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                       SECURITIES AND EXCHANGE COMMISSION
                              Washington, DC 20549

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

                                   FORM 10-K

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

    For the fiscal year ended March 31, 2001

                                       or

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

    For the transition period from       to

                         Commission file number 0-26395

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

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

                          22 Fourth Street, 16th Floor
                            San Francisco, CA 94103
                    (Address of principal executive offices)


                                 (415) 645-9200
              (Registrant's telephone number, including area code)


          Securities registered pursuant to Section 12(b) of the Act:
                                      None


          Securities registered pursuant to Section 12(g) of the Act:
                         Common Stock, $0.001 Par Value
                                (Title of Class)

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

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

   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. [_]

   The number of outstanding shares of the Registrant's Common Stock, par value
$0.001 per share, on June 8, 2001 was 14,155,276 shares.

   Parts of the definitive proxy statement for Registrant's 2001 Annual Meeting
of Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Report are
incorporated by reference into Part III of this Report.

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<PAGE>

                                   FORM 10-K

                            SALON MEDIA GROUP, INC.

                                     INDEX

<TABLE>
<CAPTION>
                                                                          Page
                                                                         Number
                                                                         ------

                                     PART I
 <C>      <S>                                                            <C>
 ITEM 1.  Business....................................................      3
 ITEM 2.  Properties..................................................     10
 ITEM 3.  Legal Proceedings...........................................     10
 ITEM 4.  Submission of Matters to a Vote of Security Holders.........     10

                                    PART II
 ITEM 5.  Market for Registrant's Common Equity and Related
           Stockholder Matters........................................     12
 ITEM 6.  Selected Consolidated Financial Data........................     12
 ITEM 7.  Management's Discussion and Analysis of Financial Condition
           and Result of Operations...................................     12
 ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk..     30
 ITEM 8.  Consolidated Financial Statements and Supplementary Data....     31
 ITEM 9.  Changes in and Disagreements with Accountants on Accounting
           and Financial Disclosures..................................     53

                                    PART III
 ITEM 10. Directors and Executive Officers of the Registrant..........     53
 ITEM 11. Executive Compensation......................................     53
 ITEM 12. Security Ownership of Certain Beneficial Owners and
           Management.................................................     53
 ITEM 13. Certain Relationships and Related Transactions..............     53

                                    PART IV
 ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form
           8-K........................................................     54

 SIGNATURES............................................................    56
</TABLE>

                                       2
<PAGE>

                                     PART I

   This report contains "forward-looking statements" within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") that involve risks and
uncertainties, including but not limited to statements regarding our strategy,
plans, objectives, expectations, intentions, financial performance, cash-flow
breakeven timing, financing, economic conditions, on-line advertising market
performance, subscription service plans, non-web opportunities and revenue
sources. Although Salon Media Group, Inc. believes its plans, intentions and
expectations reflected in such forward-looking statements are reasonable, they
can give no assurance that such plans, intentions or expectations will be
achieved. Our actual results may differ significantly from those anticipated or
implied in these forward-looking statements as a result of the factors set
forth above and in Salon's public filings. Salon assumes no obligation to
update any forward-looking statements as circumstances change.

   Our actual results may differ significantly from those anticipated or
implied in these forward-looking statements as a result of the factors set
forth below and in "Management's Discussion and Analysis of Financial
Conditions and Results of Operations" and "Factors That May Affect Our
Operating Results and Market Price of Stock." In this report, the words
"anticipates," "believes," "expects," "estimates," "intends," "future," and
similar expressions identify forward-looking statements. Readers are cautioned
not to place undue reliance on these forward-looking statements, which speak
only as of the date hereof.

ITEM 1. Business

   Salon Media Group, Inc. (Salon) is a leading Internet media company that
produces a total network of ten subject-specific websites, and hosts two online
communities--Table Talk, a free interactive forum and The Well, a paid
subscription service. In May 2000, Salon acquired MP3Lit.com (MP3Lit), a
website offering quality spoken word and audio literature recordings in MP3 and
Real Audio formats. MP3Lit was incorporated into Salon's web site as Salon
Audio. Salon believes that its network of websites combines the thoughtfulness
of print, the timeliness of television and the interactivity of talk radio.

   Salon was originally incorporated in July 1995 in the state of California
and reincorporated in Delaware in June 1999. On June 22, 1999, Salon had its
initial public offering, with its common stock quoted on the NASDAQ National
Market under the symbol "SALN." Effective May 16, 2001 the company adopted the
name Salon Media Group, Inc.

   The main entry and navigation point to Salon's ten websites is Salon's home
page at www.salon.com. Salon's websites provide a continuously updated array of
news, features, interviews and regular columnists and include the following:

News.....................  News features breaking stories, investigative
                           journalism and commentary, as well as interviews
                           with newsmakers, politicians and pundits. Salon
                           News columnists include political commentators Joe
                           Conason and David Horowitz and sports writer Allen
                           Barra. In addition, author and broadcaster Arianna
                           Huffington contributes regularly to the site.

Technology & Business....  Smart, opinionated coverage of Internet news and
                           digital culture from today's best technology
                           writers, along with in-depth features about the
                           business world and the economy. Technology &
                           Business offers daily feature stories; reviews of
                           books, hardware, software and web sites; the In
                           Box, our frequently updated blotter of breaking Net
                           news; Scott Rosenberg's column of Internet
                           commentary; and the Free Software Project, a
                           totally unique approach to book publishing using
                           the interactivity of the Internet to present Andrew
                           Leonard's groundbreaking reporting on Linux and the
                           open source movement.

                                       3
<PAGE>

Arts & Entertainment.....  Arts & Entertainment features movie, music and
                           television reviews and interviews. The site
                           includes Joyce Millman's daily Blue Glow and
                           frequent television features; extended film
                           coverage including actor and director interviews;
                           and Real Life Rock Top 10, Greil Marcus' weekly
                           music column.

Life.....................  Life (formerly known as Mothers Who Think) features
                           articles by thought-provoking writers about family
                           life, motherhood and women's lives. Includes our
                           weekly "Mothers Who Think" feature and a weekly
                           "Style of Life" column of witty, thoughtful
                           commentary on style and fashion.

Books....................  Books includes ahead-of-the-curve daily book
                           reviews; interviews with today's most interesting
                           writers; Book Bag, a weekly dose of must-reads
                           recommended by celebrated authors; and the Salon
                           Book Awards, an annual literary event honoring the
                           year's best books. The Books site is also home to
                           Garrison Keillor's beloved column of advice on
                           literature and love, "Ask Mr. Blue."

People...................  This site takes a discerning look at celebrity and
                           the culture of celebrity. People includes Brilliant
                           Careers, Salon's weekly series of profiles of
                           today's outstanding achievers; Camille Paglia's
                           column on culture and politics; and Nothing
                           Personal, a daily gossip and news column by Amy
                           Reiter.

Comics...................  The site features the works of comic luminaries Tom
                           Tomorrow, Ruben Bolling, Carol Lay and Keith
                           Knight.

Politics.................  Salon Politics features some of the most in-depth
                           and hard-hitting political coverage found anywhere,
                           and hosts daily features like "Bushed," our
                           opinionated chronicle of the George W. Bush era,
                           and "Red Vs. Blue," a compendium of popular
                           observations from across the political spectrum.
                           The site is home to the writing of Jake Tapper,
                           Salon's Washington correspondent, and "one of the
                           best young reporters in D.C.," according to
                           Business Week.

Sex......................  The site features articles about sex, society and
                           culture, and features David Thompson's column about
                           sex in movies and popular culture.

Salon Audio..............  Salon Audio offers hundreds of free recordings of
                           short stories, novel excerpts, poems, essays,
                           interviews and more. Authors include such American
                           legends as Ernest Hemingway and Edgar Allen Poe,
                           plus contemporary favorites such as John Grisham,
                           Michael Crichton, Anne Rice, Tom Wolfe, John
                           Updike, Maya Angelou, Henry Rollins and many more.

   The acceptability of websites can be measured by the number of unique
visitors to a site and the number of page views generated by site visitors. To
Salon, a unique user is an individual visitor to its network of web sites while
page views are the total number of complete pages retrieved and viewed by
visitors. Salon's unique visitors to its websites and communities have stayed
constant during the past year. Unique visitors the last three months in its
fiscal year ended March 31, 2001 averaged approximately 3.5 million per month
versus an approximate 3.7 million in the same time period last year when Salon
was aggressively purchasing traffic. The unique visitors generated on average
50.7 million page views per month during the last quarter of the fiscal year
ended March 31, 2001 compared to 24 million in the same time period last year.
The increase in page views demonstrates the acceptability of the Salon brand of
journalism and content acceptance.

                                       4
<PAGE>

   Unique users are audited by Audit Bureau Verification Service (ABVS), an
independent contractor, who identifies and counts the individual Internet
protocol address of each user who visits the Salon network. Salon has been
using the services of ABVS since July 1999. Salon independently prepares unique
visitor tallies by analyzing site server log files. Page views have been
calculated automatically using Accrue software within Salon since December
1999. Prior to that time, the log files were manually downloaded and analyzed.

   Salon has two online communities, The Well and Table Talk, which allow users
to discuss Salon content and interact with other users and Salon's editorial
staff. Salon frequently arranges for featured guests, including well-known
commentators and writers, to join discussions. Salon's Table Talk is a free
interactive community and The Well is a paid subscription service. The Well had
approximately 4,200 paying subscribers as of March 31, 2001.

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

  .  2000 "General Excellence in Online Journalism Original to the Web" and
     "Enterprise Journalism Original to the Web"--Online Journalism Awards
     sponsored by the Online News Association and the Columbia Graduate
     School of Journalism

  .  "Top 100 Websites"--PC Magazine

  .  "Best Online Magazine"--Yahoo Internet Life

  .  1999 "Best Technology Site" and "Best Parenting Site"--Forbes Magazine

  .  1999 "David Talbot, one of the 20 Stars of the New News"--Newsweek

  .  1999, 1998 & 1997 "Top of the Net"--Yahoo Internet Life

  .  1999, 1998 & 1997 Webby Award for "Best Online Magazine"

  .  1998 "Best of Multimedia"--Entertainment Weekly

  .  1997 "Best of the Web"--Business Week

  .  1997 "Best Website"--Entertainment Weekly

  .  1997 "Best Online Magazine of the Year"--Advertising Age

  .  1996 "Web Site of the Year"--Time Magazine

   According to a user survey conducted by Cyber Dialogue, an independent
research firm, the demographics of the Salon user base includes: (a) 88% are
between the ages of 18 and 49; (b) average household income of $71,300; (c) 90%
have earned a college degree, or are pursuing one; (d) 70% have professional,
managerial or technical positions; (e) at least 80% have shopped on the
Internet in the last 6 months; and (f) 91% are online everyday or more often.
The Cyber Dialogue survey also found that Salon's users spend an average of
26.3 minutes each time they visited Salon's network of websites.

Internet Advertising

   The Internet was originally thought to be an attractive medium for
advertisers because it would allow more flexibility, interactivity and
measurement capabilities than traditional media, such as newspapers, magazines,
television and radio, and provide users with immediate access to information
about advertisers and their products. It was hoped that the Internet would
allow advertisers to gather demographic information about users and to deliver
targeted messages and products to specific consumer groups. Because of these
factors, advertisers purchased advertising in websites based on the number of
"clicks" to one's advertising or the

                                       5
<PAGE>

revenue directly generated by the advertising, matrices which could be
quantified by readily available software. In practical terms, this has not
proven to be profitable to publishers such as Salon. As a consequence, Salon
now concentrates its efforts on the basis that the main strength of Internet
advertising closely mimics that of traditional media advertising, that of
forging brand loyalty.

   Online advertisers and retailers have spent most of their marketing budgets
on web sites with the highest traffic volume. These sites include portals such
as Yahoo.com, which bring together and organize a wide variety of content,
search engines such as Google.com, which allow users to search for specific
information, and major online media publications such as CNN.com. As Internet
advertising and electronic commerce mature, however, Salon believes online
advertisers and retailers will increasingly spend their marketing dollars on
more focused websites to reach specific demographic groups, as has occurred in
traditional advertising media.

   Some predict that a major shift in online advertising spending will occur as
advertisers move media campaigns from generalized web sites toward more
narrowly targeted web sites. Targeted sites provide content on designated
topics, and therefore attract users looking for subject-specific information.
Because targeted sites are usually the direct source of information the user
wants, rather than simply a gateway to other collections of information like a
portal or search engine, these sites are frequently referred to as "destination
sites." Destination sites such as Salon may become attractive to advertisers
and retailers because they allow more seamless integration of marketing
campaigns and product sales with related content, and more effectively target
the advertisers' and retailers' most likely customers.

Revenue Sources

   Substantially all of Salon's revenues are derived from the sale of
promotional space on its Internet properties. Services offered range from
short-term advertisements to long-term arrangements, which may include the
development of co-branded, integrated websites. Revenues derived from such
arrangements are recognized during the period which the service is provided,
provided that no significant obligations remain at the end of the period.
Salon's obligations typically include the guarantee of a minimum number of
impressions, or times that an advertisement appears in pages viewed by users of
Salon's websites. To the extent the minimum guaranteed impressions are not
delivered, Salon defers recognition of the corresponding revenue until the
remaining guaranteed impression levels are achieved. One customer, Ask Jeeves,
accounted for 10% of total revenue for the fiscal year ended March 31, 2001.
This customer reduced its level of activity during the fourth quarter of the
fiscal year and Salon believes that the loss of this customer would not have a
material adverse impact on Salon. No customer accounted for 10% or more of
total revenue for the fiscal year eneded March 31, 2000. One customer, Borders
Group Inc., accounted for 13% of total revenue for the fiscal year ended
March 31, 1999.

   Salon offers The Well, a paid monthly subscription service, as one of its
web sites. Revenue is recognized ratably over the period that services are
provided. Product sales revenues are recognized upon receipt of payment from a
fulfillment contractor. Salon generates revenue from the licensing of content
which has appeared in Salon's websites. Revenue is recognized ratably over the
contract term for major agreements, or upon receipt of amounts due from minor
agreements. Salon generates income by offering HTML leads from content partners
who provide dynamic headlines. Income is recognized ratably over the term of
the contract.

   Advertising revenues include barter revenues, which are the exchange by
Salon of advertising space on Salon's web sites for reciprocal advertising
space on other web sites or the exchange of goods or services. Revenues from
these barter transactions are recorded as advertising revenues at the estimated
fair value of the advertisements delivered and are recognized when the
advertisements are run on Salon's web sites. Barter expenses are recorded when
Salon's advertisements are run on the reciprocal web sites, which is typically
in the same period as when advertisements are run on Salon's Web sites. Barter
revenues represented 0.9%, 17.8% and 16.2% of total revenues for the fiscal
years ended March 31, 2001, 2000 and 1999, respectively. Salon does not expect
to have significant barter revenues in the future.

                                       6
<PAGE>

   Substantially all of Salon's content, as well as participation in Table Talk
are free of charge to users. On April 25, 2001 Salon launched a paid
subscription service for enhanced features, charging rates of $30 for a one-
year subscription and $50 for a two-year subscription. Based on the company's
market research, 1% to 2% of our reader base may subscribe, resulting in
estimated incremental annual revenue of $900,000 to $1.8 million.

Sales and Marketing

   Salon has sales offices in New York City and San Francisco with a staff of
sixteen active employees as of March 31, 2001, down from thirty-six employees
as of March 31, 2000. During the current fiscal year, Salon closed offices in
Los Angeles, CA and Chicago, IL in order to reduce expenses. Due to Salon's
operating losses, Salon has experienced difficulties in hiring and retaining
sales personnel.

   During the fiscal year ended March 31, 2000, Salon incurred $7.8 million in
advertising costs to promote and attract viewers to its network of websites.
The targeted campaign consisted of online advertising, traditional print, radio
and television advertising as well as local and national events. During the
fiscal year ended March 31, 2001 Salon incurred $1.2 million in advertising
costs, as it has determined that this type of expenditure was no longer the
preferred method to expand the user base. Salon does not expect to incur any
cash outlays for advertising in the next fiscal year. Salon, however does
intend to continue to utilize the benefits of its agreement with Rainbow Media
Holdings which provides advertising in various television networks without the
use of cash.

Competition

   The first half of calendar year 2001 has brought on a weakened economy
affecting both traditional and Internet based businesses. The weakened economy
has resulted in the reduction, deferral or elimination of advertising campaigns
by many advertisers. With this event and the estimate that the top nine
websites receive eighty-five percent of all Internet advertising dollars, Salon
is experiencing strong competition for advertising dollars. Because of these
factors, competitive conditions for Internet advertising dollars are likely to
intensify in the future. Increased competition could result in price
reductions, reduced net revenues, or erosion in market share, any of which harm
Salon's business.

   Many of Salon's present and potential competitors are likely to enjoy
substantial competitive advantages, including a larger number of users, greater
brand recognition, ability to offer traditional and Internet-based advertising
mediums and substantially greater financial resources.

   If Salon does not compete effectively or if it experiences any pricing
pressures, reduced margins or loss of market share resulting from increased
competition, its business could be adversely affected.

Salon's Strategy

 Broaden Revenue Base in Advertising

   As of March 31, 2001, Salon has derived its revenues from a customer base of
over 500 advertisers, including a large proportion of e-commerce and Internet
businesses. During the fiscal year ended March 31, 2001 e-commerce or Internet
businesses have cut advertising or have gone out of business without
compensating increases from more established advertisers. It is Salon's intent
to make up this shortfall in the future by selling advertising space to the
more than 4,000 companies that currently advertise on the Internet, and in
particular, well established Fortune 1000 companies. In order to entice these
companies to advertise in Salon's sites, Salon has developed new ad units on
the standard adopted by the Interactive Advertising Bureau and CNET. These new
units are bigger, more visually integrated with the site, optimized for
animation and allow interaction with the viewer. Also, these new units more
closely resemble the traditional creative look of print media and television.
Salon expects to receive higher prices from these ad units as compared to
traditional Internet banner ads.

                                       7
<PAGE>

 Continue To Establish Innovative Advertising and Promotion Programs

   Salon has established innovative advertising and promotional programs with
some of its major clients. Salon implemented such a plan at the end of its
fiscal year ended March 31, 2001 and the beginning of its fiscal year ending
March 31, 2002 for Intel Corporation as it launched its MP3 pocket player. The
program included new large-format interactive advertising units on the Salon
Arts & Entertainment site, sponsorship of the Salon Audio Hub, XML links for
Shop Intel promotion of their products and an upcoming on-line promotion giving
away the new MP3 players to selected Salon users. In addition, Salon supplied
Intel with audio spoken word content for the pocket player.

   Salon provided an advertising program for Lincoln Mercury for the launch of
its new urban SUV Mountaineer with high impact interstitial ad units on the
Salon site and the first ever "road block" on Salon's site cover as part of an
integrated campaign consisting of advertising, sweepstakes and other consumer
offerings. In a "road block" an advertiser in essence acquires all of the
available ad space on the top and sides of a web page.

   Lexus, a multi-year client of Salon, has done a variety of on-line and
offline promotions and currently benefits from unique visual Unicast ads that
mirror their offline TV ads, as well as strong promotional integration with the
site.

 Expand Subscription-based Revenues

   Salon has been generating $0.5 million of subscription revenue from The Well
the last two fiscal years and Salon plans to increase such revenue. To that
purpose, and to capitalize on its brand appeal, Salon began Salon Premium, a
subscription-based service in April 2001. Salon Premium offers readers who pay
either $30 for a one year subscription or $50 for a two year subscription,
access to exclusive new content; the option to view Salon content without
advertising banners and pop-ups; access to select unabridged content that is
currently offered for free (abridged versions will continue to be available
free for non-subscribers) and the ability to easily download content in text
format, a convenience that will enable readers to view additional Salon
articles when not connected to the Internet. Salon believes it is one of the
few web sites whose readers are numerous, affluent and devoted enough to make
this premium strategy succeed. Salon seeks to convert 1% to 2% of its
approximately 3.5 million monthly readers to this premium subscription program
by April 2002.

 Expand Salon's Audience

   Building on its strength as a premier Internet content producer, Salon has
established non-revenue generating distribution relationship agreements with
major portals. In past years, these have included NBCi, CBS Market Watch, and
CNET. Many of these agreements are "content-for-carriage," in which Salon
provides its proprietary headlines to a distribution partner and receives
prominent placement of its logo and content on the distribution partner's site,
as well as links back to Salon's network. During the fiscal year ended March
31, 2000, Salon has augmented these relationships by adding wireless innovator
AvantGo, and during the fiscal year ended March 31, 2001 added, Omnisky and
MyPalm by Palm.net. Salon intends to continue to establish similar distribution
agreements as opportunity arise.

   As a means of expanding its audience, Salon sends out its headlines to over
600 websites. Salon intends to continue this method as a means to increase
visitors to its websites.

 Capitalize on its agreement with Rainbow Media Holdings

   In December 1999, Salon entered into a ten-year agreement with Rainbow Media
Holdings, a subsidiary of Cablevision Systems (NYSE: CVC), to receive $11.8
million in advertising credits. The advertising is being provided to Salon
through Rainbow Media Holdings television networks, The Bravo Network,
Independent Film Channel, American Movie Classics, entertainment venues Madison
Square Garden, Radio City Music

                                       8
<PAGE>

Hall, Clearview Cinemas (movie theatres) and the electronics retailer, The Wiz.
Through its fiscal year ended March 31, 2001, Salon has received $1.6 million
of advertising value from this agreement. Salon intends to continue to utilize
the remaining value of this agreement to continue to promote the Salon brand.

 Capitalize on the intrinsic value of its website management software

   Salon has developed proprietary software to manage its web sites and to
facilitate the publishing of content within the site. This system has been
designed to optimize the Salon network's user experience and advertising
performance. Salon believes its custom-built, Linux-based platform gives Salon
the ability to store Salon's content in a database and automatically assemble
pages. This system facilitates easier navigation of Salon's web sites as well
as printing, bookmarking and e-mailing of Salon content for users. During
Salon's fiscal year ended March 31, 2001, Salon spent $0.7 million to upgrade
the software so that it could be marketed to other parties. Salon expects to
recognize $0.2 million in revenue during the first quarter of its fiscal year
ending March 31, 2002. Salon is exploring further customers for this product.

Infrastructure and Operations

   Salon has created a flexible publishing structure which enables it to
develop its content while responding quickly to news events and taking
advantage of the ease of distribution provided by the Internet. Salon content
is developed on its proprietary software platform and captured in an Oracle
database for reuse in web and other formats. The system allows Salon content to
be easily redistributed to other websites, newspapers, magazines, and
electronic devices.

   Salon's websites are supported by a variety of servers using the Windows NT,
Solaris and Linux operating systems. Salon's top technical priority is the fast
delivery of pages to its users. Salon's systems are designed to handle
significant traffic growth by balancing the amount of traffic among multiple
servers. Salon relies on server redundancy to help achieve its goal of 24 hour,
seven-day-a-week site availability. Regular automated backups protect the
integrity of Salon data. During the fiscal year ended March 31, 2001, Salon
significantly revised the design of its websites to improve site navigation and
improve the integration of advertising placement.

   Salon servers are maintained by a third-party facility in Sunnyvale,
California who provides bandwidth on demand to meet the fluctuating needs of
Salon's network. The third party offers high-speed connections to the Internet,
helping ensure fast serving and delivery of Salon's websites, and monitors all
servers via human or technical means on a continuous basis. Salon follows
strict password management procedures to protect access to its servers. All of
Salon's servers are supported by uninterruptible power supplies for protection
against power outages.

Proprietary Rights

   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,
such steps may not be adequate to prevent the infringement or misappropriation
of its content. Infringement or misappropriation of Salon's intellectual
property could materially harm Salon's business. Salon also licenses content
from various freelance providers and other third-party content providers. While
Salon attempts to insure that third-party content may be freely licensed to
Salon, other parties may assert claims of infringement against Salon relating
to this content.

   Salon has licensed in the past, and expects to license in the future,
proprietary rights such as trademarks and copyrighted material to third
parties. While Salon attempts to insure that the quality of its brand is
maintained by these licensees, its licensees may take actions that adversely
affect the value of the Salon brand or Salon's other proprietary rights. Any
such adverse acts could materially harm Salon's reputation and its business.

                                       9
<PAGE>

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

Employees

   As of March 31, 2001, Salon had 100 active full-time employees and one
employee on a leave of absence. None of Salon's employees are represented by a
union. Salon's future success is highly dependent on the ability to attract,
retain and motivate highly skilled employees.

ITEM 2. Properties

   Salon leases approximately 20,833 square feet of space at 22 Fourth Street
15th and 16th Floor, San Francisco, California. The rent for this space
currently is approximately $70,000 per month, and the lease expires in December
2009. Approximately 10,735 square feet of the space, representing the 15th
floor, is subleased at $44,729 per month with the term expiring February 2003.

   Salon leases approximately 7,000 square feet of space at 126 Fifth Avenue,
New York, New York. The rent for this space currently is approximately $16,000
per month, and the lease expires in December 2004.

   Salon leases approximately 3,635 square feet of space at 1642 R Street,
Washington, DC. The rent for this space currently is approximately $3,000 per
month, and the lease expires in February 2006.

   Salon leases approximately 9,277 square feet of space at 706 Mission, San
Francisco, California. The rent for this space currently is approximately
$15,500 per month, and the lease expires in July 2002. This entire space is
sublet with a term expiring July 2002 at approximately $16,200 per month.

   Salon leases approximately 3,903 square feet of space at 1500 Broadway, New
York, New York. The rent for this space currently is approximately $13,400 per
month, and the lease expires in March 2004. This entire space is sublet with a
term expiring March 2004 at approximately $17,600 per month.

ITEM 3. Legal Proceedings

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

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

   No matters were submitted to a vote of security holders during the fourth
quarter of the fiscal year ended March 31, 2001.

Executive Officers of the Registrant

   The following sets forth certain information with respect to executive
officers of Salon as of March 31, 2001:

<TABLE>
<CAPTION>
   Name                     Age                     Position
   ----                     ---                     --------
   <S>                      <C> <C>
   David Talbot............  49 Chairman of the Board, Editor-in-Chief
   Michael O'Donnell.......  37 Chief Executive Officer, President
   Robert O'Callahan.......  50 Chief Financial Officer, Treasurer and Secretary
   Scott Rosenberg.........  41 Senior Vice President, Editorial Operations
   Patrick Hurley..........  39 Senior Vice President, Business Operations
</TABLE>

                                       10
<PAGE>

   David Talbot co-founded Salon in 1995. He has served as Editor-in-Chief
since Salon's incorporation. He served as Chief Executive Officer from Salon's
incorporation through April 1999. He became Chairman of the Board in April
1999. From 1990 to 1995, Mr. Talbot was the Arts & Features editor for the San
Francisco Examiner newspaper. Mr. Talbot has co-authored three books and
written for numerous publications including The New Yorker, Rolling Stone and
Playboy. Mr. Talbot holds a bachelor of arts degree in sociology from the
University of California at Santa Cruz.

   Michael O'Donnell has served as Salon's President since December 1996. He
became Chief Executive Officer in April 1999. In 1996, he served as Vice
President of Sales and Merchandising at SegaSoft, Inc., a consumer software
publisher. From 1995 to 1996, Mr. O'Donnell was Vice President of Worldwide
Sales at Rocket Science Games, Inc., a consumer software publisher. From 1993
to 1995, he served as Vice President of Retail Sales at Mindscape, Inc., a
consumer software publisher. Mr. O'Donnell holds a bachelor of arts degree in
political science from the University of California at Berkeley.

   Robert O'Callahan has served as Chief Financial Officer and Treasurer since
July 2000. Since August 2000 he has also served as Secretary. From July 1999
through July 2000, he served as Director, Worldwide Planning and Treasury with
Banter, Inc., a venture funded software development firm. From January 1998 to
July 1999, Mr. O'Callahan worked for John G. Kinnard & Co. as a securities
research analyst. From August 1997 to December 1997, he worked at Dain
Bosworth, Inc., as a research associate. From 1992 to 1997, Mr. O'Callahan was
Chief Financial Officer of Consan, Inc. a wholesale distributor of digital mass
storage equipment. Mr. O'Callahan holds a master's degree in management, with
concentrations in marketing and finance, from the J.L. Kellogg Graduate School
of Management at Northwestern University, a juris doctor degree from the
University of Washington School of Law, and a bachelor of arts degree from the
University of Washington.

   Scott Rosenberg has served as Salon's Senior Vice President, Editorial
Operations since October 2000. From January 1999 until then, he served as Vice
President of Site Development. He also serves as Salon's managing editor and
has held that position since June 1999. Previous to that, he served as Senior
Editor/Technology, a position he held from the founding of Salon in 1995.
Before joining Salon, he was the San Francisco Examiner's movie and theater
critic for nearly 10 years. Mr. Rosenberg holds a bachelor of arts degree from
Harvard University.

   Patrick Hurley has served as Salon's Senior Vice President, Business
Operations since October 2000. From March 1999 to October 2000 he served as
Vice President of Marketing. From 1998 to 1999, he served as Salon's Marketing
Director. From 1996 to 1998, he was management supervisor at Hal Riney &
Partners, an advertising agency. From 1994 to 1996, he served as account
supervisor for the J. Walter Thompson advertising agency. Mr. Hurley holds a
bachelor of arts degree in journalism from Marquette University.

                                       11
<PAGE>

                                    PART II

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

   Salon's common stock has been quoted on the NASDAQ National Market since its
June 22, 1999 initial public offering under the symbol "SALN." Information with
respect to the quarterly high and low market prices for Salon's common stock
for its fiscal years 2001 and 2000, based on sales transactions reported by the
NASDAQ National Market, is provided below:

<TABLE>
<CAPTION>
                                            Fiscal Year Ended Fiscal Year Ended
                                             March 31, 2001     March 31, 2000
                                            ----------------- ------------------
                                              High     Low      High      Low
                                            ----------------- --------- --------
     <S>                                    <C>      <C>      <C>       <C>
     For the quarters ended
       June 30.............................     4.63     1.06     10.81     9.00
       September 30........................     2.25     1.13     15.13     3.75
       December 31.........................     1.69     0.38      9.00     4.25
       March 31............................     1.13     0.22     10.06     4.06
</TABLE>

   There were 180 holders of record of Salon common stock as of June 8, 2001
with a then closing price of $0.35 per share.

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

ITEM 6. Selected Consolidated Financial Data

<TABLE>
<CAPTION>
                                                   Year ended March 31,
                                           ------------------------------------
                                            2001    2000    1999   1998   1997
                                           ------- ------- ------ ------ ------
                                           Dollar amounts in thousands, except
                                                        per share
<S>                                        <C>     <C>     <C>    <C>    <C>
Net revenues.............................  $ 7,202 $ 8,002 $2,921 $1,156 $  280
Net loss attributable to common
 stockholders (1)........................  $19,155 $33,405 $6,504 $3,825 $1,944
Net loss per share attributable to common
 stockholders............................  $  1.48 $  3.63 $16.63 $10.20 $ 3.84
Weighted average common shares
 outstanding used in computing per share
 amounts.................................   12,962   9,204    391    375    507
Cash and cash equivalents................  $ 3,047 $17,982 $  754 $1,926 $2,638
Total assets.............................  $ 9,223 $27,400 $7,808 $2,707 $2,834
Capital leases--long-term portion........  $   325 $   324 $  --  $  --  $  --
Total long-term liabilities..............  $   478 $   473 $   75 $   95 $  --
</TABLE>
--------
(1)  Net loss for fiscal year ended March 31, 2001 includes a write-down of
     long-lived assets of $3,517 due to impairments. Net loss attributable to
     common stockholders for fiscal year ended March 31, 2000 includes a
     preferred deemed dividend of $11,515 which was the difference between the
     offering price of Salon's Series C preferred stock sold in April 1999 and
     the deemed fair value of Salon's common stock on the date of the
     transaction.

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

Overview

   Salon Media Group, Inc. (Salon) is a leading Internet media company that
produces a total network of ten subject-specific, web sites, and two online
communities--The Well and Table Talk. Salon was incorporated in July 1995 and
launched its initial Web sites in November 1995. Salon has approximately 3.5
million unique visitors per month, who recently have generated approximately
50.7 million page views per month. Page views are the total number of complete
pages retrieved and viewed by visitors to Salon's network. A unique user is an
individual visitor to Salon's network.

                                       12
<PAGE>

   The substantial majority of Salon's revenues are derived from the sale of
promotional space on its Internet properties. Services offered range from
short-term advertisements to long-term arrangements, which may include the
development of co-branded, integrated websites. Revenues derived from such
arrangements are recognized during the period which the service is provided,
provided that no significant obligations remain at the end of the period.
Salon's obligations typically include the guarantee of a minimum number of
impressions, or times that an advertisement appears in pages viewed by users of
Salon's websites. To the extent the minimum guaranteed impressions are not
delivered, Salon defers recognition of the corresponding revenue until the
remaining guaranteed impression levels are achieved.

   Salon offers The Well, a paid monthly subscription service, as one of its
web sites. Revenue is recognized ratably over the period that services are
provided. Product sales revenues are recognized upon receipt of payment from a
fulfillment contractor. Salon generates revenue from the licensing of content
which has appeared in Salon's websites. Revenue is recognized ratably over the
contract term for major agreements, or upon receipt of amounts due from minor
agreements. Salon generates income by offering HTML leads from content partners
who provide dynamic headlines. Income is recognized ratably over the term of
the contract.

   Advertising revenues include barter revenues, which are the exchange by
Salon of advertising space on Salon's web sites for reciprocal advertising
space on other web sites or the exchange of goods or services. Revenues from
these barter transactions are recorded as advertising revenues at the estimated
fair value of the advertisements delivered and are recognized when the
advertisements are run on Salon's web sites. Barter expenses are recorded when
Salon's advertisements are run on the reciprocal web sites, which is typically
in the same period as when advertisements are run on Salon's Web sites. Barter
revenues represented 0.9%, 17.8% and 16.2% of total revenues for the fiscal
years ended March 31, 2001, 2000 and 1999, respectively.

   Substantially all of Salon's content, as well as participation in Table Talk
are free of charge to users. On April 25, 2001 Salon launched a paid
subscription service for enhanced features, charging rates of $30 for a one-
year subscription and $50 for a two-year subscription. Based on the company's
market research, 1% to 2% of Salon's reader base may subscribe, resulting in
estimated incremental annual revenue of $900,000 to $1.8 million.

   Production, content and product expenses consist primarily of salaries and
related expenses for Salon's editorial, artistic and production staffs, online
communities staff, Salon Audio staffs, payments to freelance writers and
artists, and telecommunications and computer related expenses for the support
and delivery of Salon's web sites and online communities. Also included in
production, content and product expenses are costs associated with electronic
commerce transactions, including the costs of product inventory and
distribution. This category of costs was not material for the fiscal year ended
March 31, 2001.

   Sales and marketing expenses consist primarily of salaries, commissions and
related personnel costs, travel, and other costs associated with Salon's sales
force, as well as advertising, promotional and distribution costs.

   Research and development expenses consist primarily of salaries and related
personnel costs associated with the development, testing and enhancement of
Salon's software to manage its websites and to enhance Salon's website, and
support editorial operations. To date, Salon has capitalized $0.7 million of
costs related to enhancing Salon's website management software and has expensed
all costs related to enhancing its websites.

   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.

   The acquisition of The Well LLC in March 1999 and MP3Lit.com (MP3Lit) in May
2000 resulted in Salon recording goodwill and other intangible assets.
Amortization of such assets is being amortized ratably over the estimated
useful lives of the respective assets, generally five years. During the fiscal
year ended March 31, 2001 Salon determined The Well LLC asset was impaired and
recorded an impairment charge of

                                       13
<PAGE>

$1.8 million. During the fiscal year ended March 31, 2001 Salon determined the
MP3Lit.com asset was impaired and recorded an impairment charge of $1.7
million, net of $0.2 million amortization previously recorded.

   Write-down of long-lived assets relates to an impairment charge against
goodwill to adjust the carrying value of such assets to the present value of
the expected future cash flows associated with these assets.

   Salon has incurred significant net losses and negative cash flows from
operations since its inception. As of March 31, 2001, Salon had an accumulated
deficit of $65.3 million. These losses have been funded primarily through the
issue of preferred stock and Salon's initial public offering in June 1999.

   Salon believes that it will incur negative cash flows from operations in the
near future. Although Salon had targeted positive cash flows from operations by
the third quarter of fiscal year 2002, because of the rapid and unexpected
sharp deterioration of the general business climate in recent months, Salon
cannot predict when it will achieve either positive cash flows from operations
or financial reporting profitability in the future.

   Salon has not recorded a provision for federal or state income taxes for any
period since inception due to incurring operating losses. At March 31, 2001
Salon had net operating loss carryforwards for federal income tax purposes of
$43.0 million, which expire in the years March 31, 2011 through March 31, 2021.
Salon also has net operating loss carryforwards for state income tax purposes
of $22.5 million which begin to expire in 2004. 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 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 $6.0 million during the year ended March 31, 2001
to $17.0 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.

Recent Events

   On May 16, 2001 Salon.com changed its name to Salon Media Group, Inc.

   In June 2001, Salon received a NASDAQ staff determination that the stock no
longer qualified for listing. Salon has appealed, staying the effect of that
determination. The hearing on this matter is set for July 26, 2001 and the
ultimate result and timing of the decision on appeal are uncertain.

Results of Operations

Fiscal Years Ended March 31, 2001 and 2000

 Net Revenues

   Salon's net revenue decreased 10% to $7.2 million in the fiscal year ended
March 31, 2001 from $8.0 million in the fiscal year ended March 31, 2000.
Excluding non-cash barter sales of $0.1 million for the fiscal year ended March
31, 2001 and $1.4 million for the fiscal year ended March 31, 2000, sales
increased 9% to $7.1 million compared to $6.6 million. The increase in cash-
generating revenue is attributable to growth of the on-line advertising market
and Salon's position in that market. However, revenues dropped markedly in the
later portion of the fiscal year ended March 31, 2001 as the overall United
States economy contracted and e-commerce or Internet businesses cut advertising
without compensating increases from more established advertisers. Subscription
revenue was $0.5 million for the fiscal years ended March 31, 2001 and March
31, 2000.


                                       14
<PAGE>

 Operating Expenses

   Salon's operating expenses decreased 13% to $26.8 million in the fiscal year
ended March 31, 2001 from $30.9 million in the fiscal year ended March 31,
2000. The decrease is primarily attributable to a decrease in sales and
marketing expenditures of $8.4 million partially offset by a write-down of
long-lived assets of $3.5 million. Salon anticipates a substantial decline in
operating expenses during the fiscal year ending March 31, 2002.

 Production, Content and Product Expense

   Production, content and product expenses decreased $0.4 million or 4% to
$9.8 million for the fiscal year ended March 31, 2001 from $10.2 million for
the fiscal year ended March 31, 2000. The decrease between years is primarily
attributable to a decline in freelance expenditures of $0.7 million and $1.1
million of stock compensation charges partially offset by an increase in
salaries and related expenses of $1.2 million. The increase in salary related
costs resulted from salary increases in the beginning of the fiscal year and
$0.5 million for Salon Audio, a new division of Salon for the year. Subsequent
to March 31, 2001, Salon reduced salaries by 15% for substantially all of its
employees with an approximate annual savings of $0.5 million. Salon anticipates
a decline in production, content and product expenses during the fiscal year
ending March 31, 2002.

   The decrease in stock compensation charges reflects the impact of the
accelerated expense recognition method. Additionally, the termination of
employees during the year resulted in lower stock compensation expense by
reversing the excess of expenses recognized in prior years over vested amounts.

 Sales and Marketing Expenses

   Sales and marketing expenses decreased $8.4 million or 54% to $7.2 million
for the fiscal year ended March 31, 2001 from $15.6 million for the fiscal year
ended March 31, 2000. The drop in sales and marketing reflects a drop in
advertising expenditures of $6.6 million to $1.2 million from $7.8 million as
Salon determined that this type of expenditure was no longer the preferred
method to expand the user base. Advertising costs include barter transactions
of $0.1 million for the fiscal ended March 31, 2001 and $1.4 million for the
fiscal year ended March 31, 2000. In January 2000 Salon issued 1,125,000 shares
of common stock to an advertiser for which Salon recorded an advertising
receivable of $8.1 million. Salon is amortizing this amount over the ten year
period for which advertising services will be provided and recognized expenses
of $0.8 million for the fiscal year ended March 31, 2001 and $0.2 million for
the fiscal year ended March 31, 2000. Salon anticipates a decline in marketing
expenses during the fiscal year ending March 31, 2002, with the exception of
the non-cash expenses for advertising services, which will remain stable.

   The decrease in expenses between fiscal years March 31, 2001 and March 31,
2000 includes a reduction in stock compensation of $0.9 million to $0.1
million. The decrease in stock compensation charges reflects the impact of the
accelerated expense recognition method. Additionally, the termination of
employees during the year resulted in lower stock compensation expense by
reversing the excess of expenses recognized in prior years over vested amounts.

   Subsequent to March 31, 2001, Salon reduced salaries by 15% for
substantially all of its employees with an approximate annual savings of $0.1
million.

 Research and Development Expenses

   Research and development expenses were $1.6 million for both fiscal years
ended March 31, 2001 and March 31, 2000. Increases in salaries and other
expenses of $0.2 million were offset by a $0.2 million decrease in stock
compensation expense. Subsequent to March 31, 2001, Salon reduced salaries by
15% for substantially all of its employees with an approximate annual savings
of $0.1 million. Salon anticipates a substantial decline in research and
development expenses during the fiscal year ending March 31, 2002.

                                       15
<PAGE>

   During the fiscal year ended March 31, 2001 Salon incurred and capitalized
$0.7 million of costs associated with developing its proprietary software used
to manage content on websites which Salon intends to market in future periods.
No comparable expenditures were incurred during the fiscal year ended March 31,
2000. Expenditures were classified as a component of "Property and equipment,
net" in its Consolidated Balance Sheet as of March 31, 2001. Salon does not
expect to incur additional costs in future periods.

 General and Administrative Expenses

   General and administrative expenses increased $1.0 million or 40% to $3.5
million for fiscal year ended March 31, 2001 from $2.5 million for the fiscal
year ended March 31, 2000. Of the increase, $0.6 million was attributable to
expenses incurred in connection with seeking venture capital and customers for
Salon's proprietary software utilized in managing websites. Subsequent to March
31, 2001, Salon reduced salaries by 15% for substantially all of its employees
with an approximate annual savings of $0.1 million. Salon anticipates a decline
in general and administrative expenses during the fiscal year ending March 31,
2002.

 Amortization of Intangibles

   Amortization of intangibles increased 18% to $1.2 million for fiscal year
ended March 31, 2001 from $1.0 million in fiscal year ended March 31, 2000. The
increase of $0.2 million is attributable to the amortization of goodwill and
other intangible assets resulting from the acquisition of MP3Lit in May 2000.

 Write-down of Long-lived Assets

   In May 2000, Salon acquired MP3Lit, a website dedicated to offering spoken
word and audio literature recordings in the MP3 format. The excess of the
purchase price over the fair value of the net tangible and identifiable
intangible assets acquired resulted in $1.9 million of goodwill. During the
fiscal year ended March 31, 2001 Salon determined that no significant income
could be generated in the foreseeable future from the sale of digital
downloadable spoken word recordings which was Salon's original intent in
acquiring MP3Lit. Accordingly, Salon determined that this asset was impaired
and recorded an impairment charge of $1.7 million during the fiscal year ended
March 31, 2001, net of $0.2 million amortization previously recorded.

   In March 1999 Salon acquired The Well LLC, an online community. The excess
of the purchase price over the fair value of the net tangible assets acquired
resulted in $3.6 million of goodwill and $1.6 million of other intangible
assets. During the fiscal year ended March 31, 2001 Salon determined that
future cash flows could not justify the current carrying value of The Well's
goodwill and recorded an impairment charge in the fourth quarter of $1.8
million, representing the difference between the carrying value and the
discounted net present value of the expected future net cash flows.

 Interest Income

   Interest income dropped $0.5 million to $0.6 million for the fiscal year
ended March 31, 2001 compared to $1.1 million for the fiscal year ended March
31, 2000. The decrease between years is primarily attributable to a decrease in
cash between periods as Salon has been utilizing its cash to fund operations.

 Preferred Deemed Dividend

   During the fiscal year ended March 31, 2000, Salon recorded a preferred
deemed dividend of $11.5 million which was the difference between the offering
price of Salon's Series C preferred stock sold in April 1999 and the deemed
fair value of Salon's common stock on the date of the transaction. No
comparable transaction occurred during the fiscal year ended March 31, 2001.

                                       16
<PAGE>

 Net Loss Attributable to Common Stockholders

   As a result of the above factors, Salon recorded a net loss attributable to
common stockholders of $19.2 million or $1.48 per share for the fiscal year
ended March 31, 2001 compared to a net loss of $33.4 or $3.63 per share for the
fiscal year ended March 31, 2000.

 Liquidity and Capital Resources

   Since its inception Salon has primarily financed its operations through
private placement of convertible preferred stock and its initial public
offering of common stock. As of March 31, 2001, Salon had $3.0 million in cash
and cash equivalents which was originally obtained through Salon's initial
public offering in June 1999 and the sale of additional common stock in July
1999.

   Net cash used in operations was $13.4 million for the fiscal year ended
March 31 2001, compared to $16.8 million for the fiscal year ended March 31,
2000. The principal use of cash during the fiscal year ended March 31, 2001 was
to fund the $19.2 million net loss after taxes for the year, partially offset
by non-cash charges of $6.9 million.

   Net cash used in investing activities totaled $1.4 million for the fiscal
year ended March 31, 2001, compared to $1.6 million for fiscal year ended March
31, 2000. During the fiscal year ended March 31, 2001, net cash used in
investing activities consisted primarily of $0.4 million cash consideration for
the MP3Lit acquisition and $0.7 million to fund software development.
Investment activities for the fiscal year ended March 31, 2000 consisted mainly
of purchases of property and equipment.

   Net cash from financing activities decreased from an inflow of $35.6 million
for the fiscal year ended March 31, 2000 to an outflow of $0.1 million for the
fiscal year ended March 31, 2001. The cash used in financing activities during
the fiscal year ended March 31, 2001 was primarily for the repayment of leases
and bank borrowings of $0.2 million and $0.1 million, respectively, offset by
cash generated from the exercise of common stock options and employee stock
purchase activity. The cash provided by financing activities during the fiscal
year ended March 31, 2000 was primarily from the net proceeds from the issuance
of preferred stock and common stock warrants and the net proceeds from the
issuance of common stock during Salon's initial public offering.

   On September 23, 1999, Salon obtained a revolving line of credit from a bank
for a maximum amount of $2.0 million which included a sub-limit of $1.5 million
for the issuance of standby letters of credit. Borrowings under the agreement
were based on 80% of eligible receivables with interest at the bank's prime
rate. The agreement expired on December 31, 2000 with no amounts then
outstanding and was not renewed by the bank. Standby letters of credit
previously issued by the bank were subsequently collateralized by like amounts
in certificates of deposit with the bank. At March 31, 2001 Salon had $0.9
million in certificates of deposit as collateral for the standby letters of
credit, classified as a component of "Other assets" in its Consolidated Balance
Sheet. Subsequent to March 31, 2001 letters of credit outstanding were reduced
to $0.8 million as were the collateral certificates of deposit.

   Salon currently anticipates that its available cash resources will be
sufficient to meet its anticipated needs for working capital and capital
expenditures for approximately the next three to five months, depending on the
revenues generated during the period, the continuing reduction of operating
expenses and the effect of a 15% reduction in employee salaries which was
effective April 1, 2001. Salon will need to raise additional funds, however, to
fund its operations at current levels. If Salon raises additional funds by
selling equity securities, or securities which convert into equity securities,
the percentage ownership of Salon's stockholders will be reduced and its
stockholders will most likely experience additional dilution. Given Salon's
recent low stock price, any dilution will likely be very substantial for
existing shareholders. Salon cannot be sure that additional financing will be
available on terms favorable to Salon, or at all. If adequate funds are not
available on acceptable terms, if at all, Salon's ability to continue
operations, react to competitive pressures, or take

                                       17
<PAGE>

advantage of unanticipated opportunities will be substantially limited. In
addition, Salon's business could be significantly adversely affected.

Fiscal Years Ended March 31, 2000 and 1999

 Net Revenues

   Salon's net revenues increased 174% to $8.0 million in the fiscal year ended
March 31, 2000 from $2.9 million in the fiscal year ended March 31, 1999. The
increase in net revenues is primarily attributable to an increase in
advertisement revenues of $5.7 million which was fueled by the rapid expansion
of Internet based businesses attempting to acquire market share by spending
heavily on advertising. Also included in revenue was $0.5 million of
subscription revenue generated from the acquisition of The Well in March 1999.

   Net revenues include revenues recognized from advertising barter
transactions of $1.4 million in the fiscal year ended March 31, 2000 and $0.5
million in the fiscal year ended March 31, 1999.

 Operating Expenses

   Salon's operating expenses increased 236% to $30.9 million in the fiscal
year ended March 31, 2000 from $9.2 million in the fiscal year ended March 31,
1999. The increase in operating expenses for the fiscal year ended March 31,
2000 is primarily attributable to increased production, content and product
expenses of $5.7 million, as well as increased sales and marketing expenses of
$11.9 million. The increase in operating expenses is primarily attributable to
an increase in the scope of Salon's content and communities, expanding its
marketing efforts and further developing its technology and infrastructure.

 Production, Content and Product Expense

   Production, content and product expenses increased 126% to $10.2 million in
the fiscal year ended March 31, 2000 from $4.5 million in the fiscal year ended
March 31, 1999. The increase in production, content and product expenses for
the fiscal year ended March 31, 2000 is attributable to Salon's increased
staffing to expand the scope and distribution of its web sites and online
communities and includes recognizing $1.2 million of stock compensation
expense.

 Sales and Marketing Expenses

   Sales and marketing expenses increased 326% to $15.6 million in the fiscal
year ended March 31, 2000 from $3.7 million in the fiscal year ended March 31,
1999. Sales and marketing expenses include expenses incurred from barter
transactions of $1.4 million for the fiscal year ended March 31, 2000 and $0.5
million for the fiscal year ended March 31, 1999. The increase in sales and
marketing expenses is primarily attributable to an increase in advertising of
$6.5 million for the fiscal year ended March 31, 2000 compared to $0.6 million
for the fiscal year ended March 31, 1999, and additional sales and marketing
personnel expenses of $3.8 million for the fiscal year ended March 31, 2000
compared to $1.1 million for the fiscal year ended March 31, 1999.

 Research and Development Expenses

   Research and development expenses increased 227% to $1.6 million in the
fiscal year ended March 31, 2000 from $0.5 million in the fiscal year ended
March 31, 1999. The increase in research and development expenses is primarily
attributable to salary and payroll related expenses for new technological
developments undertaken by Salon, including the design and development of
software to manage Salon's websites and to a lesser extent, an increase in
technical support staff.

                                       18
<PAGE>

 General and Administrative Expenses

   General and administrative expenses increased 354% to $2.5 million in the
fiscal year ended March 31, 2000 from $0.6 million in the fiscal year ended
March 31, 1999. The increase in general and administrative expenses is
primarily attributable to salary and related expenses for additional personnel,
higher legal, accounting and other professional fees, and other corporate costs
associated with operating as a publicly traded company.

 Amortization of Intangibles

   Amortization of intangibles consists of the costs associated with the
amortization of goodwill and intangible assets resulting from the March 1999
acquisition of The Well which are being amortized on a straight-line basis over
five years. Amortization expenses for the fiscal year ended March 31, 2000 were
$1.0 million. There was no similar amortization expense in 1999.

 Interest Income

   Interest income consists primarily of interest earned on Salon's cash, cash
equivalents and short-term investments. Other income increased to $1.0 million
in the fiscal year ended March 31, 2000 from $45,000 in the fiscal year ended
March 31, 1999. The increase in interest income is primarily attributable to an
increase in the amount of interest earned by Salon due to an increase in
Salon's cash and cash equivalents resulting from Salon's initial public
offering on June 22, 1999.

 Preferred Deemed Dividend

   The preferred deemed dividend of $11.5 million for the fiscal year ended
March 31, 2000 is the difference between the offering price of Salon's Series C
preferred stock sold in April 1999 and the deemed fair value of Salon's common
stock on the date of the transaction. This is a one-time non-cash expense.
Salon recorded a $0.3 million charge for a similar transaction in its fiscal
year ended March 31, 1999.

 Net Loss Attributable to Common Stockholders

   Due to the above reasons, Salon recorded a net loss attributable to common
stockholders of $33.4 million or $3.63 per share for the fiscal year ended
March 31, 2000 compared to a net loss of $6.5 million or $16.63 per share for
same period in 1999.

Recent Accounting Pronouncements

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

                                       19
<PAGE>

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

Salon lacks significant revenues, and has a history of losses

   Salon has not achieved profitability and expects to incur operating losses
in the near future. If and when Salon does achieve profitability, we may not be
able to sustain or increase profitability on a quarterly or annual basis in the
future. If our revenues grow more slowly than we anticipate or if our operating
expenses exceed our expectations, financial results will most likely be
severely harmed and the ability of Salon to continue its operations will be
seriously jeopardized.

Additional financing may not be available

   Salon will need to raise additional funds within the next three to five
months to fund operations at current levels, and to maintain its network of web
sites and on-line communities. If Salon raises additional funds by selling
equity securities, or securities which convert into equity securities, the
percentage ownership of Salon's stockholders will be reduced and its
stockholders will most likely experience additional dilution. Given Salon's
recent low stock price, any dilution will likely be very substantial for
existing shareholders. Salon cannot be sure that additional financing will be
available on terms favorable to Salon, or at all. If adequate funds are not
available on acceptable terms, if at all, Salon's ability to continue
operations, react to competitive pressures, or take advantage of unanticipated
opportunities will be substantially limited. In addition, Salon's business
could be significantly adversely affected. In the event that Salon is unable to
increase revenue levels or financing is unavailable, management will have to
reduce its workforce, reduce discretionary costs, and reduce the size of its
web site and corresponding web site offerings to match revenue levels.

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

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

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

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

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

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

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

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

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

  .  the economic and business cycle and the recovery speed;

  .  the level of Internet usage;

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

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

                                       20
<PAGE>

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

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

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

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

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

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

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

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

  .  increase our user base;

  .  increase the amount of revenues we receive per advertisement;

  .  increase awareness of the Salon brand;

  .  successfully sell new ad units and formats;

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

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

  .  retain sales personnel.

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

   Historically, we have relied on a small number of advertisers and
advertising sponsors for a significant percentage of our revenues. The loss of
any of our significant advertisers or advertising sponsors could harm our
business. We anticipate that our financial results in any given period will
continue to significantly depend on revenues from a small number of advertisers
and sponsors.

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

   Our dependence on advertising subjects us to the risk of revenue shortfalls
because the sales cycles for advertising vary significantly, and during these
cycles we may expend substantial funds and management resources while not
obtaining advertising revenues. If sales are delayed or do not occur, our
financial results for

                                       21
<PAGE>

a particular period may be harmed. The time between the date of initial contact
with a potential customer and the signing of an advertising order may range
from as little as one week to up to nine months. Sales of advertising are
subject to factors over which we have little or no control, including:

  .  advertisers' and sponsors' budgets;

  .  internal acceptance reviews by advertisers and their agencies;

  .  the timing of completion of advertisements and sponsorships; and

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

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

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

We must continually develop compelling content to attract Internet users

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

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

  .  the quality of our editorial staff; and

  .  the technical expertise of our production staff.

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

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

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

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

   The success of the Salon brand depends largely on our ability to provide
high quality content and services. If Internet users do not perceive our
existing content and services to be of high quality, or if we introduce new

                                       22
<PAGE>

content and services or enter into new business ventures that are not favorably
perceived by users, we may not be successful in promoting and maintaining our
brand. Any change in the focus of our operations creates a risk of diluting our
brand, confusing consumers and decreasing the value of our user base to
advertisers. If we are unable to maintain or increase the Salon brand, our
business could be severely harmed.

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

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

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

   Due to recurring operating losses, we may experience difficulty in hiring
and retaining highly skilled employees with appropriate qualifications. We may
be unable to retain our current key employees or attract, integrate or retain
other qualified employees in the future. Additionally, it is often more
difficult to attract employees once a company's stock is publicly traded
because the exercise price of equity awards such as stock options are based on
the public market, which is highly volatile. If we do not succeed in attracting
new personnel or integrating, retaining and motivating our current personnel,
our business could be harmed.

The integration of new management personnel may interfere with our operations

   During the fiscal year, we have hired new management personnel and made
management team changes. To integrate into Salon, new individuals must spend a
significant amount of time learning our business model and management system in
addition to performing their regular duties. Accordingly, the integration of
new personnel has resulted in and will continue to result in some disruption to
our ongoing operations.

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

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

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

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

                                       23
<PAGE>

to adequately protect our rights in the address, or if a third party infringes
our rights in the address or otherwise dilutes the value of www.salon.com, our
business could be harmed.

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

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

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

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

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

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

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

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

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

   Different pricing models are used to sell Internet advertising. It is
difficult to predict which pricing models, if any, will emerge as the industry
standard. This uncertainty makes it difficult to project our future advertising
rates and revenues. Any failure to adapt to pricing models that develop or
respond to competitive pressures

                                       24
<PAGE>

could reduce our advertising revenues. Moreover, "filter" software programs
that limit or prevent advertising from being delivered to an Internet user's
computer are commonly available. Widespread use of this software could
adversely affect the commercial viability of Internet advertising and our
business.

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

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

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

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

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

  .  inadequate network infrastructure;

  .  security concerns;

  .  inconsistent quality of service; and

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

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

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

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

                                       25
<PAGE>

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

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

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

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

We may be held liable for content on our Web sites

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

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

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

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

   A significant barrier to electronic commerce is the secure transmission of
confidential information over public networks. Any breach in our security could
expose us to a risk of loss or litigation and possible liability. We rely on
encryption and authentication technology licensed from third parties to provide
secure transmission of confidential information. As a result of advances in
computer capabilities, new discoveries in the field of

                                       26
<PAGE>

cryptography or other developments, a compromise or breach of the algorithms we
use to protect customer transaction data may occur. A compromise of our
security could severely harm our business. A party who is able to circumvent
our security measures could misappropriate proprietary information, including
customer credit card information, or cause interruptions in the operation of
our network of Web sites.

   We may be required to expend significant capital and other resources to
protect against the threat of security breaches or to alleviate problems caused
by these breaches. However, protection may not be available at a reasonable
price or at all. Concerns over the security of electronic commerce and the
privacy of users may also inhibit the growth of the Internet as a means of
conducting commercial transactions.

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

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

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

   Substantially all of our communications hardware and computer hardware
operations for our Web sites are located at Exodus facilities in Sunnyvale,
California. Fire, floods, earthquakes, power loss, telecommunications failures,
break-ins and similar events could damage these systems and cause interruptions
in our services. Computer viruses, electronic break-ins or other similar
disruptive problems could cause users to stop visiting our network of Web sites
and could cause advertisers and sponsors to terminate any agreements with us.
In addition, we could lose advertising revenues during these interruptions and
user satisfaction could be negatively impacted if the service is slow or
unavailable. If any of these circumstances occurred, our business could be
harmed. Our insurance policies may not adequately compensate us for any losses
that may occur due to any failures of or interruptions in our systems. We do
not presently have a formal disaster recovery plan.

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

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

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

                                       27
<PAGE>

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

   There are currently few laws or regulations that specifically regulate
communications or commerce on the Internet. Laws and regulations may be adopted
in the future, however, that address issues including content, copyrights,
distribution, antitrust matters, user privacy, pricing, and the characteristics
and quality of products and services. An increase in regulation or the
application of existing laws to the Internet could significantly increase our
costs of operations and harm our business. For example, the Communications
Decency Act of 1996 sought to prohibit the transmission of certain types of
information and content over the Web. Additionally, several telecommunications
companies have petitioned the Federal Communications Commission to regulate
Internet service providers and online service providers in a manner similar to
long distance telephone carriers and to impose access fees on these companies.
Imposition of access fees could increase the cost of transmitting data over the
Internet. Moreover, it may take years to determine the extent to which existing
laws relating to issues such as property ownership, obscenity, libel and
personal privacy are applicable to the Internet or the application of laws and
regulations from jurisdictions whose laws do not currently apply to our
business.

Privacy concerns could impair our business

   We have a policy against using personally identifiable information obtained
from users of our site and services without the user's permission. In the past,
the Federal Trade Commission has investigated companies that have used
personally identifiable information without permission or in violation of a
stated privacy policy. If we use this information without permission or in
violation of our policy, we may face potential liability for invasion of
privacy for compiling and providing information to our corporate customers and
electronic commerce merchants. We voluntarily register members in order to
tailor content to them and assist advertisers in fulfilling advertising
campaigns. However, privacy concerns may cause users to resist providing the
personal data necessary to support this capability. Even the perception of
security and privacy concerns, whether or not valid, may indirectly inhibit use
of registration at our site. In addition, legislative or regulatory
requirements may heighten these concerns if businesses must notify Internet
users that the data may be used by marketing entities to direct product
promotion and advertising to the user. Other countries and political entities,
such as the European Union, have adopted such legislation or regulatory
requirements. The United States may adopt similar legislation or regulatory
requirements. If consumer privacy concerns are not adequately addressed, our
business, financial condition and results of operations could be materially
harmed.

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

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

Our stock may be delisted from the NASDAQ National Market

   In connection with our listing on The NASDAQ National Market (NASDAQ) we
must maintain compliance with several requirements related to the trading price
of our stock, our financial condition and our periodic reporting with the
Securities and Exchange Commission (SEC) among other issues. In the event that
we are not able to comply with the NASDAQ requirements we may be delisted from
the NASDAQ. On June 13, 2001, we received a notice from NASDAQ that our common
stock would be delisted in connection with our failure to maintain a minimum
bid price of $1.00. We have appealed the NASDAQ determination, which appeal
will be heard on July 26, 2001. Pending the outcome of the appeal, our common
stock will

                                       28
<PAGE>

continue to be listed on NASDAQ. We anticipate seeking stockholder approval for
a reverse stock split which would have the effect of raising our stock price
above $1.00 for an indeterminate period of time. A delisting may negatively
impact the value of our stock as stocks trading on the over-the-counter market,
which will most likely be where our stock will be traded, are typically less
liquid and trade with larger variations between the bid and ask price. The loss
of our NASDAQ listing would most likely harm our business and its financial
condition.

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

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

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

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

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

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

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

  .  our board is classified into three classes of directors as nearly equal
     in size as possible with staggered three year-terms; and

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

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

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

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

                                       29
<PAGE>

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

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

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

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

  .  changes in financial estimates by securities analysts;

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

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

  .  additions or departures of key personnel;

  .  sales of common stock; and

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

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

ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk

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

                                       30
<PAGE>

ITEM 8. Consolidated Financial Statements and Supplementary Data

<TABLE>
<CAPTION>
                                                                           Page
                                                                           ----

<S>                                                                        <C>
Consolidated Balance Sheets as of March 31, 2001 and 2000.................  32

Consolidated Statements of Operations for the years ended March 31, 2001,

 2000, and 1999...........................................................  33

Statements of Stockholders' Equity for the years ended March 31, 2001,

 2000, and 1999...........................................................  34

Consolidated Statements of Cash Flows for the years ended March 31, 2001,

 2000, and 1999...........................................................  35

Notes to Consolidated Financial Statements................................  36

Report of Independent Accountants.........................................  51

Selected Quarterly Financial Data (unaudited).............................  52
</TABLE>

                                       31
<PAGE>

                            SALON MEDIA GROUP, INC.

                          CONSOLIDATED BALANCE SHEETS
               (in thousands, except share and per share amounts)

<TABLE>
<CAPTION>
                                                                March 31,
                                                            ------------------
                                                              2001      2000
                                                            --------  --------
<S>                                                         <C>       <C>
                          ASSETS
Current assets:
  Cash and cash equivalents................................ $  3,047  $ 17,982
  Accounts receivable, net.................................      474     2,425
  Prepaid expenses and other current assets................      201       407
                                                            --------  --------
    Total current assets...................................    3,722    20,814
Property and equipment, net................................    2,731     2,312
Other assets...............................................    1,375       186
Intangible assets, net.....................................    1,395     4,088
                                                            --------  --------
    Total assets........................................... $  9,223  $ 27,400
                                                            ========  ========
           LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities................. $  2,517  $  4,149
  Deferred revenue.........................................      223       210
  Capital lease obligations, current.......................      203       154
  Short term borrowings....................................      --         90
                                                            --------  --------
    Total current liabilities..............................    2,943     4,603
Other long term liabilities................................      153       149
Capital lease obligations, long term.......................      325       324
                                                            --------  --------
    Total liabilities......................................    3,421     5,076
                                                            --------  --------
Commitments and Contingencies (Note 11)
Stockholders' equity:
  Common stock, $0.001 par value, 50,000,000 shares
   authorized, 14,139,626 and 12,546,569 shares issued and
   outstanding at March 31, 2001 and March 31, 2000........       14        13
  Additional paid-in capital...............................   78,404    78,448
  Advertising receivable from stockholder..................   (7,075)   (7,884)
  Unearned compensation....................................     (231)   (2,098)
  Accumulated deficit......................................  (65,310)  (46,155)
                                                            --------  --------
    Total stockholders' equity.............................    5,802    22,324
                                                            --------  --------
    Total liabilities and stockholders' equity............. $  9,223  $ 27,400
                                                            ========  ========
</TABLE>

          See accompanying notes to Consolidated Financial Statements

                                       32
<PAGE>

                            SALON MEDIA GROUP, INC.

                     CONSOLIDATED STATEMENTS OF OPERATIONS
                     (in thousands, except per share data)

<TABLE>
<CAPTION>
                                                     Year ended March 31,
                                                   ---------------------------
                                                     2001      2000     1999
                                                   --------  --------  -------
<S>                                                <C>       <C>       <C>
Net revenues...................................... $  7,202  $  8,002  $ 2,921
                                                   --------  --------  -------
Operating expenses:
  Production, content and product.................    9,809    10,193    4,505
  Sales and marketing.............................    7,160    15,577    3,655
  Research and development........................    1,598     1,591      486
  General and administrative......................    3,523     2,511      553
  Amortization of intangibles.....................    1,207     1,023      --
  Write-down of long-lived assets.................    3,517       --       --
                                                   --------  --------  -------
    Total operating expenses......................   26,814    30,895    9,199
Loss from operations..............................  (19,612)  (22,893)  (6,278)
Interest income...................................      591     1,129       45
Other income (expense), net.......................     (134)     (126)     --
                                                   --------  --------  -------
Net loss..........................................  (19,155)  (21,890)  (6,233)
Preferred deemed dividend.........................      --    (11,515)    (271)
                                                   --------  --------  -------
Net loss attributable to common stockholders...... $(19,155) $(33,405) $(6,504)
                                                   ========  ========  =======
Basic and diluted net loss per share attributable
 to common stockholders........................... $  (1.48) $  (3.63) $(16.63)
Weighted average shares used in computing basic
 and diluted net loss per share attributable to
 common stockholders..............................   12,962     9,204      391
</TABLE>



          See accompanying notes to Consolidated Financial Statements

                                       33
<PAGE>

                            SALON MEDIA GROUP, INC.

                       STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (in thousands)

<TABLE>
<CAPTION>
                             Preferred         Common                Advertising
                               Stock            Stock     Additional Receivable                               Total
                          ----------------  -------------  Paid-In      from       Unearned   Accumulated Stockholders'
                          Shares   Amount   Shares Amount  Capital   Stockholder Compensation   Deficit      Equity
                          ------  --------  ------ ------ ---------- ----------- ------------ ----------- -------------
<S>                       <C>     <C>       <C>    <C>    <C>        <C>         <C>          <C>         <C>
Balance, March 31,
 1998...................   3,449  $  7,955     375  $  1   $ 1,109     $   --      $  (624)    $ (6,246)    $  2,195
Series C convertible
 preferred and common
 stock warrants issued
 for cash...............     902     2,824     --    --        615         --          --           --         3,439
Shares issued under
 employee stock plans...     --        --       55   --         11         --          --           --            11
Preferred stock warrants
 issued in connection
 with bank borrowings...     --        --      --    --         99         --          --           --            99
Preferred stock warrants
 issued in connection
 with distribution
 agreements.............     --        --      --    --        217         --          --           --           217
Unearned compensation...     --        --      --    --        764         --         (764)         --           --
Amortization of unearned
 compensation...........     --        --      --    --        --          --          554          --           554
Shares issued for
 acquisition............     464     5,010     --    --        --          --          --           --         5,010
Shares issued for domain
 name...................     --        --       17   --         61         --          --           --            61
Preferred dividend......     --        --      --    --        271         --          --          (271)         --
Net loss................     --        --      --    --        --          --          --        (6,233)      (6,233)
                          ------  --------  ------  ----   -------     -------     -------     --------     --------
Balance, March 31,
 1999...................   4,815    15,789     447     1     3,147         --         (834)     (12,750)       5,353
Series C convertible
 preferred and common
 stock warrants issued
 for cash...............   2,968     9,511     --    --      1,424         --          --           --        10,935
Shares issued under
 employee stock plans...     --        --      522   --        210         --          --           --           210
Shares issued in
 connection with initial
 public offering........     --        --    2,500     3    23,858         --          --           --        23,861
Conversion of preferred
 to common stock........  (7,783)  (25,300)  7,783     8    25,292         --          --           --           --
Shares issued upon
 exercise of over-
 allotment..............     --        --      100   --        997         --          --           --           997
Shares issued upon
 exercise of warrants...     --        --       70   --        --          --          --           --           --
Shares issued in
 connection with
 advertising agreement..     --        --    1,125     1     8,085      (8,086)        --           --           --
Warrants issued in
 association with
 Advertising agreement..     --        --      --    --        244         --          --           --           244
Amortization of
 advertising
 receivable.............     --        --      --    --        --          202         --           --           202
Unearned compensation...     --        --      --    --      3,676         --       (3,676)         --           --
Amortization of unearned
 compensation...........     --        --      --    --        --          --        2,412          --         2,412
Preferred dividend......     --        --      --    --     11,515         --          --       (11,515)         --
Net loss................     --        --      --    --        --          --          --       (21,890)     (21,890)
                          ------  --------  ------  ----   -------     -------     -------     --------     --------
Balance, March 31,
 2000...................     --        --   12,547    13    78,448      (7,884)     (2,098)     (46,155)      22,324
Shares issued under
 employee stock plans...     --        --      325   --        134         --          --           --           134
Shares issued for
 acquisitions...........     --        --    1,268     1     1,469         --          --           --         1,470
Unearned compensation...     --        --      --    --     (1,647)        --        1,693          --            46
Amortization of unearned
 compensation...........     --        --      --    --        --          --          174          --           174
Amortization of
 advertising
 receivable.............     --        --      --    --        --          809         --           --           809
Net loss................     --        --      --    --        --          --          --       (19,155)     (19,155)
                          ------  --------  ------  ----   -------     -------     -------     --------     --------
Balance, March 31,
 2001...................     --   $    --   14,140  $ 14   $78,404     $(7,075)    $  (231)    $(65,310)    $  5,802
                          ======  ========  ======  ====   =======     =======     =======     ========     ========
</TABLE>

          See accompanying notes to Consolidated Financial Statements.

                                       34
<PAGE>

                            SALON MEDIA GROUP, INC.

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

<TABLE>
<CAPTION>
                                                    Year Ended March 31,
                                                  ---------------------------
                                                    2001      2000     1999
                                                  --------  --------  -------
<S>                                               <C>       <C>       <C>
Cash flows from operating activities:
Net loss......................................... $(19,155) $(21,890) $(6,233)
Adjustments to reconcile net loss to net cash
 used in operating activities:
  Write-down of long lived assets................    3,517       --       --
  Stock-based compensation and warrant
   amortization..................................      269     2,467      554
  Depreciation and amortization..................    2,057     1,505      299
  Amortization of discount on short-term
   borrowings....................................      --         40        6
  Allowance for doubtful accounts................      283       347       30
  Amortization of advertising receivable from
   stockholder...................................      809       202      --
  Changes in assets and liabilities:
    Accounts receivable..........................    1,668    (2,274)    (277)
    Prepaid expenses, other current assets and
     other assets................................   (1,027)      335     (343)
    Accounts payable and accrued liabilities.....   (1,800)    2,828      971
    Deferred revenue.............................       13      (331)     495
                                                  --------  --------  -------
      Net cash used in operating activities......  (13,366)  (16,771)  (4,498)
                                                  --------  --------  -------
Cash flows from investing activities:
Purchase of property and equipment...............   (1,043)   (1,552)    (495)
Acquisitions, net of liabilities assumed.........     (400)      --        29
                                                  --------  --------  -------
      Net cash used in investing activities......   (1,443)   (1,552)    (466)
                                                  --------  --------  -------
Cash flows from financing activities:
  Proceeds from issuance of preferred stock,
   net...........................................      --     10,935    3,439
  Proceeds from issuance of common stock, net....      134    25,067       11
  Proceeds from bank borrowings..................      --        --       462
  Principal payments under capital leases........     (170)      (63)     --
  Repayment of short-term borrowings.............      (90)     (388)    (120)
                                                  --------  --------  -------
      Net cash (used in) provided by financing
       activities................................     (126)   35,551    3,792
                                                  --------  --------  -------
  Net (decrease) increase in cash and cash
   equivalents...................................  (14,935)   17,228   (1,172)
  Cash and cash equivalents at beginning of
   period........................................   17,982       754    1,926
                                                  --------  --------  -------
  Cash and cash equivalents at end of period..... $  3,047  $ 17,982  $   754
                                                  ========  ========  =======
Amount paid for interest......................... $    118  $    126  $    39
Supplemental schedule of non-cash investing and
 financing activities:
  Issuance of stock in connection with
   advertising agreement......................... $    --   $  8,086  $   --
  Unearned compensation in connection with the
   issuance of stock options.....................    1,461     3,676      764
  Issuance of stock and warrants in connection
   with acquisition..............................    1,469       --     5,010
  Issuance of warrants in connection with bank
   borrowings....................................      --        --        99
  Issuance of warrants in connection with
   agreements....................................      --        244      217
  Issuance of stock in connection with domain
   name..........................................      --        --        61
  Value assigned to reciprocal advertising
   agreements....................................       63     1,424      472
  Property and equipment purchased under capital
   lease.........................................      221       536      --
</TABLE>

          See accompanying notes to Consolidated Financial Statements

                                       35
<PAGE>

                            SALON MEDIA GROUP, INC.

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                 (amounts in thousands, except per share data)

Note 1. The Company

   Salon Media Group, Inc ("Salon" or the "Company") is an Internet media
company that produces a total network of ten primary subject-specific,
demographically targeted web sites, with an audio streaming web site and two
online communities designed to attract Internet advertisers and electronic
commerce partners. Salon was originally incorporated in July 1995 in the State
of California and reincorporated in Delaware in June 1999. Salon operates in
one business segment.

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 flow from operations since
inception and has an accumulated deficit at March 31, 2001 of $65,310. These
factors raise substantial doubt about Salon's ability to continue as a going
concern.

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

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

 Reclassification

   Certain reclassifications of prior year amounts have been made to conform
with the current year's presentation.

 Principles of consolidation

   The consolidated financial statements include the accounts of Salon and its
wholly owned subsidiaries. All material intercompany accounts and transactions
have been eliminated in the consolidated financial statements.

 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.

                                       36
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)


 Cash equivalents

   Salon considers all highly liquid investments purchased with an original
maturity of three months or less at the date of purchase to be cash
equivalents.

 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.

 Intangible assets

   Goodwill and purchased intangibles are carried at cost less accumulated
amortization. Amortization is computed on a straight-line basis over five
years.

 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 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.

   The majority of Salon's revenues are derived from the sale of promotional
space on its Internet properties. Services offered range from short-term
advertisements to long-term arrangements, which may include the development of
co-branded, integrated websites. Revenues derived from such arrangements are
recognized during the period which the service is provided, provided that no
significant obligations remain at the end of the period. Salon's obligations
typically include the guarantee of a minimum number of impressions, or number
of times that an advertisement appears in pages viewed by users of Salon's
websites. To the extent the minimum guaranteed impressions are not delivered,
Salon defers recognition of the corresponding revenue until the remaining
guaranteed impression levels are achieved.

   Salon generates revenue from the licensing of content which has appeared in
Salon's websites. Revenue is recognized ratably over the contract term for
major agreements, or upon receipt of amounts due from minor agreements. Salon
offers The Well, a paid monthly subscription service, as one of its websites.
Revenue is recognized ratably over the period that services are provided.
Product sales revenues are recognized upon receipt of payment from a
fulfillment contractor.

   Advertising revenues include barter revenues, which are the exchange by
Salon of advertising space on Salon's Web sites for reciprocal advertising
space on other Web sites or the exchange of goods or services. In

                                       37
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)

accordance with the Financial Accounting Standards Board's (FASB) Emerging
Issues Task Force (EITF) Issue No. 99-17, revenues from these barter
transactions are recorded as advertising revenues at the estimated fair value
of the advertisements delivered and are recognized when the advertisements are
run on Salon's Web sites. Barter expenses are recorded when Salon's
advertisements are run on the reciprocal Web sites, which is typically in the
same period as when advertisements are run on Salon's Web sites. Barter
revenues represented 0.9%, 17.8% and 16.2% of total revenues for the fiscal
years ended March 31, 2001, 2000 and 1999, respectively.

 Software development costs

   Research and development expenditures to enhance Salon's proprietary
software, originally developed to manage its web sites, are capitalized as
software development costs as Salon plans on marketing the software. Salon
capitalized $674 of expenditures incurred subsequent to the establishment of
technological feasibility during the fiscal year ended March 31, 2001. Such
development activity did not occur in prior periods. These amounts will be
depreciated over an eighteen-month period starting April 1, 2001. All other
expenditures are expensed as incurred.

 Website development costs

   Salon recognizes website development costs in accordance with the EITF Issue
No. 00-02, "Accounting for Website Development Costs." As such, Salon expenses
all costs incurred that relate to the planning and post implementation phases
of development of its websites. Direct costs incurred in the development phase
are capitalized and recognized over the product's estimated useful life. Costs
associated with repair or maintenance for the website are expensed in the
accompanying consolidated statements of operations.

 Advertising Costs

   Salon expenses advertising costs as they are incurred. Advertising expense
was $1,208, $7,804 and $629 for the fiscal years ended March 31, 2001, 2000 and
1999. Of these total expenses, barter advertising cost represents $63, $1,427
and $472 for the fiscal years ended March 31, 2001, 2000 and 1999. Advertising
costs include amortization of an advertising receivable from a stockholder of
$809, $202, and $0 for the fiscal years ended March 31, 2001, 2000 and 1999.

 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.

 Stock-based compensation

   Salon accounts for stock-based employee compensation arrangements in
accordance with the provisions of Accounting Principles Board Opinion No. 25,
"Accounting for Stock issued to Employees" (APB 25), and 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 Standards (SFAS) No. 123,
"Accounting for Stock-Based Compensation" (SFAS No. 123). Under

                                       38
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)

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 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."

 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 bank borrowings and
capital lease obligations, if any, approximates carrying value since they bear
interest at current market rates.

 Concentrations of credit risk

   Financial instruments that potentially subject Salon to concentrations of
credit risk consist principally of cash and cash equivalents and trade accounts
receivable. Salon's cash and cash equivalents are held with high credit quality
financial institutions and may at times exceed federally insured amounts.

   Salon performs ongoing credit evaluations of its customers, but does not
require collateral. Salon provides an allowance for credit losses which it
periodically adjusts to reflect management's expectations of future losses. Two
customers accounted for 16% and 10%, respectively, of total trade accounts
receivable at March 31, 2001 and no customer accounted for more than 10% of
total trade accounts receivable at March 31, 2000. One customer accounted for
10% of total revenue for the fiscal year ended March 31, 2001, no customer
accounted for more than 10% of total revenue for the fiscal year ended March
31, 2000 and one customer accounted for 13% of total revenue for the fiscal
year ended March 31, 1999.

 Comprehensive income

   Comprehensive income, as defined, includes all changes in equity (net
assets) during a period from non-owner sources. To date, Salon has not had any
transactions that are required to be reported in comprehensive income that are
excluded from the net loss for the periods presented.

 Net loss per share

   Basic earnings per share is computed using the weighted-average number of
common shares outstanding during the period. Diluted earnings per share is
computed using the weighted-average number of common and common stock
equivalents outstanding during the period. The calculation of diluted net loss
per share excludes potential shares of common stock as their effect would be
anti-dilutive.

   Diluted net loss per share attributable to common stockholders for the years
ended March 31, 2001, 2000 and 1999 does not include the effect of common stock
equivalent shares, comprised of stock options, common stock warrants and
convertible preferred stock on an "as if converted" basis as the effect of
their inclusion is anti-dilutive during each period as follows:

<TABLE>
<CAPTION>
        Fiscal Year                                                     Dilutive
      Ended March 31,                                                    Shares
      ---------------                                                   --------
     <S>                                                                <C>
         2001..........................................................  4,961
         2000..........................................................  3,173
         1999..........................................................  6,833
</TABLE>


                                       39
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)

 Recent accounting pronouncements

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

Note 3. Bank Borrowings

   In April 1998, Salon entered into a borrowing agreement with a bank which
provided for an equipment term loan up to $300. Interest on amounts outstanding
were at the bank's prime rate plus 0.5%. All amounts owed under this agreement
were paid as of March 31, 2001.

   On September 23, 1999, Salon obtained a revolving line of credit from a bank
for a maximum amount of $2,000 which included a sub-limit of $1,500 for the
issuance of standby letters of credit. Borrowings under the agreement were
based on 80% of eligible receivables with interest at the bank's prime rate.
The agreement expired on December 31, 2000 with no amounts then outstanding and
was not renewed by the bank. Standby letters of credit previously issued by the
bank were subsequently collateralized by like amounts in certificates of
deposit with the bank. At March 31, 2001 Salon has $871 in certificates of
deposit as collateral for the standby letters of credit, classified as a
component of "Other assets" in its Consolidated Balance Sheet as of March 31,
2001. Subsequent to March 31, 2001 letters of credit outstanding were reduced
to $801 as were the collateral certificates of deposit.

                                       40
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)

Note 4. Balance Sheet Components

<TABLE>
<CAPTION>
                                                          Year ended March 31,
                                                          ----------------------
                                                             2001       2000
                                                          ----------  ----------
<S>                                                       <C>         <C>
Accounts receivable, net:
  Accounts receivable.................................... $      554  $   2,719
  Less: allowance for doubtful accounts..................        (80)      (294)
                                                          ----------  ---------
                                                          $      474  $   2,425
                                                          ==========  =========
Property and equipment, net
  Computer hardware and software......................... $    2,168  $   1,909
  Leasehold improvements.................................      1,009        967
  Furniture and office equipment.........................        607        510
  Software development costs.............................        674        --
                                                          ----------  ---------
                                                               4,458      3,386
  Less accumulated depreciation and amortization.........     (1,727)    (1,074)
                                                          ----------  ---------
                                                             $ 2,731  $   2,312
                                                          ==========  =========
</TABLE>

   Depreciation expense for the years ended March 31, 2001, 2000 and 1999 was
$849, $483 and $243, respectively. Included in computer hardware and software
and furniture and office equipment are assets under capital leases amounting to
$784 and $536 as of March 31, 2001 and 2000 respectively. The related
accumulated depreciation for these assets was $228 and $59 as of March 31, 2001
and 2000 respectively.

<TABLE>
<S>                                                                 <C>     <C>
Other assets
  Restricted cash.................................................. $ 1,025 $--
  Other............................................................     350  186
                                                                    ------- ----
                                                                    $ 1,375 $186
                                                                    ======= ====
</TABLE>

   Restricted cash at March 31, 2001 includes $871 in time deposits held at
financial institutions as collateral for Salon's letters of credit pursuant to
various office lease agreements and $154 held by Salon as collateral for an
office sublease agreement.

<TABLE>
<S>                                                            <C>      <C>
Intangible assets, net
  Goodwill.................................................... $ 3,555  $ 3,555
  Tradename...................................................   1,200    1,200
  Proprietary technology......................................     355      305
  Other.......................................................     158       50
                                                               -------  -------
                                                                 5,268    5,110
  Less accumulated amortization...............................  (3,873)  (1,022)
                                                               -------  -------
                                                               $ 1,395  $ 4,088
                                                               =======  =======
Accounts payable and accrued liabilities
  Accounts payable............................................ $   820  $ 1,831
  Salaries and wages payable..................................     989      958
  Accrued marketing expenses..................................     --       462
  Other accrued expenses......................................     708      898
                                                               -------  -------
                                                               $ 2,517  $ 4,149
                                                               =======  =======
</TABLE>


                                       41
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)

Note 5. Acquisitions

 MP3Lit.com:

   On May 5, 2000, Salon acquired MP3Lit.com (MP3Lit), a web site dedicated to
offering spoken word and audio literature recordings in the MP3 format. The
acquisition of MP3Lit consisted of: (i) 380 shares of common stock valued at
$3.375 per share; (ii) $400 of cash consideration; (iii) warrants to purchase
100 shares of common stock over a five-year period at a price of $10.50 per
share. The warrants were valued at $185 using the Black-Scholes option-pricing
model, applying an expected life of five years, a weighted average risk-free
rate of 6.73%, an expected dividend yield of 0%, a volatility of 90% and a
deemed fair value of common stock of $1.85; and (iv) acquisition costs of $135.
An additional 888 shares have been issued and are held in escrow. These shares
are contingent upon the achievement of certain business benchmarks over a
three-year period. If the business benchmarks are achieved, the shares will be
released to certain former stockholders of MP3Lit. When the contingencies are
resolved, the shares will be recorded at their fair value on the respective
dates, as either an additional cost of the acquisition or as compensation
expense of the appropriate period.

   Salon's acquisition of MP3Lit has been accounted for under the purchase
method of accounting which requires the results of MP3Lit to be included in the
consolidated financial statements since the date of acquisition and also
requires the purchase price to be allocated to the acquired assets and
liabilities of MP3Lit on the basis of their estimated fair values as of the
date of acquisition. The assets acquired consist primarily of identifiable
intangible assets and goodwill. Identifiable intangible assets acquired include
the purchase of audio streaming technology which serves as the platform for
Salon Audio, digital downloadable spoken word recordings, an acquired workforce
and non-compete agreements which are being amortized over a five-year period.
The excess of the purchase price over the fair value of the net tangible and
identifiable intangible assets acquired resulted in $1,873 of goodwill. During
the fiscal year ended March 31, 2001 Salon determined that no significant
income could be generated in the near future from the sale of digital
downloadable spoken word recordings which was Salon's original intent in
acquiring MP3Lit. Accordingly, Salon determined that this asset was impaired
and recorded an impairment charge of $1,717 during fiscal year 2001, net of
$156 amortization previously recorded.

                                       42
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)


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

<TABLE>
<CAPTION>
                                                       Year ended March 31,
                                                       ----------------------
                                                          2001        2000
                                                       ----------  ----------
                                                            (unaudited)
<S>                                                    <C>         <C>
Net revenues.......................................... $    7,202  $    8,002
Net loss attributable to common stockholders..........    (19,189)    (35,473)
Basic and diluted net loss per share attributable to
 common stockholders..................................      (1.47)      (3.76)
</TABLE>

 The Well:

   On March 29, 1999 Salon acquired The Well LLC, an online community, for 464
shares of Series C preferred stock valued at $10.80 per share and incurred
acquisition costs of $114. The acquisition, which was accounted for as a
purchase business combination, resulted in $3,555 of goodwill and $1,555 of
intangible assets to be amortized over a five-year period. The Well's operating
earnings have been included in Salon's consolidated statements of income since
the date of acquisition.

   During the fourth quarter of the fiscal year ended March 31, 2001 Salon
determined that future cash flows from The Well could not support the carrying
value of The Well's goodwill and consequently recorded an impairment charge of
$1,800 representing the difference between the carrying value and the
discounted net present value of the expected future net cash flows.

Note 6. Employee Stock Purchase Plan and Option Plan

   Salon has an Employee Stock Purchase Plan (the "ESPP") 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. Participant account balances are used to purchase shares of Salon
common stock at the lesser of 85 percent 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 aggregate number of shares purchased by an employee may
not exceed 2.0 shares in any one Offering Period, generally six months (subject
to limitations imposed by the Internal Revenue Code). A total of 500 shares are
available for purchase under the ESPP. The ESPP was suspended on March 1, 2001.

   Salon issued 67 shares at an average price of $0.99 per share during the
fiscal year ended March 31, 2001 and 15 shares at an average price of $6.85
during the fiscal year ended March 31, 2000. The weighted average fair value of
rights granted under the ESPP in accordance with SFAS No. 123 was $0.45, $1.61
and $0 per share for the years ended March 31, 2001, 2000 and 1999
respectively.

Note 7. 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 15% of

                                       43
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)

compensation, subject to statutory limitations. Effective March 23, 2001
participants may contribute from 1% to 20% of compensation. 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, 2001.

Note 8. Re-incorporation and Stock Split

   On April 8, 1999, Salon's Articles of Incorporation were amended to (i)
increase the amount of authorized shares of preferred stock to 8,108.75 and
common stock to 12,500 and (ii) increase the number shares of preferred stock
designated as Series C to 4,500. In conjunction with the increase in Series C
preferred stock, 4,500 shares of Salon's common stock were reserved for
issuance upon conversion of the Series C preferred stock.

   In April 1999, Salon reincorporated in Delaware, and effected a one for two
split of its common and preferred stock. In connection with the re-
incorporation, Salon authorized an increase in the amount of authorized shares
of common stock to 50,000. All share data and stock option plan information has
been restated to reflect the split and the re-incorporation.

Note 9. Stockholders' Equity

 Preferred stock

   In April 1999, Salon authorized 5,000 shares of a new class of preferred
stock whose preferences, rights and privileges are to be decided by the Board
of Directors. At March 31, 2001 there were no shares of preferred stock
outstanding.

 Convertible preferred stock

   Convertible preferred stock from Series A, B and C at March 31, 1999
consisted of 4,815 shares. On April 14, 1999, Salon completed an additional
offering of Series C preferred stock. Pursuant to this offering, a total of
2,968 additional shares of Series C preferred stock were sold at a price of
$3.88 per share, for total proceeds to Salon of $11,515. The difference between
the offering price and the deemed fair value of the common stock on the date of
the transaction resulted in a beneficial conversion feature in the amount of
$11,515. The beneficial conversion feature is reflected as a preferred deemed
dividend in the consolidated statement of operations for the year ended March
31, 2000.

   On June 23, 1999, in association with Salon's initial public offering, 7,783
shares of Salon's preferred stock were converted to a like amount of common
stock.

 Convertible preferred stock warrants

   In July 1998, Salon issued a warrant to purchase 79 shares of Series B
preferred stock at an exercise price of $3.16 per share in connection with an
online distribution agreement. Salon valued the warrant at $217 using the
Black-Scholes option pricing model and amortized this amount to sales and
marketing expense through its fiscal year ended March 31, 2000 in its
Consolidated Statement of Operations. 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
warrant may be exercised at any time within 5 years after issuance and expires
in July 2003. The warrant has not been exercised as of March 31, 2001.


                                       44
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)


   In September 1998, Salon issued warrants to purchase up to 220 shares of
common stock at an exercise price of $0.52 per share in connection with the
sale of Series C convertible preferred stock. Salon valued the warrants at $615
using the Black-Scholes option pricing model and applied the amount to
additional paid-in capital. The allocation of proceeds between convertible
preferred stock and warrants resulted in a beneficial conversion feature in the
amount of $271 which was reflected as a preferred deemed dividend in the
Consolidated Statement of Operations for the fiscal year ended March 31, 1999.
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, 2001,
warrants to purchase 173 shares of common stock were exercisable.

   In April 1999, Salon issued warrants to purchase 148 shares of Series C
preferred stock at an exercise price of $3.88 per share. Salon valued the
warrants using the Black-Scholes option pricing model, applying an expected
life of 5 years, a weighted average risk-free interest rate of 5.14%, an
expected dividend yield of zero percent, a volatility of 107% and a deemed fair
value of common stock of $10.80. The fair market value of the warrants of $1.4
million was netted against the proceeds from Salon's initial public offering.
Upon completion of the initial public offering, the warrants were converted
into the right to purchase an equivalent number of shares of Salon's common
stock at the same exercise price per share. The warrants may be exercised at
any time within five years after issuance and expire in April 2004. The
warrants have not been exercised as of March 31, 2001.

   In April 1999, Salon issued warrants to purchase 26 shares of Series C
preferred stock at an exercise price of $3.88 per share. Salon valued the
warrant using the Black-Scholes option pricing model, applying an expected life
of 5 years, a weighted average risk-free interest rate of 5.14%, an expected
dividends yield of zero percent, a volatility of 107% and a deemed fair value
of common stock of $10.80. The fair market value of the warrants of $244 is
being amortized through Salon's fiscal year ending March 31, 2002 as a
component of sales and marketing expense in the Consolidated Statement of
Operations. Upon completion of Salon's initial public offering, the warrants
were converted into the right to purchase an equivalent number of shares of
Salon's common stock at the same exercise price per share. The warrants may be
exercised at any time within five years after issuance and expire in April
2004. The warrants have not been exercised as of March 31, 2001.

 Common stock warrants

   In June 1999, Salon issued warrants to purchase 6 shares of common stock at
an exercise price of $10.06 per share. Salon valued the warrants using the
Black-Scholes option pricing model, applying an expected life of 5 years, a
weighted average risk-free interest rate of 5.5%, an expected dividend yield of
zero percent, a volatility of 107% and a deemed fair value of common stock of
$10.06. The fair market value of the warrants of $47 is being amortized through
Salon's fiscal year ending March 31, 2002 as a component of sales and marketing
expense in the Consolidated Statement of Operations. The warrants may be
exercised at any time within five years after issuance and expire in June 2004.
The warrants have not been exercised as of March 31, 2001.

                                       45
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)


 Reserved Stock

   Salon had reserved shares of stock for the following:

<TABLE>
<CAPTION>
                                                               Year ended March
                                                                      31,
                                                               -----------------
                                                               2001  2000  1999
                                                               ----- ----- -----
<S>                                                            <C>   <C>   <C>
Warrants......................................................   552   479   334
Convertible preferred stock...................................   --    --  4,815
Preferred stock............................................... 5,000 5,000   --
                                                               ----- ----- -----
                                                               5,552 5,479 5,149
                                                               ===== ===== =====
</TABLE>

 Common stock issued for broadcast advertising

   In December 1999, Salon issued 1,125 shares of common stock, representing
approximately 10% of Salon's then outstanding common stock to a broadcasting
company in exchange for $11.8 million 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 $8.1 million
which it is amortizing on a straight line basis over the life of the agreement.
To date, the advertising company has delivered $1,562 of advertising and
promotion time.

Note 10. Employee Stock Option Plan

   Under the Salon Internet, Inc. 1995 Stock Option Plan (Salon Plan) incentive
and nonqualified stock options may be granted to officers, employees, directors
and consultants of Salon. Options vest over periods of one to four years and
have terms of ten years. 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. At March 31, 2001, 2000 and 1999 Salon had 916,
163, and 191 shares, respectively, authorized and available for grants under
this plan.

                                       46
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)


   The following table summarizes activity under Salon's Plan from March 31,
1998 through March 31, 2001:

<TABLE>
<CAPTION>
                                                     Number of Weighted Average
                                                      shares    Exercise Price
                                                     --------- ----------------
<S>                                                  <C>       <C>
Balance March 31, 1998..............................   1,562        $0.20
Options granted.....................................     376        $0.38
Options terminated..................................    (199)       $0.28
Options exercised...................................     (55)       $0.20
                                                       -----
Balance March 31, 1999..............................   1,684        $0.24
Options granted.....................................   1,825        $7.37
Options terminated..................................    (291)       $3.74
Options exercised...................................    (506)       $0.21
                                                       -----
Balance March 31, 2000..............................   2,712        $4.64
Options granted.....................................   1,914        $1.36
Options terminated..................................    (859)       $3.66
Options exercised...................................    (258)       $0.26
                                                       -----
Balance March 31, 2001..............................   3,509        $3.43
                                                       =====
</TABLE>


   The following table summarizes information about stock options outstanding
at March 31, 2001:

<TABLE>
<CAPTION>
                                  Options Outstanding        Options Exercisable
                            -------------------------------- --------------------
                                         Weighted
                                          Average
                                         Remaining  Weighted             Weighted
    Range of                 Number of  Contractual Average   Number of  Average
    Exercise                  Shares       Life     Exercise   Shares    Exercise
     Prices                 Outstanding   (Years)    Price   Exercisable  Price
    --------                ----------- ----------- -------- ----------- --------
   <S>                      <C>         <C>         <C>      <C>         <C>
   $0.20-$ 0.20............      533        6.0      $0.20        528     $0.20
   $0.32-$ 0.37............      762        9.5       0.36         82      0.32
   $0.52-$ 0.52............       52        7.2       0.52         30      0.52
   $1.38-$ 2.00............      924        9.4       1.79        --        --
   $2.92-$ 3.63............      159        8.2       3.04         67      2.92
   $5.06-$ 6.97............      203        8.5       5.69         70      5.72
   $8.50-$10.94............      876        8.4       9.49        341      9.62
                               -----                            -----
                               3,509        8.5      $3.42      1,118     $3.60
                               =====                            =====
</TABLE>

   At March 31, 2000 and 1999 options to purchase 736 and 705 shares of common
stock, respectively, were exercisable.


                                       47
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)

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

<TABLE>
<CAPTION>
                                                               Year ended March
                                                                     31,
                                                               ----------------
                                                               2001  2000  1999
                                                               ---- ------ ----
   <S>                                                         <C>  <C>    <C>
   Production, content and product............................ $ 46 $1,189 $273
   Sales and marketing........................................  106    976  224
   Research and development...................................   11    189   43
   General and administrative.................................   11     58   14
                                                               ---- ------ ----
                                                               $174 $2,412 $554
                                                               ==== ====== ====
</TABLE>

   The following information concerning the Plan is provided in accordance with
SFAS No. 123. Prior to Salon's initial public offering, the fair value of each
option granted to employees and consultants was determined using the minimum
value method. Subsequent to the offering, the fair value was determined using
the Black-Scholes model. The weighted average grant date fair value per share
of options granted during the years ended March 31, 2001, 2000 and 1999 was
$0.98, $4.67 and $2.72, respectively.

<TABLE>
<CAPTION>
                                                       Year Ended March 31,
                                                     --------------------------
                                                       2001       2000     1999
                                                     ---------  ---------  ----
   <S>                                               <C>        <C>        <C>
   Risk-free interest rates......................... 4.56-6.44% 4.99-6.50% 5.66%
   Expected lives (in years)........................      4.00       4.00  4.00
   Expected volatility..............................     100.0%      90.0%  0.0%
   Dividend yield...................................       0.0%       0.0%  0.0%
</TABLE>

   Using the above method and assumptions, had Salon accounted for compensation
expense according to SFAS No. 123, the pro forma net loss would be as follows:

<TABLE>
<CAPTION>
                                                    Year Ended March 31,
                                                  ---------------------------
                                                    2001      2000     1999
                                                  --------  --------  -------
   <S>                                            <C>       <C>       <C>
   Net loss attributable to common stockholders:
     As reported................................. $(19,155) $(33,405) $(6,504)
     Pro forma...................................  (21,877)  (34,467)  (6,912)
   Basic and diluted net loss per share
    attributable to common stockholders:
     As reported.................................    (1.48)    (3.63)  (16.63)
     Pro forma...................................    (1.69)    (3.74)  (17.66)
</TABLE>

Note 11. Commitments and Contingencies

   Salon has several non-cancelable operating lease agreements primarily for
office space with various expiration dates through December 2009. The
agreements provide for adjustments or escalations based upon changes in
consumer price indices or operating expenses. Rent expense under operating
lease agreements was $1,744, $749, and $284, for the years ended March 31,
2001, 2000 and 1999, respectively.

                                       48
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)


   Salon leases various furniture and computer equipment under capital leases.
In January 2000, Salon entered into a three-year master capital lease
agreement with a credit limit of approximately $500. As of March 31, 2001 the
available limit was utilized under three sub-lease agreements.

   Future minimum rental payments under capital leases and non-cancelable
operating leases, are as follows:

<TABLE>
<CAPTION>
                                                               Capital Operating
   Year Ending March 31,                                       Leases   Leases
   ---------------------                                       ------- ---------
   <S>                                                         <C>     <C>
   2002.......................................................  $ 263   $1,470
   2003.......................................................    272    1,349
   2004.......................................................     68    1,271
   2005.......................................................     24    1,083
   2006.......................................................    --       980
   2007, and thereafter.......................................    --     3,485
                                                                -----   ------
     Total minimum lease payments.............................    627   $9,638
                                                                        ======
       Less: interest.........................................    (99)
                                                                -----
     Present value of minimum lease payments..................    528
       Less: current portion..................................   (203)
                                                                -----
     Long-term portion of capital lease obligation............  $ 325
                                                                =====
</TABLE>

   Salon subleases unused office space in two locations with lease agreements
that expire at various dates through March 2004. Annual rental income totaled
$575, $52 and $0 for the years ended March 31, 2001, 2000 and 1999,
respectively. The income is recorded as an offset against rent expense. Future
minimum rental receipts under non-cancelable lease agreements are as follows:

<TABLE>
<CAPTION>
   Year ending March 31,                                                  Amount
   ---------------------                                                  ------
   <S>                                                                    <C>
   2002.................................................................. $  760
   2003..................................................................    721
   2004..................................................................    236
                                                                          ------
                                                                          $1,717
                                                                          ======
</TABLE>

Note 12. 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, 2001, Salon has net operating loss carry-forwards of $42,971 and
$22,464 for Federal and California purposes, respectively, available to reduce
future taxable income, if any. These carry-forwards expire through 2020 and
2006 for Federal and California purposes, respectively, if not utilized
beforehand.

   At March 31, 2001, 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 a change in ownership,
utilization of the carry-forwards could be restricted.


                                      49
<PAGE>

                                   SALON.COM

            NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
                 (amounts in thousands, except per share data)

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

<TABLE>
<CAPTION>
                                                             Year ended March
                                                                    31,
                                                             ------------------
                                                               2001      2000
                                                             --------  --------
   <S>                                                       <C>       <C>
   Net operating losses..................................... $ 15,921  $ 10,706
   Other....................................................    1,097       266
                                                             --------  --------
     Total deferred tax assets..............................   17,018    10,972
   Valuation allowance......................................  (17,018)  (10,972)
                                                             --------  --------
   Net deferred tax asset................................... $    --   $    --
                                                             ========  ========
</TABLE>

   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:

<TABLE>
<CAPTION>
                                                      Year ended March 31,
                                                    --------------------------
                                                     2001      2000     1999
                                                    -------  --------  -------
   <S>                                              <C>      <C>       <C>
   Statutory tax benefit........................... $(6,513) $(11,358) $(2,211)
   State taxes, net of federal benefit.............  (1,118)     (974)    (379)
   Permanent differences...........................     869     5,577      280
   Other...........................................     716       361      204
                                                    -------  --------  -------
     Total.........................................  (6,046)   (6,394)  (2,106)
   Change in valuation allowance...................   6,046     6,394    2,106
                                                    -------  --------  -------
                                                    $   --   $    --   $   --
                                                    =======  ========  =======
</TABLE>

Note 13. Subsequent Events (unaudited)

   On May 16, 2001, Salon.com changed its name to Salon Media Group, Inc.

   In June 2001, Salon received a NASDAQ staff determination that the stock no
longer qualified for listing. Salon has appealed, staying the effect of that
determination. The hearing on this matter is set for July 26, 2001 and the
ultimate result and timing of the decision on appeal are uncertain.

                                       50
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS

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

   In our opinion, the consolidated financial statements listed in the index on
page 31 present fairly, in all material respects, the consolidated financial
position of Salon Media Group, Inc. and its subsidiaries at March 31, 2001 and
2000, and the results of their operations and their cash flows for each of the
three years in the period ended March 31, 2001 in conformity with accounting
principles generally accepted in the United States of America. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

   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 at March 31, 2001 of $65,310,000 that raise substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 2. The Company's ability to continue as a
going concern is dependent upon, among other things, its ability to (a) achieve
sufficient levels of net revenues to produce profitable operations and (b)
generate adequate levels of liquidity through internally generated cash flows
as well as additional sources of capital. The consolidated financial statements
do not include any adjustments that might result from the outcome of this
uncertainty.

/s/ PricewaterhouseCoopers LLP

San Jose, California
May 1, 2001

                                       51
<PAGE>

                 Selected Quarterly Financial Data (unaudited)

<TABLE>
<CAPTION>
                                                                         Loss
                                              Net     Gross     Net       per
   Quarter                                  Revenues Margin    Income    Share
   -------                                  -------- -------  --------  -------
                                             (in thousands, except per share
                                                          data)
   <S>                                      <C>      <C>      <C>       <C>
   2001
     1st...................................  $1,759  $  (950) $ (4,520) $ (0.36)
     2nd...................................   2,197     (252)   (3,504)   (0.27)
     3rd...................................   2,270     (230)   (5,605)   (0.43)
     4th...................................     976   (1,175)   (5,526)   (0.42)
                                             ------  -------  --------
       Total...............................  $7,202  $(2,607) $(19,155) $ (1.48)
                                             ======  =======  ========
   2000
     1st...................................  $1,005  $(1,403) $(16,080) $(10.10)
     2nd...................................   1,378   (1,046)   (4,697)   (0.41)
     3rd...................................   3,016      365    (6,446)   (0.57)
     4th...................................   2,603     (107)   (6,182)   (0.50)
                                             ------  -------  --------
       Total...............................  $8,002  $(2,191) $(33,405) $ (3.63)
                                             ======  =======  ========
</TABLE>

   The sum of the quarterly net loss per share amounts may not equal the full-
year amounts since the computation of the weighted average number of common-
equivalent shares outstanding for each quarter and the full year are made
independently.

                                       52
<PAGE>

ITEM 9. Changes In and Disagreements with Accountants on Accounting and
Financial Disclosure.

   None.

                                    PART III

ITEM 10. Directors and Executive Officers

   The information concerning Salon's directors and compliance with Section 16
of the Securities and Exchange Act of 1934 required by this item are
incorporated by reference to Salon's Proxy Statement.

   The information concerning Salon's executive officers required by this item
is incorporated by reference herein to the section of this Report in Part I,
Item 4, entitled "Executive Officers of the Registrant."

ITEM 11. Executive Compensation

   The information required by this item is incorporated by reference to
Salon's Proxy Statement.

ITEM 12. Security Ownership of Certain Beneficial Owners and Management

   The information required by this item is incorporated by reference to
Salon's Proxy statement.

ITEM 13. Certain Relationships and Related Transactions

   The information required by this item is incorporated by reference to
Salon's Proxy statement.

                                       53
<PAGE>

                                    PART IV

ITEM 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

   a) The following documents are filed as a part of this Report:

    1. Financial Statements: The information concerning Salon's financial
       statements, and the Report of PricewaterhouseCoopers LLP,
       Independent Accountants, required by this item is incorporated by
       reference herein to the section of this Report in Item 8, entitled
       "Financial Statements and Supplementary Data."

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

<TABLE>
<CAPTION>
      Exhibit
      Number   Description of Document
      -------  -----------------------
     <C>       <S>
      3.2**    Certificate of Incorporation of Salon

      3.3**    Bylaws of Salon.

      4.1***** Fourth Amended and Restated Rights Agreement dated January 12,
               2000

     10.1*     1995 Stock Option Plan.

     10.2*     1999 Employee Stock Purchase Plan.

     10.3*     Form of Indemnity Agreement.

     10.4*     Commercial Office Lease between T/W Associates and Registrant
               dated June 25, 1997.

     10.5*     Agreement of Lease between ZAPCO 1500 Investment L.P. and
               Registrant dated March 1998.

     10.6*     Employment Agreement between Michael O'Donnell and Registrant
               dated November 7, 1996.

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

     10.7*     Employment Agreement between Bruce Roberts and Registrant dated
               April 2,1999.

     10.8*     Warrant to Purchase Stock issued to Imperial Bancorp dated
               December 17, 1998.

     10.9*     Warrant to Purchase Stock issued to Imperial Bank dated April
               13, 1998.

     10.10*    Warrant to Purchase Stock issued to Imperial Bankcorp dated
               April   , 1997.

     10.11*    Warrant to Purchase Stock issued to America Online Inc. dated
               July   , 1998.

     10.12*    Warrant to Purchase Stock issued to Adobe Ventures II L.P. dated
               September 18, 1998.

     10.13*    Warrant to Purchase Stock issued to ASCII Ventures dated
               September 18, 1998.

     10.14*    Warrant to Purchase Stock issued to H&Q Salon Investors, L.P.
               dated September 18, 1998.

     10.15*    Warrant to Purchase Stock issued to Daiwa Securities America
               Inc. dated April 14, 1999.

     10.16*    Warrant to Purchase Stock issued to ACT III Communications dated
               April 14, 1999.

     10.17*    Loan Agreement between Imperial Bank and Registrant dated April
               14, 1998.

     10.18**   Employment Agreement between Steven Reed and the Company dated
               May 31, 2000
</TABLE>

                                       54
<PAGE>

<TABLE>
<CAPTION>
      Exhibit
      Number   Description of Document
      -------  -----------------------
     <C>       <S>
     10.18***  Amendment No. 2 To Anchor Tenant Agreement between America
               Online, Inc. and the Company.

     21.1***** Subsidiaries of Salon

     23.1      Consent of Independent Accountants

     99.1****  Business Summary of the Company
</TABLE>
--------
*    Incorporated by reference to the exhibit filed with the Registrant's
     Registration Statement report on Form S-1 filed on April 19, 1999.

**   Incorporated by reference to the exhibit filed with the Registrant's
     Quarterly Report on Form 10-Q filed on August 14, 2000.

***  Incorporated by reference to the exhibit filed with the Registrant's
     Quarterly Report on Form 10-Q filed on November 13, 2000.

****  Incorporated by reference to the exhibit filed with the Registrant's
      Current Report on Form 8-K filed on March 20, 2001

*****  Incorporated by reference to the exhibit filed with the Registrant's
       Annual Report on Form 10-K filed on June 30, 2000.

   b) Reports on Form 8-K during the quarter ended March 31, 2001:

     Salon filed a Form 8-K on March 20, 2001 under Item 9 "Regulation FD
  Disclosure." The Form 8-K included as Exhibit 99.2 a Business Summary
  utilized by Salon in connection with a proposed private placement of
  securities with institutional investors.

                                       55
<PAGE>

                                   SIGNATURES

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

                                          Salon Media Group, Inc.

                                                   /s/ Michael O'Donnell
                                          By: _________________________________
                                                     Michael O'Donnell
                                                Chief Executive Officer and
                                                         President

   Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
              Signature                          Title                   Date
              ---------                          -----                   ----

<S>                                    <C>                        <C>
           /s/ David Talbot            Chairman of the Board,        June 28, 2001
______________________________________  Editor-in-Chief
             David Talbot

        /s/ Michael O'Donnell          Chief Executive Officer,      June 28, 2001
______________________________________  President and Director
          Michael O'Donnell             (Principal Executive
                                        Officer)

        /s/ Robert O'Callahan          Chief Financial Officer,      June 28, 2001
______________________________________  Treasurer and Director
          Robert O'Callahan             (Principal Financial
                                        Officer)

         /s/ Brian Dougherty           Director                      June 28, 2001
______________________________________
           Brian Dougherty

          /s/ Jim Rosenfield           Director                      June 28, 2001
______________________________________
            Jim Rosenfield

        /s/ Leonardo Mondadori         Director                      June 28, 2001
______________________________________
          Leonardo Mondadori

           /s/ Norman Lear             Director                      June 28, 2001
______________________________________
             Norman Lear

           /s/ Gary Adelson            Director                      June 28, 2001
______________________________________
             Gary Adelson
</TABLE>

                                       56