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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

                                   FORM 10-K/A
                                (Amendment No. 1)

       [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
                              EXCHANGE ACT OF 1934
                    For the fiscal year ended March 31, 2006
                                       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 [X] No [ ]

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. [X]

Indicate by check mark whether the registrant is an accelerated filer as defined
in Rule 12b-2 of the Act.
Large Accelerated Filer |_|   Accelerated Filer |_|   Non-Accelerated Filer |X|

The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on June 23, 2006 was 29,988,439 shares.

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                                   FORM 10-K/A

     The undersigned registrant hereby amends the following items of its Annual
Report on Form 10-K for the fiscal year ended March 31, 2006, filed with the
Securities and Exchange Commission on June 28, 2006, as follows:

     1.   Part I, Item 1A. Risk Factors
     2.   Part II, Item 6. Selected Consolidated Financial Data
     3.   Part II, Item 7. Management Discussion and Analysis of Financial
          Condition and Results of Operations
     4.   Part II, Item 8. Consolidated Financial Statements and Supplementary
          Data
     5.   Part II, Item 9A. Controls and Procedures

     The purpose of the amendment is to correct the accounting for the value of
the beneficial conversion feature of the Series C preferred stock issued on
February 10, 2004 and the shares of Series D preferred stock issued on December
21, 2005. The values of the beneficial conversion feature were recorded as
preferred deemed dividends in the statement of operations. The results of the
re-calculations were reductions in charges for preferred deemed dividends from
$2,615,000 to $936,000 for the year ended March 31, 2004 and from $1,040,000 to
$227,000 for the year ended March 31, 2006. These corrections had the effect of:

     1.   Reducing the net loss attributable to common stockholders for the year
          ended March 31, 2006 from $2,162,000 to $1,349,000;
     2.   Reducing the basic and diluted net loss per share attributable to
          common stockholders for the year ended March 31, 2006 from ($0.13) to
          ($0.08);
     3.   Reducing the net loss attributable to common stockholders for the year
          ended March 31, 2004 from $8,661,000 to $6,982,000;
     4.   Reducing the basic and diluted net loss per share attributable to
          common stockholders for the year ended March 31, 2004 from ($0.61) to
          ($0.50).

     With the exception of the foregoing, no other information in the
registrants Annual Report on Form 10-K has been supplemented, updated or
amended. Pursuant to Rule 12b-5 under the Securities Exchange Act of 1934, as
amended, the complete text of each amended item is set forth below.

     As a result of management's internal review, the registrant has identified
material weaknesses in its internal control over financial reporting, including
controls over the accounting for issuances of preferred stock. The registrant is
actively engaged in the implementation of remediation efforts to address these
material weaknesses in internal controls over financial reporting. See Part II,
Item 9A, "Controls and Procedures."


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--------------------------------------------------------------------------------
FORM 10-K/A
SALON MEDIA GROUP, INC.
INDEX
--------------------------------------------------------------------------------

                                                                           Page
PART I                                                                    Number

ITEM 1A.    Risk Factors...................................................  4

PART II

ITEM 6.     Selected Consolidated Financial Data........................... 14

ITEM 7.     Management's Discussion and Analysis of Financial Condition
            and Results of Operations...................................... 15

ITEM 8.     Consolidated Financial Statements and Supplementary Data....... 26

ITEM 9A.    Controls and Procedures........................................ 57

PART IV

ITEM 15.    Exhibits and Financial Statement Schedules..................... 58

SIGNATURES  ............................................................... 58

<PAGE>

PART I

ITEM 1A.  Risk Factors

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

Salon's projected cash flows may not meet expectations

     Salon relies on cash projections to run its business. 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 cash receipts from advertising sales 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. 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 may issue additional preferred stock at effective prices lower than
current common stock market prices that may result in non-cash charges to
operations

     The certificate of designation and preferences and rights of the Series D
preferred stock stipulates that the Series D conversion price will be equal to
70% of the average closing sales price of Salon's common stock for the thirty
days prior to the date Salon provides notice to purchasers of its intent to sell
additional shares of Series D preferred stock. Such a discount, and the time lag
between the date of the notice and the date a transaction is consummated, may
trigger a non-cash preferred deemed dividend charge. In connection with the sale
of 209 shares of Series D-3 in December 2005, it incurred a preferred deemed
dividend charge of $0.2 million. Currently, there are 1,042 shares of authorized
and unissued shares of Series D preferred that it may sell. Salon cannot predict
to what extent it may incur future preferred deemed dividend charges, if any.

Salon has relied on related parties for significant investment capital

     Salon has been relying on cash infusions from related parties to fund
operations. The related parties are primarily John Warnock, a Director of Salon,
and William Hambrecht. William Hambrecht is the father of Salon's President and
Chief Executive Officer. Subsequent to March 31, 2006, these two related
parties, in conjunction with affiliated entities, exercised warrants for which
Salon received $0.5 million. In addition, William Hambrecht and John Warnock
have committed to provide Salon with $0.4 million in cash in July 2006 from the
exercise of outstanding warrants and from the purchase of additional shares of
Series D preferred stock. Curtailment of cash investments 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 they may make business decisions with which non-principal
stockholders disagree that 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 95% of all voting
securities as of May 15, 2006. These stockholders therefore own a controlling
interest in Salon. Of this amount, approximately 69% is held by related


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parties, including former Directors, of which approximately 21% is controlled
directly or indirectly by William Hambrecht and approximately 41% by Director
John Warnock. Therefore, related parties by themselves own a controlling
interest in Salon.

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

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

     Salon's preferred stock holders can convert 8,558 shares of preferred stock
to approximately 183 million shares of common stock at their discretion, and as
a group, hold over 18 million shares of common stock. Even though only one
shareholder during the year ended March 31, 2006 converted one share of Series A
preferred stock and 36 shares of Series C preferred stock to 760,173 shares of
common stock, other more significant holders of preferred stock could convert
their holdings to common stock. If these stockholders convert their shares of
preferred stock to common stock and sell the resulting shares, such an inflow of
common stock into the securities market may cause the price of Salon's common
stock to decline.

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 to common stockholders of the first approximately $21.7 million in
potential sales proceeds as of March 31, 2006, which includes the effect of
undeclared dividends of $2.4 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 $21.7 million of cash distributions, while the holders of
common stock would receive none of this amount. If a liquidation event were to
occur in excess of $21.7 million and if preferred stock dividends were to be
declared, the holders of preferred stock would be entitled to receive a
relatively larger distribution than the holders of common stock would be
entitled to receive.

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

     Salon has a history of significant losses and expects to incur a loss from
operations, based on generally accepted accounting principals, for its fiscal
year ending March 31, 2007 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, 2004, March 31, 2005, and March 31, 2006,
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.


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Salon's Site Pass advertising model may inhibit traffic to its Website, which
would harm its revenues and business

     As a result of analyzing the traffic patterns to Salon's Website, Salon
believes that its Site Pass advertising model, which Salon credits as
instrumental in increasing advertising revenues, and driving memberships to
Salon Premium, inhibits growth in traffic to its Website. Salon contemplates
further analysis of these relationships and may adjust its Site Pass advertising
model to attract a wider audience. While a wider audience is intended to
increase the supply of advertising impressions, and to introduce more potential
members to Salon Premium, Salon cannot estimate when, or if, membership to Salon
Premium will again increase or if it will be successful in adjusting its Site
Pass to achieve desired results.

Salon's operations require attractive content, subscriber interest, and
confidence by subscribers that the subscription offering warrants their
long-term support and investment

     Salon is under budgetary constraints to control expenditures. These
constraints affect editorial staffing levels and the purchase of content from
freelance writers. These constraints affect the quantity of content published on
Salon's Website and consequently, a positive experience of Website visitors. The
positive experience leads to recurring Website visits and new subscriptions to
Salon Premium. The absence of any of these factors could impair the results,
revenue and cash flow from subscriptions. Salon cannot predict how many new
Salon Premium subscriptions it will acquire.

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 65,500 as of March 31, 2006.
If this decline were to continue, 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 will harm its business

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

     o    successfully sell and market its Website Site Pass or other rich media
          advertisements;

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

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

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

     o    successfully sell and market its network to advertisers;

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


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     o    increase awareness of the Salon brand;

     o    improve the technology for serving advertising on its Website;

     o    handle temporary high volume traffic spikes to its Website;

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

     o    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. Recently adopted changes in the accounting rules for employee stock
options as a compensation expense, among other accounting rules, could
materially increase the expenses that it reports under generally accepted
accounting principles and adversely affect its operating results.

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.

Salon's stock has been and will likely continue to be subject to substantial
price and volume fluctuations due to a number of factors, many of which will be
beyond its control, that 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
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.


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<PAGE>

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 our
management's attention could be diverted, causing its business, financial
condition and operating results to suffer. To date, Salon has not been subjected
to such litigation.

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

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

     o    Salon's ability to attract and retain advertisers and subscribers;

     o    Salon's ability to attract and retain a large number of users;

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

     o    the timing and uncertainty of Salon's advertising sales cycles;

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

     o    the economic and business cycle;

     o    the level of Internet usage;

     o    Salon's ability to attract, integrate and retain qualified personnel;

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

     o    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.


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Salon's outspoken stance on political issues has and may continue to result in
negative reactions from some users, commentators and other media outlets. From
time to time, certain advocacy groups have successfully targeted Salon's
advertisers in an attempt to persuade such advertisers to cease doing business
with Salon. These efforts may be a material impediment to Salon's ability to
grow and maintain advertising revenue.

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

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

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

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

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

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

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

     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 in the address. If Salon fails to adequately
protect its rights in the Website


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address, or if a third party infringes its rights in 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 or a loss of Salon Premium subscribers

     Salon has developed a proprietary online publishing system and has
developed, and continues to improve, the software to manage its Salon Premium
subscription service. 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 like 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
impact its business adversely.

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.

Measurement standards for Internet based advertising may not evolve to the
extent necessary to support Internet advertising, thereby creating uncertainty
about the viability of Salon's business model

     It is important to Salon's advertisers that Salon accurately presents the
demographics of its user base and the delivery of advertisements on its Website.
Salon depends on third parties to provide certain advertiser-requested services.
If such third parties are unable to provide these services in the future, Salon
will need to perform this function itself or obtain such services from another
provider, if available. This could cause Salon to incur additional costs or lose
revenue due to a lower level of service. Companies may choose not to advertise
on Salon or may pay less for advertising if they do not perceive its
measurements or measurements made by third parties to be reliable.

Increasing competition among Internet content providers could reduce Salon's
advertising sales or market share, thereby harming its business

     The market for Internet content is rapidly changing and intensely
competitive. Salon expects competition for Internet content to continue to
increase, and if it cannot compete effectively, its business could be harmed.
The number of Websites competing for the attention and spending of users and
advertisers may continue to increase with the most trafficked Websites receiving
a disproportionate share of advertising dollars. Salon is not one of the most
trafficked Websites, or even one of the top fifty Websites.


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     Increased competition could result in advertising price reductions or loss
of market share, any of which could harm Salon's business. Competition is likely
to increase as new companies enter the market and current competitors expand
their services. Many of Salon's present and potential competitors are likely to
enjoy substantial competitive advantages over Salon. If Salon does not compete
effectively or if it experiences any pricing pressures or loss of market share
resulting from increased competition, 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 our security
measures could misappropriate proprietary information, including customer credit
card information, or cause interruptions in the operation of its Website.

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

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

     Salon's software to manage its subscription business was developed
internally to interface with the software provided by a third party. The third
party's software provides a gateway to authenticate credit card transactions.
Even though Salon is Payment Card Industry (PCI) compliant, if these systems
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.


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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 San Francisco, 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 any
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.


                                       12
<PAGE>

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:

     o    the board of directors approved the transaction where the stockholder
          acquired 15% or more of the corporation's assets;

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

     o    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:

     o    Salon's board is classified into three classes of directors as nearly
          equal in size as possible with staggered three year-terms; and

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

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

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

     In addition, an employment agreement with an executive officer subsequent
to March 31, 2006 provides for the payment of severance and acceleration of the
vesting of options in the event of termination of the executive officer
following a change of control of Salon. These provisions in offer letters could
have the effect of discouraging potential takeover attempts.


                                       13
<PAGE>

PART II

ITEM 6. Selected Consolidated Financial Data

<TABLE>
<CAPTION>
                                              Dollar amounts in thousands, except per share
                                          ----------------------------------------------------
Year Ended March 31,                        2006       2005       2004       2003       2002
--------------------------------------    --------   --------   --------   --------   --------
                                         (Restated)            (Restated)
--------------------------------------    --------   --------   --------   --------   --------
<S>                                       <C>        <C>        <C>        <C>        <C>
Net revenues                              $  6,516   $  6,628   $  4,499   $  4,003   $  3,619
Net loss (1)                              $  1,122   $    518   $  6,046   $  5,597   $  8,000
Net loss attributable to common
    stockholders (2) (Restated)           $  1,349   $    358   $  6,982   $  5,678   $ 11,286
Basic and diluted net loss per share
attributable to common stockholders
(Restated)                                $   0.08   $   0.02   $   0.50   $   0.41   $   0.83
Weighted average common shares
    outstanding used in computing
    per share amounts (thousands)           16,188     14,390     14,099     13,938     13,547
Cash and cash equivalents                 $    441   $    686   $    696   $    162   $  1,542
Prepaid advertising rights                $  3,718   $  3,970   $  4,430   $  5,480   $  6,266
Total assets                              $  5,304   $  6,069   $  6,270   $  7,590   $ 11,342
Capital leases - long-term portion        $      -   $      -   $      -   $     18   $     77
Total long-term liabilities (3)           $    120   $     82   $  2,621   $    569   $    229
</TABLE>

(1) The net loss for the year ended March 31, 2003 includes write-down of
long-lived assets of $345 related to certain leasehold improvements. The net
loss for the year ended March 31, 2002 includes a write-down of long-lived
assets of $782 due to impairments.

(2) 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


                                       14
<PAGE>

to preferred stockholders. The net loss attributable to common stockholders for
the fiscal year ended March 31, 2002 includes a preferred deemed dividend of
$3,189 which was the difference between the offering price of Salon's Series A
preferred stock sold in August and September 2001 and the deemed fair value of
Salon's common stock on the date of the transaction.

(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 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 Internet media company that produces a content Website with ten
subject-specific sections, and two online communities - The Well and Table Talk.
Salon was incorporated in July 1995 and launched its initial Website in November
1995.

     A significant portion of Salon's revenues is derived from advertising
revenues 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. Subscriptions to Salon Premium are generally $35
for one year. Salon Premium revenue is recognized ratably over the period that
services are provided. During the years ended March 31, 2006 and 2005, Salon
received $1.8 million and $2.3 million in cash and recognized $2.0 million and
$2.2 million of revenue for this service, respectively.

     Through March 31, 2004, Salon offered The Well and Table Talk online
discussion forums as monthly subscription services. During the year ended March
31, 2005, Salon made access to Table Talk free to Salon Premium members. Revenue
from the on-line discussion forums has been recognized ratably over the
subscription period. Salon 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.

     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 and costs of serving ads.

     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 Salon premium service. It also
includes advertising, promotional and distribution costs 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


                                       15
<PAGE>

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.

     Salon has incurred significant net losses and negative cash flows from
operations since its inception. As of March 31, 2006, Salon had an accumulated
deficit of $91.0 million. These losses have been funded primarily through the
issuance of common stock from Salon's initial public offering in June 1999,
issuance of preferred stock, and from the issuance of convertible notes payable.

     Burr, Pilger & Mayer LLP, Salon's independent accountants for the years
ended March 31, 2006, March 31, 2005 and March 31, 2004 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 reoccurring operating losses. At March 31, 2006 Salon had net
operating loss carryforwards of $64.1 million for federal income tax purposes
that begin to expire in March 2015, and $33.1 million for California income tax
purposes that began to expire for the year ended March 31, 2006. 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 $0.3 million during the year ended
March 31, 2006 to $25.0 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.

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 57% and 54% of Salon's revenues, respectively for the years
ended March 31, 2006 and 2005. 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


                                       16
<PAGE>

typically include the guarantee of a minimum number of impressions, a set number
of Site Pass advertisement viewed, or a set number of days that a Site Pass
advertisement will run. To the extent minimum guaranteed amounts are not
achieved, Salon defers recognition of the corresponding revenue until the
remaining guaranteed amounts are provided, if mutually agreeable with an
advertiser. If these "make good" impressions are not agreeable to an advertiser,
no further revenue is recognized.

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

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

Prepaid Advertising Rights

     In January 2000, Salon sold 1,125,000 shares of common stock to Rainbow
Media Holdings and received $11.8 million of advertising credits that were to be
utilized for up to ten years. 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, 2006, Salon has $5.4 million
advertising credits resulting from the transaction, valued at $3.7 million for
financial reporting purposes. The common stock sale agreement stipulates that
the advertising credits be utilized through December 31, 2009. Salon therefore
contemplates accelerating the use of these credits in future years.


Results of Operations

Fiscal Years Ended March 31, 2006 and 2005

Net Revenues

     Salon's net revenue decreased 2% to $6.5 million in the year ended March
31, 2006 from $6.6 million in the year ended March 31, 2005.

     Advertising revenues increased 3% to $3.7 million for the year ended March
31, 2006 from $3.6 million for the year ended March 31, 2005. The increase in
advertising sales reflects an industry wide trend of corporations earmarking
more funds for Internet advertising.

     Salon Premium subscription revenues decreased by 8% to $2.0 million for the
year ended March 31, 2006 from $2.2 million for the year ended March 31, 2005.
The drop in Salon Premium revenues recognized for the year ended March 31, 2006
compared to the year ended March 31, 2005 is attributable to a substantial
reduction in the number of new subscribers. Paid one year subscriptions were
approximately 58,700 for the year ended March 31, 2006 compared to approximately
79,100 for the year ended March 31, 2005. The larger number of paid one year
subscribers during the year ended March 31, 2005 was primarily attributable to
capitalizing on reader interest in Salon's political coverage during the 2004
election year, with no comparable event taking place this year. The drop in paid
one year subscribers negatively impacted our renewal rate which declined from
approximately 69% as of March 31, 2005 to approximately 62% as of March 31,
2006. In addition, paid one month subscriptions declined


                                       17
<PAGE>

to approximately 3,900 for the year ended March 31, 2006 compared to
approximately 5,000 for the year ended March 31, 2005. As a result of these
factors, the number of paid subscribers decreased from approximately 84,500 at
March 31, 2005 to approximately 65,500 at March 31, 2006. As of June 25, 2006,
Salon had approximately 62,000 paid subscribers.

     In analyzing the traffic patterns on its Website, Salon believes that its
Site Pass advertising model, which Salon credits as instrumental in increasing
advertising revenues, and driving memberships to Salon Premium, inhibits a
growth in traffic to its Website. Salon contemplates further analysis of these
relationships and may adjust its Site Pass advertising model to attract a wider
audience. While a wider audience is intended to increase the supply of
advertising impressions, and to introduce more potential members to Salon
Premium, Salon cannot estimate when, or if, membership to Salon Premium will
again increase or if it will be successful in adjusting its Site Pass to achieve
desired results.

     All other sources of revenue were $0.8 million for the year ended March 31,
2006 and the year ended March 31, 2005. Approximately $0.5 million of this
revenue was derived from the Well, an online discussion forum. During Salon's
second quarter ended September 30, 2005, Salon announced that it was seeking a
buyer for this business.

Production and Content

     Production and content expenses during the year ended March 31, 2006 were
$4.5 million versus $4.4 million for the year ended March 31, 2005, an increase
of $0.1 million. The nominal 1% increase primarily reflects recognizing $0.1
million of stock compensation expense this year and none last year, $0.1 million
of additional salary related costs from an increase in staff, offset by a $0.1
million reduction in ad serving costs.

Sales and Marketing Expenses

     Sales and marketing expenses during the year ended March 31, 2006 were $1.5
million versus $1.9 million for the year ended March 31, 2005, a decrease of
$0.4 million. The 20% decrease primarily reflects utilizing $0.2 million fewer
advertising credits this year compared to last year, salary related costs
declining by $0.1 million as the amounts of commissions earned were less than
last year and a business development position was unfilled for most of the year.
In addition, the results for the year ended March 31, 2005 included a $0.1
million charge related to the issuance of a warrant to purchase common stock
that was granted as part of a separation agreement.

     As of March 31, 2006, Salon has $5.4 million of advertising credits that it
has valued at $3.7 million. The agreement that allows for the utilization of the
advertising credits will expire on December 31, 2009. Therefore, Salon
anticipates accelerating the utilization of these credits in the coming years.

Information Technology Support Expenses

     Information technology support expenses during the year ended March 31,
2006 were $0.7 million versus $0.6 million for the year ended March 31, 2005, an
increase of $0.1 million. The 10% increase was primarily attributable to hiring
technical consultants and the value of a warrant issued as part of a severance
agreement.


                                       18
<PAGE>

General and Administrative Expenses

     General and administrative expenses the year ended March 31, 2006 were $1.0
million versus $0.8 million for the year ended March 31, 2005, an increase of
$0.2 million. The 26% increase primarily resulted from a $0.1 million increase
in salary related costs attributable to raises awarded to two officers in
February 2005, an addition of one staff member and $0.1 million is attributable
to a general increase in other corporate expenses.

Interest and other income (expense)

     Interest and other income (expense) for the year ended March 31, 2006 was
essentially nil compared to a benefit of $0.6 million for the year ended March
31, 2005.

     The results for the year ended March 31, 2005 included benefits of $0.4
million from a decrease in value of warrants previously issued to convertible
note holders and approximately $0.2 million from monies received to finance
editorial content. During the year ended March 31, 2005, 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
charges or benefits in future periods relating to the value of warrants.

Preferred Deemed Dividend

     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.

     The non-cash preferred deemed dividend benefit of $0.2 million for the year
ended March 31, 2005 includes a benefit of $0.5 million from a decrease in value
of warrants previously issued to preferred stockholders and a charge of $0.3
million from the issuance of Series D preferred stock during the year. During
the year ended March 31, 2005, Salon sold 417 shares of Series D-1 and 417
shares of Series D-2 preferred stock at an effective price less than the fair
market value of Salon's common stock on the commitment dates. Salon valued the
beneficial conversion feature of the preferred stock sold at $0.3 million. As
the shares of preferred stock were all immediately convertible, for its year
ended March 31, 2005, Salon recorded a $0.3 million non-cash preferred deemed
dividend, representing the value of the beneficial conversion feature of the
shares issued.


                                       19
<PAGE>

Fiscal Years Ended March 31, 2005 and 2004

Net Revenues

     Salon's net revenue increased 47% to $6.6 million in the year ended March
31, 2005 from $4.5 million in the year ended March 31, 2004.

     Advertising revenues increased 103% to $3.6 million for the year ended
March 31, 2005 from $1.8 million for the year ended March 31, 2004. The increase
in advertising revenues reflected the success of Salon's site pass advertisement
format, which generated the majority of the ad revenue, in conjunction with
traditional advertising banners. This combination of advertisements gained wide
acceptance with advertisers. The increase also reflects the overall increase in
advertising dollars being allocated to Internet properties by companies that
wish to brand their products and services.

     Salon Premium subscription revenues increased by 20% to $2.2 million for
the year ended March 31, 2005 from $1.8 million for the year ended March 31,
2004. The revenue increase reflected a greater number of individuals signing up
for this service, as new and renewed subscriptions during the year ended March
31, 2005 were approximately 84,200 compared to approximately 77,700 during the
year ended March 31, 2004. The increase in the number of subscribers acquired
during the year ended March 31, 2005 compared to the prior year is largely
attributed 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.

     During the year ended March 31, 2005, membership to Salon Premium
decreased, the first time since inception. The number of subscribers to Salon
Premium at March 31, 2004 was approximately 72,000 and increased during the year
to approximately 89,100 on December 31, 2004 and subsequently decreased to
approximately 84,500 as of March 31, 2005. This trend also mirrored Salon's
renewal rate for one year paid subscriptions to Salon Premium, which began the
year at approximately 64%, increased to approximately 73% as of December 31,
2004, and dropped to approximately 69% as of March 31, 2005.

     All other sources of revenue accounted for $0.8 million for the year ended
March 31, 2005 compared to $0.9 million for the year ended March 31, 2004. The
decrease of $0.1 is primarily attributable to a decrease in membership to The
Well. Salon recognized $0.1 million of revenue for its year ended March 31, 2005
for hosting links to a third party's personals/dating Website.

Production and Content

     Production and content expenses during the year ended March 31, 2005 were
$4.4 million versus $4.6 million for the year ended March 31, 2004, a decrease
of $0.2 million. The 4% decrease reflects, among other items, recognizing $0.2
million related to the value of warrants issued for editorial collaboration with
a print publisher during the year ended March 31, 2004, with no comparable
amounts during the year ended March 31, 2005. During the year ended March 31,
2005, salary related expenses increased by $0.2 million due to the opening of an
office in Washington, DC, ad serving charges increased by $0.1 million from an
increase in the number of ads served, while purchased content was reduced by
$0.1 million, depreciation decreased by $0.1 million as assets became more fully
depreciated, and other general expenditures were cut by $0.1 million.


                                       20
<PAGE>

Sales and Marketing Expenses

     Sales and marketing expenses during the year ended March 31, 2005 were $1.9
million versus $2.4 million for the year ended March 31, 2004, a decrease of
$0.5 million or 21%. The decrease primarily reflects utilizing $0.6 million
fewer advertising credits for the year ended March 31, 2005 versus the year
ended March 31, 2004, offset by a $0.1 million charge from the value of warrants
issued to a former employee.

Information Technology Support Expenses

     Information technology support expenses for the years ended March 31, 2005
and March 31, 2004 were $0.6 million.

General and Administrative Expenses

     General and administrative expenses for the year ended March 31, 2005 were
$0.8 million versus $1.4 million for the year ended March 31, 2004, a decrease
of $0.6 million or 45%. The decrease reflects $0.4 million in reduction in
salary related costs from the elimination of three positions and $0.1 million
reduction in general operating costs. The March 31, 2004 results include a
charge of $0.1 million related to the issuance of warrants to a former employee
with no comparable charge during the year ended March 31, 2005.

Amortization of Intangibles

     Salon did not recognize any amortization of intangibles for its year ended
March 31, 2005 as all amounts required to be amortized have previously been
charged to operations. For the year ended March 31, 2004, Salon amortized $0.4
million of intangible assets.

Interest and other income (expense)

     Net interest and other income (expense) for the year ended March 31, 2005
was a benefit of $0.6 million compared to a charge of $1.2 million for the year
ended March 31, 2004.

     The results for the year ended March 31, 2005 includes a benefit of $0.4
million from a decrease in value of warrants previously issued to convertible
note holders and approximately $0.2 million from monies received to finance
editorial content.

     The results for the year ended March 31, 2004 include a charge of $0.8
million related to the revaluation of warrants held by convertible note holders,
a charge of $0.2 million of interest on convertible notes and other interest
related charges, and $0.3 million related to amortizing the initial value of
warrants issued to the then holders of convertible notes. Salon converted all
outstanding convertible notes to preferred stock on December 30, 2003. The
results for the year ending March 31, 2004 also includes a benefit of $0.1
million from monies received to finance editorial content.

     During the year ended March 31, 2005, 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 charges or
benefits in future periods relating to the value of warrants.


                                       21
<PAGE>

Preferred Deemed Dividend

     The non-cash preferred deemed dividend benefit of $0.2 million for the year
ended March 31, 2005 includes a benefit of $0.5 million from a decrease in value
of warrants previously issued to preferred stockholders and a charge of $0.3
million from the issuance of Series D preferred stock during the year. During
the year ended March 31, 2005, Salon sold 417 shares of Series D-1 and 417
shares of Series D-2 preferred stock at an effective price less than the fair
market value of Salon's common stock on the commitment dates. Salon valued the
beneficial conversion feature of the preferred stock sold at $0.3 million. As
the shares of preferred stock were all immediately convertible, for its year
ended March 31, 2005, Salon recorded a $0.3 million non-cash preferred deemed
dividend, representing the value of the beneficial conversion feature of the
shares issued.

     The non-cash preferred deemed dividend charge of $0.9 million for the year
ended March 31, 2004 includes a charge of $575,000 from an increase in value of
warrants previously issued to preferred stockholders and a charge of $361,000
from the issuance of Series C preferred stock during the year. During the year
ended March 31, 2004 Salon sold 500 shares of Series C preferred stock that were
sold 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 $361,000. As the shares of preferred stock were all
immediately convertible, Salon recorded a $361,000 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 $0.6 million for the year ended March 31,
2006, $0.8 million for the year ended March 31, 2005 and $2.8 million for the
year ended March 31, 2004. 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. The principal use of cash during the year ended
March 31, 2005 was to fund the $0.5 million net loss, less non-cash charges of
$0.5 million, a $0.3 million increase in accounts receivable and the $0.3
million decrease in accounts payable. The principal use of cash during the year
ended March 31, 2004 was to fund the $6.0 million net loss for the period,
offset partly by non-cash charges of $3.4 million, and use of assets and
liabilities of $0.1 million.

     Net cash used in investing activities was $0.1 million for the year ended
March 31, 2006 for the purchase of computer related equipment. Net cash used in
investing activities was $0.2 million for the year ended March 31, 2005 to fund
the acquisition of computer equipment, and for leasehold improvements. Net cash
used in investing activities was immaterial for the years ended March 31, 2004.
Salon anticipates capital expenditures of $0.1 million during the year ending
March 31, 2007 for computer related equipment.

     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. For the year ended March 31,
2005, net cash from financing activities was $1.0 million primarily from the
issuance of Series D preferred stock. For the year ended March 31, 2004, net
cash from financing activities was $3.3 million, which was comprised of $2.5
million from the issuance of notes payable, $0.9 million from the issuance of
Series C preferred stock and $0.2 million from bank borrowings, offset by $0.2
million of re-payments to the bank and $0.1 million of payments under capital
leases.

     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


                                       22
<PAGE>

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, 2006, Salon has no outstanding capital leases and does not
anticipate entering into similar debt instruments during its year ending March
31, 2007. The following summarizes Salon's contractual obligations as of March
31, 2006, 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 Period
                      -------------------------------------------------
                                     1 Year       1 - 3       More than
                         Total       or Less      Years        3 Years
                      ----------   ----------   ----------   ----------
Operating leases      $      799   $      308   $      491   $        -
                      ----------   ----------   ----------   ----------
     Total            $      799   $      308   $      491   $        -
                      ==========   ==========   ==========   ==========

     Salon's independent accountants for the years ended March 31, 2004, 2005
and 2006 have included a paragraph in their reports indicating substantial doubt
as to Salon's ability to continue as a going concern due to recurring operating
losses and negative cash flows. To address the negative cash flows, Salon
reduced expenses, evidenced by net cash used in operating activities decreasing
from $5.0 million for the year ended March 31, 2002 to $2.8 million for the year
ended March 31, 2004. The reduction in use of cash facilitated raising capital
during this period, which in turn facilitated being awarded a greater number of
advertisements, as advertisers gained confidence in Salon's survivability.

     The resurgence of the Internet ad market positively influenced Salon, as
advertising revenues increased from $1.8 million for the year ended March 31,
2004 to $3.6 million for the year ended March 31, 2005 which in turn caused the
net cash used in operations to decrease to $0.8 million for the year ended March
31, 2005. This trend has continued for the year ended March 31, 2006 as the cash
used in operations decreased to $0.6 million.

     As a result of the cash used in operations, $0.4 million from financing
activities and the use of $0.1 million for capital expenditures, Salon's
available cash at March 31, 2006 was $0.4 million. Subsequent to March 31, 2006,
Salon received $0.6 million from the exercise of warrants to purchase 9.8
million shares of common stock. The investors included John Warnock, a Director
of Salon, William Hambrecht, the father of Elizabeth Hambrecht, Salon's CEO and
President, and two entities that William Hambrecht and Elizabeth Hambrecht have
an ownership interest in.

     Based on cash proceeds from the exercise of warrants subsequent to March
31, 2006 and forecasted trade receivable receipts, cash payments, advertising
revenues of a potential high of $5.4 million and total revenues of a potential
high of $8.1 million, Salon estimates that its cash on hand may be $0.1 million
at March 31, 2007. Due to seasonality of advertising sales, Salon forecasts that
it will sustain a cash deficit of approximately $0.1 million by July 2006 that
will increase to an expected high of approximately $0.4 million by October 2006
before diminishing. If the anticipated revenue expectations are not met, Salon's
cash on hand could be significantly less. To address the projected shortfall,
Salon has received commitments from two investors, one of which is a Director of
Salon and the other is the father of Salon's CEO and President, to provide Salon
with approximately $0.4 million in cash in July 2006 from the exercise of an
outstanding warrant and from the purchase of Series D preferred stock. There is
no certainty that Salon will be able to attain any of the above mentioned
projected revenue amounts.


                                       23
<PAGE>

     If anticipated cash balances are not realized, Salon may need to raise
additional working capital. Salon may secure additional working capital from:
(1) the exercise of outstanding warrants, (2) the sale of 1,042 authorized and
unissued shares of Series D preferred stock as of this filing, (3) selling the
Well, or (4) the issuance of securities to a strategic investor.

     Salon has outstanding warrants that expire between the date of this filing
and March 31, 2007, from which Salon estimates it could potentially receive cash
of up to $0.8 million from their exercise. However, with the exception of a
commitment to exercise a warrant for approximately $0.1 million subsequent to
this filing, the actual amount could be considerably less, or nothing at all, as
the terms of the warrants allow for cashless exercise. Except for a commitment
by the two investors noted above to purchase approximately $0.3 million of
Series D preferred stock, the potential to raise additional working capital from
the issuance of additional shares of currently authorized shares of Series D
preferred stock, though viable, is not certain. In addition, Salon may explore
amending the "Securities Purchase Agreement", as amended to date, and 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," (collectively, the Series D
preferred stock) to allow for the sale of additional shares of Series D than the
1,042 currently authorized and unissued as of this filing. There is no certainty
that Salon will be able to amend these documents or sell any such additional
shares.

     Salon is currently attempting to sell The Well, an on-line community it
purchased in 1999. As of this filing, Salon has not found a suitable buyer for
this asset, which has a book value of approximately $0.2 million, most of which
is goodwill. The potential sale of The Well is not primarily driven by a need to
generate cash to finance Salon's operations, but is intended to free management
to concentrate on Salon's core operations.

     From time to time, Salon has explored the possibilities of aligning itself
with a strategic investor, a strategic partner, or being acquired by a third
party. Though these possibilities exist, there is no certainty that any of these
alternatives may come to fruition.

Off-Balance Sheet Arrangements

     Salon has no off-balance sheet arrangements.

Reverse Stock Split

     In October 2005, Salon's stockholders granted to its Board of Directors the
right to effect a reverse stock split of Salon's common stock in four ratios
between 1-for-10 and 1-for-20. The right is to expire the earlier of Salon's
2006 Annual Meeting of Stockholders or December 31, 2006. At present, Salon's
Board of Directors does not plan to exercise such right and effect a reverse
stock split.

Recent Accounting Pronouncements

     In December 2004, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standard (SFAS) No. 123R (revised 2004),
"Share-Based Payment" (SFAS 123R). In annual periods beginning after June 15,
2005, as amended by the Securities and Exchange Commission (SEC), SFAS 123R
would eliminate the ability to account for equity-based compensation using the
intrinsic value-based method under Accounting Principles Board (APB) Opinion No.
25. SFAS 123R requires companies to calculate equity-based compensation expense
for stock compensation awards based on the fair value of the equity instrument
at the time of grant. Salon currently uses, and will use upon


                                       24
<PAGE>

adoption of SFAS 123R, the Black-Scholes option pricing model to determine the
value of its stock compensation awards, but may later determine that an
alternative model may be more appropriate.

     Under SFAS 123R, public companies are allowed to select from two
alternative transition methods: the Modified Prospective Application, which
allows for the adoption of SFAS 123R without restatement of prior interim
periods in the year of adoption; and the Modified Retrospective Application
which allows companies to restate prior financial statements. Salon expects to
adopt SFAS 123R beginning in the first quarter of fiscal year 2007, as required,
using the Modified Prospective method, and will not restate prior periods for
the adoption of SFAS 123R.

     Currently, Salon discloses pro forma net income (loss) and related pro
forma net income (loss) per share in accordance with SFAS 123 "Accounting for
Stock-Based Compensation" and SFAS 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure-An Amendment of FASB Statement No. 123".
Under SFAS 123R, equity-based compensation expense is required to be recognized
in companies' financial statements.

     The amounts disclosed within the footnotes are not necessarily indicative
of the amounts that will be expensed upon the adoption of SFAS No. 123R.
Compensation expense calculated under SFAS No. 123R may differ materially from
amounts currently disclosed within the footnotes, as a result of changes in the
fair value of our common stock, the term in which the options vest, changes in
the number of options granted, the treatment of tax benefits that may result,
and changes in interest rates or other factors.

     In May 2005, the FASB issued SFAS 154 "Accounting Changes and Error
Corrections." which replaces APB Opinion No. 20 "Accounting Changes" and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements--An
Amendment of APB Opinion No. 20." SFAS 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. Specifically,
this statement requires "retrospective application" of the direct effect for a
voluntary change in accounting principle to prior periods' financial statements,
if it is practicable to do so. SFAS 154 also strictly redefines the term
"restatement" to mean the correction of an error by revising previously issued
financial statements. SFAS 154 replaces APB No. 20, which requires that most
voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the new
accounting principle. SFAS 154 is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005 and
is required to be adopted by Salon in the first quarter of fiscal 2007. Salon
does not currently believe adoption will have a material impact on its results
of operations, financial position or cash flows.


                                       25
<PAGE>

ITEM 8. Consolidated Financial Statements and Supplementary Data

                                                                            Page

Reports of Independent Registered Public Accounting Firm ....................27

Consolidated Balance Sheets as of March 31, 2006, 2005, and 2004.............28

Consolidated Statements of Operations for the years ended
     March 31, 2006, 2005, and 2004 .........................................29

Consolidated Statements of Stockholders' Equity for the years ended
     March 31, 2006, 2005, and 2004 .........................................30

Consolidated Statements of Cash Flows for the years ended
     March 31, 2006, 2005, and 2004 .........................................31

Notes to Consolidated Financial Statements...................................32

Selected Quarterly Financial Data (unaudited)................................56


                                       26
<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM


To the Board of Directors and Stockholders
Salon Media Group, Inc.

We have audited the accompanying consolidated financial statements of Salon
Media Group, Inc. and its subsidiaries (the "Company") as of March 31, 2006,
2005 and 2004, and the related consolidated statements of operations,
stockholders' equity, and cash flows for each of the three years in the period
ended March 31, 2006. 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. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the consolidated financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Salon Media Group,
Inc. and its subsidiaries as of March 31, 2006 and 2005, and the results of
their operations and their cash flows for each of the of the three years in the
period ended March 31, 2006 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 $91.0
million at March 31, 2006. 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
May 4, 2006, except for the restatement discussed in Note 1 and in the
thirteenth paragraph of Note 12 to the financial statements, as to which the
date is October 25, 2006


                                       27
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                March 31,
                                                                  --------------------------------------
                                                                     2006          2005          2004
                                                                  ----------    ----------    ----------
Assets                                                            (Restated)    (Restated)    (Restated)
<S>                                                               <C>           <C>           <C>
   Current assets:
        Cash and cash equivalents                                 $      441    $      686    $      696
        Accounts receivable, net                                         502           623           306
        Prepaid expenses and other current assets                        184           232           432
                                                                  ----------    ----------    ----------
           Total current assets                                        1,127         1,541         1,434

   Property and equipment, net                                           155           191            89
   Prepaid advertising rights                                          3,718         3,970         4,430
   Goodwill, net                                                         200           200           200
   Other assets                                                          104           167           117
                                                                  ----------    ----------    ----------
           Total assets                                           $    5,304    $    6,069    $    6,270
                                                                  ==========    ==========    ==========
Liabilities and stockholders' equity
   Current liabilities:
        Accounts payable and accrued liabilities                  $      747    $      788    $    1,125
        Deferred revenue                                                 820         1,047         1,107
        Capital lease obligations, current                                 -             -            18
                                                                  ----------    ----------    ----------
           Total current liabilities                                   1,567         1,835         2,250

   Warrants payable                                                        -             -         2,621
                                                                  ----------    ----------    ----------

   Other long-term liabilities                                           120            82             -
                                                                  ----------    ----------    ----------

        Total liabilities                                              1,687         1,917         4,871
                                                                  ----------    ----------    ----------
Commitments and Contingencies (Note 8)

Stockholders' equity:
   Preferred stock, $0.001 par value, 5,000,000 shares
      authorized, 8,558 shares issued and outstanding at
      March 31, 2006, 8,386 shares issued and outstanding
      at March 31, 2005 and 7,552 issued and outstanding at
      March 31, 2004
      (aggregate liquidation preference of $21,655 at
      March 31, 2006, $20,686 at March 31, 2005 and $18,926
      at March 31, 2004)                                                   -             -             -

   Common stock, $0.001 par value, 600,000,000 shares
      authorized, 19,129,012 shares issued and outstanding
      at March 31, 2006 , 14,970,622 shares issued and
      outstanding at March 31, 2005 and 14,155,276 issued
      and outstanding at March 31, 2004                                   19            15            14
   Additional paid-in capital (Restated)                              94,601        93,751        90,641

   Unearned compensation                                                 (40)            -             -
   Accumulated deficit (Restated)                                    (90,963)      (89,614)      (89,256)
                                                                  ----------    ----------    ----------
         Total stockholders' equity                                    3,617         4,152         1,399
                                                                  ----------    ----------    ----------
           Total liabilities and stockholders' equity             $    5,304    $    6,069    $    6,270
                                                                  ==========    ==========    ==========
</TABLE>

           See accompanying notes to Consolidated Financial Statements


                                       28
<PAGE>

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

<TABLE>
<CAPTION>
                                                         Year Ended March 31,
                                                --------------------------------------
                                                   2006          2005          2004
                                                --------------------------------------
                                                (Restated)                  (Restated)
                                                ----------    ----------    ----------
<S>                                             <C>           <C>           <C>
Net revenues                                    $    6,516    $    6,628    $    4,499
                                                ----------    ----------    ----------

Operating expenses:
   Production and content                            4,505         4,446         4,647
   Sales and marketing                               1,515         1,891         2,393
   Information technology support                      676           617           614
   General and administrative                          964           766         1,386
   Amortization of intangibles                           -             -           353
                                                ----------    ----------    ----------
       Total operating expenses                      7,660         7,720         9,393

Loss from operations                                (1,144)       (1,092)       (4,894)

Interest and other income (expense)                     22           574        (1,152)
                                                ----------    ----------    ----------
       Net loss                                     (1,122)         (518)       (6,046)

Preferred deemed dividend (Restated)                  (227)          160          (936)
                                                ----------    ----------    ----------
Net loss attributable to common
stockholders (Restated)                         $   (1,349)   $     (358)   $   (6,982)
                                                ==========    ==========    ==========

Basic and diluted net loss per share
   attributable to common stockholders
   (Restated)                                   $    (0.08)   $    (0.02)   $    (0.50)

Weighted average shares used in computing
   basic and diluted net loss per share
   attributable to common stockholders              16,188        14,390        14,099
</TABLE>


           See accompanying notes to Consolidated Financial Statements


                                       29
<PAGE>

                             SALON MEDIA GROUP, INC.
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                  (in thousands, except Preferred Stock Shares)

<TABLE>
<CAPTION>
                                      Preferred                Common
                                        Stock                   Stock           Additional                               Total
                                ----------------------------------------------   Paid-In     Unearned    Accumulated  Stockholders'
                                  Shares      Amount      Shares      Amount     Capital    Compensation    Deficit      Equity
                                --------------------------------------------------------------------------------------------------
                                                                                (Restated)                (Restated)
                                --------------------------------------------------------------------------------------------------
<S>                                <C>          <C>        <C>      <C>         <C>          <C>          <C>          <C>
Balance, March 31, 2003              934            -      14,155          14      85,283            -      (82,274)       3,023

Value of contingent shares
  issued in conjunction
  with acquisition                     -            -           -           -           5            -            -            5
Series C convertible
  preferred stock and
  common stock warrants
  issued from conversion of
  convertible notes payable        5,493            -           -           -       4,394            -            -        4,394
Series C convertible
  preferred stock and
  common stock warrants
  issued for cash                  1,125            -           -           -         892            -            -          892
Preferred deemed dividend
  on issuance of Series C
  Convertible preferred
  stock (Restated)                     -            -           -           -         361            -         (361)           -
Preferred deemed dividend
  from revaluation of
  warrants issued to
  preferred stock holders              -            -           -           -           -            -         (575)        (575)
Reclassification of
  warrants to liabilities              -            -           -           -        (294)           -            -         (294)
Net loss                               -            -           -           -           -            -       (6,046)      (6,046)
                                --------------------------------------------------------------------------------------------------
Balance, March 31, 2004
(Restated)                     $   7,552            -      14,155   $      14   $  90,641    $       -    $ (89,256)   $   1,399

Shares issued under employee
  stock plans                          -            -         399           -          55            -            -           55
Value of shares issued to
  settle amounts owed a
  trade payable                        -            -         417           1          41            -            -           42
Value of warrants issued               -            -           -           -         100            -            -          100
Series D convertible
  preferred stock and
  common stock warrants
  issued for cash                    834            -           -           -       1,207            -         (310)         897
Preferred deemed dividend
  from revaluation of
  warrants issued to
  preferred stock holders              -            -           -           -           -            -          470          470
Extinguishment of warrant
  liability - see Note 12              -            -           -           -       1,707            -            -        1,707
Net loss                               -            -           -           -           -            -         (518)        (518)
                                --------------------------------------------------------------------------------------------------
Balance, March 31, 2005
(Restated)                     $   8,386            -      14,971   $      15   $  93,751    $       -    $ (89,614)   $   4,152

Shares issued under
  employee stock plans                 -            -         520           -          72            -            -           72
Shares issued under
  warrant agreements                   -            -       2,878           3          63            -            -           66
Value of warrants issued               -            -           -           -          55            -            -           55
Preferred stock converted
  to common stock                    (37)           -         760           1          (1)           -            -            -
Amortization of unearned
  compensation                         -            -           -           -         183          (40)           -          143
Series D convertible
  preferred stock and
  common stock warrants
  issued for cash                    209            -           -           -         251            -            -          251
Preferred deemed dividend
  on issuance of Series D
  Convertible preferred
  stock (Restated)                     -            -           -           -         227            -         (227)           -
Net loss                               -            -           -           -           -            -       (1,122)      (1,122)
                                --------------------------------------------------------------------------------------------------
Balance, March 31, 2006
(Restated)                         8,558        $   -      19,129   $      19   $  94,601    $     (40)   $ (90,963)   $   3,617
</TABLE>

           See accompanying notes to Consolidated Financial Statements


                                       30
<PAGE>

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

<TABLE>
<CAPTION>
                                                                                       Year Ended March 31,
                                                                                 --------------------------------
                                                                                   2006        2005        2004
                                                                                 --------    --------    --------
<S>                                                                              <C>         <C>         <C>
Cash flows from operating activities:
 Net loss                                                                        $ (1,122)   $   (518)   $ (6,046)
 Adjustments to reconcile net loss to net cash used in operating activities:
    Loss from retirement of assets                                                      -           -          43
    Stock-based compensation                                                          143           -           -
    Warrant re-valuation                                                                -        (541)      1,037
    Depreciation and amortization                                                     143         495       1,285
    Allowance for (recovery of) doubtful accounts                                      (1)          2         (10)
    Operating lease incentives                                                          -          65           -
    Gain on issuance of common stock for trade payable                                  -         (25)          -
    Prepaid advertising rights usage                                                  252         460       1,050
    Changes in assets and liabilities:
      Accounts receivable                                                             122        (319)        (69)
      Prepaid expenses, other current assets and other assets                         111        (130)        (59)
      Accounts payable, accrued liabilities and other long-term liabilities            (3)       (254)       (180)
      Deferred revenue                                                               (227)        (60)        189
                                                                                 --------    --------    --------
         Net cash used in operating activities                                       (582)       (825)     (2,760)
                                                                                 --------    --------    --------
Cash flows from investing activities:
 Purchase of property and equipment                                                   (52)       (217)        (35)
 Proceeds from asset sales                                                              -           -          15
                                                                                 --------    --------    --------
         Net cash used in investing activities                                        (52)       (217)        (20)
                                                                                 --------    --------    --------
Cash flows from financing activities:
 Proceeds from issuance of preferred stock, net                                       251         995         892
 Proceeds from issuance of common stock, net                                          138          55           -
 Proceeds from bank borrowings                                                          -           -         182
 Repayment of short-term borrowings                                                     -           -        (182)
 Proceeds from issuance of notes payable, net                                           -           -       2,513
 Principal payments under capital leases                                                -         (18)        (91)
                                                                                 --------    --------    --------
         Net cash provided by financing activities                                    389       1,032       3,314
                                                                                 --------    --------    --------
Net increase (decrease) in cash and cash equivalents                                 (245)        (10)        534

Cash and cash equivalents at beginning of period                                      686         696         162
                                                                                 --------    --------    --------

Cash and cash equivalents at end of period                                       $    441    $    686    $    696
                                                                                 ========    ========    ========

Amount paid for interest                                                         $      -    $      -    $      6
Supplemental schedule of non-cash investing and financing activities:
 Warrants issued in connection with issuance of convertible notes payable        $      -    $      -    $    263
 Issuance of stock and warrants in connection with acquisition                          -           -           5
 Issuance of warrants in connection with agreements                                    55         100         100
 Preferred deemed dividend (Restated)                                                 227        (160)        936
 Conversion of notes payable and accrued interest to preferred stock                    -           -       4,394
 Issuance of common stock for trade payable                                             -          42           -
</TABLE>

           See accompanying notes to Consolidated Financial Statements


                                       31
<PAGE>

                             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.

     The financial statements contained herein have been restated to correct the
accounting for the beneficial conversion features of certain of Series C and
Series D preferred stock issued on February 10, 2004 and December 21, 2005.
Salon originally recorded the full intrinsic value of the aforementioned
beneficial conversion features as preferred deemed dividends. The amounts
recorded as preferred deemed dividends should have been limited to the proceeds
received from the transactions which were attributable to the preferred stock
issued. This resulted in overstating the amount of their preferred deemed
dividends and the net loss attributable to common stockholders in the statement
of operations for fiscal years ended March 31, 2004, March 31, 2006 and the
stockholders equity section of the balance sheet as of March 31, 2004, 2004 and
2006. These were non-cash charges which had no impact on Salon's statement of
cash flows or cash position.

     The effect of the correction on the Consolidated Statement of Operations is
as follows:

                                                   As Recorded     As Restated
                                                  ------------    ------------
Year-ended March 31, 2004
Preferred deemed dividend                         $     (2,615)   $       (936)
Net loss attributable to common stockholders            (8,661)         (6,982)
Basic and diluted net loss per share
    attributable to common stockholders                  (0.61)          (0.50)

Year-ended March 31, 2006
Preferred deemed dividend                         $     (1,040)   $       (227)
Net loss attributable to common stockholders            (2,162)         (1,349)
Basic and diluted net loss per share
    attributable to common stockholders                  (0.13)          (0.08)


                                       32
<PAGE>

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

The cumulative effect of the correction on the Consolidated Balance Sheet is as
follows:

                                         As Reported    As Restated
                                         -----------    -----------
      As of March 31, 2004
      Additional paid-in capital         $    92,320    $    90,641
      Accumulated deficit                $   (90,935)   $   (89,256)
      Total stockholders' equity         $     1,399    $     1,399

      As of March 31, 2005
      Additional paid-in capital         $    95,430    $    93,751
      Accumulated deficit                $   (91,293)   $   (89,614)
      Total stockholders' equity         $     4,152    $     4,152

      As of March 31, 2006
      Additional paid-in capital         $    97,093    $    94,601
      Accumulated deficit                $   (93,455)   $   (90,963)
      Total stockholders' equity         $     3,617    $     3,617


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, 2006 of $90,963. These
factors raise substantial doubt about Salon's ability to continue as a going
concern.

     Salon's independent accountants for the years ended March 31, 2004, 2005
and 2006 have included a paragraph in their reports indicating substantial doubt
as to Salon's ability to continue as a going concern due to recurring operating
losses and negative cash flows. To address the negative cash flows, Salon
reduced expenses, evidenced by net cash used in operating activities decreasing
from $5.0 million for the year ended March 31, 2002 to $2.8 million for the year
ended March 31, 2004. The reduction in use of cash facilitated raising capital
during this period, which in turn facilitated being awarded a greater number of
advertisements, as advertisers gained confidence in Salon's survivability.

     The resurgence of the Internet ad market positively influenced Salon, as
advertising revenues increased from $1.8 million for the year ended March 31,
2004 to $3.6 million for the year ended March 31, 2005 which in turn caused the
net cash used in operations to decrease to $0.8 million for the year ended March
31, 2005. This trend has continued for the year ended March 31, 2006 as the cash
used in operations decreased to $0.6 million.


                                       33
<PAGE>

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

     As a result of the cash used in operations, $0.4 million from financing
activities and the use of $0.1 million for capital expenditures, Salon's
available cash at March 31, 2006 was $0.4 million. Subsequent to March 31, 2006,
Salon received $0.6 million from the exercise of warrants to purchase 9.8
million shares of common stock. The investors included John Warnock, a Director
of Salon, William Hambrecht, the father of Elizabeth Hambrecht, Salon's CEO and
President, and two entities that William Hambrecht and Elizabeth Hambrecht have
an ownership interest in.

     Based on cash proceeds from the exercise of warrants subsequent to March
31, 2006 and forecasted trade receivable receipts, cash payments, advertising
revenues of a potential high of $5.4 million and total revenues of a potential
high of $8.1 million, Salon estimates that its cash on hand may be $0.1 million
at March 31, 2007. Due to seasonality of advertising sales, Salon forecasts that
it will sustain a cash deficit of approximately $0.1 million by July 2006 that
will increase to an expected high of approximately $0.4 million by October 2006
before diminishing. If the anticipated revenue expectations are not met, Salon's
cash on hand could be significantly less. To address the projected shortfall,
Salon has received commitments from two investors, one of which is a Director of
Salon and the other is the father of Salon's CEO and President, to provide Salon
with approximately $0.4 million in cash in July 2006 from the exercise of an
outstanding warrant and from the purchase of Series D preferred stock. There is
no certainty that Salon will be able to attain any of the above mentioned
projected revenue amounts.

     If anticipated cash balances are not realized, Salon may need to raise
additional working capital. Salon may secure additional working capital from:
(1) the exercise of outstanding warrants, (2) the sale of 1,042 authorized and
unissued shares of Series D preferred stock as of this filing, (3) selling the
Well, or (4) the issuance of securities to a strategic investor.

     Salon has outstanding warrants that expire between the date of this filing
and March 31, 2007, from which Salon estimates it could potentially receive cash
of up to $0.8 million from their exercise. However, with the exception of a
commitment to exercise a warrant for approximately $0.1 million subsequent to
this filing, the actual amount could be considerably less, or nothing at all, as
the terms of the warrants allow for cashless exercise. Except for a commitment
by the two investors noted above to purchase approximately $0.3 million of
Series D preferred stock, the potential to raise additional working capital from
the issuance of additional shares of currently authorized shares of Series D
preferred stock, though viable, is not certain. In addition, Salon may explore
amending the "Securities Purchase Agreement", as amended to date, and 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," (collectively, the Series D
preferred stock) to allow for the sale of additional shares of Series D than the
1,042 currently authorized and unissued as of this filing. There is no certainty
that Salon will be able to amend these documents or sell any such additional
shares.

     Salon is currently attempting to sell The Well, an on-line community it
purchased in 1999. As of this filing, Salon has not found a suitable buyer for
this asset, which has a book value of approximately $0.2 million, most of which
is goodwill. The potential sale of The Well is not primarily driven by a need to
generate cash to finance Salon's operations, but is intended to free management
to concentrate on Salon's core operations.


                                       34
<PAGE>

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

     From time to time, Salon has explored the possibilities of aligning itself
with a strategic investor, a strategic partner, or being acquired by a third
party. Though these possibilities exist, there is no certainty that any of these
alternatives may come to fruition.

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.

Segment and enterprise-wide reporting

     Salon discloses segment enterprise-wide information in accordance with
Statement of Financial Accounting Standard (SFAS) 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 North America, 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

     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

     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.

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.


                                       35
<PAGE>

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

Goodwill and intangible assets

     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. Intangible assets are amortized over their
respective estimated useful lives.

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
advertising 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, which includes Salon Premium,
The Well and Table Talk, is recognized ratably over the subscription period.
Subscription revenues from Table Talk were eliminated during the year ended
March 31, 2005 and became a no-cost benefit to Salon Premium subscribers. 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 $271, $471, and $1,056, for the fiscal years ended March 31, 2006, 2005, and
2004.


                                       36
<PAGE>

                             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, 2006, 2005 and 2004 and
comprehensive loss for those periods.

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, but does not require collateral.
Salon provides an allowance for credit losses that it periodically adjusts to
reflect management's expectations of future losses. One customer accounted for
11% of total trade accounts receivable at March 31, 2006 and two customers
accounted for 19% and 15%, respectively, of total trade accounts receivable at
March 31, 2005. Two customers accounted for 20% and 12%, respectively, of total
trade accounts receivable at March 31, 2004. No customer accounted for 10% or
more of total revenue for the fiscal years ended March 31, 2006, 2005 and 2004
respectively.

Stock-based compensation

     Salon accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board (APB) Opinion No.
25 and Financial Accounting Standards Board (FASB) Interpretation No. 44,
"Accounting for Certain Transactions Involving Stock Compensation - an
Interpretation of APB No. 25" (FIN 44), and complies with the disclosure
provisions of Statement of Financial Accounting Standard (SFAS) 123, as amended
by SFAS No. 148, "Accounting for Stock-Based Compensation-Transition and
Disclosure-amendment to FASB Statement No. 123, Accounting for Stock-Based
Compensation." Under APB 25, compensation expense is based on the difference, if
any, on the date of the grant, between the fair value of Salon's stock and the
exercise price. Salon accounts for stock issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Issues Task Force (EITF) Issue
No. 96-18, "Accounting for Equity Instruments that are Issued to Other than
Employees for Acquiring, or in Conjunction with Selling Goods or Services." If
Salon's


                                       37
<PAGE>

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

compensation expense under its stock option plan had been determined pursuant to
SFAS 123, Salon's net loss and net loss per share would have been as follows:

<TABLE>
<CAPTION>
                                                                   Year Ended March 31,
                                                           --------------------------------------
                                                              2006          2005          2004
                                                           ----------    ----------    ----------
                                                           (Restated)                  (Restated)
                                                           ----------    ----------    ----------
<S>                                                        <C>           <C>           <C>
Net loss attributable to common stockholders:
    As reported (Restated)                                 $   (1,349)   $     (358)   $   (6,982)
    Add back: stock-based employee compensation
    expense included in reported net loss                           -             -             -
    Deduct: total stock-based compensation expense
    determined under the fair value based method, net
    of related tax                                             (2,321)       (1,390)         (219)
                                                           ----------    ----------    ----------
    Pro forma net loss attributable to common
    stockholders (Restated)                                $   (3,670)   $   (1,748)   $   (7,201)
                                                           ==========    ==========    ==========
Basic and diluted net loss per share attributable
common stockholders:
    As reported (Restated)                                 $    (0.08)   $    (0.02)   $    (0.50)
    Pro forma net loss per share (Restated)                $    (0.23)   $    (0.12)   $    (0.51)
</TABLE>

     The fair value of the options was estimated at the date of grant using the
Black-Scholes option-pricing model. No options were granted during the year
ended March 31, 2004. Salon determined the estimated fair value of its options
granted for the years ended March 31, 2006, and 2005, using the following
assumptions:

                                               Year Ended March 31,
                                    --------------------------------------------
                                        2006            2005            2004
                                    ------------    ------------    ------------
Risk-free interest rates            3.80 - 4.30%        3.40%           N/A
Expected lives (in years)                 4               4             N/A
Expected volatility                     120%            120%            N/A
Dividend yield                          0.0%            0.0%            N/A

     The weighted average grant date fair value per share of options granted
during the years ended March 31, 2006, 2005, and 2004 was $0.19, $0.11 and none,
respectively.


                                       38
<PAGE>

                             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:

<TABLE>
<CAPTION>
                                                                   Year Ended March 31,
                                                       -----------------------------------------------
                                                           2006             2005              2004
                                                       -------------    -------------    -------------
                                                        (Restated)                         (Restated)
                                                       -------------    -------------    -------------
<S>                                                    <C>              <C>              <C>
Numerator:
    Net loss attributable to common
        stockholders (Restated)                        $      (1,349)   $        (358)   $      (6,982)
                                                       =============    =============    =============

Denominator:
    Weighted average shares outstanding                   16,188,000       14,390,000       14,155,000
    Weighted average shares held in escrow                         0                0          (56,000)
                                                       -------------    -------------    -------------
    Weighted average shares used in
       computing basic and diluted net loss per
       share attributable to common stockholders          16,188,000       14,390,000       14,099,000
                                                       =============    =============    =============

Basic and diluted net loss per share attributable
    to common stockholders (Restated)                  $       (0.08)   $       (0.02)   $       (0.50)
                                                       =============    =============    =============

Antidilutive securities including options,
    warrants and convertible preferred stock
    not included in loss per share calculation           237,979,000      232,006,000      199,312,000
                                                       =============    =============    =============
</TABLE>

Recent accounting pronouncements

     In December 2004, the FASB issued SFAS No. 123R (revised 2004),
"Share-Based Payment" (SFAS 123R). In annual periods beginning after June 15,
2005, as amended by the Securities and Exchange Commission (SEC), SFAS 123R
would eliminate the ability to account for equity-based compensation using the
intrinsic value-based method under APB Opinion No. 25. SFAS 123R requires
companies to calculate equity-based compensation expense for stock compensation
awards based on the fair value of the equity instrument at the time of grant.
Salon currently uses, and will use upon adoption of SFAS 123R, the Black-Scholes
option pricing model to determine the value of its stock compensation awards,
but may later determine that an alternative model may be more appropriate.

     Under SFAS 123R, public companies are allowed to select from two
alternative transition methods: the Modified Prospective Application, which
allows for the adoption of SFAS 123R without restatement of prior annual periods
in the year of adoption, and the Modified Retrospective Application which allows
companies to restate prior financial statements. Salon expects to adopt SFAS
123R


                                       39
<PAGE>

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

beginning in the first quarter of fiscal year 2007, as required, using the
Modified Prospective method, and will not restate prior periods for the adoption
of SFAS 123R.

     Currently, Salon discloses pro forma net income (loss) and related pro
forma net income (loss) per share in accordance with SFAS 123 "Accounting for
Stock-Based Compensation" and SFAS 148 "Accounting for Stock-Based
Compensation-Transition and Disclosure-An Amendment of FASB Statement No. 123".
Under SFAS 123R, equity-based compensation expense is required to be recognized
in companies' financial statements.

     The amounts disclosed within the footnotes are not necessarily indicative
of the amounts that will be expensed upon the adoption of SFAS No. 123R.
Compensation expense calculated under SFAS No. 123R may differ materially from
amounts currently disclosed within the footnotes, as a result of changes in the
fair value of our common stock, the term in which the options vest, changes in
the number of options granted, the treatment of tax benefits that may result,
and changes in interest rates or other factors.

     In May 2005, the FASB issued SFAS 154 "Accounting Changes and Error
Corrections." which replaces APB Opinion No. 20 "Accounting Changes" and SFAS
No. 3, "Reporting Accounting Changes in Interim Financial Statements--An
Amendment of APB Opinion No. 20." SFAS 154 provides guidance on the accounting
for and reporting of accounting changes and error corrections. Specifically,
this statement requires "retrospective application" of the direct effect for a
voluntary change in accounting principle to prior periods' financial statements,
if it is practicable to do so. SFAS 154 also strictly redefines the term
"restatement" to mean the correction of an error by revising previously issued
financial statements. SFAS 154 replaces APB No. 20, which requires that most
voluntary changes in accounting principle be recognized by including in net
income of the period of the change the cumulative effect of changing to the new
accounting principle. SFAS 154 is effective for accounting changes and
correction of errors made in fiscal years beginning after December 15, 2005 and
is required to be adopted by Salon in the first quarter of fiscal 2007. Salon
does not currently believe adoption will have a material impact on its results
of operations, financial position or cash flows.

Note 3. Balance Sheet Components

<TABLE>
<CAPTION>
                                                         Year Ended March 31,
                                                --------------------------------------
                                                   2006          2005          2004
                                                ----------    ----------    ----------
<S>                                             <C>           <C>           <C>
Accounts receivable, net:
   Accounts receivable                          $      532    $      653    $      336
   Less: allowance for doubtful accounts               (30)          (30)          (30)
                                                ----------    ----------    ----------
                                                $      502    $      623    $      306
                                                ==========    ==========    ==========

Prepaid expenses and other current assets
   Prepaid lease termination fees               $        -    $        -    $      192
   Receivable from employees                            48            89            92
   Prepaid expenses                                     40            88            79
   Short-term deposits                                  96            54            49
   Other receivables                                     -             1            20
                                                ----------    ----------    ----------
                                                $      184    $      232    $      432
                                                ==========    ==========    ==========
</TABLE>


                                       40
<PAGE>

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

<TABLE>
<CAPTION>
                                                         Year Ended March 31,
                                                --------------------------------------
Balance sheet components (continued)               2006          2005          2004
                                                ----------    ----------    ----------
<S>                                             <C>           <C>           <C>
Property and equipment, net
   Computer hardware and software               $    1,263    $    1,316    $    1,392
   Leasehold improvements                               67            67            34
   Furniture and office equipment                      242           243           258
                                                ----------    ----------    ----------
                                                     1,572         1,626         1,684
   Less: accumulated depreciation                   (1,417)       (1,435)       (1,595)
                                                ----------    ----------    ----------
                                                $      155    $      191    $       89
                                                ==========    ==========    ==========

Other assets
   Long-term deposits                           $      104    $      167    $       65
   Other                                                 -             -            52
                                                ----------    ----------    ----------
                                                $      104    $      167    $      117
                                                ==========    ==========    ==========

Accounts payable and accrued liabilities
   Accounts payable                             $      253    $      216    $      348
   Salaries and wages payable                          290           270           162
   Accrued services                                     88            92            68
   Reserve for claims                                   75           151           181
   Rent expense normalization                            -             -           302
   Other accrued expenses                               41            59            64
                                                ----------    ----------    ----------
                                                $      747    $      788    $    1,125
                                                ==========    ==========    ==========
</TABLE>

     Depreciation expense for the years ended March 31, 2006, 2005 and 2004 was
$88, $115, and $347 respectively.

Note 4. 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. The aggregate number of
shares purchased by an employee may not exceed 2,000 shares in any one Offering
Period, generally six months


                                       41
<PAGE>

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

(subject to limitations imposed by the Internal Revenue Code). A total of
500,000 shares are available for purchase under the ESPP.

Note 5. 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,
2006.

Note 6. Bank Line of Credit

     In October 2002, Salon entered into an Accounts Receivable Purchase
Agreement with a bank. Under the terms of the agreement, the bank could make
advances of 60% or 80% of the face value of acceptable receivables from Salon,
depending on the nature of the receivable. The aggregate advances on receivables
outstanding under the agreement could not exceed $1,000, however the amount was
capped at $300 until such time as Salon had $2,500 of unrestricted cash. Amounts
advanced under this agreement accrued interest at prime plus 1% per annum on the
average daily balance outstanding and were subject to a fee of 1.25% per month
on the average daily balance outstanding. Upon collection of the outstanding
receivable used as collateral for the advance, the corresponding advance was
paid back to the bank along with applicable fees. As part of the agreement,
Salon issued 37,500 warrants to the bank. The warrants were valued at an
immaterial amount using the Black-Scholes option-pricing model, applying a
contractual life of seven years, a weighted average risk-free rate of 4.375%, an
expected dividend yield of 0%, a volatility of 120% and a deemed fair value of
common stock of seven cents. During the year ended March 31, 2003, Salon
borrowed and repaid $82 leaving no amounts owed at the end of the year. During
the year ended March 31, 2004, Salon borrowed and repaid $182. The agreement
expired in January 2004 with no amounts owed and was not renewed.

Note 7. Related Party Transactions

     On October 10, 2000, Salon loaned its Chairman $75 with an agreed 6.3%
annual interest rate with no due date. A balance of $48 remains outstanding as
of March 31, 2006 and is included as a component of "Prepaid expenses and other
current assets" in Salon's Consolidated Balance Sheets. During the year ended
March 31, 2006, $45 of interest and principal was paid to Salon.

     From July 24, 2002 through December 31, 2003 Salon issued $4,227 of
promissory and convertible promissory notes to various investors and issued
warrants to purchase 10,146,036 shares of common stock. The promissory notes
were converted to 5,493 shares of Series C preferred stock in December 2003.


                                       42
<PAGE>

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

     Related parties pertaining to the issuance of notes were comprised of the
following:

<TABLE>
<CAPTION>
                                                Promissory                     Series C
                                                   Note         Warrants        Shares
Name                                              Amount         Issued         Issued
------------------------------------------     ------------   ------------   ------------
<S>                                            <C>               <C>                <C>
The Hambrecht 1980 Revocable Trust             $         50        150,000             64
WR Hambrecht + Co., LLC                                  50        150,000             64
The Sarah & William Hambrecht Foundation                 80         40,107            108
HAMCO Capital Corporation                               100        300,000            127
Ironstone Group, Inc                                    650      1,950,000            843
                                               ------------   ------------   ------------
Total William Hambrecht related entities                930      2,590,107          1,206

John Warnock                                          2,199      5,649,345          2,849
Wenner Media LLC                                        200        600,000            250
Robert McKay                                            117         58,423            158
Brian Dougherty                                          50         25,000             67
Elizabeth Hambrecht                                      25         75,000             31
                                               ------------   ------------   ------------
Total all                                      $      3,521      8,997,875          4,561
                                               ============   ============   ============
</TABLE>

Elizabeth Hambrecht has an ownership interest in WR Hambrecht + Co., LLC and in
HAMCO Capital Corporation. William Hambrecht has an ownership interest in HAMCO
Capital Corporation and Ironstone Group, Inc. Jann Wenner, who served as a
Director of Salon from January 2004 through February 2006, has a controlling
interest and is the Chairman and President of Wenner Media LLC. Robert McKay is
a Director of Salon. Brian Dougherty served as a Director of Salon until April
2003.

     In addition to converting promissory notes to shares of Series C preferred
stock in December 2003, Salon received $500 from Director John Warnock for which
Salon issued 625 shares of Series C preferred stock and granted warrants to
purchase 1,500,000 shares of common stock. In February 2004, Salon issued 125
shares of Series C preferred stock and warrants to purchase 300,000 shares of
common stock to The Hambrecht 1980 Revocable Trust and issued 125 shares of
Series C preferred stock and warrants to purchase 300,000 shares of common stock
to WR Hambrecht + Co, Inc.

     In December 2003, Wenner Media LLC received a warrant to purchase 2,600,000
shares of common stock, of which 2,000,000 was part of an editorial
collaboration agreement. Former Salon director Jann Wenner is the Chairman and
President of Wenner Media LLC. During the years ended March 31, 2006 and March
31, 2005, Salon received $4 and $17 respectively, from Wenner Media for
editorial collaboration.


                                       43
<PAGE>

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

     On June 4, 2004, September 30, 2004 and February 2, 2005, Salon issued a
total of 834 shares of Series D preferred stock and warrants to purchase
1,489,457 shares of common stock. The related parties in these transactions
were:

                                             Series D
                                              Shares      Warrants     Purchase
Name                                          Issued       Issued        Price
----------------------------------------    ----------   ----------   ----------
The Hambrecht 1980 Revocable Trust          $      334      590,216          401
HAMCO Capital Corporation                           63      115,653           76
                                            ----------   ----------   ----------
Total William Hambrecht related entities           397      705,869          477

John Warnock                                       416      742,943          499
                                            ----------   ----------   ----------
Total all                                   $      813    1,448,812          976
                                            ==========   ==========   ==========

     During the year ended March 31, 2006, John Warnock, a Director of Salon,
exercised the following outstanding warrants and received common stock of Salon:

     Date             Number             Exercise             Cash Received
   Exercised        Of Shares         Price per share            by Salon
-----------------------------------------------------------------------------
   5/24/2005            99,345           0.08979801                   9
   1/23/2006           150,000           0.04505918                   6
   1/23/2006           300,000           0.04168543                  13
   1/23/2006           300,000           0.04168543                  13
                 --------------                               --------------
                       849,345                                       41
                 ==============                               ==============

     Brian Dougherty, a former Director of Salon, exercised a warrant on May 17,
2005 for 25,000 shares of common stock for which Salon received $2. On July 20,
2005, Robert McKay, a Director of Salon, through the Elaine McKay Family
Partnership, exercised a warrant for 58,423 shares of common stock for which
Salon received $5. The Sarah and William Hambrecht Foundation, for which William
Hambrecht and Elizabeth Hambrecht, Salon's CEO and President and daughter of
William Hambrecht serve as Directors, exercised a warrant on July 22, 2006 for
40,107 shares of common stock for which Salon received $4.

     On each of February 7, 2006, March 7, 2006 and March 20, 2006, Ironstone
Group, Inc. converted warrants for 300,000 shares of common stock to 262,450,
255,337 and 249,977 shares of common stock for which Salon received no cash.
William Hambrecht has an ownership interest in Ironstone Group, Inc.

     On October 7, 2005, Michael O'Donnell, a former CEO and President of Salon,
converted a warrant for 1,000,000 shares of common stock to 642,857 shares of
common stock for which Salon received no cash.


                                       44
<PAGE>

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

Note 8. Commitments and Contingencies

     Salon has a non-cancelable operating lease agreement for its office space
in San Francisco, CA that expires in February 2009, for its office in New York,
NY that expires in May 2006, for its office in Washington, D.C. that expires in
May 2007 and to host its servers in San Francisco, CA that expires in September
2007. Rent expense under operating lease agreements was $396, $634, and $625,
for the years ended March 31, 2006, 2005, and 2004, respectively.

     In May 2003, Salon subleased its former office in New York. The sublease
agreement, which expired in December 2004, resulted in a charge to rent expense
of $180 that was included in Salon's results of operations for the year ended
March 31, 2004.

     Salon has no capital leases as of March 31, 2006. Total future minimum
rental payments under capital leases and non-cancelable operating leases in
effect at March 31, 2006 are as follows:

                                                   Operating
        Year Ending March 31,                        Leases
                                                 -------------
                 2007                             $      308
                 2008                                    262
                 2009                                    229
                 2010                                      -
                                                 -------------
                     Total lease payments                799
                                                 =============

     Subsequent to March 31, 2006, Salon extended its lease agreement for its
office in New York to expire in May 2007.

     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.

Note 9. Goodwill and Intangible Assets

     In accordance with FASB No. 142, "Goodwill and Other Intangible Assets"
(SFAS No. 142), goodwill amortization was discontinued as of March 31, 2002. The
carrying value of goodwill at March 31, 2006 and March 31, 2005 was $200 and has
been found not to be impaired.


                                       45
<PAGE>

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

     The following table sets forth information concerning Salon's intangible
assets as of March 31, 2006, 2005 and 2004:

<TABLE>
<CAPTION>
                                                            Gross                     Net
                                                          Carrying    Accumulated   Carrying
                                                           Amount    Amortization    Amount
                                                         ----------   ----------   ----------
<S>                                                      <C>          <C>                 <C>
Trade name                                               $    1,200   $    1,200   $        -

Proprietary technology                                          355          355            -

Audio technology                                                158          158            -
                                                         ----------   ----------   ----------

Total intangible assets subject to amortization          $    1,713   $    1,713   $        -
                                                         ==========   ==========   ==========

Goodwill                                                 $    3,555   $    3,355   $      200
                                                         ----------   ----------   ----------
Total intangible assets not subject to amortization      $    3,555   $    3,355   $      200
                                                         ==========   ==========   ==========
</TABLE>

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 incurring operating losses. At March
31, 2006, Salon has net operating loss carry-forwards of $64,075 and $33,137 for
Federal and California purposes, respectively, available to reduce future
taxable income, if any. During the year ended March 31, 2006, $375 of California
net operating loss carry-forwards expired and additional $1,297 is due to expire
as of March 31, 2007, 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, 2006, 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:

                                      Year Ended March 31,
                                --------------------------------
                                  2006        2005        2004
                                --------    --------    --------
Net operating losses            $ 23,719    $ 23,274    $ 22,496
Other                              1,309       1,483       1,702
                                --------    --------    --------

Total deferred tax assets         25,028      24,757      24,198
Valuation allowance              (25,028)    (24,757)    (24,198)
                                --------    --------    --------
Net deferred tax asset$         $      -    $      -    $      -
                                ========    ========    ========


                                       46
<PAGE>

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

     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,
                                          --------------------------------
                                            2006        2005        2004
                                          --------    --------    --------
Statutory tax benefit                     $   (735)   $   (122)   $ (2,945)
State taxes, net of federal benefit           (126)        (21)       (505)

Permanent differences                          493        (244)      1,608

Other                                           97        (172)        330
                                          --------    --------    --------
Total                                         (271)       (559)     (1,512)

Change in valuation allowance                  271         559       1,512
                                          --------    --------    --------

                                          $      -    $      -    $      -
                                          ========    ========    ========

Note 11. Employee Stock Option Plan

     Salon has two stock option plans approved by shareholders. The Salon
Internet, Inc. 1995 Stock Option Plan (the 1995 Plan) 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 Plans). 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
16,000,000 to a total of 46,000,000.

     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 one to four years and have terms of ten years.
However, in the case of 20,910,000 options granted on February 7, 2005 and
7,641,000 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 generally at least equal to the fair
market value of the stock on the grant date.

     On February 7, 2005, Salon granted its Chairman 1,000,000 options from a
plan not approved by shareholders.

     At March 31, 2006 and 2005, Salon had 17,364,000 and 9,090,000 shares of
common stock authorized and available for grants under the 2004 Plan and at
March 31, 2004 had 3,336,000 shares of common stock authorized and available for
grants under the 1995 Plan.


                                       47
<PAGE>

                             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 from March 31,
2003 through March 31, 2006:

                                                     Weighted
                                                      Average
                                     Number of       Exercise
                                       shares         Price
                                    -----------    -----------
Balance March 31, 2003                6,136,000    $      1.62
Options granted                               -    $         -
Options terminated                   (2,185,000)   $      1.83
Options exercised                             -    $         -
                                    -----------
Balance March 31, 2004                3,951,000    $      1.50
Options granted                      21,910,000    $      0.14
Options terminated                     (663,000)   $      1.27
Options exercised                      (399,000)   $      0.14
                                    -----------
Balance March 31, 2005               24,799,000    $      0.33
Options granted                      10,792,000    $      0.24
Options terminated                   (3,533,000)   $      0.33
Options exercised                      (520,000)   $      0.14
                                    -----------
Balance March 31, 2006               31,538,000    $      0.30
                                    ===========

The following table summarizes information about stock options outstanding at
March 31, 2006:

<TABLE>
<CAPTION>
                                   Options Outstanding                     Options Exercisable
                     ----------------------------------------------   -----------------------------
                                           Weighted
                                           Average       Weighted                        Weighted
                        Number of         Remaining       Average        Number of        Average
      Range of           Shares          Contractual     Exercise          Shares        Exercise
  Exercise Prices      Outstanding       Life (Years)     Price         Exercisable        Price
 -----------------   ----------------   -------------  ------------   ---------------   -----------
<S>                     <C>                  <C>        <C>              <C>             <C>
   $0.06 - $ 0.06            8,000           6.5        $     0.06            7,000      $    0.06
   $0.12 - $ 0.14       22,384,000           8.7              0.14       20,766,000           0.14
   $0.19 - $ 0.26        7,191,000           8.9              0.26        6,840,000           0.26
   $0.32 - $ 0.37        1,269,000           8.0              0.36          455,000           0.36
   $0.52 - $ 0.52           18,000           2.6              0.52           18,000           0.52
   $1.38 - $ 2.00          257,000           4.4              1.88          257,000           1.88
   $2.92 - $ 3.63           40,000           3.0              2.96           40,000           2.96
   $5.06 - $ 5.25           30,000           3.6              5.22           30,000           5.22
   $8.50 - $10.06          341,000           3.4              9.67          341,000           9.67
                     ---------------                                  ---------------
                        31,538,000           8.6        $     0.30       28,754,000      $    0.31
                     ===============                                  ===============
</TABLE>

     At March 31, 2005 and 2004 options to purchase 13,605,000 and 3,061,000
shares of common stock, respectively, were exercisable.


                                       48
<PAGE>

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

Note 12. Stockholders' Equity

Preferred stock

     Salon has 5,000,000 shares of preferred stock, authorized in April 1999,
whose preferences, rights and privileges may be amended by the Board of
Directors and by no less than a majority vote by each series of A, B, C or D
preferred stock.

     A summary of the series of shares of preferred stock that Salon has
outstanding, corresponding warrants issued, and common stock equivalents,
follows as of March 31, 2006:

<TABLE>
<CAPTION>
                                       Warrants Outstanding    Conversion        Common
                        Per Share                   Exercise     Rate to       Equivalent
 Series       Shares      Price         Number      Price (1)   Common (2)       Shares
--------   ----------   ---------  -------------  -----------  -----------  --------------
<S>            <C>        <C>         <C>           <C>          <C>          <C>
 A(3,4)          808      $4,000      6,272,000     $0.10942     0.09957       32,459,897

   B             125      $4,000      1,414,827     $0.08980     0.08003        6,247,750

 C(3,5)        6,582        $800      2,700,000     $0.03450     0.04000      131,640,000

  D-1            417      $1,200        807,095     $0.13742     0.09300        5,380,642
  D-2            208      $1,200        340,363     $0.12650     0.11000        2,269,090
  D-2            209      $1,200        341,999     $0.16100     0.11000        2,279,999
  D-3            209      $1,200        404,516     $0.54050     0.09300        2,696,774
           ----------              -------------                            --------------
D total        1,043                  1,893,973                                12,626,505
           ----------              -------------                            --------------
               8,558                 12,280,800                               182,974,152
           ==========              =============                            ==============
</TABLE>

(1)  Exercise Prices of Series A, B and D-1 have been adjusted as of March 31,
     2006 pursuant to an antidilution provision of the underlying security.
(2)  Rates of conversion to common stock of the Series A and B preferred stock
     has been adjusted as of March 31, 2006 pursuant to an antidilution
     provision of the underlying security.
(3)  Reflects conversion by an investor in January 2006 of one share Series A
     preferred stock to 40,173 shares of common stock and thirty-six shares of
     Series C preferred stock to 720,000 shares of common stock.
(4)  Subsequent to March 31, 2006 warrants to purchase 1,600,000 share of common
     stock were exercised by two investors. One of the investors was a
     foundation in which Salon's CEO and president serves as a Director.
(5)  Subsequent to March 31, 2006 warrants to purchase 1,800,000 share of common
     stock were exercised by two investors. The investors included a Director of
     Salon and the father of Salon's CEO and President.

     As of March 31, 2006, the Purchase Agreement, as amended, and the
Certificate of Designation of Preferences and Rights of the Series D-1, D-2,
D-3, D-4 and D-5, collectively "Series D," preferred stock allow the sale and
issuance of an additional 1,042 shares of Series D preferred stock and stipulate
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 the Series D
preferred offering is made.


                                       49
<PAGE>

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

     The holders of the Series A, B, and C preferred stock are entitled
dividends of 8.0%, as and if declared by the Board of Directors, and the holders
of the Series D preferred stock are entitled dividends of 5.0%, as and if
declared by the Board of Directors. As of March 31, 2006, no cash dividend has
been declared or paid.

     In event of a liquidation occurrence, 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, Series A and B preferred
stock. The holders of Series D preferred stock are entitled to 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. 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 is to 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. 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.

     If, after initial preferential liquidation payments to the holders of
Series A, B, C and D preferred stock holders, any assets remain available for
distribution, such assets are to be distributed ratably among the holders of
common stock and preferred stock, based on to 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.

     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. The holders of Series C Preferred
Stock hold approximately 87% of this group of securities.

     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. Subsequent to March 31, 2006, the preferred stockholders as a
group control approximately 95% of all voting securities of Salon.

     The aggregate liquidation preferences of all preferred stockholders as of
March 31, 2006 were $19,247 excluding the effect of undeclared dividends, and
$21,655 including the effect of undeclared


                                       50
<PAGE>

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

dividends. The aggregate liquidation preferences of all preferred stockholders
as of March 31, 2005 were $19,062 excluding the effect of undeclared dividends,
and $20,686 including the effect of undeclared dividends.

     On November 22, 2005, Salon amended its Certificate of Incorporation to
increase the number of authorized shares of common stock from 50,000,000 shares
to 600,000,000 thereby allowing the holders of all series of preferred
stockholders, at their option, to convert their shares to common stock at any
time. Prior to that date, only the holders of Series A and B could convert their
shares of preferred stock to common stock. As of March 31, 2006, one share of
Series A preferred stock was converted to 40,173 shares of common stock and 36
shares of Series C preferred stock was converted to 720,000 shares of common
stock. No shares of preferred stock were converted to common stock in prior
years.

     The Series A, B, C and D preferred stock conversion price is subject to a
downward adjustment anti-dilution provision under certain circumstances related
to subsequent Salon stock issuances. The effect of this provision through March
31, 2006, has been to reduce the Series A conversion rate from an original 0.25
to 0.09957, and the series B conversion rate from an original 0.1767 to 0.08003.

     The exercise price of warrants issued in conjunction with the issuance of
Series A, B, C and D are also subject to a downward adjustment anti-dilution
provision under certain circumstances related to subsequent Salon warrant
issuances. The effect of this provision through March 31, 2006, was to reduce
the per share exercise price of warrants issued to Series A preferred
stockholders from an original $0.2875 to $0.10942, the series B conversion price
from an original $0.21 to $0.08980, and the Series D-1 shares issued on June 4,
2004 from an original $0.13800 to $0.13742.

     Salon issued 500 shares of Series C preferred stock during the year ended
March 31, 2004, 417 shares of Series D-1 and 417 shares of Series D-2 during the
year ended March 31, 2005 and 209 shares of Series D-3 during the year ended
March 31, 2006. 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
$2,040 for the shares issued during the year ended March 31, 2004, $310 for the
shares issued during the year ended March 31, 2005 and $1,040 for the shares
issued during the year ended March 31, 2006. As the proportional consideration
attributable to the shares issued during the years ended March 31, 2004 and
March 31, 2006 was $361 and $227, respectively, a limiting factor of $1,679 and
$813 was applied, and the value of the beneficial conversion feature was
therefore limited to $361 and $227 for the years ended March 31, 2004 and March
31, 2006, respectively. As the proportional consideration attributable to the
shares issued during the year ended March 31, 2005 was in excess of the value
determined for the beneficial conversion feature, no such limiting factor was
applicable that year. As a result, Salon recorded preferred deemed dividends,
representing the value of the beneficial conversion feature, of $361, $310 and
$227 for the years ended March 31, 2004, March 31, 2005 and March 31, 2006,
respectively.

     The preferred deemed dividend charge of $310 in conjunction with a benefit
of $470 from a change in value of warrants issued to preferred stockholders is
reflected in the results of operations for the year ended March 31, 2005. The
preferred deemed dividend charge of $361 in conjunction with a charge of $576
from a change in value of warrants issued to preferred stockholders is reflected
is reflected in the results of operations for the year ended March 31, 2004.


                                       51
<PAGE>

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

     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.

Stock warrants

     In September 1998, Salon issued warrants to purchase up to 220,000 shares
of common stock at an exercise price of $0.52 per share in connection with the
sale of pre-IPO Series C convertible preferred stock offering. Upon completion
of the initial public offering, the warrant was converted to the right to
purchase an equivalent number of Salon's common stock at the same exercise price
per share. The warrants may be exercised at any time within 10 years after
issuance and expire in September 2008. As of March 31, 2006, warrants to
purchase 172,529 shares of common stock remain exercisable.

     In August 2001 and September 2001, Salon issued warrants to purchase a
total of 6,472,000 shares of common stock in conjunction with the issuance of
Series A preferred stock, all with a five year life. Due to an anti-dilution
provision of the warrants, the exercise price of the warrants has been reduced
to $0.10942 as of March 31, 2006. During the year ended March 31, 2006, a
warrant to purchase 200,000 shares of common stock was converted to 112,464
shares of common stock under the net exercise provision of the warrant.
Accordingly, Salon did not receive any cash consideration. Subsequent to March
31, 2006, two warrant to purchase 1,600,000 shares of common stock were
exercised for which Salon received $175 in cash. One of the warrants was
exercised by a foundation for which Salon's CEO and President serves as a
Director. Subsequent to March 31, 2006, warrants to purchase 3,168,000 shares of
common stock remain exercisable and expire on August 9, 2006 and warrants to
purchase 1,504,000 shares of common stock remain exercisable and expire on
September 13, 2006.

     In January 2002, Salon issued warrants to purchase 30,000 shares of common
stock at an exercise price of $0.15 per share and a five year life. The warrants
have not been exercised as of March 31, 2006.

     In March 2002, Salon issued a warrant to purchase 1,414,827 shares of
common stock in conjunction with the issuance of Series B preferred stock. The
warrant may be exercised at any time within five years and have not been
exercised as of March 31, 2006. Due to an anti-dilution provision of the
warrant, the exercise price of each warrant share has been reduced from $0.21 to
$0.0898 as of March 31, 2006.

     In October 2002, Salon issued a warrant to purchase 37,500 shares of common
stock at an exercise price of $0.05 per share with a seven year life. The
subsequent issuance of Series C preferred stock triggered an anti-dilution
provision of the warrant agreement, increasing the number of warrants to 44,285
and lowering the exercise price to $0.0431. The warrant has not been exercised
as of March 31, 2007.

     In October 2003, Salon issued warrants to purchase 1,000,000 shares of
common stock at an exercise price of $0.05 per share to its former President and
Chief Executive Officer. Salon valued the warrant using the Black-Scholes
option-pricing model, applying a contractual life of 2 years, a weighted average
risk-free interest rate of 1.625%, an expected dividend yield of 0%, a
volatility of 120% and a deemed fair value of common stock of $0.05. The fair
market value of the warrant of $31 was amortized through Salon's fiscal year
ending March 31, 2004 as a component of general and administrative expense


                                       52
<PAGE>

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

in the Consolidated Statement of Operations. In October 2005, the warrant was
converted to 642,857 shares of common stock in which Salon did not receive any
cash consideration.

     In December 2003, Salon issued a warrant to purchase 2,600,000 shares of
common stock with a three year life as part of an editorial collaboration
agreement with a publisher and a convertible note. Due to an anti-dilution
provision of the warrant, the exercise price of each warrant share has been
reduced from $0.0575 to $0.04506 as of March 31, 2006. The Chairman and
President of the publisher served as a Director of Salon from January 2004
through February 2006. The warrant has not been exercised as of March 31, 2006.

     In December 2003, Salon issued a warrant to purchase 1,500,000 shares of
common stock at an initial exercise price of $0.0345 per share in conjunction
with the issuance of 625 shares of Series C preferred stock. In addition, in
February 2004, Salon issued three warrants to purchase 1,200,000 shares of
common stock at an initial exercise price of $0.0345 per share in conjunction
with the additional issuance of 500 shares of Series C preferred stock. These
warrants have a five year life. Subsequent to March 31, 2006, the warrant
originally issued in December 2003 was exercised by a Director of Salon for
which Salon received $52 and a warrant to purchase 300,000 shares of common
stock was exercised by the father of Salon's CEO and President for which Salon
received $10. Subsequent to March 31, 2006 two warrants to purchase 900,000
shares of common stock remain outstanding that expire in February 2007.

     In June 2004, Salon issued warrants to purchase 807,095 shares of common
stock in conjunction with the issuance of 417 shares Series D-1 preferred stock.
As the transaction resulted in a $195 preferred deemed dividend in Salon's
consolidated statement of operations for the year ended March 31, 2005, Salon
valued the warrants using the Black-Scholes option-pricing model, applying a
contractual life of 3 years, a weighted average risk-free interest rate of
3.19%, an expected dividend yield of 0%, a volatility of 120%, a deemed fair
value of common stock of $0.12 and an exercise price of $0.138 per share.
Subsequent to March 31, 2006, warrants to purchase 363,870 shares of common
stock were exercised by two investors for which Salon received $50. The two
investors included the father of Salon's CEO and President and an entity in
which the father of Salon's CEO and President and Salon's CEO and President both
have an ownership interest. Subsequent to March 31, 2006, warrants to purchase
443,225 shares of common stock remain outstanding.

     In September 2004, Salon issued a warrant to purchase 340,363 shares of
common stock to a Director of Salon in conjunction with the issuance of 208
shares of Series D-2 preferred stock. As the transaction resulted in a $23
preferred deemed dividend in Salon's consolidated statement of operations for
the year ended March 31, 2005, Salon valued the warrants using the Black-Scholes
option-pricing model, applying a contractual life of 3 years, a weighted average
risk-free interest rate of 2.792%, an expected dividend yield of 0%, a
volatility of 120%, a deemed fair value of common stock of $0.11 and an exercise
price of $0.1265 per share. This warrant has not been exercised as of March 31,
2006.

     In February 2005, Salon issued to two investors warrants to purchase
341,999 shares of common stock in conjunction with the issuance of an additional
209 shares of Series D-2 preferred stock. The investors included the father of
Salon's CEO and President and an entity in which the father of Salon's CEO and
President and Salon's CEO and President both have an ownership interest. As the
transaction resulted in a $92 preferred deemed dividend in Salon's consolidated
statement of operations for the year ended March 31, 2005, Salon valued the
warrants using the Black-Scholes option-pricing model, applying


                                       53
<PAGE>

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

a contractual life of 3 years, a weighted average risk-free interest rate of
3.327%, an expected dividend yield of 0%, a volatility of 120%, a deemed fair
value of common stock of $0.14 and an exercise price of $0.161 per share.
Subsequent to March 31, 2006, these warrants were exercised for which Salon
received $55.

     In March 2005, Salon issued a warrant to purchase 600,000 shares of common
stock at an exercise price of $0.27 per share to its former Senior Vice
President-Business Operations. Salon valued the warrants using the Black-Scholes
option-pricing model, applying a contractual life of 2 years, a weighted average
risk-free interest rate of 3.75%, an expected dividend yield of 0%, a volatility
of 120% and a deemed fair value of common stock of $0.27. The fair market value
of the warrants of $100 was amortized through Salon's fiscal year ending March
31, 2005 as a component of Sales and marketing expense in the Consolidated
Statement of Operations. The warrants may be exercised at any time within two
years after issuance and expires in March 2007. The warrant has not been
exercised as of March 31, 2006.

     From July 2002 through December 2003, Salon issued warrants to purchase
10,146,036 shares of common stock in conjunction with the issuance of
convertible notes payable and a promissory note. Salon valued the warrants using
the Black-Scholes option-pricing model, applying a contractual life of 3 years,
a weighted average risk-free interest rate ranging from 1.625% to 2.75%, an
expected dividend yield of 0%, a volatility of 120% and a deemed fair value of
common stock ranging from $0.03 to $0.07 per share. The fair market value of the
warrants of $324 was amortized during Salon's fiscal years ending March 31, 2003
and March 31, 2004 as a component of Interest and other expense in the
Consolidated Statement of Operations. During the year ended March 31, 2006,
warrants to purchase 1,027,541 shares of common stock were converted to 848,387
shares of common stock for which Salon did not receive any consideration under
the net exercise provision of the warrant. Of the total warrants tendered for
conversion, 900,000 was from an entity that the father of Salon's CEO and
President has an ownership interest therein and were converted to 767,764 shares
of common stock. In addition, warrants to purchase 1,274,480 shares of common
stock were exercised for which Salon received $65 and a warrant to purchase
5,000 shares of common stock expired. Subsequent to March 31, 2006, warrants to
purchase 1,344,015 shares of common stock were converted to 1,053,558 shares of
common stock for which Salon did not receive any consideration under the net
exercise provision of the warrant, and included an investor that the father of
Salon's CEO and President has an ownership interest therein. In addition,
subsequent to March 31, 2006, warrants to purchase 5,700,000 shares of common
stock were exercised for which Salon received $248. The investors in these
transactions included a Director of Salon, the father of Salon's CEO and
President, and two entities that the father of Salon's CEO and President and
Salon's CEO and President have an ownership interest therein. Subsequent to
March 31, 2006, warrants to purchase 195,000 shares of common stock at an
exercise price of $0.0345 per share and a warrant to purchase 600,000 shares of
common stock, all issued in conjunction with the issuance of convertible notes
payable, remain outstanding.

     In August 2005, Salon issued a warrant to purchase 400,000 shares of common
stock as part of an employee separation agreement. Salon valued the warrants
using the Black-Scholes option-pricing model, applying a contractual life of 1
year, a weighted average risk-free interest rate of 3.625%, an expected dividend
yield of 0%, a volatility of 120% and a deemed fair value of common stock of
$0.18. The fair market value of the warrants of $33 was amortized during Salon's
fiscal year ending March 31, 2006 as a component of Information technology
support in the Consolidated Statement of Operations. The warrant remains
outstanding as of March 31, 2006.


                                       54
<PAGE>

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

     In February 2006, Salon issued a warrant to purchase 100,000 shares of
common stock to a consultant. Salon valued the warrants using the Black-Scholes
option-pricing model, applying a contractual life of 2 years, a weighted average
risk-free interest rate of 4.38%, an expected dividend yield of 0%, a volatility
of 120% and a deemed fair value of common stock of $0.36. The fair market value
of the warrants of $22 was amortized during Salon's fiscal year ending March 31,
2006 as a component of General and administrative expenses in the Consolidated
Statement of Operations.

Convertible securities issued in excess of then authorized shares of common
stock

     On July 24, 2002, Salon issued convertible promissory notes that did not
stipulate a maximum number of shares of common stock that they could be
converted into. As the 50,000,000 shares of common stock then authorized were
deemed to be insufficient to satisfy all obligations under convertible
instruments, warrant agreements and options, Salon recorded the fair value of
the then outstanding warrants of $175 as a long-term liability. The inadequacy
of the number of authorized shares of common stock was exasperated by the
issuance of 6,618 shares of Series C preferred stock, which could be converted
to 132,360,000 shares of common stock, except for a lack in a sufficient number
of authorized shares of common stock. From July 24, 2002, at each measurement
period (the last day of each fiscal quarter), through November 22, 2004, Salon
re-measured the value of its outstanding warrants.

     For the year ended March 31, 2004, the re-measurement of warrants resulted
in a charge of $1,610, of which $575 related to warrants issued in conjunction
with the issuances of preferred stock, and was recorded as a preferred deemed
dividend in Salon's results of operations for the year then ended. From June 30,
2004 through November 22, 2004, the re-measurement of warrants resulted in a
benefit of $1,011, of which $470 related to warrants issued in conjunction with
the issuances of preferred stock, and was recorded as a preferred deemed
dividend in Salon's results of operations for the year then ended.

     On November 22, 2004, Salon amended its Certificate of Incorporation,
increasing the number of authorized shares of common stock from 50,000,000 to
600,000,000. As of that date, Salon has had a sufficient number of authorized
shares of common stock to satisfy all obligations under convertible instruments,
warrant agreements and options, and relieved its then cumulative $1,707 warrant
long-term liability to a component of additional paid-in-capital.

Common stock issued for prepaid advertising rights

     In December 1999, Salon issued 1,125,000 shares of common stock,
representing approximately 10% of Salon's then outstanding common stock to a
broadcasting company in exchange for $11,812 in advertising and promotional time
to be delivered over ten years. Based on the then closing price of Salon's
common stock, Salon recorded the value of the services to be rendered at $8,100
that it is amortizing as used. To date, the broadcasting company has delivered
$6,383 of advertising and promotion time.


                                       55
<PAGE>

Selected Quarterly Financial Data (unaudited)
(in thousands, except per share data)

<TABLE>
<CAPTION>
                                                                              (Restated)    (Restated)
                                                     First        Second         Third        Fourth
                                                    Quarter       Quarter       Quarter       Quarter
                                                  ----------    ----------    ----------    ----------
<S>                                               <C>           <C>           <C>           <C>
2006:
Net revenue                                       $    1,630    $    1,654    $    2,069    $    1,163
Gross margin                                             577           614           886           (66)
Net loss attributable to common stockholders            (116)         (160)         (132)         (941)
Basic net loss per share
      attributable to common stockholders              (0.01)        (0.01)        (0.01)        (0.05)
Diluted net loss per share
      attributable to common stockholders              (0.01)        (0.01)        (0.01)        (0.05)
Shares used in per share calculation
     Basic                                            15,132        15,428        16,129        18,028
     Diluted                                          15,132        15,428        16,129        18,028

2005:
Net revenue                                       $    1,733    $    1,256    $    2,150    $    1,489
Gross margin                                             533           252         1,019           378
Net income (loss) attributable to
     common stockholders                              (1,164)        1,018           395          (607)
Basic net income (loss) per share
      attributable to common stockholders              (0.08)         0.07          0.03         (0.04)
Diluted net income (loss) per share
      attributable to common stockholders              (0.08)         0.00          0.00         (0.04)
Shares used in per share calculation
     Basic                                            14,155        14,161        14,507        14,743
     Diluted                                          14,155       205,148       203,387        14,743

2004:
Net revenue                                       $    1,045    $    1,086    $    1,273    $    1,095
Gross margin                                            (144)          130           204          (338)
Net loss attributable to
     common stockholders                              (1,320)       (1,198)       (1,187)       (3,277)
Basic net loss per share
     attributable to common stockholders               (0.09)        (0.09)        (0.08)        (0.23)
Diluted net loss per share
     attributable to common stockholders               (0.09)        (0.09)        (0.08)        (0.23)
Shares used in per share calculation
     Basic                                            13,997        14,090        14,155        14,155
     Diluted                                          13,997        14,090        14,155        14,155
</TABLE>


                                       56
<PAGE>

ITEM 9A. Controls and Procedures

Evaluation of Our Disclosure Controls and Internal Controls

     Our management, with the participation of our Chief Executive Officer and
Chief Financial Officer, conducted an evaluation of our disclosure controls and
procedures as of March 31, 2006. 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 final decisions regarding required disclosures. Our
management has concluded that, as of the end of the period covered by this
report, our disclosure controls and procedures were not effective.
Notwithstanding the material weaknesses discussed below, our management has
concluded that the financial statements included in this Form 10-K/A 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.

     Management has determined that it has a material weakness in determining
the value of the beneficial conversion feature of shares of preferred stock that
it issues. To remedy this material weakness, Salon intends to take the following
actions:

     1.   Add an additional layer to the preparation and review of similar
          transactions,
     2.   Increase the level of training of its finance staff, and
     3.   Acquire a readily accessible comprehensive data base of generally
          accepted accounting principles

     These changes either have been, or are in the process of being implemented.
We believe the planned and implemented changes to our system of internal
controls and our disclosure controls and procedures will be adequate to provide
reasonable assurance that the information required to be disclosed in our
Exchange Act reports is recorded, processed, summarized and reported within the
time periods specified in the SEC's rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Principal Accounting Officer, as appropriate, to allow timely
decisions regarding required disclosure based closely on the definition of
"disclosure controls and procedures" in Rule 13-a-14(c). However, because of the
inherent limitations in all control systems, no evaluation of controls can
provide absolute assurance that all control issues, if any, within the Company
have been detected. These inherent limitations include the realities that
judgments in decision making can be faulty, and that breakdowns can occur
because of simple error or mistake.


Changes in internal controls over financial reporting

     There was no change in our internal controls over financial reporting that
occurred during the period covered by this Annual Report on Form 10-K/A that has
materially affected, or is reasonably likely to materially affect, our internal
controls over financial reporting.


                                       57
<PAGE>

PART IV

ITEM 15. Exhibits and Financial Statement Schedules

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

Exhibit
Number      Description of Document
------      -----------------------
23.5        Consent of Burr, Pilger & Mayer LLP, Independent Registered Public
            Accounting Firm dated October 27, 2006.
31.1        Certification of Elizabeth Hambrecht, President and Chief Executive
            Officer of the Registrant pursuant to Section 302, as adopted
            pursuant to the Sarbanes-Oxley Act of 2002.
31.2        Certification of Conrad Lowry, 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 Elizabeth Hambrecht, President and Chief Executive
            Officer of the Registrant pursuant to Section 906, as adopted
            pursuant to the Sarbanes-Oxley Act of 2002.
32.2        Certification of Conrad Lowry, Chief Financial Officer and Secretary
            of the Registrant pursuant to Section 906, as adopted pursuant to
            the Sarbanes-Oxley Act of 2002.




SIGNATURE

     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.


October 31, 2006                       By: /s/ Elizabeth Hambrecht
                                       -------------------------------------
                                       Elizabeth Hambrecht
                                       President and Chief Executive Officer


                                       58