.  Salon Premium
subscriptions are generally for one month or one year periods.  Well
subscriptions are generally only for one month.





Advertising
costs





Salon
expenses advertising costs as they are incurred.  Advertising expense
was $1,136, $448, and $271, for the fiscal years ended March 31, 2008, 2007, and
2006.





45





SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Comprehensive
loss




Comprehensive
loss is defined as the change in equity of a business enterprise during a period
from non-owner sources.  There were no differences between the net
loss for the years ended March 31, 2008, 2007 and 2006 and comprehensive loss
for those periods.





Stock-based
compensation





On April
1, 2006, Salon adopted the provisions of, and accounted for stock-based
compensation in accordance with, the Financial Accounting Standards Board’s
(FASB) Statement of Financial Accounting Standards No. 123 (revised 2004,)
“Share Based Payment” (SFAS 123R), which replaced SFAS No. 123, “Accounting
for Stock-Based Compensation” (SFAS 123) and supersedes Accounting Principals
Board (APB) Opinion No. 25, “Accounting for Stock Issued to Employees” (APB
25).  Under the fair value provisions of this statement, stock-based
compensation cost is measured at the grant date based on the fair value of the
award and is recognized as expense over the requisite service period, which is
the vesting period.  Salon uses the Black-Scholes option-pricing model
to determine the fair-value of stock-based awards under SFAS 123R, consistent
with that used for pro forma disclosures under SFAS 123.  Prior to the
adoption of SFAS 123R, Salon accounted for stock-based awards to employees using
the intrinsic value method in accordance with APB No. 25 as allowed under
SFAS 123.  Under the intrinsic value method, no stock-based
compensation expense had been recognized in Salon’s consolidated statement of
operations, other than as related to non-employees, because the exercise price
of its stock options granted to employees equaled the fair market value of the
underlying stock at the date of grant.  Salon recognizes compensation
cost related to stock options granted prior to the adoption of SFAS 123R on an
accelerated basis over the applicable vesting period using the methodology
described in FASB Interpretation No. 28, “Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans” (FIN
28).  Salon recognizes compensation cost related to options granted
subsequent to the adoption of SFAS 123R on a straight-line basis over the
applicable vesting period.





Salon
utilized the modified prospective transition method, which requires that
stock-based compensation expense be recorded for all new and unvested stock
options and employee stock purchase plan shares that are ultimately expected to
vest as the requisite service is rendered beginning on April 1,
2006.  In accordance with the modified prospective transition method,
Salon’s consolidated financial statements for prior periods have not been
restated to reflect, and do not include, the impact of SFAS
123R.  Stock-based compensation expense recognized under SFAS 123R for
the year ended March 31, 2008 was $313, which consisted solely of
stock-based compensation expense related to stock options.  See
Note 7: “Employee Stock Option Plan” to the financial statements for
additional information.





As of
March 31, 2008, the aggregate stock compensation remaining to be amortized
to expenses was $1,255. Salon expects this stock compensation balance to be
amortized as follows: $434 during fiscal 2009; $434 during fiscal 2010; $274
during fiscal 2011; and $113 during fiscal 2012.  The expected
amortization reflects only outstanding stock awards as of March 31,
2008.





No
amounts were recorded relating to excess tax benefits from the exercise of
stock-based compensation awards during the year ended March 31, 2008, and as a
result there were no differences in net cash used in operating and financing
activities due to the implementation of SFAS 123R.





46





SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




The fair
value of each option grant was estimated on the date of grant using the
Black-Scholes option pricing model with the following assumptions and fair value
per share:




Year
      Ended March 31,2008
            
            2007
            
            2006Risk-free
      interest rates
            
            2.16
      – 5.00%
            
            4.47
      – 4.97%
            
            3.80
      – 4.30%Expected
      lives (in years)
            
            4
            
            4
            
            4Expected
      volatility
            
            94
      – 116 %
            
            107
      - 129 %
            
            120%Dividend
      yield
            
            0.0%
            
            0.0%
            
            0.0%





The
expected term of the options of four years represents the estimated period of
time until exercise and is based on historical experience of similar awards,
including the contractual terms, vesting schedules and expectations of future
employee behavior.  Expected stock price volatility is based on
historical volatility of Salon’s stock.  The risk-free interest rate
is based on the implied yield available on U.S. Treasury securities with a term
equivalent to the vesting period of the stock options, or four
years.  Salon has not paid dividends in the past.





The
following table illustrates the effect on net loss and net loss per share if
Salon had applied the fair value recognition provisions of SFAS 123 to
stock-based employee compensation during the year ended March 31,
2006:




Year
      EndedMarch
      31, 2006Net
      loss attributable to common stockholders:As
      reported
            
            $
            (1,349
            )Add
      back: share-based employee compensationexpense
      included in reported net loss
            
            
            -Deduct:
      share-based employee compensationexpense
      determined under the fair value based method,net
      of related tax
            
            
            (2,321
            )Pro
      forma net loss attributable to common stockholders
            
            $
            (3,670
            )Basis
      and diluted net loss per share attributable tocommon
      stockholders:As
      reported
            
            $
            (1.67
            )Pro
      forma
            
            $
            (4.54
            )




47




SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Net
loss per share




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




Year
      Ended March 31,2008
            
            
            2007
            
            
            2006Numerator:Net
      loss attributable to common stockholders
            
            $
            (3,463
            )
            
            $
            (1,861
            )
            
            $
            (1,349
            )Denominator:Weighted
      average shares used incomputing
      basic and diluted net loss pershare
      attributable to common stockholders
            
            
            1,940,000
            
            
            
            1,692,000
            
            
            
            809,000Basic
      and diluted net loss per share attributableto
      common stockholders
            
            $
            (1.79
            )
            
            $
            (1.10
            )
            
            $
            (1.67
            )Antidilutive
      securities including options,warrants
      and convertible preferred stocknot
      included in loss per share calculation
            
            
            12,678,000
            
            
            
            11,868,000
            
            
            
            11,899,000





Financial
instruments





The
carrying amounts of Salon’s financial instruments, including cash and cash
equivalents, accounts receivable, and accounts payable, approximate fair value
because of their short maturities.  Fair value of capital lease
obligations, if any, approximates carrying value since they bear interest at
current market rates.





Income
taxes





Salon recognizes deferred taxes by the
asset and liability method of accounting for income taxes. Under the asset and
liability method, deferred income taxes are recognized for differences between
the financial statement and tax basis of assets and liabilities at enacted
statutory tax rates in effect for the years in which the differences are
expected to reverse.  The effect on deferred taxes of a change in tax
rates is recognized in income in the period that includes the enactment
date.  Valuation allowances are established when necessary to reduce
deferred tax assets to the amounts expected to be realized.





Concentrations
of credit risk





Financial
instruments that potentially subject Salon to concentrations of credit risk
consist principally of trade accounts receivable.Salon performs ongoing
credit evaluations of its customers, butdoes not require
collateral.  Salon provides an allowance for credit losses that it
periodically adjusts to reflect management’s expectations of future
losses.  No customer accounted for 10% or more of the
total




48


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)







trade
accounts receivable at March 31, 2008 and March 31, 2007; one customer accounted
for 11% of total trade accounts receivable at March 31,
2006.   No customer accounted for 10% or more of total revenue
for the fiscal years ended March 31, 2008, 2007 and 2006
respectively.





Recent
accounting pronouncements





In June
2006, the FASB issued Interpretation No. 48, “Accounting for Uncertainty in
Income Taxes—an interpretation of FASB Statement No. 109” (FIN
48).  FIN 48 clarifies the accounting for uncertainty in income taxes
recognized in an enterprise’s financial statements in accordance with FASB
Statement No. 109, “Accounting for Income Taxes,” and prescribes a recognition
threshold and measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a tax
return.  FIN 48 also provides guidance on derecognition,
classification, interest and penalties, accounting in interim periods,
disclosure, and transition.  FIN 48 is effective for fiscal years
beginning after December 15, 2006.  Adoption did not have a material
impact on its results of operations, financial position, or cash
flows.





In
September 2006, the FASB issued Statement of Financial Accounting Standard No.
157, “Fair Value Measurements,” (SFAS 157).  SFAS 157 addresses how
companies should measure fair value when they are required to use a fair value
measure for recognition or disclosure purposes under generally accepted
accounting principles, and expands disclosures about fair value
measurements.  SFAS 157 is effective for fiscal years beginning after
November 15, 2007.  Salon, adopted SFAS 157 as of April 1, 2007. It
did not have a material impact on its results of operations, financial position,
or cash flows.





In
September 2006, the FASB issued Statement of Financial Accounting Standard No.
158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement
Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R),” (SFAS
158).  SFAS 158 improves financial reporting by requiring an
employer to recognize the overfunded or underfunded status of a defined benefit
postretirement plan (other than a multiemployer plan) as an asset or liability
in its statement of financial position and to recognize changes in that funded
status in the year in which the changes occur through comprehensive income of a
business entity or changes in unrestricted net assets of a not-for-profit
organization.  SFAS 158 also improves financial reporting by requiring
an employer to measure the funded status of a plan as of the date of its
year-end statement of financial position, with limited
exceptions.  SFAS 158 is effective for fiscal years ending after
December 15, 2006.  Salon does not currently believe adoption will
have a material impact on its results of operations, financial position, or cash
flows.  Salon does not have such funds addressed by this
statement.





In
September 2006, the Securities and Exchange Commission (SEC) issued Staff
Accounting Bulletin No. 108 on Quantifying Financial Statement Misstatements
(SAB 108).  SAB 108 sets forth the SEC staff's views that registrants
should quantify errors using both a balance sheet and an income statement
approach, and evaluate whether either approach results in quantifying a
misstatement that, when all relevant quantitative and qualitative factors are
considered, is material.  SAB 108 is effective the first fiscal year
ending after November 15, 2006.  Adoption has not had a material
impact on its results of operations, financial position, or cash
flows.





49




SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)







In
February 2007, the FASB issued Statement of Financial Accounting Standard No.
159, “The Fair Value Option for Financial Assets and Financial Liabilities –
Including an Amendment to FASB Statement No. 115,” (SFAS 159).  Under
SFAS 159entities
will be permitted to measure financial instruments and certain other assets and
liabilities at fair value on an instrument-by-instrument basis (the fair value
option).  SFAS 159 is effective for fiscal years beginning after
December 15, 2007 and allows for early adoption.  Salon, adopted SFAS
159 as of April 1, 2007, and it has not had a material impact on its results of
operations, financial position, or cash flows.





In
December 2007, the FASB issued Statement of Financial Accounting Standard No.
141 (revised 2007), “Business Combinations,” (“SFAS 141R”) and No. 160,
“Noncontrolling Interests in Consolidated Financial Statements,”an
amendment of ARB No. 51(“SFAS
160”.) SFAS 141R establishes principles and requirements during business
combinations for how the acquirer:





a.
            Recognizes
      and measures in its financial statements the identifiable assets acquired,
      the liabilities assumed, and any noncontrolling interest in the
      acquiree,


b.
            Recognizes
      and measures the goodwill acquired in the business combination or a gain
      from a bargain purchase, and


c.
            Determines
      what information to disclose to enable users of the financial statements
      to evaluate the nature and financial effects of the business
      combination.





SFAS 160
sets parameters as to how to report noncontrolling interest in consolidated
financial statements.  SFAS 141R and SFAS 160 are effective for fiscal
years beginning after December 15, 2008. Salon believes that the adoption of
SFAS 141R and SFAS 160 will not impact Salon’s results of operations, financial
position, or cash flows.





In March
2008, the FASB issued SFAS No. 161, “Disclosures about Derivative Instruments
and Hedging Activities,” (SFAS 161).  SFAS 161 amends and expands the
disclosure requirements of SFAS No. 133, Accounting for Derivative Instruments
and Hedging Activities, and requires entities to provide enhanced qualitative
disclosures about objectives and strategies for using derivatives, quantitative
disclosures about fair values and amounts of gains and losses on derivative
contracts, and disclosures about credit-risk-related contingent features in
derivative agreements.  This statement applies to all entities and all
derivative instruments. SFAS 161 is effective for financial statements issued
for fiscal years and interim periods beginning after November 15,
2008.  The Company is currently evaluating the impact of SFAS 161 and
does not expect this statement to have a material impact on its financial
position and results of operations.





In May
2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles,” (SFAS 162).  SFAS 162 establishes the GAAP
hierarchy and identifies the sources of accounting principles and the framework
for selecting the principles used in the preparation of financial
statements.  SFAS 162 is effective 60 days following the Securities and
Exchange Commission’s approval of the Public Accounting Oversight Board
amendments to AU Section 411, The Meaning of Present Fairly in Conformity with
Generally Accepted Accounting Principles.  We have not yet determined
the impact, if any, that implementation of SFAS 162 will have on our results of
operations and financial condition.





50





SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)







In May
2008, the FASB also issued SFAS No. 163, “Accounting for Financial Guarantee
Insurance Contracts – an interpretation of FASB Statement No. 60,” (SFAS
163).  SFAS 163 requires that an insurance enterprise recognize a claim
liability prior to an event of default (insured event) when there is evidence
that credit deterioration has occurred in an insured financial obligation. 
This Statement also clarifies how Statement 60 applies to financial guarantee
insurance contracts, including the recognition and measurement to be used to
account for premium revenue and claim liabilities.  Those
clarifications will increase comparability in financial reporting of financial
guarantee insurance contracts by insurance enterprises.  This
Statement requires expanded disclosures about financial guarantee insurance
contracts. The accounting and disclosure requirements of the Statement will
improve the quality of information provided to users of financial
statements.  SFAS 163 will be effective for financial statements issued for
fiscal years beginning after December 15, 2008.  The Company does not
expect the adoption of SFAS 163 will have a material impact on its financial
condition or results of operation.





Note
3.  Borrowing Agreements





In May
2007, Salon finalized a borrowing agreement with Deutsche Bank Securities, Inc.
that will allow Salon to borrow up to $1,000 at a rate of prime less
0.25%.  The agreement is guaranteed in its entirety by Salon’s
Chairman.  The line of credit has been fully drawn as of March 31,
2008.  Salon and its Chairman have agreed to lift previously agreed
restrictions on the timing of borrowing to permit borrowing to continue under
the agreement with the guarantee of the Chairman until March 31,
2009.  Though Deutsche Bank Securities may demand repayment of amounts
borrowed at any time, Salon does not believe that it is likely until March 31,
2009.




In March
2008, the Company’s Chairman advanced $500, pending completion of a financing
that was under negotiation as of March 31, 2008.  The transaction
closed in April, and the advance was used to purchase a $500 convertible
promissory note.  (See Note 13.)




Note
4. Goodwill





In
accordance with FASB No. 142, “Goodwill and Other Intangible Assets” (SFAS No.
142), goodwill amortization was discontinued as of March 31,
2002.  The carrying value of goodwill at March 31, 2008 and March 31,
2007 was $200 and has been found not to be impaired.





51


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Note
5. Balance Sheet Components




Year
      Ended March 31,2008
            
            
            2007Accounts
      receivable, net:Accounts
      receivable
            
            $
            894
            
            
            $
            1,037Less:
      allowance for doubtful accounts
            
            
            (30
            )
            
            
            (30
            )$
            864
            
            
            $
            1,007Prepaid
      expenses and other current assetsPrepaid
      expenses
            
            $
            51
            
            
            $
            53Short-term
      deposits
            
            
            134
            
            
            
            -$
            185
            
            
            $
            53Property
      and equipment, netComputer
      hardware and software
            
            $
            1,299
            
            
            $
            1,277Leasehold
      improvements
            
            
            67
            
            
            
            67Furniture
      and office equipment
            
            
            243
            
            
            
            2431,609
            
            
            
            1,587Less
      accumulated depreciation and amortization
            
            
            (1,197
            )
            
            
            (1,472
            )$
            412
            
            
            $
            115Other
      assetsLong-term
      deposits
            
            $
            6
            
            
            $
            134$
            6
            
            
            $
            134Accounts
      payable and accrued liabilitiesAccounts
      payable
            
            $
            429
            
            
            $
            269Salaries
      and wages payable
            
            
            287
            
            
            
            321Accrued
      services
            
            
            37
            
            
            
            5Reserve
      for claims
            
            
            85
            
            
            
            98Capital
      lease, current portion
            
            
            25
            
            
            
            -Other
      accrued expenses
            
            
            431
            
            
            
            69$
            1,294
            
            
            $
            762




Depreciation
expense for the years ended March 31, 2008, 2007 and 2006 was $102, $89, and $88
respectively.





Note
6.  401(k) Savings Plan





Salon’s
401(k) Savings Plan (the “401(k) Plan”) is a defined contribution retirement
plan intended to qualify under Sections 401(a) and 401(k) of the Internal
Revenue Code. All full-time employees of Salon are eligible to participate in
the 401(k) Plan pursuant to its terms.  Participants may contribute
from 1% to 20% of compensation, subject to statutory
limitations.  Employer matching contributions are discretionary based
on a certain percentage of a participant’s contributions as determined by
management of Salon.  Salon has not made any discretionary
contributions to the 401(k) Plan through March 31, 2008.




52


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Note
7. Employee Stock Option Plan




Salon has
two stock option plans approved by shareholders.  The Salon Internet,
Inc. 1995 Stock Option Plan (the 1995 Plan), which was terminated in November
2004, and the Salon Media Group, Inc. 2004 Stock Plan (the 2004 Plan) that was
approved by Salon’s stockholders in November 2004.  The 2004 Plan
allows the issuance of incentive and nonstatutory options to employees and
non-employees of Salon.  In October 2005, Salon’s stockholders
approved an amendment to the 2004 Plan to increase the maximum number of shares
of common stock that may be issued under the plan by 800,000 to 2,300,000
shares.  In October 2007, Salon’s stockholders approved another
amendment to the 2004 Plan to increase the maximum number of shares of common
stock that may be issued under the plan by 875,000 to a total of 3,175,000
shares and to allow for grants of restricted stock awards.




Under the
2004 Plan, incentive and nonqualified stock options may be granted to officers,
employees, Directors and consultants of Salon.  Options generally vest
over periods of four years.Options generally became
exercisable as to 25% of the option shares one year from the date of grant and
then ratably over the following 36 months (1/48 per month).  However,
in the case of 1,045,500 options granted on February 7, 2005 and 382,050 options
granted on May 16, 2005, half vested on the date of grant, and the remaining
half vested on February 7, 2006.  The exercise price of options is
determined by the Board of Directors and is equal to the fair market value of
the stock on the grant date.  Generally, Salon’s options expire, if
not exercised, ten years after the date of grant.




Salon may
grant restricted stock awards to officers under the Salon Media Group, Inc. 2004
Stock Plan, as amended and restated through October 4, 2007 (the “2004 Plan),
that typically vest over an approximate four year period.  Restricted
stock awards are considered outstanding at the time of grant, as the stock award
holders are entitled to dividends and voting rights.  As of March 31,
2008, the number of shares granted but still unvested was 250,000 with a
weighted-average fair value of $1.60.





As of
March 31, 2008, Salon has approximately 595,000 shares authorized to be issued
under the 2004 Plan.  Of these shares, approximately 354,000 may not
be issued as they have not been properly registered with state or local
regulatory authorities.  In addition, approximately 446,000 shares
have previously been granted and are currently outstanding that have also not
been properly registered.  As the recipients of these grants are
entitled to file a claim for a cash settlement, the company has classified the
value of these shares of $204 as a liability.  The weighted average
exercise price of these option grants is $1.64.





Salon has
granted options pursuant to plans not approved by shareholders.  These
grants include an option to purchase 25,000 shares of common stock issued in
December 2006 and an option to purchase 50,000 shares of common stock issued in
June 2006, both granted to Salon’s then Senior Vice President – Publisher, and
an option to purchase 50,000 shares of common stock issued in February 2005 to
Salon’s former Chairman.  At March 31, 2008 Salon had 240,000 shares
of common stock authorized and available for grants under the 2004
Plan.




53


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




The
following table summarizes activity under Salon’s plans for the year ended March
31, 2008:




WeightedOutstanding
            
            
            Average
            
            
            AggregateStock
            
            
            Exercise
            
            
            IntrinsicOptions
            
            
            Price
            
            
            ValueBalance
      as of April 1, 2007
            
            
            2,205,000
            
            
            
            $4.67Options
      granted under all plans
            
            
            739,000
            
            
            
            $1.54Exercised
            
            
            (1,000
            )
            
            
            $1.05Cancelled
            
            
            (413,000
            )
            
            
            $3.09Outstanding
      at March 31, 2008
            
            
            2,530,000
            
            
            
            $4.02
            
            
            
            $320,000Exercisable
      at March 31, 2008
            
            
            1,456,000
            
            
            
            $5.72
            
            
            
            -Expected
      to vest
            
            
            1,031,000
            
            
            
            $1.86
            
            
            
            $260,000





The
following table summarizes information about stock options outstanding at March
31, 2008:





Options
      Outstanding
            
            
            Options
      ExercisableWeightedAverage
            
            
            Weighted
            
            
            
            
            
            WeightedNumber
      of
            
            
            Remaining
            
            
            Average
            
            
            Number
      of
            
            
            AverageRange
      of
            
            
            Shares
            
            
            Contractual
            
            
            Exercise
            
            
            Shares
            
            
            ExerciseExercise
      Prices
            
            
            Outstanding
            
            
            Life
      (Years)
            
            
            Price
            
            
            Exercisable
            
            
            Price$1.05
      - $1.55
            
            
            
            487,000
            
            
            
            8.9
            
            
            $
            1.15
            
            
            
            118,000
            
            
            $
            1.06$1.60
      - $2.40
            
            
            
            558,000
            
            
            
            9.7
            
            
            $
            1.62
            
            
            
            11,000
            
            
            $
            2.03$2.60
      - $3.80
            
            
            
            1,195,000
            
            
            
            7.0
            
            
            $
            2.89
            
            
            
            1,043,000
            
            
            $
            2.85$4.00
      - $5.20
            
            
            
            227,000
            
            
            
            7.1
            
            
            $
            5.20
            
            
            
            227,000
            
            
            $
            5.20$6.40
      - $7.40
            
            
            
            30,000
            
            
            
            4.4
            
            
            $
            7.12
            
            
            
            25,000
            
            
            $
            7.10$10.40
      - $10.40
            
            
            
            1,000
            
            
            
            0.6
            
            
            $
            10.40
            
            
            
            1,000
            
            
            $
            10.40$27.60
      - $40.00
            
            
            
            12,000
            
            
            
            2.4
            
            
            $
            37.79
            
            
            
            12,000
            
            
            $
            37.79$58.40
      - $72.50
            
            
            
            2,000
            
            
            
            1.0
            
            
            $
            58.40
            
            
            
            2,000
            
            
            $
            58.40$101.25
      - $105.00
            
            
            
            2,000
            
            
            
            1.6
            
            
            $
            104.38
            
            
            
            2,000
            
            
            $
            104.38$170.00
      - $201.20
            
            
            
            16,000
            
            
            
            1.4
            
            
            $
            194.35
            
            
            
            16,000
            
            
            $
            194.352,530,000
            
            
            
            7.9
            
            
            $
            4.02
            
            
            
            1,457,000
            
            
            $
            5.72





The
weighted average fair value per share of the stock option awards in the year
ended March 31, 2008, 2007 and 2006 was $1.14, $1.48 and $3.82,
respectively.  The weighted average fair value of options vested
during the year ended March 31, 2008 was $1.75 per share.




The
total intrinsic value of options exercised during the year ended March 31, 2008
for which Salon received $1 in cash was $1 per share.




54


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Note 8. Employee Stock Purchase
Plan





The
Salon.com, Inc. 1999 Employee Stock Purchase Plan (the “ESPP”) was established
to provide substantially all employees whose customary employment is more than
20 hours per week for more than five months in any calendar year, eligibility to
purchase shares of its common stock through payroll deductions, up to 10% of
eligible compensation.  The purchase price of each share of stock to
be acquired is established at the discretion of Salon’s Board of Directors, but
in no event shall the price be set at the lesser of 85% of the fair market value
of shares on either the first day or the last day of the designated payroll
deduction period (the Offering Period), as chosen by the Board of Directors at
its discretion, whichever is lower.




The
ESPP operation was suspended on March 1, 2001.




Note
9.  Commitments and Contingencies





Salon has
a non-cancelable operating lease agreement for its office space in San
Francisco, CA that expires in February 2009, and for its office in Washington,
D.C. that expires in June 2009.





In
addition, Salon’s operating lease for its office space in New York, NY that was
to expire in May 2008 was extended to June 2008.  An operating lease
for the New York office space at a new location was signed for period June 2008
through August 2011.  Rent expense under operating lease agreements
was $530, $470, and $396 for the years ended March 31, 2008, 2007, and 2006
respectively.





Salon
has two capital leases as of March 31, 2008.  Total future minimum
rental payments under non-cancelable operating and capital leases in effect at
March 31, 2008 are as follows:





Operating
            
            
            Capital
            
            
            TotalYear Ending March 31,
            
            Leases
            
            
            Leases
            
            
            Interest
            
            
            Leases2009
            
            
            
            $329
            
            
            
            $25
            
            
            
            $11
            
            
            
            $3652010
            
            
            
            11
            
            
            
            29
            
            
            
            6
            
            
            
            462011
            
            
            
            -
            
            
            
            27
            
            
            
            2
            
            
            
            29Total
      lease payments
            
            
            $340
            
            
            
            $81
            
            
            
            $19
            
            
            
            $440





Salon, as
permitted under Delaware law and in accordance with its Bylaws, indemnifies its
officers and directors for certain events or occurrences, subject to certain
limits, while the officer is or was serving at Salon’s request in such
capacity.  The term of the indemnification period is for the officer’s
or director’s lifetime.  The maximum amount of potential future
indemnification is unlimited; however, Salon does have a Director and Officer
Insurance Policy that limits Salon’s exposure and enables Salon to recover a
portion of any future amounts paid.  As a result of the insurance
policy coverage, Salon believes the fair value of these indemnification
agreements is minimal.





Salon has
entered into employment agreements with certain key executives under which
severance payments in the aggregate amount of approximately $600 would become
due and payable in the event of their termination for other than cause or as a
result of a change in control.





55





SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)





Note
10. Income Taxes





Salon has
not recorded a provision or benefit for federal or state income taxes for any
period since inception due to incurred operating losses.  At March 31,
2008, Salon has net operating loss carry-forwards of $69,136 and $32,818 for
Federal and California purposes, respectively, available to reduce future
taxable income, if any.  During the year ended March 31, 2008, $3,271
of California net operating loss carry-forwards expired and additional $2,307 is
due to expire as of March 31, 2009, with the balance expiring over time
thereafter if not utilized beforehand.  The federal net operating loss
carry-forwards begin to expire on March 31, 2016 if not utilized
beforehand.





At March
31, 2008, Salon has research and development credit carry-forwards of $12 and $9
for Federal and California income tax purposes, respectively.  The
research and development credit carry-forwards expire beginning in the year
2011.





The Tax
Reform Act of 1986 limits the use of net operating loss and tax credit
carry-forwards in certain situations where changes occur in the stock ownership
of a company.  In the event Salon has incurred a change in ownership,
utilization of the carry-forwards could be significantly
restricted.





Temporary
differences and other sources of deferred tax assets that give rise to
significant portions of deferred tax assets and liabilities are as
follows:





March
      31,2008
            
            
            2007Net
      operating losses
            
            $
            25,421
            
            
            $
            24,278Other
            
            
            1,031
            
            
            
            1,177Total
      deferred tax assets
            
            
            26,452
            
            
            
            25,455Valuation
      allowance
            
            
            (26,452
            )
            
            
            (25,455
            )Net
      deferred tax asset
            
            $
            -
            
            
            $
            -





Due to
the uncertainty of realizing the benefits attributable to the aforementioned
deferred tax assets, Salon has provided a valuation allowance against the net
deferred tax assets.  The difference between Salon’s effective income
tax rate and the federal statutory (34%) rate is as follows:





Year
      Ended March 31,2008
            
            
            2007
            
            
            2006Statutory
      tax benefit
            
            $
            (1,177
            )
            
            $
            (633
            )
            
            $
            (735
            )State
      taxes, net of federal benefit
            
            
            (202
            )
            
            
            (109
            )
            
            
            (126
            )Permanent
      differences
            
            
            130
            
            
            
            195
            
            
            
            493Other
            
            
            253
            
            
            
            120
            
            
            
            97Total
            
            
            (996
            )
            
            
            (427
            )
            
            
            (271
            )Change
      in valuation allowance
            
            
            996
            
            
            
            427
            
            
            
            271$
            -
            
            
            $
            -
            
            
            $
            -




56


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Note
11. Preferred Stock




On
November 19, 2007 Salon issued 292 shares of Series D-5 preferred stock and
warrants to purchase a total of 35,040 shares of common stock for which it
received $350 in cash from the father of a Salon director.  The
warrants were issued at an exercise price of $1.840 per share, subject to
adjustment.  The financing was effected in accordance with Amendment
No. 8 to the Securities Purchase Agreement dated as of November 19,
2007.  All shares were sold at a price of $1,200 per
share.  The 292 shares of Series D-5 preferred stock are convertible
into, and have the voting rights of 233,600 shares of common stock, subject to
adjustment.




On
December 18, 2006 Salon issued 42 shares of Series D-4 preferred stock, 125
shares of Series D-5 preferred stock, and warrants to purchase a total of 32,780
shares of common stock for which it received $200 in cash from the Chairman of
Salon.  The warrants were issued at an exercise price of $1.495 per
share, subject to adjustment.  The financing was effected in
accordance with Amendment No. 7 to the Securities Purchase Agreement dated as of
December 18, 2006.  All shares were sold at a price of $1,200 per
share.  The 42 shares of Series D-4 preferred stock and 125 shares of
Series D-5 preferred stock are convertible into, and have the voting rights of
218,537 shares of common stock, subject to adjustment.




On
September 21, 2006 Salon issued 333 shares of Series D-4 preferred stock and
warrants to purchase 701,872 shares of common stock for which it received $400
in cash.  The warrants were issued at an exercise price of $0.115 per
share, subject to adjustment.  The investors included the father of
Salon’s then CEO and President and the Chairman of Salon. The financing was
effected in accordance with Amendment No. 6 to the Securities Purchase Agreement
dated as of September 21, 2006.  All shares were sold at a price of
$1,200 per share.  The 333 shares of Series D-4 preferred stock were
originally convertible into and had the voting rights of 4,679,156 shares of
common stock, subject to adjustment.  On November 15, 2006, Salon
effected a reverse stock split in the ratio of 20:1.  The issuance of
preferred stock on December 18, 2006, triggered anti-dilution provisions of the
securities issued on September 21, 2006.  As a result, and after
considering the effect of the reverse stock split, (1) the warrants to purchase
701,872 shares of common stock at an exercise price of $0.115 per share, were
adjusted to warrants to purchase 35,093 shares of common stock at an exercise
price of $2.275 per share, and (2) the 333 shares of Series D-4 preferred stock
are now convertible into, and have the voting rights of 235,852 shares of common
stock.




On July
27, 2006 Salon issued 208 shares of Series D-3 preferred stock, 42 shares of
Series D-4 preferred stock and issued warrants to purchase 363,879 shares of
common stock for which it received $300 in cash.  The warrants were
issued at an exercise price of $0.161 per share, subject to
adjustment.  The investors included the father of Salon’s then CEO and
President and the Chairman of Salon.  The financing was effected in
accordance with Amendment No. 5 to the Securities Purchase Agreement dated as of
July 27, 2006.  All shares were sold at a price of $1,200 per
share.  The 208 shares of Series D-3 preferred stock were originally
convertible into, and had the voting rights of 2,018,322 shares of common
stock.  The 42 shares of Series D-4 preferred stock were originally
convertible into, and had the voting rights of 407,546 shares of common stock,
subject to adjustment.  On November 15, 2006, Salon effected a reverse
stock split in the ratio of 20:1.  The subsequent issuances of
preferred stock triggered anti-dilution provisions of the securities issued on
July 27, 2006.  As a result, and after considering the effect of the
reverse stock split, (1) the warrants to purchase 363,879 shares of common stock
at an exercise price of $0.161 per share, were adjusted to warrants to purchase
18,193 shares of common stock at an




57


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




exercise
price of $3.148 per share, (2) the 208 shares of Series D-3 preferred stock are
now convertible into, and have the voting rights of 102,677 shares of common
stock, and (3) the 42 shares of Series D-4 preferred stock are now convertible
into, and have the voting rights of 20,732 shares of common stock.




The Certificate of Designation of
Preferences and Rights of the Series D preferred stock stipulates that the
conversion price to common stock be equal to 70% of the average closing price of
Salon’s common stock for the thirty days prior to the date Salon provides notice
to purchasers regarding the sale of shares of Series D preferred
stock.  As a result, (1) the issuance of preferred stock on November
19, 2007 was at an effective common stock per share price of $1.500 compared to
a closing per share stock price on the date of the transaction of $1.600, (2)
the issuance of preferred stock on December 18, 2006 was at an effective common
stock per share price of $0.917 compared to a closing per share stock price on
the date of the transaction of $1.30, (3) the issuance of preferred stock on
September 21, 2006 was at an effective common stock per share price of $1.708
(as adjusted for the reverse stock split) compared to a closing per share stock
price on the date of the transaction of $2.00 (as adjusted for the reverse stock
split), and (4) the issuance of preferred stock on July 27, 2006 was at an
effective common stock per share price of $2.473 (as adjusted for the reverse
stock split) compared to a closing per share stock price on the date of the
transaction of $2.80 (as adjusted for the reverse stock split).  As
the shares of preferred stock were in the money on the commitment dates, Salon
therefore determined that the value of the beneficial conversion feature of the
shares of preferred stock issued was $73 for the shares issued on July 27, 2006,
$113 for the shares issued on September 21, 2006, $109 for the shares issued on
December 18, 2006 and $54 for the shares issued on November 19,
2007.  As the shares of preferred stock were immediately convertible
to shares of common stock, Salon recorded a preferred deemed dividend of $54 for
the year ended March 31, 2008.




During
the year ended March 31, 2006, Salon issued 209 shares of Series D-3 preferred
stock.  All such shares issued were in the money on their respective
commitment dates, and the non-detachable conversion feature was also effective
on the commitment date.  The value of the beneficial conversion
feature was $1,040 for the shares issued during the year ended March 31,
2006.  As the proportional consideration attributable to the shares
issued during the year ended March 31, 2006 was $227 a limiting factor of $813
was applied, and the value of the beneficial conversion feature was therefore
limited to $227 for the year ended March 31, 2006.  As a result, Salon
recorded preferred deemed dividends, representing the value of the beneficial
conversion feature, of $227 for the year ended March 31, 2006.





The
warrants issued have a three year life.  In the event of a change in
control within the exercise period, Salon will give the warrant holders thirty
(30) days advance notice of the effective date of such transaction, and to the
extent the warrants have not been exercised in full by the effective date of
such transaction, the warrants will terminate. The exercise price of the
warrants may be adjusted downward in the event of certain subsequent Salon stock
issuances.




During
the year ended March 31, 2007 and after considering the 20:1 reverse stock split
of November 15, 2006, 62 shares of Series A preferred stock were converted to
124,536 shares of common stock and 63 shares of Series A preferred stock were
converted to 126,545 shares of common stock.  During the year ended
March 31, 2006, one share of Series A preferred stock was converted to 2,008
shares of common stock and 36 shares of Series C preferred stock was converted
to 36,000 shares of common stock.   Salon did not receive any
cash proceeds from these transactions.








58


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Following
the above transactions and the 20:1 reverse stock split of November 15, 2006,
the conversion rate and common equivalent shares of Salon’s preferred stock is
as follows as of March 31, 2008:




Per
      share
            
            
            CommonShares
            
            
            Purchase
            
            
            Conversion
            
            
            EquivalentPreferred
      Stock
            
            Outstanding
            
            
            Price
            
            
            Rate
            
            
            SharesSeries
      A
            
            
            683
            
            
            
            $4,000
            
            
            
            1.959
            
            
            
            1,394,290Series
      B
            
            
            125
            
            
            
            $4,000
            
            
            
            1.588
            
            
            
            314,860Series
      C
            
            
            6,582
            
            
            
            $800
            
            
            
            0.800
            
            
            
            6,582,000Series
      D-1
            
            
            417
            
            
            
            $1,200
            
            
            
            1.836
            
            
            
            272,579Series
      D-2
            
            
            417
            
            
            
            $1,200
            
            
            
            2.156
            
            
            
            232,126Series
      D-3Issued
      on 12/21/05
            
            
            209
            
            
            
            $1,200
            
            
            
            1.836
            
            
            
            136,616Issued
      on 07/27/06
            
            
            208
            
            
            
            $1,200
            
            
            
            2.413
            
            
            
            103,444Series
      D-4Issued
      on 07/27/06
            
            
            42
            
            
            
            $1,200
            
            
            
            2.413
            
            
            
            20,887Issued
      on 09/21/06
            
            
            333
            
            
            
            $1,200
            
            
            
            1.691
            
            
            
            236,277Issued
      on 12/18/06
            
            
            42
            
            
            
            $1,200
            
            
            
            0.917
            
            
            
            54,961Series
      D-5Issued
      on 12/18/06
            
            
            125
            
            
            
            $1,200
            
            
            
            0.917
            
            
            
            163,576Issued
      on 11/19/07
            
            
            292
            
            
            
            $1,200
            
            
            
            1.5000
            
            
            
            233,600Total
            
            
            9,475
            
            
            
            
            
            
            
            
            
            
            
            9,745,216




The
Series A, B, C and D preferred stock conversion rate is subject to a downward
adjustment anti-dilution provision under certain circumstances related to
subsequent Salon stock issuances.




59


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Warrants
outstanding as of March 31, 2008 that have been issued to holders of Series D
preferred stock are as follows:




Exercise
            
            
            WarrantPrice
            
            
            SharesSeries
      D-3Issued
      on 12/21/05
            
            
            $10.173
            
            
            
            20,225Issued
      on 07/27/06
            
            
            $3.115
            
            
            
            15,137Series
      D-4Issued
      on 07/27/06
            
            
            $3.115
            
            
            
            3,056Issued
      on 09/21/06
            
            
            $2.260
            
            
            
            35,093Issued
      on 12/18/06
            
            
            $1.495
            
            
            
            8,244Series
      D-5Issued
      on 12/18/06
            
            
            $1.495
            
            
            
            24,536Issued
      on 11/19/07
            
            
            $1.840
            
            
            
            35,040141,331




The
exercise price of warrants issued in conjunction with the issuance of Series D
are subject to a downward adjustment anti-dilution provision under certain
circumstances related to subsequent Salon warrant issuances.





The holders of the Series D preferred
stock are entitled to dividends of 5.0%, as and if declared by the Board of
Directors.  In event of a liquidation, the holders of Series D
preferred stock and the holders of the Series C preferred stock rank in parity,
and are entitled to receive, prior and in preference to any distribution of any
assets or property of Salon to the holders of common stock, and the holders of
Series A and B preferred stock,  and in the case of the Series D
preferred stock, an amount per share equal to $1,200 plus an amount equal to all
declared but unpaid dividends, and in the case of the Series C preferred stock,
$1,600 per share, plus an amount equal to all declared but unpaid dividends,
based on an annual rate of 8%.  If the assets and funds available for
distribution are insufficient to permit the payment to the holders of Series C
and D preferred stock of their full preferential amounts, then the entire assets
and funds of Salon legally available for distribution to stockholders will be
distributed among the holders of Series C and D preferred stock ratably in
proportion to the full preferential amounts which they are entitled to
receive.  After an initial distribution to the holders of Series C and
D preferred stock, the holders of the Series A and B preferred stock, who rank
in parity, are entitled to receive, prior and in preference to any distribution
of any assets or property of Salon to the holders of common stock, an amount per
share equal to $8,000 plus an amount equal to all declared but unpaid dividends,
based on an annual rate of 8%.  If, after the initial distribution to
holders of Series C and D preferred stock, the remaining assets and funds
available for distribution are insufficient to permit the payment to the holders
of Series A and B preferred stock of the full preferential amounts, then the
entire remaining assets and funds of Salon legally available for distribution to
stockholders will be distributed among the holders of Series A and B preferred
stock ratably in proportion to the full preferential amounts which they are
entitled to receive. As of March 31, 2008, no dividend has been declared to the
holders of preferred stock.





60





SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




If, after
initial preferential liquidation payments to the holders of Series A, B, C and D
preferred stock, any assets remain available for distribution, such assets are
to be distributed ratably among the holders of common stock and preferred stock,
based on the shares of common stock then held by them and issuable upon
conversion of the shares of preferred stock then held by them, until aggregate
distributions per share reach $12,000 for the holders of Series A and B
preferred stock, $2,400 for the holders of Series C Preferred Stock and $3,600
for the holders of Series D preferred stock.  Salon has currently
outstanding 683 shares of Series A preferred stock, 125 shares of Series B
preferred stock, 6,582 shares of Series C preferred stock and 2,085 shares of
Series D preferred stock.





If, after
payment has been made to the holders of common stock and holders of preferred
stock mentioned above, any assets remain available for distribution, such assets
are to be distributed ratably among the holders of common stock and the holders
of Series C preferred stock, based on the number of shares of common stock then
held by them and issuable upon conversion of the Series C preferred stock then
held by them.  Based on available information, Salon estimates that
the holders of Series C preferred stock hold approximately 90% of this group of
shareholders.





The
holders of preferred stock are entitled to vote together with the holders of
Salon’s common stock as though part of that class, and are entitled to vote on
all matters and to that number of votes equal to the largest number of whole
shares of common stock into which the shares of preferred stock could be
converted.  Preferred stockholders as a group own approximately 92% of
the outstanding shares of common stock and common stock issuable upon conversion
of the shares of preferred stock, all with voting rights.





The
aggregate liquidation preferences of all preferred stockholders as of March 31,
2008 were $19,497 excluding the effect of undeclared dividends, and $23,498
including the effect of undeclared dividends.  The aggregate
liquidation preferences of all preferred stockholders as of March 31, 2007 were
$19,147 excluding the effect of undeclared dividends, and $22,344 including the
effect of undeclared dividends.





Neither
the Series A, B, C or D preferred stock, the associated warrants, nor the
underlying shares of common stock have been registered for sale under the
Securities Act of 1933, as amended, and may not be offered or sold in the United
States absent registration under such act or an applicable exemption from
registration requirements.







61


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Note
12. Warrants




During
the year ended March 31, 2008, no warrants were exercised.




During
the year ended March 31, 2007, warrants to acquire 603,642 shares of common
stock were exercised for which Salon received $779 in cash that was used for
working capital and other general corporate purposes, as follows:




Warrant
            
            
            Exercise
            
            
            CashIssue
      Date
            Exercise
      Date
            Warrant
      Holder
            
            Shares
            
            
            Price
      per share
            
            
            Received08/09/01
            06/22/06
            Shea
      Ventures LLC
            
            
            50,000
            
            
            
            $2.188
            
            
            $
            10906/26/03
            06/22/06
            E&M
      RP Trust
            
            
            15,000
            
            
            
            $0.901
            
            
            
            1408/09/01
            07/31/06
            Stewart
      Carrell
            
            
            2,400
            
            
            
            $2.188
            
            
            
            508/09/01
            07/31/06
            Arthur
      Bruno
            
            
            1,200
            
            
            
            $2.188
            
            
            
            308/29/03
            08/29/06
            William
      E Mayer Holdings, Inc.
            
            
            6,000
            
            
            
            $0.690
            
            
            
            402/10/04
            02/05/07
            Shea
      Ventures LLC
            
            
            30,000
            
            
            
            $0.690
            
            
            
            21Total
      non-related parties
            
            
            104,600
            
            
            
            
            
            
            $
            15604/10/03
            04/05/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.834
            
            
            $
            1304/29/03
            04/05/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.901
            
            
            
            1408/09/01
            05/11/06
            Sarah
      & William Hambrecht Foundation
            
            
            30,000
            
            
            
            $2.188
            
            
            
            6606/12/03
            05/11/06
            The
      Hambrecht 1980 Revocable Trust
            
            
            7,500
            
            
            
            $0.901
            
            
            
            706/12/03
            05/11/06
            WR
      Hambrecht + Co LLC
            
            
            7,500
            
            
            
            $0.901
            
            
            
            707/10/03
            05/11/06
            HAMCO
      Capital Corporation
            
            
            7,500
            
            
            
            $0.834
            
            
            
            611/24/03
            05/11/06
            HAMCO
      Capital Corporation
            
            
            7,500
            
            
            
            $0.901
            
            
            
            702/10/04
            05/11/06
            The
      Hambrecht 1980 Revocable Trust
            
            
            15,000
            
            
            
            $0.690
            
            
            
            1006/04/04
            05/11/06
            HAMCO
      Capital Corporation
            
            
            4,064
            
            
            
            $2.748
            
            
            
            1106/04/04
            05/11/06
            The
      Hambrecht 1980 Revocable Trust
            
            
            14,129
            
            
            
            $2.748
            
            
            
            3902/02/05
            05/11/06
            HAMCO
      Capital Corporation
            
            
            1,718
            
            
            
            $3.220
            
            
            
            602/02/05
            05/11/06
            The
      Hambrecht 1980 Revocable Trust
            
            
            15,381
            
            
            
            $3.220
            
            
            
            5005/28/03
            05/12/06
            John
      Warnock
            
            
            45,000
            
            
            
            $0.901
            
            
            
            4107/10/03
            05/12/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.833
            
            
            
            1207/30/03
            05/12/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.690
            
            
            
            1008/29/03
            05/12/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.690
            
            
            
            1009/12/03
            05/12/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.901
            
            
            
            1309/29/03
            05/12/06
            John
      Warnock
            
            
            15,000
            
            
            
            $1.036
            
            
            
            1610/10/03
            05/12/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.901
            
            
            
            1310/30/03
            05/12/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.901
            
            
            
            1311/12/03
            05/12/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.969
            
            
            
            1511/24/03
            05/12/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.901
            
            
            
            1312/11/03
            05/12/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.901
            
            
            
            1312/30/03
            05/12/06
            John
      Warnock
            
            
            75,000
            
            
            
            $0.690
            
            
            
            5212/31/03
            05/12/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.690
            
            
            
            1008/09/01
            06/29/06
            John
      Warnock
            
            
            50,000
            
            
            
            $2.188
            
            
            
            10908/09/01
            08/08/06
            WR
      Hambrecht + Co LLC
            
            
            20,000
            
            
            
            $2.188
            
            
            
            4408/29/03
            08/29/06
            Eu
      Revocable Trust
            
            
            3,750
            
            
            
            $0.690
            
            
            
            3Total
      related parties
            
            
            499,042
            
            
            
            
            
            
            $
            623Total
      exercised
            
            
            603,642
            
            
            
            
            
            
            $
            779





62


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




The
related parties include:




1.
            John
      Warnock, the Chairman and Director of Salon.2.
            Salon’s
      former CEO and President has an ownership interest in WR Hambrecht + Co.
      LLC.  In addition, the Chairman and CEO of WR Hambrecht + Co LLC
      is the father of Salon’s former CEO and
  President.


3.
            The
      Hambrecht 1980 Revocable Trust, a trust of the father of Salon’s former
      CEO and President.


4.
            Sarah
      & William Hambrecht Foundation for which Salon’s former CEO and
      President serves as a Director and has voting
  rights.


5.
            HAMCO
      Capital Corporation, in which Salon’s former CEO and President, and her
      father, each has an ownership interest
therein.


6.
            The
      Eu Revocable Trust is for the benefit of Salon’s former CEO and
      President.




During
the year ended March 31, 2007, warrants for 371,800 shares of common stock were
converted to 126,462 shares of common stock for which Salon did not receive any
consideration under the net exercise provisions of the warrants, as
follows:





ExerciseIssue
      Date
            Exercise
      Date
            Warrant
      Holder
            
            Warrant
      Shares
            
            
            Price
      per share
            
            
            Converted
      Shares07/10/03
            06/05/06
            Octavia,
      LLC
            
            
            14,700
            
            
            
            $0.834
            
            
            
            11,09608/09/01
            07/31/06
            Alacrity
      Tertiare LLC
            
            
            10,000
            
            
            
            $2.188
            
            
            
            3,16108/09/01
            07/31/06
            Thomas
      Dittmer Declaration Trust
            
            
            24,800
            
            
            
            $2.188
            
            
            
            7,84008/09/01
            08/08/06
            Constellation
      Venture Offshore
            
            
            4,400
            
            
            
            $2.188
            
            
            
            1,39008/09/01
            08/08/06
            Constellation
      Venture
            
            
            20,800
            
            
            
            $2.188
            
            
            
            6,57509/13/01
            08/30/06
            Octavia,
      LLC
            
            
            24,800
            
            
            
            $2.188
            
            
            
            6,70909/13/01
            08/31/06
            HVS
      Boxers, LLC
            
            
            24,800
            
            
            
            $2.188
            
            
            
            6,70909/13/01
            09/05/06
            Wasserstein
      Adelson Ventures
            
            
            25,200
            
            
            
            $2.188
            
            
            
            6,81712/10/03
            12/06/06
            Wenner
      Media LLC
            
            
            130,000
            
            
            
            $0.901
            
            
            
            18,424Total
      non-related parties
            
            
            279,500
            
            
            
            
            
            
            
            68,72104/10/03
            04/04/06
            Ironstone
      Group, Inc
            
            
            15,000
            
            
            
            $0.834
            
            
            
            12,76604/29/03
            04/25/06
            Ironstone
      Group, Inc
            
            
            15,000
            
            
            
            $0.901
            
            
            
            12,18310/06/03
            05/11/06
            Ironstone
      Group, Inc
            
            
            15,000
            
            
            
            $1.036
            
            
            
            10,90910/30/03
            05/11/06
            Ironstone
      Group, Inc
            
            
            7,500
            
            
            
            $0.901
            
            
            
            5,72108/09/01
            08/09/06
            McKay
      Investment Group
            
            
            24,800
            
            
            
            $2.188
            
            
            
            7,84002/10/04
            02/07/07
            WR
      Hambrecht + Co Inc.
            
            
            15,000
            
            
            
            $0.690
            
            
            
            8,322Total
      related parties
            
            
            92,300
            
            
            
            
            
            
            
            57,741Total
      converted
            
            
            371,800
            
            
            
            
            
            
            
            126,462




63


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)







The
related parties include:


1.
            William
      Hambrecht, the father of Salon’s former CEO and President, has an
      ownership interest in Ironstone Group,
Inc.


2.
            Salon’s
      former CEO and President has an ownership interest in WR Hambrecht + Co.
      Inc.  In addition, the Chairman and CEO of WR Hambrecht + Co
      Inc. is the father of Salon’s former CEO and
  President.


3.
            Robert
      McKay, a Director of Salon, is the managing partner of the McKay
      Investment Group.





The
related parties in the prior table exclude Wenner Media LLC.  Jann
Wenner, the Chairman and President of Wenner Media LLC, served as a Director of
Salon until February 2006.





During
the year ended March 31, 2006, warrants to acquire 63,723 shares of common stock
were exercised for which Salon received $65 in cash that was used for working
capital and other general corporate purposes, as follows:





ExerciseIssue
      Date
            Exercise
      Date
            Warrant
      Holder
            
            Warrant
      Shares
            
            
            Price
      per share
            
            
            Cash
      Received07/24/02
            05/17/05
            Arthur
      Bruno
            
            
            80
            
            
            
            $1.796
            
            
            $
            -07/24/02
            05/17/05
            Brian
      Dougherty
            
            
            1,250
            
            
            
            $1.796
            
            
            
            212/18/02
            11/28/05
            Shea
      Ventures LLC
            
            
            15,000
            
            
            
            $0.901
            
            
            
            13Total
      non-related parties
            
            
            16,330
            
            
            
            
            
            
            $
            1507/24/02
            05/24/05
            John
      Warnock
            
            
            4,967
            
            
            
            $1.796
            
            
            $
            907/24/02
            07/20/05
            Elaine
      McKay Family Partnership
            
            
            2,921
            
            
            
            $1.796
            
            
            
            507/24/02
            07/22/05
            Sarah
      & William Hambrecht Foundation
            
            
            2,005
            
            
            
            $1.796
            
            
            
            301/26/03
            01/23/06
            John
      Warnock
            
            
            7,500
            
            
            
            $0.901
            
            
            
            703/18/03
            01/23/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.834
            
            
            
            1303/25/03
            01/23/06
            John
      Warnock
            
            
            15,000
            
            
            
            $0.834
            
            
            
            13Total
      related parties
            
            
            47,393
            
            
            
            
            
            
            $
            50Total
      exercised
            
            
            63,723
            
            
            
            
            
            
            $
            65





The
related parties include:






1.
            John
      Warnock, the Chairman and Director of Salon.2.
            Robert
      McKay, a Director of Salon, is the managing partner of the Elaine McKay
      Family Partnership.3.
            Sarah
      & William Hambrecht Foundation for which Salon’s former CEO and
      President serves as a Director and has voting
  rights.





64


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




During
the year ended March 31, 2006, warrants for 111,375 shares of common stock were
converted to 80,179 shares of common stock for which Salon did not receive any
consideration under the net exercise provisions of the warrants, as
follows:




ExerciseIssue
      Date
            Exercise
      Date
            Warrant
      Holder
            
            Warrant
      Shares
            
            
            Price
      per share
            
            
            Converted
      Shares07/24/02
            04/06/05
            Octavia,
      LLC
            
            
            1,671
            
            
            
            $1.796
            
            
            
            1,09308/09/01
            05/12/05
            Timken
      Living Trust
            
            
            10,000
            
            
            
            $2.188
            
            
            
            5,62307/24/02
            05/12/05
            Timken
      Living Trust
            
            
            668
            
            
            
            $1.796
            
            
            
            42807/24/02
            05/12/05
            J.
      F. Shea Inc.
            
            
            3,342
            
            
            
            $1.796
            
            
            
            2,14107/24/02
            06/06/05
            Richard
      Jeffrey
            
            
            26
            
            
            
            $1.796
            
            
            
            1407/24/02
            07/19/05
            Alicrity
      Management
            
            
            668
            
            
            
            $1.796
            
            
            
            35210/08/03
            10/07/05
            Michael
      O’Donnell
            
            
            50,000
            
            
            
            $1.000
            
            
            
            32,142Total
      non-related parties
            
            
            66,375
            
            
            
            
            
            
            
            41,79302/11/03
            02/07/06
            Ironstone
      Group, Inc
            
            
            15,000
            
            
            
            $0.901
            
            
            
            13,12203/12/03
            03/07/06
            Ironstone
      Group, Inc
            
            
            15,000
            
            
            
            $0.834
            
            
            
            12,76603/25/03
            03/20/06
            Ironstone
      Group, Inc
            
            
            15,000
            
            
            
            $0.834
            
            
            
            12,498Total
      related parties
            
            
            45,000
            
            
            
            
            
            
            
            38,386Total
      converted
            
            
            111,375
            
            
            
            
            
            
            
            80,179




William
Hambrecht, the father of Salon’s former CEO and President, has an ownership
interest in Ironstone Group, Inc.  The related party total excludes
Michael O’Donnell who served as CEO and President of Salon until October
2005.





Following
the above transactions, and after considering warrants issued in conjunction
with the issuance of preferred stock (see Footnote No.11) and expired warrants,
Salon has warrants to purchase 152,171 shares of common stock outstanding as of
March 31, 2008, as follows:




Warrant
            
            
            Exercise
            
            Grant
            ExpirationWarrant
      Holder
            
            Shares
            
            
            Price
            
            Date
            DateDotcom
      Ventures
            
            
            1,568
            
            
            
            $10.400
            
            09/01/98
            09/01/08Adobe
      Systems, Inc.
            
            
            7,058
            
            
            
            $10.400
            
            09/23/98
            09/23/08Nancy
      and Timothy Armstrong
            
            
            20,225
            
            
            
            $10.173
            
            12/21/05
            12/21/08The
      Hambrecht 1980 Revocable Trust
            
            
            9,097
            
            
            
            $3.115
            
            07/27/06
            07/27/09John
      Warnock
            
            
            6,040
            
            
            
            $3.115
            
            07/27/06
            07/27/09John
      Warnock
            
            
            3,056
            
            
            
            $3.115
            
            07/27/06
            07/27/09The
      Hambrecht 1980 Revocable Trust
            
            
            17,599
            
            
            
            $2.260
            
            09/21/06
            09/21/09John
      Warnock
            
            
            17,494
            
            
            
            $2.260
            
            09/21/06
            09/21/09Silicon
      Valley Bank
            
            
            2,214
            
            
            
            $0.862
            
            10/17/02
            10/17/09John
      Warnock
            
            
            8,244
            
            
            
            $1.495
            
            12/18/06
            12/18/09John
      Warnock
            
            
            24,536
            
            
            
            $1.495
            
            12/18/06
            12/18/09The
      Hambrecht 1980 Revocable Trust
            
            
            35,040
            
            
            
            $1.840
            
            11/19/07
            11/19/10152,171




65


SALON
MEDIA GROUP, INC.


NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS


(amounts
in thousands, except share and per share data)




Note
13. Subsequent Events





On April
4, 2008, Salon sold and issued to its Chairman and the father of a director
each a convertible promissory note with a principal amount of $500 as part of a
series of financing transactions in which Salon has generated gross proceeds of
approximately $1,500.  Each note bears an interest rate of 7.50
percent per annum, payable semi-annually, in cash or in kind, and matures on
March 31, 2012.  Each note may convert at the election of the holder
at any time into a number of shares of the company’s common stock equal to the
aggregate amount of the note obligations divided by (1) $1.68 or (2) the
subsequent closing price if the holder participated in a subsequent
closing.





On May
15, 2008, Salon sold and issued to an investor a convertible promissory note
with a principal amount of $500 as part of a above-referenced financing
transaction.  The note bears an interest rate of 7.50 percent per
annum, payable semi-annually, in cash or in kind, and matures on March 31,
2012.  The note may convert at the election of the holder at any time
into a number of shares of the company’s common stock equal to the aggregate
amount of the note obligations divided by $1.45.





In the
event Salon, at any time prior to the payment in full of the notes, or
conversion thereof, shall (a) issue and sell shares of its common or preferred
stock or an instrument convertible into its common or preferred stock or (b)
issue and sell debentures or enter into any new indebtedness, then the holders
of the first $1,000 in principal of the notes may choose to exchange the
outstanding principal balance and accrued interest due under the notes for new
securities issued on the same terms and conditions of the
financing.  If Salon completes a financing in excess of $500, then
this right of exchange will terminate 30 days following notice of such financing
being given to the holders.







66


Selected
      Quarterly Financial Data (unaudited)(in
      thousands, except per share data)First
            
            
            Second
            
            
            Third
            
            
            FourthQuarter
            
            
            Quarter
            
            
            Quarter
            
            
            Quarter2008:Net
      revenue
            
            $
            1,974
            
            
            $
            2,132
            
            
            $
            2,190
            
            
            $
            1,217Net
      loss attributable tocommon
      stockholders
            
            
            (996
            )
            
            
            (308
            )
            
            
            (616
            )
            
            
            (1,544
            )Basic
      and diluted net loss per shareattributable
      to common stockholders
            
            
            (0.51
            )
            
            
            (0.16
            )
            
            
            (0.32
            )
            
            
            (0.80
            )Basic
      and diluted shares used in per share calculation
            
            
            1,940
            
            
            
            1,940
            
            
            
            1,940
            
            
            
            1,9402007:Net
      revenue
            
            $
            1,545
            
            
            $
            1,884
            
            
            $
            2,765
            
            
            $
            1,554Net
      profit (loss) attributable to common stockholders
            
            
            (525
            )
            
            
            (535
            )
            
            
            197
            
            
            
            (998
            )Basic
      net profit (loss) per shareattributable
      to common stockholders
            
            
            (0.42
            )
            
            
            (0.31
            )
            
            
            0.10
            
            
            
            (0.52
            )Diluted
      net profit (loss) per shareattributable
      to common stockholders
            
            
            (0.42
            )
            
            
            (0.31
            )
            
            
            0.02
            
            
            
            (0.52
            )Shares
      used in per share calculationBasic
            
            
            1,238
            
            
            
            1,719
            
            
            
            1,888
            
            
            
            1,924Diluted
            
            
            1,238
            
            
            
            1,719
            
            
            
            11,243
            
            
            
            1,924





67


ITEM
9.  Changes in and Disagreements with Accountants on Accounting and
Financial Disclosures





None.





ITEM
9A.  Controls and Procedures





Disclosure
Controls and Procedures





Our
management, with the participation of our Chief Executive Officer and Chief
Financial Officer, conducted an evaluation of the effectiveness of our
disclosure controls and procedures as of the end of the period covered by this
Annual Report (March 31, 2008), as is defined in
Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended. Our disclosure controls and procedures are intended to ensure that
the information we are required to disclose in the reports that we file or
submit under the Securities Exchange Act of 1934 is (i) recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms and
(ii) accumulated and communicated to our management, including the Chief
Executive Officer and Chief Financial Officer, as the principal executive and
financial officers, respectively, to allow timely decisions regarding required
disclosures.





Based on
that evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that, as of the end of the period covered by this Annual Report, our
disclosure controls and procedures were effective.





Our
management has concluded that the financial statements included in this
Form 10-K present fairly, in all material respects our financial position,
results of operations and cash flows for the periods presented in conformity
with generally accepted accounting principles.





It should
be noted that any system of controls, however well designed and operated, can
provide only reasonable, and not absolute, assurance that the objectives of the
system will be met. In addition, the design of any control system is based in
part upon certain assumptions about the likelihood of future
events.





Management’s
Annual Report on Internal Control Over Financial Reporting





Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as defined in Exchange Act Rule 13a-15(f). Our
internal control over financial reporting is designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation
of consolidated financial statements for external purposes in accordance with
generally accepted accounting principles.





Under the
supervision and with the participation of our management, including our Chief
Executive Officer and Chief Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting based on the
guidelines as set forth in Securities and Exchange Commission Release no.
33-8810, Commission Guidance Regarding Management’s Report on Internal Control
Over Financial Reporting Under Section 13(a) or 15(d) of the Securities Exchange
Act of 1934. Based on our evaluation, our management concluded that our internal
control over financial reporting was effective as of March 31,
2008.





This
annual report does not include an audit or attestation report of our registered
public accounting firm regarding our internal control over financial reporting.
Our management’s report was not subject to audit or attestation by our
registered public accounting firm pursuant to temporary rules of the SEC that
permit us to provide only management’s report in this annual
report.





68


Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. It should be noted that any system of controls,
however well designed and operated, can provide only reasonable, and not
absolute, assurance that the objectives of the system will be met. In addition,
the design of any control system is based in part upon certain assumptions about
the likelihood of future events. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.




Changes
in Internal Control Over Financial Reporting





During
the most recent fiscal quarter, there have not been any significant changes in
our internal controls over financial reporting or in other factors that have
materially affected, or are reasonably likely to materially affect, our internal
controls over financial reporting.





ITEM
9B.  Other Information





None.








69


PART
III





ITEM
10.   Directors and Executive Officers of the
Registrant





Salon’s executive officers and
directors as of March 31, 2008 are as follows:





Name
            
            Age
            
            PositionChristopher
      Neimeth
            
            38
            
            Chief
      Executive Officer, DirectorNorman
      Blashka
            
            54
            
            Executive
      Vice President and Chief Financial OfficerJoan
      Walsh
            
            49
            
            Editor-in-ChiefDeepak
      Desai (1,4,6)
            
            49
            
            DirectorRobert
      Ellis (2,4)
            
            72
            
            DirectorElizabeth  Hambrecht(3)
            
            45
            
            DirectorGeorge
      Hirsch(1,4)
            
            73
            
            DirectorRobert
      McKay(3)
            
            44
            
            DirectorJames
      Rosenfield (3,5)
            
            79
            
            DirectorDavid
      Talbot(2,7)
            
            56
            
            DirectorJohn
      Warnock(1,5,7)
            
            67
            
            Chairman
      of the Board, Director





(1)
            Class
      I director whose term expires at the 2008 Annual Meeting of
      Stockholders


(2)
            Class
      II director whose term expires at the 2009 Annual Meeting of
      Stockholders


(3)
            Class
      III director whose term expires at the next Annual Meeting of
      Stockholders


(4)
            Member
      of Audit Committee


(5)
            Member
      of Compensation Committee


(6)
            Audit
      Committee financial expert


(7)
            David
      Talbot served as Chairman of the Board until December 2006, where upon
      John Warnock was appointed Chairman of the
Board




Christopher Neimeth was
appointed Senior Vice President – Publisher in June 2006 and became Chief
Executive Officer and a Director in September 2007.  Prior to joining
Salon, he served as President, IAC Partner Marketing from August 2004 through
October 2005 of InterActive Corporation.  From March 2001 through
August 2004 he served as Executive Vice President, National Sales of
Ticketmaster, a wholly owned subsidiary of InterActive
Corporation.  From December 1999 through December 2000 he served as
President and Chief Executive Officer of Real Media, Inc.  From
September 1999 through November 1999 he served as Senior Vice President,
Business Development and Strategic Planning and from September 1995 through
September 1999 he served as Group Vice President of The New York Times
Digital.  Mr. Neimeth holds a Bachelor of Arts degree in Anthropology
from Hamilton College.





Norman Blashkawas appointed
Executive Vice President and Chief Financial Officer of Salon in January 2008.
From May 2006 through December 2007, he served as Chief Financial Officer of
Vizible Corp., an internet software and social networking company. From January
2005 to April 2006, he served as Chief Financial Officer of Operative Media,
Inc., an online advertising operations and software company. From January 2004
through December 2005, he served as a financial advisor to a number of internet
companies. From October 2001 to January 2004, he served as Executive Vice
President and Chief Financial Officer of 24/7 Real Media, Inc., a global digital
marketing and technology company. From September 1999 until its acquisition in
October 2001, he served as Senior Vice President, Chief Financial Officer and
Secretary of Real Media, Inc.  Prior thereto, he served in a variety
of senior financial and operating positions with both start-ups and established
media companies. Mr. Blashka is a Certified Public Accountant, earned an MBA in
finance and accounting from Columbia University, and holds a BA in economics,
summa cum laude, from
SUNY New Paltz, where he currently sits on the Board of Trustees and chairs its
audit committee.





70





Joan Walsh was appointed
Editor-in-Chief in February 2005.  From November 2004 through February
2005, she held the position of Senior Vice President – Editorial
Operations.  From November 2003 to November 2004, she served as Vice
President Co-Managing Editor.  From October 1999 to November 2003, she
served as Vice President of News.  Ms. Walsh served as Salon’s News
Editor from October 1998 to October 1999.  Prior to joining Salon, Ms.
Walsh was a freelance writer for approximately ten years and was a consultant to
national and regional foundations including the Rockefeller Foundation, the
Annie E Casey Foundation and the James Irvine Foundation.  Ms. Walsh
is currently a Board member of PolicyLink, a research and advocacy
group.  Ms. Walsh holds a Bachelor of Arts in History from the
University of Wisconsin.





Deepak Desai has served as a
Director of Salon since September 2004.   He joined GlobalEnglish
Corporation in June 2002 as its Chief Financial Officer and in December 2005 was
appointed its President and Chief Executive Officer.  From December 2001 to
May 2002, Mr. Desai was the interim Chief Financial Officer for Pointcross,
Inc., and from July 2001 to October 2001, he was the interim Co-Chief Executive
Officer of Yesasia.com Ltd.  From August 1999 to June 2001, Mr. Desai was
the Chief Financial Officer of Asiacontent.com Ltd.  From July 1987 to July
1999, Mr. Desai held various positions with Time Warner, Inc., including General
Manager and Chief Financial Officer with Time Life Asia, Associate Business
Manager, Financial Manager and Assistant Business Manager with Time Inc. and
Senior Auditor with Time Warner Inc.  Mr. Desai is a Certified Public
Accountant, received a Bachelor of Commerce in Accounting from the University of
Bombay, India and an M.B.A. with a Finance emphasis from the Wharton School of
Business of the University of Pennsylvania.





Robert Ellis has served as a
Director of Salon since August 2001.  He is an advisor, investor, and
director of Internet companies.He currently
serves on the board of VerticalResponse.com  From 1997 through 1999,
he was the publisher, board member and early investor of XOOM.com (XMCM) that
was merged with the National Broadcasting Company, Inc.’s Internet properties.
He formerly served as President of eNature.com, a nature content site on the
web.   In 1996, he founded and produced Bonjour Paris, a travel
destination site in France featured on America Online.  Prior to that,
he founded and owned Compact Publishing, for which he developed the Time Almanac with Time
Magazine.  He formerly was a correspondent for Time
Magazine.  Mr. Ellis holds an M.A. degree in History from the
University of Chicago and a B. A. in Philosophy from Yale
University.





Elizabeth Hambrechthas
served as a Director of Salon since 2003.  She also served as Salon’s
Chief Executive Officer from February 2005 until September 2007 and was Salon’s
President from October 2003 until September 2007. From May 2003 through February
2005 she also served as Salon’s Chief Financial Officer and
Secretary.  From 1999 to March 2003, she was co-founder and Director
of Asiacontent.com, an online media company focused on Asian markets. From 1997
to 2000 she was co-founder, Chief Financial Officer and Director of Boom.com, a
Hong Kong-based online stock trading company.  From 1992 to 1995 she
was Executive Director at Goldman Sachs (Hong Kong) Ltd.  From 1987 to
1992 she was Assistant Director at Barings Securities (Hong Kong)
Ltd.  Ms. Hambrecht holds a Bachelor of Arts degree in History from
Vassar College.  She sits on the Board of Trustees of the San
Francisco Friends School, and Northern California Public Broadcasting, a public
broadcast company for Northern California.





71


George Hirsch has served as a
Director of Salon since April 2003.  Mr. Hirsch is the Chairman of the
Board of the U.S. subsidiary of La Cucina Italiana magazine.  From
1978 to 1987, he was the founding publisher and president of The Runner magazine
at which time it was merged into Runner's World.  From 1987 until his
retirement in 2004, he held various positions with Rodale, Inc., including
Worldwide Publisher of Runner’s World, Publishing Director of Men’s Health, and
Director of International Magazines.   In 1973, he was founding
publisher of New Times magazine and served as its President through
1979.  In 1967, he was the founding publisher of New York magazine and
served as its President through 1971.  From 1962 through 1967, he held
various positions with Time Inc.  Mr. Hirsch holds a Masters in
Business Administration from the Harvard University and a B.A. in History from
Princeton University. He is the Chairman of the Board of the New York City
Marathon (New York Roadrunners.)





Robert McKay has served as a
Director of Salon since August 2001.  He has served as the President
of the McKay Family Foundation since its inception in 1992, which supports
community-based activist organizations working for long-term social and economic
change.  Mr. McKay is also the Managing Partner for the McKay
Investment Group, which provides venture capital for early-stage technology and
consumer product companies.  He also serves as a Board member of Ms.
Foundation for Women and Mother Jones.  Mr. McKay received his B.A.
degree in Political Science and Sociology from Occidental College, and his M.A.
in Social and Public Policy from the University of California,
Berkeley.





James H. Rosenfield has
served as a Director of Salon since April 1998.  Mr. Rosenfield
has been the President of JHR & Associates, a media-consulting firm,
since 1998.  From 1994 to 1998, Mr. Rosenfield was Managing
Director at the investment-banking firm of Veronis Suhler &
Associates.  From 1987 to 1994, he was Chairman and Chief Executive
Officer of John Blair Communications, Inc., a television sales and syndication
company.  From 1965 to 1985, Mr. Rosenfield held various
executive positions at CBS Corporation, a television broadcasting and media
company, including Executive Vice President of the Broadcast Group.
Mr. Rosenfield holds a B.A. degree in English from Dartmouth
College.




David Talbotfounded Salon in
1995.  He served as Chief Executive Officer from 1995 through April
1999 and again from October 2003 through February 2005.  He was the
Chairman of the Board from April 1999 through December 2006.  He
served as Editor-in-Chief from Salon’s incorporation in 1995 through February
2005.  From 1990 to 1995, Mr. Talbot was the Sunday magazine
editor and arts & features editor for the San Francisco Examiner
newspaper.Mr. Talbot
is the author of the New York Times best-seller, "Brothers: The Hidden History
of the Kennedy Years," recently published by Free Press/Simon & Schuster.
Mr. Talbot has written for numerous publications including Time, The New
Yorker and Rolling Stone. In July 2007, Mr. Talbot will join Fenton
Communications as a Senior Vice President.  Mr. Talbot holds a
Bachelor of Arts degree in Sociology from the University of California at Santa
Cruz.





John Warnock has served as a
Director of Salon since August 2001 and was appointed Chairman of the Board in
December 2006.  He was a founder of Adobe Systems and has been its
Chairman of the Board since April 1989. Since September 1997, he has shared the
position of Adobe Chairman of the Board with Charles M. Geschke. Dr. Warnock
served as Chief Executive Officer of Adobe from 1982 through December
2000.  Dr. Warnock received a Ph.D. in Electrical Engineering from the
University of Utah.  Mr. Warnock served as a Director for Knight
Ridder, Inc., a publisher of news and information in digital and hard copy
formats, until its sale in June 2006.





72


Code
of Conduct




Salon has
adopted a Code of Conduct and Policy Regarding Reporting of Possible Violations
(the “Code of Conduct”).  The Code of Conduct can be found at Salon’s
Website at www.salon.com under
the caption “About Salon.”





Section
16(a) Beneficial Ownership Reporting Compliance




Section 16(a)
of the Securities Exchange Act of 1934 requires the Company’s executive
officers, directors and persons who beneficially own more than 10% of the
Company’s Common Stock to file initial reports of ownership and reports of
changes in ownership with the Securities and Exchange Commission
(“SEC”).  Such persons are required by SEC regulations to furnish the
Company with copies of all Section 16(a) forms filed by such
persons.




Based
solely on Salon’s review of such forms furnished to us and written
representations from certain reporting persons, we believe that all filing
requirements applicable to our executive officers, directors and more than 10%
stockholders were complied with.


73


ITEM
11.  Executive Compensation




Executive
Compensation




The
following table shows, for the fiscal year ended March 31, 2008, the
compensation of Salon’s (i) principal executive officer; (ii) principal
financial officer; and (iii) the three most highly compensated executive
officers other than our principal executive officer and principal financial
officer who were serving as executive officers during the year ended March 31,
2008, collectively the “Named Executive Officers”:




Summary
Compensation Table




Non-EquityOption
            
            Incentive
      PlanName
      and Principal Position
            
            Year
            
            Salary
      ($)
            
            Bonus
      ($)
            
            Awards
      ($) (1)
            
            Compensation
      ($)
            
            Total
      ($)Christopher
      Neimeth (2)
            
            2008
            
            218,419
            
            -
            
            175,868
            
            67,718
            
            462,005Chief
      Executive OfficerNorman
      Blashka (3)
            
            2008
            
            50,769
            
            -
            
            15,714
            
            -
            
            66,483Executive
      Vice President and Chief Financial OfficerJoan
      Walsh (4)
            
            2008
            
            200,000
            
            -
            
            29,772
            
            -
            
            229,772Editor-in-ChiefElizabeth
      Hambrecht (5)
            
            2008
            
            77,917
            
            -
            
            17,938
            
            -
            
            95,855Former
      President and Chief Executive OfficerConrad
      Lowry (6)
            
            2008
            
            166,990
            
            -
            
            13,953
            
            -
            
            180,943Former
      Chief Financial Officer and SecretaryHarvey
      Gamm (7)
            
            2008
            
            107,827
            
            -
            
            2,072
            
            1,000
            
            110,899Former
      Senior Vice President - Sales





(1)
            The
      amounts shown are the compensation costs recognized by Salon in fiscal
      year 2008 for option and restricted stock awards, as determined pursuant
      to Statement of Financial Accounting Standards No. 123 (revised 2004),
      Share-Based
      Payments (“SFAS 123R”), excluding any estimates of future
      forfeitures.  These compensation costs reflect option and
      restricted stock awards made in fiscal year 2008.  For a
      discussion of the assumptions used to calculate the value of the option
      awards, see Note 2 of the Notes to the Consolidated Financial
      Statements.


(2)
            Mr.
      Neimeth began employment with Salon on June 6, 2006 as Senior Vice
      President – Publisher at a base annual salary of $200,000 and became Chief
      Executive Officer in September 2007 with a base annual salary of
      $230,000.  As part of his employment terms, Mr. Neimeth was
      granted 250,000 shares of restricted stock on December 6, 2007 with 25%
      percent vesting on September 13, 2008 and 25% on a subsequent annual
      basis.  The non-equity incentive plan compensation amount
      reflects amount earned on attaining targeted  revenue goals for
      the fiscal year.


(3)
            Mr.
      Blashka was appointed Executive Vice President and Chief Financial Officer
      in January 2008 at a base annual salary of
  $200,000.


(4)
            Due
      to insufficient liquidity, no bonus or non-equity incentive plans were
      established for Ms. Walsh during the
year.




74


(5)
            Ms.
      Hambrecht served as Chief Executive Officer from February 2005 until
      September 2007 and was Salon’s President from October 2003 until September
      2007.  Her base annual salary during fiscal 2008 was
      $170,000.  Ms. Hambrecht continues to serve as a company
      director.  Since October 2007, she has earned fees at the rate
      of $130,000 per annum.


(6)
            Mr.
      Lowry served as Chief Financial Officer and Secretary from February 2005
      to February 2008.  His base salary was $140,000.  The
      salary amount includes payments paid upon his termination totaling
      $48,760.


(7)
            Mr.
      Gamm served as Senior Vice President – Sales from February 2007 to October
      2007 at a base annual salary of $150,000.  The salary amount
      includes payments paid upon his termination totaling
      $26,000.  The non-equity incentive plan compensation amount
      reflects commissions paid during the fiscal
  year.




Grants
of Plan-Based Awards in Fiscal 2008




The
following table presents information on equity awards granted during the 2008
fiscal year:





GRANTS
OF PLAN BASED AWARDS




All
      OtherOption
      Awards:
            
            
            
            Grant
      DateNumber
      of
            
            Exercise
      or
            
            Fair
      ValueEstimated
      Future Payouts Under
            
            Securities
            
            Base
      Price
            
            of
      StockGrant
            
            Equity
      Incentive Plan Awards (3)
            
            Underlying
            
            of
      Option
            
            and
      OptionName
            Date
            
            Threshold
            
            Target
            
            Maximum
            
            Options
      (1)
            
            Awards
      (2)
            
            AwardsChristopher
      Neimeth (3)
            12/6/2007
            
            
            
            
            
            
            
            250,000
            
            $1.60
            
            $400,000Norman
      Blashka (4)
            1/7/2008
            
            
            
            
            
            
            
            365,781
            
            $1.60
            
            $424,306Elizabeth
      Hambrecht
            6/28/2007
            
            
            
            
            
            
            
            70,000
            
            $1.36
            
            $74,060Conrad
      Lowry
            6/28/2007
            
            
            
            
            
            
            
            70,000
            
            $1.36
            
            $74,060





(1)
            Restricted
      stocks awarded to Mr. Neimeth on December 6, 2007 included 250,000 shares
      pursuant to the Salon Media Group, Inc. 2004 Stock Plan.  The
      options awarded the other Named Executives were incentive stock
      options.




(2)
            The
      exercise price per share of each restricted stock and option was equal to
      the fair market value of Salon’s common stock on the date of
      grant.




(3)
            Mr.
      Neimeth’s employment agreement stipulated that he would be eligible to
      receive 250,000 shares of restricted stock during his employment with
      Salon if mutually agreed goals were
attained.




(4)
            Mr.
      Blashka’s option awards on January 7, 2008 include 73,156 shares that will
      vest in their entirety upon achievement of “positive operating cash flow”
      for any trailing four fiscal
quarters.




Profit
Sharing Retirement Plan and 401(k) Savings Plan




Salon has made no contributions to its
profit sharing plan nor matched employee contributions to its 401(k) plan since
its inception.




75


Outstanding
Equity Awards at Fiscal 2008 Year-End




The
following table sets forth the outstanding equity awards for each Named
Executive Officer as of March 31, 2008.




OUTSTANDING
EQUITY AWARDS AT FISCAL YEAR END




Option
      AwardsEquity
      IncentiveNumber
      of
            
            Number
      of
            
            Plan
      Awards:Securities
            
            Securities
            
            Number
      ofUnderlying
            
            Underlying
            
            SecuritiesUnexercised
            
            Unexercised
            
            Underlying
            
            Option
            
            OptionOptions
            
            Options
            
            Unexercised
            
            Exercise
            
            ExpirationName
            
            Exercisable
            
            Unexercisable
            
            Unearned  Options
            
            Price
      ($)
            
            DateChristopher
      Neimeth
            
            87,500
            
            (2)
            112,500
            
            
            
            3.20
            
            6/6/201621,875
            
            (3)
            28,125
            
            
            
            3.20
            
            6/6/20167,812
            
            (1)
            17,188
            
            
            
            1.05
            
            12/7/2016Norman
      Blashka
            
            
            
            (4)
            365,781
            
            
            
            1.60
            
            1/7/2018Joan
      Walsh
            
            500
            
            
            
            
            
            
            10.40
            
            9/24/20081,000
            
            
            
            
            
            
            170.00
            
            1/25/2010450
            
            
            
            
            
            
            40.00
            
            8/17/2010750
            
            
            
            
            
            
            27.60
            
            11/7/2010336
            
            
            
            
            
            
            7.40
            
            3/22/20111,000
            
            
            
            
            
            
            7.00
            
            5/3/20116,250
            
            
            
            
            
            
            2.80
            
            10/24/2011100,000
            
            
            
            
            
            
            2.80
            
            2/7/201554,687
            
            (1,5)
            120,313
            
            
            
            1.05
            
            12/7/2016Elizabeth
      Hambrecht
            
            125,000
            
            
            
            
            
            
            2.80
            
            2/7/20157,812
            
            (1)
            17,188
            
            
            
            1.05
            
            12/7/201670,000
            
            
            
            1.36
            
            6/28/2017Conrad
      Lowry (6)
            
            625
            
            
            
            
            
            
            30.00
            
            2/8/2009500
            
            
            
            
            
            
            7.40
            
            2/8/2009400
            
            
            
            
            
            
            7.40
            
            2/8/2009500
            
            
            
            
            
            
            7.00
            
            2/8/20092,000
            
            
            
            
            
            
            2.80
            
            2/8/2009750
            
            
            
            
            
            
            2.40
            
            2/8/200975,000
            
            
            
            
            
            
            2.80
            
            2/8/20097,812
            
            
            
            
            
            
            1.05
            
            2/8/2009




76


(1)
            Option
      vests 25% on December 7, 2007 and 1/48th
      per month thereafter provided the grantee continues to be employed by
      Salon.




(2)
            Option
      vests 25% on June 6, 2007 and 1/48th
      per month thereafter provided the grantee continues to be employed by
      Salon.  In addition, (1) if Mr. Neimeth is terminated after June
      5, 2007, 100% of his outstanding options shall be fully vested and
      exercisable as of the date of his employment termination; and (2) in the
      event of a change in control, all outstanding options become fully vested
      and exercisable.  These options were granted pursuant to the
      Salon Media Group, Inc. 2004 Stock
Plan.




(3)
            Option
      vests 25% on June 6, 2007 and 1/48th
      per month thereafter provided the grantee continues to be employed by
      Salon.  In addition, (1) if Mr. Neimeth is terminated after June
      5, 2007, 100% of his outstanding options shall be fully vested and
      exercisable as of the date of his employment termination; and (2) in the
      event of a change in control, all outstanding options become fully vested
      and exercisable.  This option was granted pursuant to an option
      plan not approved by Salon’s stockholders and as such is a non-statutory
      stock option.




(4)
            292,625
      options vest 25% on January 7, 2009 and 1/48th
      per month thereafter provided the grantee continues to be employed by
      Salon. 73, 156 options vest upon Salon achieving “positive operating cash
      flow” in any four trailing quarters. In addition, (1) if Mr. Blashka is
      terminated between June 30, 2008 and December 31, 2008, 50% of the shares
      subject to then outstanding options shall be fully vested and exercisable
      as of the date of his employment termination; (2) if Mr. Blashka is
      terminated after December 31, 2008, 100% of his outstanding options shall
      be fully vested and exercisable as of the date of his employment
      termination; and (3) in the event of a change in control, all outstanding
      options become fully vested and
exercisable.




(5)
            Options
      vest (1) if Ms. Walsh is terminated for other than cause, 100% of the
      shares subject to then outstanding options shall be fully vested and
      exercisable as of the date of her termination, and (2) in the event of a
      change of control, all outstanding options shall become fully vested and
      exercisable.(6)
            PerMr.
      Lowry's Separation Agreement, all vested options expire onFebruary
      8, 2009.




Option
Exercises during Fiscal Year 2008




No
current Named Executive Officer exercised any option during fiscal year
2008.





Pension
Benefits




None of
Salon’s executive officers are covered by a pension plan or other similar
benefit plan that provides for payments or other benefits at, following, or in
conjunction with retirement.





Nonqualified
Deferred Compensation




Salon
does not have any nonqualified deferred compensation plan.





Potential
Payments Upon Termination or Change in Control





Salon has
entered into employment agreements with Mr. Neimeth, Mr. Blashka and Ms.
Walsh.





In the
event Mr. Neimeth is terminated for a reason other than cause, he will be
entitled to a severance payment of one year’s salary and benefits.  If
Mr. Neimeth (1) is terminated after June 5, 2007, 100% of his outstanding
options and restricted stock shall be fully vested and exercisable; and (2) in
the event of a change in control, all outstanding options and restricted stock
become fully vested and exercisable.





77


In the
event Mr. Blashka is terminated for a reason other than cause, he will be
entitled to a severance payment of six month’s salary and
benefits.  If Mr. Blashka (1) is terminated after June 30, 2008, 50%
of his outstanding options shall be fully vested and exercisable; (2) is
terminated after December 31, 2008, 100% of his outstanding options shall be
fully vested and exercisable; and (3) in the event of a change in control, all
outstanding options and restricted stock become fully vested and
exercisable.





In the
event Ms. Walsh is terminated for a reason other than cause, she will be
entitled to a severance payment of one year’s salary and benefits. If Ms. Walsh
(1) is terminated for other than cause, 100% of her outstanding options shall be
fully vested and exercisable; and (2) in the event of a change in control, all
outstanding options become fully vested and exercisable.





Mr.
Neimeth, Mr. Blashka and Ms. Walsh’s incentive compensation plans for fiscal
year 2009 are based on attaining prescribed common operating, financial and
other profitability goals, and are targeted at $200,000, $150,000 and 150,000,
respectively.  The bonuses, if earned, may be payable in cash or stock
at the Company’s option.  If paid in stock, amounts will be increased
by 25%.  In the event any of the executives are terminated for a
reason other than cause, he or she will be entitled to receive an amount equal
to the bonus earned through the date of termination.





Compensation
of Directors




The
following table details the total compensation by Salon’s non-employee directors
for its 2008 fiscal year:




Fees
      Earnedor
      Paid in
            
            OptionName
            
            Cash
            
            Awards
      (3)
            
            TotalDeepak
      Desai
            
            -
            
            $587
            
            $587Robert
      Ellis
            
            -
            
            $587
            
            $587Elizabeth
      Hambrecht (4)
            
            $32,499
            
            $17,938
            
            $17,938George
      Hirsch
            
            -
            
            $587
            
            $587Robert
      McKay
            
            -
            
            $587
            
            $587James
      Rosenfield
            
            -
            
            $587
            
            $587David
      Talbot (1)
            
            -
            
            $587
            
            $587John
      Warnock (2)
            
            -
            
            $649
            
            $649





(1)
            Mr.
      Talbot, the founder of Salon, served as Chairman of Board until December
      2006.  The payment of fees to Mr. Talbot has been discontinued
      for fiscal year 2008.


(2)
            Mr.
      Warnock, Salon’s largest shareholder, was appointed Chairman of the Board
      in December 2006.


(3)
            In
      December 2006, each director received an option to purchase 3,500 shares
      of common stock.  The grant date fair value of each stock option
      award was $2,856.  The exercise price per share for the grants
      to all of the directors except Mr. Warnock was $1.05.  As Mr.
      Warnock owns 10% or more of the voting securities of Salon, the exercise
      price per share of his grant was determined at 110% of market, or
      $1.16.  The amounts shown are the compensation costs recognized
      by Salon in fiscal year 2007 for option awards, as determined pursuant to
      SFAS 123R, excluding any estimates of future forfeitures.  These
      compensation costs reflect option awards made in fiscal year
      2008.  For a discussion of the assumptions used to calculate the
      value of the option awards, see Note 2 of Notes to the Consolidated
      Financial Statements.


(4)
            Ms.
      Hambrecht served as Chief Executive Officer from February 2005 until
      September 2007 and was Salon’s President from October 2003 until September
      2007.  From May 2003 through February 2005 she also served as
      Salon’s Chief Financial Officer and Secretary.  Ms. Hambrecht
      continues to serve as a company director and receives $10,833 in monthly
      fees.  At March 31, 2008, a total of $32,499 has been accrued
      but not yet paid.





78


Compensation
Committee Interlocks and Insider Participation




None of
Salon’s executive officers has served as a member of the compensation committee
or board of directors of any other entity that has an executive officer serving
as a member of Salon’s Board of Directors.




Compensation
Discussion and Analysis




The
Compensation Committee has responsibility for setting the overall compensation
strategy for Salon and aligning it to Salon’s business goals. This includes
determining the compensation of the Chief Executive Officer and other Named
Executive Officers and ensuring that Salon’s compensation program is fair,
reasonable and competitive.  The Compensation Committee makes
recommendations to the Board on equity compensation with the Board having
ultimate authority in making equity grants.





Objectives
and Challenges of Salon’s Compensation Program





Salon’s
executive compensation program is designed to attract, retain and motivate
outstanding executive officers capable of leading Salon to fulfill its business
objectives, and to establish an appropriate link between executive compensation
and achievement of Salon’s strategic and financial performance goals that
include attaining profitability, generating sufficient cash to fund operations,
and ultimately, enhancing shareholder value.





Due to
insufficient cash, Salon has only been able to offer its Chief Executive Officer
and President, its Editor-in-Chief and its Executive Vice President and Chief
Financial Officer a competitive base annual salary and has not previously been
able to implement a non-equity incentive compensation plan, or award annual
bonuses to these executives.  As a consequence, Salon has had to rely
on stock option awards in lieu of cash compensation for these
officers.  Cash constraints have hampered Salon in attracting new
executives.  Salon has therefore had to rely on offering substantial
equity awards to entice prospective new executives to join
Salon.  Besides cash constraints, Salon faces challenges in hiring and
retaining executives due to a relatively small pool of available executive
talent in its industry, and because it competes with more established media
companies and better funded upstarts.  Salon has experienced
difficulties in finding suitable executives to lead its sales and technology
efforts, positions in high demand.  As Salon’s brand recognition has
increased, so has the demand for its trained talent.





Role
of Compensation Committee and Outside Consultants





The
Compensation Committee of the Board of Directors oversees and administers
Salon’s executive compensation program in accordance with the Compensation
Committee Charter.  The Compensation Committee meets on an as-needed
basis to: (1) adjust and review salaries; (2) award bonuses; (3) approve offers
to prospective new executive officers; (4) recommend equity grants for executive
officers to the Board of Directors; and (5) set non-equity incentive
compensation plans for Salon’s Senior Vice President – Sales and for its Senior
Vice President – Publisher.  Subsequent to March 31, 2007, the
Compensation Committee set fiscal year 2008 non-equity compensation plans for
its Senior Vice President – Publisher and its Senior Vice President –
Sales.





Due to
budgetary constraints, Salon has not utilized the services of outside
consultants.  Once Salon’s operations generate sufficient cash to meet
operating needs, the Compensation Committee will likely retain the services of
outside consultants to review executive salaries for appropriateness and to
formulate incentive plans for the Named Executive Officers.





79


Elements
of Compensation





Salon
provides its executive officers with a compensation package consisting of base
salary, commissions for its sales executives, and benefit plan participation
generally available to other employees. In setting total compensation, the
Compensation Committee considers individual and company performance, as well as
current and projected cash balances.  In determining the compensation
for an executive who has been with Salon for a substantial amount of time, the
Compensation Committee will consider what it might cost to hire that executive’s
replacement, the effect on attaining revenue goals, and the effect on the well
being of Salon’s Website.





Base
Salary. Salaries for Salon’s executive officers are initially set based
on negotiation with the individual executive officers at the time of recruitment
and with reference to salaries for comparable positions in the industry for
individuals of similar education and background. Salon also considers the
individual’s experience, reputation in his or her industry and expected
contributions to Salon.  Base salary is continuously evaluated to
ensure it is competitive and may be adjusted from time to time if Salon believes
that it is no longer competitive, to match changes to an individual’s job
performance or duties, or to retain an executive.  Cost of living
salary adjustments are also granted to executive officers.  In each
case, Salon takes into account the results achieved by the executive, his or her
future potential, scope of responsibilities and experience, competitive salary
practices, the potential impediment in reaching profitability if the executive
were to leave Salon, and cash projections.  Salon has not utilized
benchmarks or compensation studies in determining salary levels, but may do so
in the future.





Bonuses and
Non-Equity Incentive Plan Compensation. Each executive is eligible for a
cash bonus.  Due to limited cash, no bonuses have ever been granted in
the past to Salon’s Chief Executive Officer and President, Chief Financial
Officer and Secretary and Editor-in-Chief.  In fiscal 2008, a cash
bonus was paid to Mr. Neimeth, the Company’s CEO since September 2007, due to
the Company achieving certain revenue targets set when he was Senior Vice
President – Publisher.





In order
to align corporate goals and provide incentives for a its new Chief Executive
Officer, new Chief Financial Officer, and its Editor-in Chief, the Compensation
Committee approved a bonus plan for fiscal 2009.  Mr. Neimeth, Mr.
Blashka  and Ms. Walsh’s incentive compensation plans for fiscal year
2009 are based on attaining prescribed common operating, financial and other
profitability goals, and are targeted at $200,000, $150,000 and $150,000,
respectively.  The bonuses, if earned, may be payable in cash or stock
at the Company’s option.  If paid in stock, amounts will be increased
by 25%.  The targeted amounts are contractually set.  The
goals were set based on what the Committee perceived to be synchronized with the
overall goal of increasing Salon’s enterprise value.





All bonus
plans and non-equity incentive plans are approved by Salon’s Compensation
Committee upon consultation with the Chief Executive Officer and Chief Financial
Officer.




Stock
Options.Salon grants stock options to newly hired executives
at the next regularly scheduled meeting of the Board of Directors, and
subsequently to align their interests with those of its stockholders and as an
incentive to remain with Salon. Salon believes that options to purchase its
common stock, priced at the market price on the date of grant, are the best tool
to motivate executives to build stockholder value.  In addition, the
granting of stock options has been an appealing form of compensation to Salon as
their granting requires no cash outlay.  However, these grants affect
Salon’s results of operations as they require Salon to record non-cash
stock-based compensation.  As options are not transferable, they have
no value unless the price of the stock increases after a grant of options is
made. Because these options typically vest over a four-year period, they are an
incentive for executives to build Salon’s value over time and encourage
executives to remain in the long-term employment with Salon.




80





The goals
of Salon’s option grant guidelines are to ensure that future grants are
competitive from a grant value perspective and that option usage is consistent
with option pool forecasts.





During
fiscal year 2007, the Board of Directors of Salon adopted a policy that options
are to be granted only at regularly scheduled meetings of the
Board.  The proximity of any awards to an earnings announcement or
other market events is coincidental.   The exercise price of the
options is the closing price of Salon’s common stock on the date of the grant
and the grant date is the date that the Board approves the grant.  All
new hires are awarded options and Salon’s Compensation Committee makes
recommendations to the Board of options grants to be made to executive
officers.





The
number of stock options Salon granted to executives has varied
widely.  During Fiscal 2008, in order to attract a new chief financial
officer, Salon granted 365,781 options to Mr. Blashka.  On June 5,
2008, the Company granted to its newly-hired Vice President of Sales and
Marketing, Andreas Droste, 50,000 options.  Joan Walsh, Salon’s
Editor-in-Chief, was also granted 125,000 options in connection with her new
employment agreement.  During fiscal year 2007, Salon made a large
grant to: (1) Mr. Neimeth, upon his joining Salon, of a total 250,000 shares to
offset a below market base annual salary and as an incentive to join Salon as it
was felt his hiring was critical in attaining future revenue goals; and (2) Ms.
Walsh, 175,000 shares, as an incentive to remain with Salon as Salon had
insufficient cash to grant a cash bonus.  In December 2006, with a
falling common stock price and with most outstanding options being
out-of-the-money, Salon granted options to all of its employees.  The
across the board grant to all employees took into consideration a number of
factors, including performance of the individual, job level, and prior
grants.





As of
March 31, 2008, Salon’s stock option plan allows for the granting of
approximately 240,000 shares of common stock.  Salon is therefore
limited to the number of option shares it can issue to its executive
officers.  As a result, Salon will seek approval at its next
shareholder meeting to increase the number of shares that may be issued under
the current stock option plan.





Restricted Stock.In October 2007, Salon’s shareholders approved an amendment to the 2004
Stock Plan to allow for the grant of restricted stock awards.  After
the creation of such an equity plan, the Compensation Committee will recommend
to the Board of Directors that similar awards be made to the other Named
Executive Officers.  It is contemplated that such awards will vest
over a period of four years and be subject to accelerated vesting in the event
that the Named Executive Officer is terminated for reasons other than cause, or
if a change in control event were to occur.  Salon feels that the
issuance of restricted stock will be a valuable incentive tool for its
executives as this type of equity award will have immediate value upon vesting
with no cash outlay by the company.





The
employment agreement with Mr. Neimeth stipulates that he be eligible to receive
250,000 shares of restricted stock if mutually agreed goals were
attained.  Such an award was approved and granted on December 6,
2007.





Perquisites.  Salon
does not offer any perquisites to its executive officers.





Retirement and
Other Benefits.  Salon has a 401(k) savings plan for its
employees that allows for matching contributions and profit
sharing.  Due to limited cash, Salon has never made matching or profit
sharing contributions and has no intent to do so in the 2008 fiscal year.Salon does not have a
deferred compensation plan for any employee.




81
 
 Named
Executive Officer Cash Compensation


Elizabeth
Hambrecht, former CEO and President, received a base annual salary of $170,000
during fiscal year 2008, until her resignation on September 13,
2008.  Ms. Hambrecht’s resignation did not affect her service as a
director of the company’s board of directors.  Due solely to limited
cash, Ms. Hambrecht did not receive any other form of cash compensation during
fiscal year 2008 in connection with her employment. Since October 2007, she has
earned directors fees at the rate of $130,000 per annum, for her assistance in
transition and certain Company fund-raising efforts.





Conrad
Lowry, former CFO and Secretary, began fiscal 2008 with a base annual salary of
$130,000 during fiscal year 2007.  Effective June 1, 2007, Mr. Lowry
received a cost of living increase, raising his base annual salary to $140,000,
until his departure in February 2008.  In connection with the
termination of his employment, Mr. Lowry received severance in the amount of
three months base salary, as well as a $15,000 bonus for his assistance in
transition.





Norman
Blashka, Executive Vice President and Chief Financial Officer, joined Salon in
January 2008. His base annual salary is $200,000.  He was not eligible
for any additional cash compensation for fiscal year 2008.





Joan
Walsh, Editor-in-Chief, received a base annual salary of $170,000 during fiscal
year 2007.  Effective April 1, 2007, Ms. Walsh’s base annual salary
was increased to $200,000 so as to commensurate with the salary of Salon’s
Senior Vice President – Publisher.  Due solely to limited cash, Ms.
Walsh did not receive any other form of cash compensation during fiscal year
2008.  Effective June 1, 2008, her salary was increased to
$230,000.





Chris
Neimeth joined Salon on June 6, 2006 as Senior Vice President - Publisher at a
base annual salary of $200,000 and received a signing bonus of $5,000 to cover
legal costs.  Effective June 16, 2007, Mr. Neimeth received a cost of
living increase, raising his base annual salary to $208,000.  In
September 2007, he was promoted to Chief Executive Officer and his base annual
salary was increased to $230,000.  During fiscal year 2008, Mr.
Neimeth met revenue goals as set by the Compensation Committee and received
quarterly bonuses totaling $67,718.





Harvey
Gamm, former Senior Vice President – Sales, left the Company’s employ in
September 2007.  His base annual salary was $150,000.  Prior
to his departure, he earned $1,000 in commissions.





Deductibility
of Executive Compensation




Section 162(m)
of the Internal Revenue Code limits deductions for executive compensation in
excess of $1 million except for certain compensation which qualifies for a
performance-based exception.  Certain types of compensation in excess
of $1 million are deductible by a company if performance criteria are specified
in detail and are contingent on stockholder approval of the compensation
arrangement.  As Salon has been unable to award bonuses and other
forms of non-equity incentive compensation to all of its Named Executive
Officers due limited cash, the $1 million limitation has not been a factor for
Salon.  In the future, Salon and the Compensation Committee will
endeavor to structure executive compensation plans to achieve maximum
deductibility under Section 162(m) with minimal sacrifices of flexibility
and impact on corporate objectives.





Accounting
for Stock-Based Compensation




Salon has
expensed stock option grants and restricted stock under SFAS 123R which requires
companies to include the fair value of equity compensation as a compensation
expense in their income statements.





82


COMPENSATION
COMMITTEE REPORT





The
Compensation Committee of Salon has reviewed and discussed the Compensation
Discussion and Analysis required by Item 402(b) of Regulation S-K with
management and, based on such review and discussions, the Compensation Committee
recommended to the Board that the Compensation Discussion and Analysis be
included in this Annual Report on Form 10-K.





THE
COMPENSATION COMMITTEE


James
Rosenfield


John
Warnock







83





ITEM
12.  Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters





Equity
Compensation Plan Information




Information
regarding Equity Compensation Plans may be found in Part II, Item 5, commencing
on page 23 of this Annual Report on Form 10-K.




Security
Ownership of Certain Beneficial Owners and Management





The
following table sets forth information regarding the beneficial ownership of
Common Stock and Common Stock equivalents of Salon as of June 1, 2008
(a) by each stockholder who is known by Salon to be the beneficial owner of
more than 5% of the outstanding Common Stock and Common Stock equivalents or the
combined total voting power of all classes of capital stock of Salon on a fully
diluted, as converted basis, (b) by each director and nominee,
(c) each executive officer named in the Summary Compensation Table, and
(d) by all executive officers and directors of Salon as a
group.




Amount
      andNature
      ofBeneficial
            
            PercentName
      and Address of Beneficial Owner (1)
            
            Ownership
      (2)
            
            of
      Class (3)William
      R. Hambrecht (4)
            
            3,007,831
            
            72.1%Shea
      Ventures LLC (5)
            
            1,629,309
            
            53.9%Adobe
      Systems Incorporated (6)
            
            431,297
            
            19.1%Octavia
      LLC (7)
            
            361,979
            
            15.8%Wenner
      Media LLC (8)
            
            268,424
            
            12.3%Constellation
      Venture Capital (9)
            
            170,420
            
            8.2%Nancy
      & Timothy Armstrong  (10)
            
            158,062
            
            7.5%HVS
      Boxers, LLC (11)
            
            134,883
            
            6.5%Executive
      Officers and DirectorsJohn
      Warnock (12)
            
            5,183,632
            
            80.8%Elizabeth
      Hambrecht (13)
            
            391,407
            
            16.8%Robert
      McKay (14)
            
            329,520
            
            14.6%David
      Talbot (15)
            
            287,863
            
            12.9%Joan
      Walsh (16)
            
            179,556
            
            8.5%Christopher
      Neimeth (17)
            
            140,105
            
            6.7%James
      Rosenfield (18)
            
            38,097
            
            1.9%George
      Hirsch (19)
            
            34,617
            
            1.8%Robert
      Ellis (20)
            
            28,885
            
            1.5%Deepak
      Desai (21)
            
            26,385
            
            1.3%Norman
      Blashka
            
            -
            
            0.0%All
      executive officers and directors as a group (12 persons)
            
            6,640,067
            
            84.6%





(1)
            The
      address for all beneficial owners is c/o Salon Media Group, Inc., 101
      Spear Street, Suite 203, San Francisco, CA
  94105.




(2)
            Unless
      otherwise noted, the persons named in the table above have sole voting and
      investment power with respect to all shares of Common Stock and Common
      Stock equivalents shown as beneficially owned by them, subject to
      community property laws where applicable and to the information contained
      in the footnotes to this table.




84


(3)
            Calculated
      on the basis of 1,941,105 shares of Common Stock outstanding as of June 1,
      2008, shares of Common Stock underlying options exercisable within
      sixty (60) days of June 1, 2008, shares of Common Stock that a
      shareholder has the right to acquire upon conversion of shares of
      Series A, B, C, and D Preferred Stock, shares of Common Stock
      issuable upon the conversion of promissory notes, and currently
      exercisable warrants to acquire shares of Common Stock are deemed
      outstanding for purposes of calculating the beneficial ownership of Common
      Stock of the holders of such options and warrants, as applicable, on a
      stand-alone basis, without considering the ownership interest of other
      stockholders.




(4)
              Mr.
      Hambrecht has an ownership interest in WR Hambrecht + Co., LLC and WR
      Hambrecht + Co., Inc. (together the “Hambrecht Entities”) and is the
      Chairman and Chief Executive Officer of those
      entities.   The Hambrecht Entities own 71,322 shares of
      Common Stock and 292,366 of Common Stock that the Hambrecht Entities have
      the right to acquire upon conversion of 50 shares of Series A Preferred
      Stock and 189 shares of Series C Preferred Stock.  Elizabeth
      Hambrecht, a director of Salon and Salon’s former President and Chief
      Executive Officer, has a pecuniary ownership interest in the Hambrecht
      Entities.  Mr. Hambrecht individually owns 274,217 shares of
      Common Stock, 605,169 shares of Common Stock that Mr. Hambrecht has the
      right to acquire upon conversion of 189 shares of Series C Preferred Stock
      and 584 shares of Series D Preferred Stock and 61,736 shares of Common
      Stock issuable upon exercise of  immediately exercisable
      warrants. He also holds a promissory note convertible into 297,619 shares
      of Common Stock. Includes ownership by The Sarah and William Hambrecht
      Foundation of 32,005 shares of Common Stock and 263,049 shares of common
      stock that the Foundation has the right to acquire upon conversion of 75
      shares of Series A Preferred Stock and 108 shares of Series C Preferred
      Stock.  William Hambrecht and Elizabeth Hambrecht are Directors
      and have voting rights in the Sarah & William Hambrecht
      Foundation.  Includes ownership by HAMCO Capital Corporation,
      consisting of 20,782 shares of Common Stock and 166,596 shares of Common
      Stock that HAMCO has the right to acquire upon conversion of 127 shares of
      Series C Preferred Stock and 63 shares of Series D preferred
      stock.  Mr. Hambrecht and Elizabeth Hambrecht, both have an
      ownership interest in HAMCO Capital.  Includes ownership by
      Ironstone Group, Inc., consisting of 79,970 shares of Common Stock and
      843,000 shares of Common Stock that Ironstone has the right to acquire
      upon conversion of 843 shares of Series C Preferred Stock.  Mr.
      Hambrecht has an ownership interest in Ironstone Group,
      Inc.  Mr. Hambrecht and Ms. Hambrecht disclaim beneficial
      ownership of the shares of Salon’s Common Stock held directly by the
      Hambrecht Entities, HAMCO Capital and Ironstone, other than their
      proportionate ownership
interest.




(5)
              Consists
      of 101,265 shares of Common Stock held by the stockholder and 955,415
      shares of Common Stock that the stockholder has the right to acquire upon
      conversion of 125 shares of Series A Preferred Stock and 697 shares of
      Series C preferred Stock.  Includes 99,801 shares of Common
      Stock of a trust, as well as 128,000 shares of Common Stock that the trust
      has the right to acquire upon conversion of 128 shares of Series C
      Preferred Stock. Includes 344,828 shares of Common Stock issuable upon
      conversion of a promissory note held by the trust.  Edward Shea
      is the Manager of the stockholder and a Trustee of the trust, and is also
      a Director of Ironstone Group, Inc. mentioned under item
    (4).




(6)
            Consists
      of 109,379 shares of Common Stock held by the
      stockholder.  Includes 314,680 shares of Common Stock that the
      stockholder has the right to acquire upon conversion of 125 shares of
      Series B Preferred Stock and 7,058 shares of Common Stock issuable
      upon exercise of an immediately exercisable warrant.  Salon’s
      Chairman John Warnock is the co-Chairman of the stockholder and disclaims
      beneficial ownership of the shares held by the
  stockholder.




(7)
            Consists
      of 17,805 shares of Common Stock held by the
      stockholder.  Includes 344,174 shares of Common Stock that the
      stockholder has the right to acquire upon conversion of 62 shares of
      Series A Preferred Stock and 216 shares of Series C Preferred
      Stock.




(8)
            Consists
      of 18,424 shares of Common Stock held by the
      stockholder.  Includes 250,000 shares of Common Stock that
      Wenner Media LLC has the right to acquire upon conversion of 250 shares of
      Series C Preferred Stock.   Mr. Wenner, the Chairman
      and President of Wenner Media LLC served as a Director of Salon
      until  February 2006.




(9)
            Consists
      of 33,084 shares of Common Stock held by Constellation Venture Capital, LP
      and 7,096 shares of Common Stock held by Constellation Venture Offshore,
      LP.  Includes 107,500 shares of Common Stock that Constellation
      Venture Capital has the right to acquire upon conversion of 52 shares of
      Series A Preferred Stock and 22,740 shares of Common Stock that
      Constellation Venture Capital Offshore, LP has the right to acquire upon
      conversion of 11 shares of Series A Preferred
  Stock.




85


(10)
            Includes
      137,837 shares of Common Stock that the stockholder has the right to
      acquire upon conversion of 209 shares of Series D Preferred Stock and
      20,225 shares of Common Stock issuable upon exercise of an immediately
      exercisable warrant.




(11)
            Consists
      of 6,709 shares of Common Stock.  Includes 128,174 shares of
      Common Stock that the stockholder has the right to acquire upon conversion
      of 62 shares of Series A Preferred
Stock.




(12)
            Consists
      of 410,426 shares of Common Stock held by the Chairman of the Board of
      Salon. Includes 4,387,832 shares of Common Stock that the stockholder has
      the right to acquire upon conversion of 125 shares of Series A
      Preferred Stock, 3,474 shares of Series C Preferred Stock, and 874
      shares of Series D preferred stock and 59,370 shares of Common Stock
      issuable upon exercise of immediately exercisable warrants. Includes
      297,619 shares of Common Stock issuable upon conversion of a promissory
      note.  Includes 28,385 shares subject to options that may be
      exercised within sixty (60) days of June 1,
  2008.




(13)
            Consists
      of 3,750 shares of Common stock held by the Director.  Includes
      233,803 shares of Common Stock that the Officer has the right to acquire
      upon conversion of 31 shares of Series C Preferred Stock and 334
      shares of Series D Preferred Stock.  Includes 153,854 shares
      subject to options that may be exercised within sixty (60) days of June 1,
      2008.  Excludes her proportional beneficial ownership of amounts
      owned by the Hambrecht Entities and HAMCO Capital described in footnote
      (4).




(14)
            Consists
      of 4,200 shares of Common Stock held by the Robert McKay Family
      Partnership, 7,840 shares of Common Stock held by the McKay Investment
      Group and 2,921 shares of Common Stock in the Elaine McKay Family
      Partnership.  Includes 286,174 shares of Common Stock that the
      McKay Investment Group, Inc. has the right to acquire upon conversion of
      62 shares of Series A Preferred Stock and that the Elaine McKay
      Family Partnership has the right to acquire upon conversion of 158 shares
      of Series C Preferred Stock.  Mr. McKay, a Director of
      Salon, is the Managing Partner of all the entities.  Includes
      28,385 shares subject to options that may be exercised within sixty (60)
      days of June 1, 2008.




(15)
              Consists
      of 384 shares of Common Stock, of which 128 shares are held by Camille
      Peri, Mr. Talbot's spouse, and 256 shares held in trust for the benefit of
      Mr. Talbot's children.  Mr. Talbot disclaims beneficial
      ownership of the shares held individually by his spouse and in trust for
      his children.  Includes 287,479 shares subject to options that
      may be exercised within sixty (60) days of June 1,
  2008.




(16)
              Includes
      179,556 shares subject to options that may be exercised within sixty (60)
      days of June 1, 2008.




(17)
              Includes
      140,105 shares subject to options that may be exercised within sixty (60)
      days of June 1, 2008.




(18)
              Includes
      38,097 shares subject to options that may be exercised within sixty (60)
      days of June 1, 2008.




(19)
              Consists
      of 732 shares of Common Stock held by the Director and 33,885 shares
      subject to options that may be exercised within sixty (60) days of June 1,
      2008.




(20)
              Consists
      of 500 shares of Common Stock held by the Director and 28,335 shares
      subject to options that may be exercised within sixty (60) days of June 1,
      2008.




(21)
                Includes
      26,385 shares subject to options that may be exercised within sixty (60)
      days of June 1, 2008.






86


Series A
Preferred Stock




The following table sets forth
information regarding the beneficial ownership of Salon’s Series A
Preferred Stock as of June 1, 2008 (a) by each stockholder who is known by
Salon to be the beneficial owner of more than 5% of the outstanding shares of
Series A Preferred Stock, (b) by each director and nominee,
(c) by the Named Executive Officers, and (d) by all current executive
officers and directors of Salon as a group.




Amount
      andNature
      ofBeneficial
            
            PercentName
      and Address of Beneficial Owner (1)
            
            Ownership
            
            of
      ClassWilliam
      R. Hambrecht (2)
            
            125
            
            
            18.3%John
      Warnock (3,6)
            
            125
            
            
            18.3%Shea
      Ventures LLC (3)
            
            125
            
            
            18.3%Constellation
      Venture Capital (4)
            
            63
            
            
            9.2%McKay
      Investment Group (5,6)
            
            62
            
            
            9.1%Octavia
      LLC (5)
            
            62
            
            
            9.1%HVS
      Boxers LLC (5)
            
            62
            
            
            9.1%All
      executive officers and directors as a group (2 persons)
            
            187
            
            
            27.4%




(1)
            Unless
      otherwise noted, the persons named in the table above have sole voting and
      investment power with respect to all shares of Preferred Stock shown as
      beneficially owned by them, subject to community property laws where
      applicable and to the information contained in the footnotes to this
      table.  The address for each beneficial owner is c/o Salon Media
      Group, Inc., 101 Spear Street, Suite 203, San Francisco, CA
      94105.




(2)
            Includes
      75 shares held by the Sarah & William Hambrecht Foundation that are
      convertible into 155,049 shares of Common Stock, subject to
      adjustment.  Also includes 50 shares held by WR Hambrecht + Co.
      LLC that are convertible into 103,366 shares of Common Stock, subject to
      adjustment.  Mr. Hambrecht is the father of Elizabeth Hambrecht,
      a director of Salon and Salon’s former President and Chief Executive
      Officer.  Ms. Hambrecht has an ownership interest in WR
      Hambrecht + Co. LLC and is a Director of and has voting rights in the
      Sarah & William Hambrecht
Foundation.




(3)
            Shares
      held by the named stockholder are convertible into 258,415 shares of
      Common Stock, subject to
adjustment.




(4)
            Includes
      52 shares held by Constellation Venture Capital, LP that are convertible
      to 107,500 shares of Common Stock and 11 shares held by Constellation
      Venture Capital (Offshore), LP that are convertible to 22,740 shares of
      Common Stock, all subject to
adjustment.




(5)
            Shares
      held by the named stockholder are convertible into 128,174 shares of
      Common Stock, subject to
adjustment.




(6)
            Director
      or related to director. Except as indicated in the table above, no other
      director or Named Executive Officer beneficially owns shares of
      Series A Preferred Stock.




87




Series B
Preferred Stock




The following table sets forth
information regarding the beneficial ownership of Salon’s Series B
Preferred Stock as of June 1, 2008 (a) by each stockholder who is known by
Salon to be the beneficial owner of more than 5% of the outstanding shares of
Series B Preferred Stock, (b) by each director and nominee,
(c) by the Named Executive Officers, and (d) by all executive officers
and directors of Salon as a group.




Amount
      andNature
      ofBeneficial
            
            PercentName
      and Address of Beneficial Owner (1)
            
            Ownership
            
            of
      ClassAdobe
      Systems Inc. (2)
            
            125
            
            
            100.0%All
      executive officers and directors as a group (3)
            
            0
            
            
            0.0%





(1)
            Unless
      otherwise noted, the persons named in the table above have sole voting and
      investment power with respect to all shares of Preferred Stock shown as
      beneficially owned by them, subject to community property laws where
      applicable and to the information contained in the footnotes to this
      table.  The address for each beneficial owner is c/o Salon Media
      Group, Inc., 101 Spear Street, Suite 203, San Francisco, CA
      94105.




(2)
            Shares
      held by the named stockholder are convertible into 314,680 shares of
      Common Stock, subject to
adjustment.




(3)
            No
      director or Named Executive Officer beneficially owns shares of
      Series B Preferred Stock.  However John Warnock, Salon’s
      Chairman of the Board, is the Co-Chairman of the Board of Adobe Systems
      Inc. and disclaims beneficial ownership of the shares of Series B
      Preferred stock held by Adobe Systems
Inc.




Series C
Preferred Stock




The following table sets forth
information regarding the beneficial ownership of Salon’s Series C
Preferred Stock as of June 1, 2008 (a) by each stockholder who is known by
Salon to be the beneficial owner of more than 5% of the outstanding shares of
Series C Preferred Stock, (b) by each director and nominee,
(c) by the Named Executive Officers, and (d) by all current executive
officers and directors of Salon as a group.




Amount
      andNature
      ofBeneficial
            
            PercentName
      and Address of Beneficial Owner (1)
            
            Ownership
            
            of
      ClassJohn
      Warnock (2,7)
            
            3,474
            
            
            52.8%William
      R. Hambrecht (3)
            
            1,456
            
            
            22.1%Shea
      Ventures LLC (4)
            
            825
            
            
            12.5%Elaine
      McKay Family Partnership (5,7)
            
            158
            
            
            2.4%Elizabeth
      Hambrecht (6,7)
            
            31
            
            
            *%All
      executive officers and directors as a group (3 persons)
            
            3,663
            
            
            55.7%





*Less
than 1%.




(1)
            Unless
      otherwise noted, the persons named in the table above have sole voting and
      investment power with respect to all shares of Preferred Stock shown as
      beneficially owned by them, subject to community property laws where
      applicable and to the information contained in the footnotes to this
      table.  The address for each beneficial owner is c/o Salon Media
      Group, Inc., 101 Spear Street, Suite 203, San Francisco, CA
      94105.




88


(2)
            Shares
      held by the named stockholder are convertible into 3,474,000 shares of
      Common Stock, subject to
adjustment.




(3)
            Mr.
      Hambrecht has an ownership interest in WR Hambrecht + Co., LLC and WR
      Hambrecht + Co., Inc. (together the “Hambrecht Entities”) and is the
      Chairman and Chief Executive Officer of those
      entities.  Elizabeth Hambrecht, a director of Salon and Salon’s
      former President and Chief Executive Officer, has an ownership interest in
      the Hambrecht Entities.  Includes 189 shares held by the
      Hambrecht Entities that are convertible to 189,000 shares of Common Stock,
      subject to adjustment, 189 shares held by a trust of Mr. Hambrecht that
      are convertible to 189,000 shares of Common Stock, subject to adjustment,
      and 108 shares held by the Sarah & William Hambrecht Foundation that
      are convertible to 108,000 shares of Common Stock, subject to
      adjustment.   Mr. Hambrecht and Ms. Hambrecht are Directors
      and have voting rights in the Sarah & William Hambrecht
      Foundation.   Includes 127 shares held by HAMCO Capital
      that are convertible to 127,000 shares of Common Stock, subject to
      adjustment.  Mr. Hambrecht and Elizabeth Hambrecht, both have an
      ownership interest in HAMCO Capital.  Includes 843 shares held
      by Ironstone Group, Inc. that are convertible to 843,000 shares of Common
      Stock, subject to adjustment.  Mr. Hambrecht has an ownership
      interest in Ironstone Group, Inc. Mr. Hambrecht disclaims beneficial
      ownership of the shares held directly by HAMCO Capital Corporation and
      Ironstone Group, Inc., other than his proportionate ownership interest.
      Ms. Hambrecht disclaims beneficial ownership of the shares held directly
      by the Hambrecht Entities and HAMCO Capital Corporation, other than her
      proportionate ownership interest.   Excludes 825 shares
      held by or controlled by Edward Shea that are convertible into 825,000
      shares of Common Stock, subject to adjustment mentioned under item
      (4).  Mr. Shea is a Director of Ironstone Group,
      Inc.




(4)
            Includes
      697 shares held by the named stockholder that are convertible into 697,000
      shares of Common Stock, subject to adjustment.  Includes 128
      shares owned by the E&M RP Trust that are convertible into 128,000
      shares of Common Stock, subject to
adjustment.




(5)
            Shares
      held by the named stockholder are convertible into 158,000 shares of
      Common Stock, subject to adjustment.  Mr. McKay, Director, has
      an ownership interest in the Elaine McKay Family Partnership. Mr. McKay is
      the Managing Partner of the
partnership.




(6)
            Shares
      held by the officer are convertible into 31,000 shares of Common
      Stock.  Stockholder is the President and Chief Executive Officer
      of the registrant.




(7)
            Current
      director or related to director. Except as indicated in the table above,
      no other director or Named Executive Officer beneficially owns shares of
      Series C Preferred Stock.




Series D
Preferred Stock




The following table sets forth
information regarding the beneficial ownership of Salon’s Series D-1, D-2,
D-3, D-4 and D-5 Preferred Stock (the “Series D Preferred Stock”) as of June 1,
2008 (a) by each stockholder who is known by Salon to be the beneficial
owner of more than 5% of the outstanding shares of Series D Preferred
Stock, (b) by each director and nominee, (c) by the Named Executive
Officers, and (d) by all current executive officers and directors of Salon
as a group.




Amount
      andNature
      ofBeneficial
            
            PercentName
      and Address of Beneficial Owner(1)
            
            Ownership
            
            of
      ClassJohn
      Warnock (2,6)
            
            874
            
            
            41.9%William
      R. Hambrecht (3)
            
            647
            
            
            31.0%Elizabeth
      Hambrecht (4,6)
            
            334
            
            
            16.0%Nancy
      & Timothy Armstrong (5)
            
            209
            
            
            10.0%All
      executive officers and directors as a group (2 persons)
(6)
            
            1,218
            
            
            58.0%







89




(1)
            Unless
      otherwise noted, the persons named in the table above have sole voting and
      investment power with respect to all shares of Preferred Stock shown as
      beneficially owned by them, subject to community property laws where
      applicable and to the information contained in the footnotes to this
      table.  The address for each beneficial owner is c/o Salon Media
      Group, Inc., 101 Spear Street, Suite 203, San Francisco, CA
      94105.




(2)
            Shares
      held by the named stockholder, who is the Chairman of the Board of Salon,
      are convertible into 655,417 shares of Common Stock, subject to
      adjustment.




(3)
            Mr.
      Hambrecht is the father Elizabeth Hambrecht, a director of Salon and
      Salon’s former President and Chief Executive Officer.  Includes
      584 shares held by a trust of the stockholder that are convertible to
      416,169 shares of common stock, subject to adjustment.  Includes
      63 shares held by HAMCO Capital Corporation that are convertible to 39,596
      shares of common stock, subject to adjustment.  Mr. Hambrecht
      and Elizabeth Hambrecht, both have an ownership interest in HAMCO
      Capital.  Mr. Hambrecht disclaims beneficial ownership of the
      shares held directly by HAMCO Capital Corporation other than his
      proportionate ownership interest. Ms. Hambrecht disclaims beneficial
      ownership of the shares held directly by HAMCO Capital Corporation other
      than her proportionate ownership
interest.




(4)
            Shares
      held by the Officer are convertible into 202,803 shares of Common Stock,
      subject to adjustment.




(5)
            Shares
      held by the named stockholder are convertible into 137,837 shares of
      Common Stock, subject to
adjustment.




(6)
            Current
      director or related to director. Except as indicated in the table above,
      no other director or Named Executive Officer beneficially owns shares of
      Series D Preferred Stock.







90





ITEM
13.  Certain Relationships and Related Transactions





During
the year ended March 31, 2008, and in April, 2008, the Company entered into a
number of financing transactions with related parties.




In May
2007, Salon entered into a line of credit with Deutsche Bank Securities, Inc.
for borrowings of up to $1 million plus accrued interest.  This
agreement is guaranteed in its entirety by John Warnock, Salon’s Chairman. As of
March 31, 2008, the line is fully drawn.  Accrued interest thereon is
$36.




In
November, 2007, Salon issued 292 shares of Series D-5 preferred stock,
convertible into 233,600 shares of Common Stock, subject to adjustment, and a
warrant to purchase 35,040 shares of Common Stock at an exercise price of $1.84
per share, subject to adjustment, for net proceeds of $350. The purchaser was
William Hambrecht, father of Elizabeth Hambrecht, a director of Salon and
Salon’s former President and Chief Executive Officer.




In March
2008, the Company’s Chairman advanced $500, pending completion of a contemplated
financing that was under negotiation as of year end.  In April, 2008,
the Company sold $1 million of convertible promissory notes.  The
notes have a four year maturity, bear interest at a fixed rate of 7.5% per
annum, payable semi-annually in cash or in kind, and are convertible into Common
Stock at the rate of $1.68 per share.  Mr. Warnock and Mr. Hambrecht
each purchased notes in the amount of $500.




On
October 10, 2000, Salon loaned its former Chairman $75,179 with an agreed 6.3%
annual interest rate with no due date.   During the year ended
March 31, 2007, the balance of the principal of $48,016 was paid off in its
entirety, as well as $1,480 of interest.




During the year ended March 31, 2007,
the following warrants were exercised by related parties:





ExerciseIssue
      Date
            Exercise
      Date
            Warrant
      Holder
            
            Warrant
      Shares
            
            
            Price
      per share
            
            
            Cash
      Received04/10/03
            04/05/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $0.834
            
            
            $
            12,50604/29/03
            04/05/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $0.901
            
            
            
            13,51808/09/01
            05/11/06
            Sarah
      & William Hambrecht Foundation (2)
            
            
            30,000
            
            
            
            $2.188
            
            
            
            65,65206/12/03
            05/11/06
            The
      Hambrecht 1980 Revocable Trust (3)
            
            
            7,500
            
            
            
            $0.901
            
            
            
            6,75906/12/03
            05/11/06
            WR
      Hambrecht + Co LLC (4)
            
            
            7,500
            
            
            
            $0.901
            
            
            
            6,75907/10/03
            05/11/06
            HAMCO
      Capital Corporation (5)
            
            
            7,500
            
            
            
            $0.834
            
            
            
            6,25311/24/03
            05/11/06
            HAMCO
      Capital Corporation (5)
            
            
            7,500
            
            
            
            $0.901
            
            
            
            6,75902/10/04
            05/11/06
            The
      Hambrecht 1980 Revocable Trust (3)
            
            
            15,000
            
            
            
            $0.690
            
            
            
            10,35006/04/04
            05/11/06
            HAMCO
      Capital Corporation (5)
            
            
            4,064
            
            
            
            $2.748
            
            
            
            11,17106/04/04
            05/11/06
            The
      Hambrecht 1980 Revocable Trust (3)
            
            
            14,129
            
            
            
            $2.748
            
            
            
            38,83302/02/05
            05/11/06
            HAMCO
      Capital Corporation (5)
            
            
            1,718
            
            
            
            $3.220
            
            
            
            5,53202/02/05
            05/11/06
            The
      Hambrecht 1980 Revocable Trust (3)
            
            
            15,381
            
            
            
            $3.220
            
            
            
            49,52905/28/03
            05/12/06
            John
      Warnock (1)
            
            
            45,000
            
            
            
            $0.901
            
            
            
            40,55307/10/03
            05/12/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $0.833
            
            
            
            12,50607/30/03
            05/12/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $0.690
            
            
            
            10,35008/29/03
            05/12/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $0.690
            
            
            
            10,35009/12/03
            05/12/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $0.901
            
            
            
            13,51809/29/03
            05/12/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $1.036
            
            
            
            15,54210/10/03
            05/12/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $0.901
            
            
            
            13,518




91


ExerciseIssue
      Date
            Exercise
      Date
            Warrant
      Holder
            
            Warrant
      Shares
            
            
            Price
      per share
            
            
            Cash
      Received10/30/03
            05/12/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $0.901
            
            
            
            13,51811/12/03
            05/12/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $0.969
            
            
            
            14,53011/24/03
            05/12/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $0.901
            
            
            
            13,51812/11/03
            05/12/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $0.901
            
            
            
            13,51812/30/03
            05/12/06
            John
      Warnock (1)
            
            
            75,000
            
            
            
            $0.690
            
            
            
            51,75012/31/03
            05/12/06
            John
      Warnock (1)
            
            
            15,000
            
            
            
            $0.690
            
            
            
            10,35008/09/01
            06/29/06
            John
      Warnock (1)
            
            
            50,000
            
            
            
            $2.188
            
            
            
            109,41908/09/01
            08/08/06
            WR
      Hambrecht + Co LLC (4)
            
            
            20,000
            
            
            
            $2.188
            
            
            
            43,76808/29/03
            08/29/06
            Eu
      Revocable Trust (6)
            
            
            3,750
            
            
            
            $0.690
            
            
            
            2,587Total
      exercised
            
            
            499,042
            
            
            
            
            
            
            $
            622,916





(1)
            John
      Warnock is the Chairman of the Board of Directors of
  Salon.


(2)
            Elizabeth
      Hambrecht, a director of Salon, and her father, William Hambrecht, have
      voting rights in the Sarah and William Hambrecht
    Foundation.


(3)
            The
      Hambrecht 1980 Revocable Trust is a trust of William Hambrecht, the father
      of Salon’s CEO and President.


(4)
            William
      Hambrecht is the Chairman and Chief Executive Officer of WR Hambrecht +
      Co. LLC.  Elizabeth Hambrecht has a pecuniary interest in WR
      Hambrecht + Co. LLC.


(5)
            William
      Hambrecht and Elizabeth Hambrecht have an ownership interest in HAMCO
      Capital Corporation.


(6)
            The
      Eu Revocable Trust is for the benefit of Elizabeth
    Hambrecht.





During
the year ended March 31, 2007, warrants for 92,300 shares of common stock were
converted by related parties to 57,741 shares of common stock for which Salon
did not receive any consideration under the net exercise provisions of the
warrants, as follows:





ExerciseIssue
      Date
            Exercise
      Date
            Warrant
      Holder
            
            Warrant
      Shares
            
            
            Price
      per share
            
            
            Converted
      Shares04/10/03
            04/04/06
            Ironstone
      Group, Inc (1)
            
            
            15,000
            
            
            
            $0.834
            
            
            
            12,76604/29/03
            04/25/06
            Ironstone
      Group, Inc (1)
            
            
            15,000
            
            
            
            $0.901
            
            
            
            12,18310/06/03
            05/11/06
            Ironstone
      Group, Inc (1)
            
            
            15,000
            
            
            
            $1.036
            
            
            
            10,90910/30/03
            05/11/06
            Ironstone
      Group, Inc (1)
            
            
            7,500
            
            
            
            $0.901
            
            
            
            5,72108/09/01
            08/09/06
            McKay
      Investment Group (2)
            
            
            24,800
            
            
            
            $2.188
            
            
            
            7,84002/10/04
            02/07/07
            WR
      Hambrecht + Co Inc. (3)
            
            
            15,000
            
            
            
            $0.690
            
            
            
            8,322Total
      converted
            
            
            92,300
            
            
            
            
            
            
            
            57,741




(1)
            William
      Hambrecht has an ownership interest in Ironstone Group,
    Inc.


(2)
            Salon
      Director Robert McKay is the managing partner of the McKay Investment
      Group.


(3)
            William
      Hambrecht is the Chairman and Chief Executive Officer of WR Hambrecht +
      Co. Inc.  Elizabeth Hambrecht has a pecuniary interest in WR
      Hambrecht + Co. Inc.








92




During
the year ended March 31, 2007, the following related parties purchased shares of
Salon’s Series D preferred stock:




Series
      D
            
            Cash
            
            Shares
            
            WarrantsPurchaser
            
            Date
            
            Subclass
            
            Received
            
            Issued
            
            IssuedThe
      Hambrecht 1980 Revocable Trust (2)
            
            07/27/06
            
            D-3
            
            $150,000
            
            125
            
            9,097John
      Warnock (1)
            
            07/27/06
            
            D-3
            
            99,600
            
            83
            
            6,040John
      Warnock (1)
            
            07/27/06
            
            D-4
            
            50,400
            
            42
            
            3,056The
      Hambrecht 1980 Revocable Trust (2)
            
            09/21/06
            
            D-4
            
            200,400
            
            167
            
            17,599John
      Warnock (1)
            
            09/21/06
            
            D-4
            
            199,200
            
            166
            
            17,494John
      Warnock (1)
            
            12/15/06
            
            D-4
            
            50,400
            
            42
            
            8,244John
      Warnock (1)
            
            12/15/06
            
            D-5
            
            150,000
            
            125
            
            24,536$900,000
            
            750
            
            86,066


(1)
            John
      Warnock is the Chairman of the Board of Directors of
  Salon.


(2)
            The
      Hambrecht 1980 Revocable Trust is a trust of William Hambrecht, the father
      of Salon’s CEO and President.




In
November 2006, William Hambrecht, the father of Salon’s CEO and President sold
to her in a private transaction 146 shares of Series D-1 preferred stock and 188
shares of Series D-2 preferred stock.




Policies
with Respect to Review, Approval or Ratification of Transactions with Related
Persons




Salon has relied on cash infusion from
related persons to meet cash operating needs from the year ended March 31, 2003
through the year ended March 31, 2008.During this period of inadequate
cash, the Board of Directors approved related person transactions after full
disclosure of the interests of related parties.  Subsequent to March 31,
2007, Salon’s Audit Committee separately, or in conjunction with the full Board,
excluding those related parties involved in such transactions reviewed, approved
and/or ratified all
related party transactions, as the Audit Committee is empowered to do
under Salon's Audit Committee Charter.




Salon has
disclosed in filings with the Securities and Exchange Commission (SEC) all
related party transactions.  The SEC defines a related party
transaction to include any transaction, arrangement or relationship in which
Salon is a participant and in which any of the following persons has or will
have a direct or indirect material interest:




·
            An
      executive officer, director or director nominee of
  Salon;


·
            Any
      person who is known to be the beneficial owner of more than 5% of Salon’s
      common stock;


·
            Any
      person who is an immediate family member of an executive officer, director
      or director nominee of Salon or beneficial owner of more than 5% of
      Salon’s common stock;


·
            Any
      firm, corporation or other entity in which any of the foregoing persons is
      employed or is a partner or principal or in a similar position or in which
      such person, together with any other of the foregoing, has a 5% or greater
      beneficial interest.




ITEM
14.  Principal Accountant Fees and Services




Burr,
Pilger & Mayer LLP is Salon’s independent registered
accountant.  The aggregate audit fees billed by Burr, Pilger &
Mayer LLP for year ended March 31, 2007 were $85,241 and for March 31, 2008 are
estimated to be approximately $94,000.  Burr, Pilger & Mayer LLP
did not perform any services for which Salon incurred fees for nonaudit-related
fees, tax fees, or other fees, nor did any other such firm.




During
the year ended March 31, 2008, all audit fees were pre-approved by the Audit
Committee.  The Audit Committee has adopted a policy that it must
pre-approve all fees for audit services, tax services and other
services.




93


PART
IV





ITEM
15.  Exhibits, Financial Statement Schedules, and Reports on Form
8-K





1.
              Financial
      Statements




The
information concerning Salon’s financial statements and the Report of Burr,
Pilger & Mayer LLP, Salon’s Independent Auditors required by this item are
incorporated by reference herein to the section of this Report in Item 8,
entitled “Financial Statements and Supplementary Data.”





2.
            Financial
      Statement Schedules




None.





3.
            Exhibits




The
following Exhibits are filed as part of, or incorporated by reference into, this
Report.





ExhibitNumber
            
            Description of Document2.1(7)
            
            Agreement
      and Plan of Reorganization dated as of May 5, 2000, among Salon.com, a
      Delaware corporation, Target Acquisition Corporation, a Delaware
      corporation and wholly-owned subsidiary of Salon, MP3Lit.com, a Nevada
      corporation and Gary Hustwit, Valerie Hustwit and William
      Hustwit.3.2(3)
            
            Restated
      Certificate of Incorporation of Salon as of June 17, 1999 with Certificate
      of Amendment of Article Fourth as of June 24, 1999.3.3.1
      (40)
            
            Certificate
      of Amendment to Restated Certificate of Incorporation, dated as of
      November 19, 2004.3.4(3)
            
            Form
      of Bylaws of Salon adopted June 24, 1999.3.4(10)
            
            Certificate
      of Designation of Preferences and Rights of the Series A Preferred Stock
      dated as of August 8, 2001.3.4.1(12)
            
            Certificate
      of Designation of Preferences and Rights of the Series B Preferred Stock,
      dated as of February 8, 2002.3.4.2(36)
            
            Certificate
      of Designation of Preferences and Rights of the Series C Preferred Stock,
      dated as of December 23, 2003.3.4.3(38)
            
            Certificate
      of Designation of Preferences and Rights of the Series D-1 Preferred
      Stock, Series D-2 Preferred Stock, Series D-3 Preferred Stock, Series D-4
      Preferred Stock and Series D-5 Preferred Stock dated as of June 1,
      2004.3.4.4(54)
            
            Amendment
      to the Certificate of Designation of Preferences and Rights of the Series
      D-1 Preferred Stock, Series D-2 Preferred Stock, Series D-3 Preferred
      Stock, Series D-4 Preferred Stock and Series D-5 Preferred Stock dated as
      of November 19, 20074.1(1)
            
            Third
      Amended and Restated Rights Agreement dated April 14,
  1999.4.1(8)
            
            Fourth
      Amended and Restated Rights Agreement dated January 12,
    2000.4.2(1)
            
            Second
      Amended and Restated Voting Agreement dated April 14,
  1999.4.2(5)
            
            Bylaws
      of the Company are incorporated by reference to Exhibit 3.4 to the
      Company’s Registration Statement on Form
S-1.




94


4.2.1(10)
            
            Securities
      Purchase Agreement dated as of August 9, 2001 between Salon Media Group,
      Inc. and the Purchasers listed on Exhibit A attached
    thereto.4.2.2(10)
            
            Securities
      Rights Agreement dated as of August 9, 2001 between Salon Media Group,
      Inc. and the Purchasers listed on Exhibit A attached
    thereto.4.2.3(10)
            
            Form
      of Common Stock Purchase Warrant dated August 9, 2001 issued by Salon
      Media Group, Inc.4.2.4(11)
            
            Securities
      Purchase Agreement dated as of September 13, 2001 between Salon Media
      Group, Inc. and the Purchasers listed on Exhibit A attached
      thereto.4.2.5(11)
            
            Securities
      Rights Agreement dated as of September 13, 2001 between Salon Media Group,
      Inc. and the Purchasers listed on Exhibit A attached
    thereto.4.2.6(11)
            
            Form
      of Common Stock Purchase Warrant dated September 13, 2001 issued by Salon
      Media Group, Inc.4.2.7(12)
            
            Securities
      Purchase Agreement dated as of February 14, 2002 between Salon Media
      Group, Inc. and Adobe Systems Incorporated.4.2.8(12)
            
            Securities
      Rights Agreement dated as of February 14, 2002 between Salon Media Group,
      Inc. and Adobe Systems Incorporated.4.2.9(12)
            
            Form
      of Common Stock Purchase Warrant dated February 14, 2002 issued by Salon
      Media Group, Inc.4.2.10(13)
            
            Note
      and Warrant Purchase Agreement dated as of July 24,
  2002.4.2.11(13)
            
            Form
      of Convertible Promissory Note, dated July 24, 2002 issued by Salon Media
      Group, Inc.4.2.12(13)
            
            Form
      of Common Stock Purchase Warrant, dated July 24, 2002 issued by Salon
      Media Group, Inc.4.2.13(14)
            
            Note
      dated as of October 3, 2002.4.2.14(15)
            
            Note
      and Warrant Purchase Agreement dated as of December 18,
    2002.4.2.15(15)
            
            Form
      of Convertible Promissory Note, dated December 18, 2002 issued by Salon
      Media Group, Inc.4.2.16(15)
            
            Form
      of Common Stock Purchase Warrant, dated December 18, 2002 issued by Salon
      Media Group, Inc.4.2.17(16)
            
            Note
      and Warrant Purchase Agreement dated as of January 26,
    2003.4.2.18(16)
            
            Form
      of Convertible Promissory Note, dated January 26, 2003 issued by Salon
      Media Group, Inc.4.2.19(16)
            
            Form
      of Common Stock Purchase Warrant, dated January 26, 2003 issued by Salon
      Media Group, Inc.4.2.20(17)
            
            Note
      and Warrant Purchase Agreement dated as of February 11,
    2003.4.2.21(17)
            
            Form
      of Convertible Promissory Note, dated February 11, 2003 issued by Salon
      Media Group, Inc.4.2.22(17)
            
            Form
      of Common Stock Purchase Warrant, dated February 11, 2003 issued by Salon
      Media Group, Inc.4.2.23(18)
            
            Form
      of Note and Warrant Purchase Agreement used during March
    2003.4.2.24(18)
            
            Form
      of Convertible Promissory Note used during March 2003 by Salon Media
      Group, Inc.




95


4.2.25(18)
            
            Form
      of Common Stock Purchase Warrant used during March 2003 by Salon Media
      Group, Inc.4.2.26(19)
            
            Note
      and Warrant Purchase Agreement dated April 10, 2003.4.2.27(19)
            
            Convertible
      Promissory Note dated April 10, 2003 by Salon Media Group,
      Inc.4.2.28(19)
            
            Common
      Stock Purchase Warrant dated April 10, 2003 by Salon Media Group,
      Inc.4.2.29(20)
            
            Note
      and Warrant Purchase Agreement dated April 29, 2003.4.2.30(20)
            
            Convertible
      Promissory Note dated April 29, 2003 by Salon Media Group,
      Inc.4.2.31(20)
            
            Common
      Stock Purchase Warrant dated April 29, 2003 by Salon Media Group,
      Inc.4.2.32(21)
            
            Note
      and Warrant Purchase Agreement dated May 28, 2003.4.2.33(21)
            
            Convertible
      Promissory Note dated May 28, 2003 by Salon Media Group,
    Inc.4.2.34(21)
            
            Common
      Stock Purchase Warrant dated May 28, 2003 by Salon Media Group,
      Inc.4.2.35(22)
            
            Note
      and Warrant Purchase Agreement dated June 12, 2003.4.2.36(22)
            
            Convertible
      Promissory Note dated June 12, 2003 by Salon Media Group,
    Inc.4.2.37(22)
            
            Common
      Stock Purchase Warrant dated June 12, 2003 by Salon Media Group,
      Inc.4.2.38(23)
            
            Note
      and Warrant Purchase Agreement dated June 26, 2003.4.2.39(23)
            
            Convertible
      Promissory Note dated June 26, 2003 by Salon Media Group,
    Inc.4.2.40(23)
            
            Common
      Stock Purchase Warrant dated June 26, 2003 by Salon Media Group,
      Inc.4.2.41(25)
            
            Note
      and Warrant Purchase Agreement dated July 10, 2003.4.2.42(25)
            
            Convertible
      Promissory Note dated July 10, 2003 by Salon Media Group,
    Inc.4.2.43(25)
            
            Common
      Stock Purchase Warrant dated July 10, 2003 by Salon Media Group,
      Inc.4.2.44(26)
            
            Note
      and Warrant Purchase Agreement dated July 30, 2003.4.2.45(26)
            
            Convertible
      Promissory Note dated July 30, 2003 by Salon Media Group,
    Inc.4.2.46(26)
            
            Common
      Stock Purchase Warrant dated July 30, 2003 by Salon Media Group,
      Inc.4.2.47(27)
            
            Note
      and Warrant Purchase Agreement dated September 12,
2003.4.2.48(27)
            
            Convertible
      Promissory Note dated September 12, 2003 by Salon Media Group,
      Inc.4.2.49(27)
            
            Common
      Stock Purchase Warrant dated September 12, 2003 by Salon Media Group,
      Inc.4.2.50(28)
            
            Note
      and Warrant Purchase Agreement dated September 29,
2003.4.2.51(28)
            
            Convertible
      Promissory Note dated September 29, 2003 by Salon Media Group,
      Inc.4.2.52(28)
            
            Common
      Stock Purchase Warrant dated September 29, 2003 by Salon Media Group,
      Inc.4.2.53(28)
            
            Note
      and Warrant Purchase Agreement dated October 6, 2003.4.2.54(28)
            
            Convertible
      Promissory Note dated October 6, 2003 by Salon Media Group,
      Inc.4.2.55(28)
            
            Common
      Stock Purchase Warrant dated October 6, 2003 by Salon Media Group,
      Inc.4.2.56(29)
            
            Note
      and Warrant Purchase Agreement dated October 10, 2003.4.2.57(29)
            
            Convertible
      Promissory Note dated October 10, 2003 by Salon Media Group,
      Inc.4.2.58(29)
            
            Common
      Stock Purchase Warrant dated October 10, 2003 by Salon Media Group,
      Inc.4.2.59(30)
            
            Note
      and Warrant Purchase Agreement dated October 30, 2003.4.2.60(30)
            
            Convertible
      Promissory Note dated October 30, 2003 by Salon Media Group, Inc. with
      Ironstone Group, Inc.




96


4.2.61(30)
            
            Common
      Stock Purchase Warrant dated October 30, 2003 by Salon Media Group, Inc.
      with Ironstone Group, Inc.4.2.62(30)
            
            Convertible
      Promissory Note dated October 30, 2003 by Salon Media Group, Inc. with
      John Warnock.4.2.63(30)
            
            Common
      Stock Purchase Warrant dated October 30, 2003 by Salon Media Group, Inc.
      with John Warnock.4.2.64(30)
            
            Note
      and Warrant Purchase Agreement dated November 12, 2003.4.2.65(30)
            
            Convertible
      Promissory Note dated November 12, 2003 by Salon Media Group,
      Inc.4.2.66(30)
            
            Common
      Stock Purchase Warrant dated November 12, 2003 by Salon Media Group,
      Inc.4.2.67(31)
            
            Note
      and Warrant Purchase Agreement dated November 24, 2003.4.2.68(31)
            
            Convertible
      Promissory Note dated November 24, 2003 by Salon Media Group, Inc. and
      John Warnock.4.2.69(31)
            
            Common
      Stock Purchase Warrant dated November 24, 2003 by Salon Media Group, Inc.
      for John Warnock.4.2.70(31)
            
            Convertible
      Promissory Note dated November 24, 2003 by Salon Media Group, Inc. and
      HAMCO Capital Corporation.4.2.71(31)
            
            Common
      Stock Purchase Warrant dated November 24, 2003 by Salon Media Group, Inc.
      for HAMCO Capital Corporation.4.2.72(32)
            
            Note
      and Warrant Purchase Agreement dated December 10, 2003.4.2.73(32)
            
            Convertible
      Promissory Note dated December 10, 2003 by Salon Media Group, Inc. and
      Wenner Media LLC.4.2.74(32)
            
            Common
      Stock Purchase Warrant dated December 10, 2003 by Salon Media Group, Inc.
      for Wenner Media LLC.4.2.75(32)
            
            Note
      and Warrant Purchase Agreement dated December 11, 2003.4.2.76(32)
            
            Convertible
      Promissory Note dated December 10, 2003 by Salon Media Group, Inc. and
      John Warnock.4.2.77(32)
            
            Common
      Stock Purchase Warrant dated December 10, 2003 by Salon Media Group, Inc.
      for John Warnock.4.2.78(36)
            
            Securities
      Purchase Agreement dated as of December 30, 2003 between Salon
      Media
              Group,
      Inc. and the Purchasers listed on the Schedule of Purchasers attached
      thereto.4.2.79(36)
            
            Form
      of Common Stock Purchase Warrant dated December 30, 2003 issued by Salon
      Media Group, Inc.4.2.80(37)
            
            Securities
      Purchase Agreement dated as of February 10, 2004 between Salon Media
      Group, Inc. and the Purchasers listed on the Schedule of Purchasers
      attached thereto.4.2.81(37)
            
            Form
      of Common Stock Purchase Warrant dated February 10, 2004 issued by Salon
      Media Group, Inc.4.2.82(38)
            
            Securities
      Purchase Agreement dated as of June 4, 2004 between Salon Media Group,
      Inc. and the Purchasers listed on the Schedule of Purchasers attached
      thereto.4.2.83(38)
            
            Form
      of Common Stock Purchase Warrant dated June 4, 2004 issued by Salon Media
      Group, Inc.4.2.84(39)
            
            Amendment
      No. 1 to Securities Purchase Agreement dated as of September 30,
      2004.4.2.85(39)
            
            Common
      Stock Purchase Warrant dated September 30, 2004 issued by Salon Media
      Group, Inc.4.2.86(43)
            
            Amendment
      No. 2 to Securities Purchase Agreement dated as of February 2,
      2005.




97


4.2.87(43)
            
            Form
      of Common Stock Purchase Warrant dated February 2, 2005 issued by Salon
      Media Group, Inc.4.2.88(45)
            
            Amendment
      No. 3 to Securities Purchase Agreement dated November 9,
    2005.4.2.89(46)
            
            Amendment
      No. 4 to Securities Purchase Agreement dated December 21,
      2005.4.2.90(46)
            
            Common
      Stock Purchase Warrant dated December 21, 2005 issued by Salon Media
      Group, Inc.4.2.91(48)
            
            Amendment
      No. 5 to Securities Purchase Agreement dated July 27,
  2006.4.2.92(48)
            
            Common
      Stock Purchase Warrant dated July 27, 2006 issued by Salon Media Group,
      Inc. to The Hambrecht 1980 Revocable Trust.4.2.93(48)
            
            Common
      Stock Purchase Warrant dated July 27, 2006 issued by Salon Media Group,
      Inc. to John E. and Marva M. Warnock.4.2.94(48)
            
            Common
      Stock Purchase Warrant dated July 27, 2006 issued by Salon Media Group,
      Inc. to John E. and Marva M. Warnock.4.2.95(49)
            
            Amendment
      No. 6 to Securities Purchase Agreement dated September 21,
      2006..4.2.96(49)
            
            Common
      Stock Purchase Warrant dated September 21, 2006 issued by Salon Media
      Group, Inc. to The Hambrecht 1980 Revocable Trust.4.2.97(49)
            
            Common
      Stock Purchase Warrant dated September 21, 2006 issued by Salon Media
      Group, Inc. to John E. and Marva M. Warnock.4.2.98(50)
            
            Amendment
      No. 7 to Securities Purchase Agreement dated December 18,
      2006..4.2.99(50)
            
            Common
      Stock Purchase Warrant dated December 18, 2006 issued by Salon Media
      Group, Inc. to John E. and Marva M. Warnock.4.2.100(50)
            
            Common
      Stock Purchase Warrant dated December 18, 2006 issued by Salon Media
      Group, Inc. to John E. and Marva M. Warnock.4.2.101(52)
            
            Amendment
      No.8 to Securities Purchase Agreement dated November 19,
    20074.2.102(52)
            
            Common
      Stock Purchase warrant dated November 19, 20075.0
      (41)
            
            Legal
      opinion filed by DLA Piper Rudnick Gray Cary US LLP dated January 14,
      2005.10.0(4)
            
            Commercial
      Office Lease between Pacific Resources PCX Development, Inc. and Salon
      dated July 9, 1999.10.0(6)
            
            Rainbow
      Media Holdings, Inc. Stock Purchase Agreement dated December 3,
      1999.10.1(1)
            
            1995
      Stock Option Plan.10.1(6)
            
            Bravo
      Website Agreement dated January 12, 2000.10.2(2)
            
            1999
      Employee Stock Purchase Plan.10.2(6)
            
            Bravo
      Production Agreement dated January 12, 2000.10.3(1)
            
            Form
      of Indemnity Agreement.10.4(1)
            
            Commercial
      Office Lease between T/W Associates and Salon dated June 25,
      1997.10.6(1)
            
            Employment
      Agreement between Michael O’Donnell and Salon dated November 7,
      1996.10.6(9)
            
            Employment
      Agreement between Robert O’Callahan and Salon dated June 26,
      2000.10.9(1)
            
            Warrant
      to Purchase Stock issued to Imperial Bancorp dated December 17,
      1998.10.10(1)
            
            Warrant
      to Purchase Stock issued to Imperial Bank dated April 13,
      1998.10.11(1)
            
            Warrant
      to Purchase Stock issued to Imperial Bankcorp dated April 14,
      1997.10.12(1)
            
            Warrant
      to Purchase Stock issued to America Online Inc. dated July 31,
      1998.




98


10.13(1)
            
            Warrant
      to Purchase Stock issued to Adobe Ventures II L.P. dated September 18,
      1998.10.14(1)
            
            Warrant
      to Purchase Stock issued to ASCII Ventures dated September 18,
      1998.10.15(1)
            
            Warrant
      to Purchase Stock issued to H&Q Salon Investors, L.P. dated September
      18, 1998.10.16(2)
            
            Warrant
      to Purchase Stock issued to Daiwa Securities America Inc. dated April 14,
      1999.10.17(2)
            
            Warrant
      to Purchase Stock issued to ACT III Communications dated April 14,
      1999.10.18(9)
            
            Amendment
      No. 2 To Anchor Tenant Agreement between America Online, Inc. and
      Salon.10.19(1)
            
            Series
      A Preferred Stock Purchase Agreement dated December 22,
    1995.10.20(1)
            
            First
      Amendment to the Series A Preferred Stock Purchase Agreement dated August
      2, 1996.10.21(1)
            
            Second
      Amendment to the Series A Preferred Stock Purchase Agreement dated
      February 6, 1997.10.22(1)
            
            Series
      B Preferred Stock Purchase Agreement dated November 28,
    1997.10.23(1)
            
            Series
      C Preferred Stock Purchase Agreement dated September 18,
    1998.10.24(1)
            
            Series
      C Preferred Stock Purchase Agreement dated April 14,
  1999.10.25(2)
            
            Warrant
      to Purchase Stock issued to Chatsworth Securities LLC dated April 14,
      1999.10.26(24)
            
            Amended
      Office Lease between Salon’s San Francisco landlord and Salon dated June
      24, 2003.10.27(33)
            
            Amended
      Office Lease between Salon’s San Francisco landlord and Salon dated
      December 31, 2003.10.28(42)
            
            Office
      Lease between BRE/Rincon II Leasehold L.L.C. and Salon Media Group, Inc.
      dated January 13, 2005.10.29
      (44)
            
            Salon
      Media Group, Inc. 2004 Stock Plan.10.30
      (44)
            
            Form
      of the Salon Media Group, Inc. Notice of Grant of Stock Option and Stock
      Option Agreement.10.31(44)
            
            Salon
      Media Group, Inc. Non-Plan Stock Option Agreement with David Talbot dated
      February 7, 200510.32(47)
            
            Employment
      Agreement with Christopher Neimeth dated June 5, 200610.33(47)
            
            Salon
      Media Group, Inc. Non-Plan Stock Option Agreement with Christopher Neimeth
      dated June 6, 200610.34(51)
            
            Amendment
      No.1 to Neimeth Employment Agreement dated September 13,
    200710.35(53)
            
            Employment
      Agreement with Norman Blashka dated December 31, 200710.36(53)
            
            Separation
      Agreement with Conrad Lowry dated January 9, 200810.37(54)
            
            Note
      Purchase Agreement dated April 4, 200810.38(54)
            
            Form
      of Convertible Promissory Note dated April 4, 200810.39
            
            Employment
      Agreement with Joan Walsh dated May 13, 200816.1
      (34)
            
            Letter
      from PricewaterhouseCoopers LLP to the Securities and Exchange
      Commission.16.2
      (35)
            
            Letter
      from PricewaterhouseCoopers LLP to the Securities and Exchange
      Commission.




99


21.1(8)
            
            Subsidiaries
      of Salon.23.2
      (41)
            
            Consent
      of PricewaterhouseCoopers LLP, Independent Registered Public Accounting
      Firm dated January 13, 2005.23.3
      (41)
            
            Consent
      of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting
      Firm dated January 12, 2005.23.1
            
            Consent
      of Burr, Pilger & Mayer LLP, Independent Registered Public Accounting
      Firm.24.1(1)
            
            Power
      of Attorney (included on page II-5).31.1
            
            Certification
      of Christopher Neimeth, Chief Executive Officer of the Registrant pursuant
      to Section 302, as adopted pursuant to the Sarbanes-Oxley Act of
      2002.31.2
            
            Certification
      of Norman Blashka, Chief Financial Officer and Secretary of the Registrant
      pursuant to Section 302, as adopted pursuant to the Sarbanes-Oxley Act of
      2002.32.1
            
            Certification
      of Christopher Neimeth, Chief Executive Officer of the Registrant pursuant
      to Section 906, as adopted pursuant to the Sarbanes-Oxley Act of
      2002.32.2
            
            Certification
      of Norman Blashka, Chief Financial Officer and Secretary of the Registrant
      pursuant to Section 906, as adopted pursuant to the Sarbanes-Oxley Act of
      2002.Footnote
            
            Footnote Description1
            
            Incorporated
      by reference to the exhibit filed with Salon’s Registration Statement
      report on Form S-1 filed on April 19, 1999.2
            
            Incorporated
      by reference to the exhibit filed with Salon’s Registration Statement
      report on Form S-1/A filed on May 27, 1999.3
            
            Incorporated
      by reference to the exhibit filed with Salon’s Registration Statement
      report on Form S-1/A filed on June 18, 1999.4
            
            Incorporated
      by reference to the exhibit filed with Salon’s Quarterly Report on Form
      10-Q filed on August 16, 1999.5
            
            Incorporated
      by reference to the exhibit filed with Salon’s Registration Statement
      report on Form S-8 filed on September 8, 1999.6
            
            Incorporated
      by reference to the exhibit filed with Salon’s Quarterly Report on Form
      10-Q filed on February 14, 2000.7
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on May 22, 2000.8
            
            Incorporated
      by reference to the exhibits filed with Salon’s Annual Report on Form
      10-K405 filed on June 30, 2000.9
            
            Incorporated
      by reference to the exhibit filed with Salon’s Quarterly Report on Form
      10-Q filed on November 13, 2000.10
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on August 20, 2001.11
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on September 25, 2001.12
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on March 13, 2002.




100


13
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on July 29, 2002.14
            
            Incorporated
      by reference to the exhibit filed with Salon’s Current Report on Form 8-K
      filed on October 15, 2002.15
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on December 30, 2002.16
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on February 11, 2003.17
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on February 24, 2003.18
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on March 28, 2003.19
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on April 22, 2003.20
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on May 12, 2003.21
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on June 10, 2003.22
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on June 27, 2003.23
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on July 11, 2003.24
            
            Incorporated
      by reference to the exhibit filed with Salon’s Quarterly Report on Form
      10-Q filed on August 11, 2003.25
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on July 25, 2003.26
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on August 7, 2003.27
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on September 29, 2003.28
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on October 14, 2003.29
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on October 27, 2003.30
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on November 14, 2003.31
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on December 9, 2003.32
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on December 24, 2003.33
            
            Incorporated
      by reference to the exhibit filed with Salon’s Quarterly Report on Form
      10-Q filed on February 6, 2004.




101


34
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on November 17, 2003.35
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on November 26, 2003.36
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on January 14, 2004.37
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on February 25, 2004.38
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on June 16, 2004.39
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on October 6, 2004.40
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on December 13, 2004.41
            
            Incorporated
      by reference to the exhibits filed with Salon’s Registration Statement on
      Form S-8 filed on January 14, 2005.42
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on January 19, 2005.43
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on February 4, 2005.44
            
            Incorporated
      by reference to the exhibits filed with Salon’s Annual Report on
      Form 10-K filed on June 29, 2005.45
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on November 10, 2005.46
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on December 22, 2005.47
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on June 9, 2006.48
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on July 31, 2006.49
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on September 26, 2006.50
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on December 20, 2006.51
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on September 14, 200752
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on November 20, 200753
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on January 9, 200854
            
            Incorporated
      by reference to the exhibits filed with Salon’s Current Report on Form 8-K
      filed on April 9, 2008






102


SIGNATURES





Pursuant
to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of
1934, the registrant has duly caused this report to be signed on its behalf by
the undersigned, thereunto duly authorized.




SALON MEDIA GROUP,
INC.








By:  /s/ Christopher
Neimeth


Christopher Neimeth


Chief
Executive Officer







POWER OF ATTORNEY




KNOW ALL PERSONS BY THESE
PRESENTS, that each person whose signature appears below constitutes and
appoints Christopher Neimeth and Norman Blashka, and each or any one of them,
his true and lawful attorney-in-fact and agent, with full power of substitution
and resubstitution, for his or her and in his or her name, place and stead,
in any and all capacities, to sign any and all amendments to this Annual Report
on Form 10-K, and to file the same, with all exhibits thereto, and other
documents in connection therewith, with the Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
connection therewith, as fully to all intents and purposes as he might or could
do in person, hereby ratifying and confirming our signatures as they may be
signed by ours said attorney-in-fact and any and all amendments to this Annual
Report on Form 10-K.





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/
      Christopher Neimeth
            
            Chief
      Executive Officer
            
            June
      27, 2008Christopher
      Neimeth
            
            (Principal
      Executive Officer)/s/
      Norman Blashka
            
            Executive
      Vice President and
            
            June
      27, 2008Norman
      Blashka
            
            Chief
      Financial Officer(Principal
      Financial Officer)/s/
      Deepak Desai
            
            Director
            
            June
      27, 2008Deepak
      Desai





103





/s/
      Robert Ellis
            
            Director
            
            June
      27, 2008Robert
      Ellis/s/
      Elizabeth Hambrecht
            
            Director
            
            June
      27, 2008Elizabeth
      Hambrecht/s/
      George Hirsch
            
            Director
            
            June
      27, 2008George
      Hirsch/s/
      Robert McKay
            
            Director
            
            June
      27, 2008Robert
      McKay/s/
      James H. Rosenfield
            
            Director
            
            June
      27, 2008James
      H. Rosenfield/s/
      David Talbot
            
            Director
            
            June
      27, 2008David
      Talbot/s/
      John Warnock
            
            Chairman
      of the Board, Director
            
            June
      27, 2008John
      Warnock






104