U.S.
Securities and Exchange Commission
 Washington,
D.C. 20549
  FORM
10-Q
  
 [X]
              Quarterly
      Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934
      for the Quarterly Period Ended September 30,
  2008
 
 [
       ]
              Transition
      Report Under Section 13 or 15(d) of The Securities Exchange Act of 1934
      for the Transition Period from _______ to
  _______
 
 Commission
File Number: 000-52749
 
 SALON
CITY, INC.
 (Exact name of small business issuer as
specified in its charter)
  NEVADA
              20-2107795(State
      or other jurisdiction of
              (IRS
      Employer Identification No.)incorporation
      or organization)
  909
North Palm Avenue
 Suite
311
 West Hollywood, California
90069
 (Address
of principal executive offices)
 
 310-358-9017
 (Issuer's
telephone number)
 
 Check
whether the issuer (1) filed all reports required to be filed by Section 13 or
15(d) of the Exchange Act during the past 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.
 Yes
      [x]
              
              
              No
      [ ]
  Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
definitions of “large accelerated filer”, “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
  Large
      accelerated filer
               ̈Non-accelerated
      filer
               ̈(Do
      not check if a smaller reporting company)Accelerated
      filer
               ̈Smaller
      reporting company
              þ
 
 Indicate
by check mark whether the registrant is a shell company (as defined in rule
12b-2 of the exchange act). Yes [ ] No [X]
  Number of
shares of common stock outstanding as of November 18, 2008: 993,716,592
  Number of
shares of preferred stock outstanding as of November 18, 2008:-0-
  CAUTIONARY
STATEMENT REGARDING FORWARD LOOKING INFORMATION
  The
discussion contained in this 10-Q under the Securities Exchange Act of 1934, as
amended, contains forward-looking statements that involve risks and
uncertainties. The issuer's actual results could differ significantly from those
discussed herein. These include statements about our expectations, beliefs,
intentions or strategies for the future, which we indicate by words or phrases
such as "anticipate," "expect," "intend," "plan," "will," "we believe," "the
Company believes," "management believes" and similar language, including those
set forth in the discussions under "Notes to Consolidated Financial Statements"
and "Management's Discussion and Analysis or Plan of Operation" as well as those
discussed elsewhere in this Form 10-Q. We base our forward-looking statements on
information currently available to us, and we assume no obligation to update
them. Statements contained in this Form 10-Q that are not historical facts are
forward-looking statements that are subject to the "safe harbor" created by the
Private Securities Litigation Reform Act of 1995.
  
  
  INDEX
      TO FORM 10-QPage
      No.PART
      IItem
      1.  Financial Statements
              3Item
      2.  Management's Discussion and Analysis of Financial Condition And
      Results of Operations
              9Item
      3.  Quantitative and Qualitative Disclosures on Market
      Risk
              12Item
      4T. Controls and Procedures
              12PART
      IIItem
      1.  Legal Proceedings
              13Item
      1A. Risk Factors
              13Item 2.  Unregistered Sales
      of Equity Securities and Use of Proceeds
              13Item
      3.  Defaults Upon Senior Securities
              13Item
      4.  Submission of Matters to a Vote of Security
    Holders
              13Item
      5.  Other Information
              13Item
      6.  Exhibits and Reports on Form 8-K
              13
 
 2
 Table of Contents
 
 ITEM
1. FINANCIALS
  INDEX
TOSALON CITY,
INC.  FINANCIAL STATEMENTS
 
 SALON CITY,
INC.                                                                                                                                PAGE
  Balance
Sheet                                                                                                               4
 
 Statement
of
Operations                                                                                                 5
 
 Statement
of Cash
Flows                                                                                                6
 
 Notes
to Financial
Statements                                                                                         7
  3
 Table of Contents
  SALON
      CITY, INC.Balance
      SheetAt
      September 30, 20082008
                
                
                
                2007Unaudited
                
                
                
                AuditedAssets:Current
      assetsCash
                
                
                
                
                
                $              24,214
                
                
                
                $           111,735Accounts
      receivable
                
                
                
                
                188,404
                
                
                
                8,549Total
      current assets
                
                
                
                
                212,618
                
                
                
                120,284Fixed
      assetsEquipment
                
                
                
                
                27,631
                
                
                
                27,631Accumulated
      depreciation
                
                
                
                (26,631)
                
                
                
                (18,883)Total
      fixed assets
                
                
                
                
                
                1,000
                
                
                
                8,748Total
      assets
                
                
                
                
                
                
                $            213,618
                
                
                
                $           129,032Liabilities
      and Stockholders' DeficitCurrent
      liabilitiesAccounts
      payable and accrued expenses
                
                
                $            456,203
                
                
                
                $           409,931Current
      portion of bank loans payable
                
                
                25,085
                
                
                
                81,869Related
      party advances
                
                
                
                264,233
                
                
                
                234,903Deferred
      Revenue
                
                
                
                
                107,794
                
                
                
                -Total
      current liabilities
                
                
                
                
                853,315
                
                
                
                726,703Long-term
      bank loans payable
                
                
                
                100,116
                
                
                
                23,833Total
      liabilities
                
                
                
                
                
                953,431
                
                
                
                750,536Stockholders'
      DeficitPreferred
      stock, (50,000,000 shares authorized, -0- sharesissued
      or outstanding, par value $ .001 per share)
                -
                
                
                
                -Common
      stock, (2,000,000,000 shares authorized, 993,716,592shares
      issued and outstanding, par value $.001 per share)
                993,717
                
                
                
                984,083Additional
      paid-in capital
                
                
                
                2,251,091
                
                
                
                2,231,833Treasury
      stock
                
                
                
                
                (230,972)
                
                
                
                (230,972)Retained
      deficit
                
                
                
                
                (3,753,649)
                
                
                
                (3,606,449)Total
      stockholders' deficit
                
                
                
                
                (739,813)
                
                
                
                (621,505)Total
      liabilities and stockholders' deficit
                
                
                
                $            213,618
                
                
                
                $           129,032
  The
accompanying notes are an integral part of these financial
statements
  4
 Table of Contents
  SALON
      CITY, INC.Statements
      of OperationsFor
      the Three and Nine Months Ended September 30, 2008 and
  2007Three
      Months
                
                
                Three
      Months
                
                
                Nine
      Months
                
                
                Nine
      Months9/30/2008
                
                
                9/30/2007
                
                
                9/30/2008
                
                
                9/30/2007Advertising
      income
                
                $
                5,094
                
                
                $
                182,302
                
                
                $
                118,118
                
                
                $
                411,126Distributors,
      conference and other income
                
                
                -
                
                
                
                -
                
                
                
                65,815
                
                
                
                140Total
      revenue
                
                
                5,094
                
                
                
                182,302
                
                
                
                183,933
                
                
                
                411,266Cost
      of goods sold
                
                
                (20,089
                )
                
                
                (171,968
                )
                
                
                (162,699
                )
                
                
                (463,537
                )Gross
      profit (loss)
                
                
                (14,995
                )
                
                
                10,334
                
                
                
                21,234
                
                
                
                (52,271
                )Selling,
      general &administrative
      expenses
                
                
                23,864
                
                
                
                312,171
                
                
                
                146,862
                
                
                
                455,009Net
      ordinary (loss)
                
                
                (38,859
                )
                
                
                (301,837
                )
                
                
                (125,628
                )
                
                
                (507,280
                )Interest
      expense
                
                
                (4,325
                )
                
                
                (8,464
                )
                
                
                (21,572
                )
                
                
                (30,259
                )Net
      (loss)
                
                $
                (43,184
                )
                
                $
                (310,301
                )
                
                $
                (147,200
                )
                
                $
                (537,539
                )Basic
      income (loss) per share
                
                $
                *
                
                
                $
                *
                
                
                $
                *
                
                
                $
                *Fully
      diluted income (loss) per share
                
                $
                *
                
                
                $
                *
                
                
                $
                *
                
                
                $
                *Weighted
      average shares outstanding
                
                
                993,716,592
                
                
                
                979,775,258
                
                
                
                990,982,211
                
                
                
                975,575,258* =
      less than $.01 per share.
  The accompanying notes are an integral
part of these financial statements
  5
 Table of Contents
  SALON
      CITY, INC.Statements
      of Cash FlowsFor
      the Nine Months ended September 30, 2008 and 2007Nine
      Months
                
                
                Nine
      MonthsEnded
                
                
                Ended9/30/2008
                
                
                9/30/2007CASH
      FLOWS FROM OPERATING ACTIVITIES:Net
      loss
                
                $
                (147,200
                )
                
                $
                (537,539
                )Adjustments
      to reconcile net (loss) to net cash(used
      in) operating activities:Depreciation
                
                
                7,748
                
                
                
                1,822Par
      value of shares returned to treasury
                
                
                -
                
                
                
                12,156Fair
      value of rent provided by officer
                
                
                -
                
                
                
                6,750Increase
      in allowance for doubtful accounts
                
                
                -
                
                
                
                -Recovery
      of prior year allowance for doubtful accounts
                
                
                -
                
                
                
                -Common
      stock issued for services rendered
                
                
                28,891
                
                
                
                221,800(Increase)
      decrease in operating assets:Accounts
      receivable
                
                
                (179,855
                )
                
                
                (57,905
                )Increase
      (decrease) in operating liabilities:Deferred
      revenue
                
                
                107,794
                
                
                
                (52,785
                )Accounts
      payable and accrued expenses
                
                
                46,272
                
                
                
                174,216NET
      CASH (USED IN) OPERATING ACTIVITIES
                
                
                (136,350
                )
                
                
                (231,485
                )CASH
      FLOWS FROM INVESTING ACTIVITIES:Purchases
      of equipment
                
                
                -
                
                
                
                (1,433
                )NET
      CASH (USED IN) INVESTING ACTIVITIES
                
                
                -
                
                
                
                (1,433
                )CASH
      FLOWS FROM FINANCING ACTIVITIES:Proceeds
      from sale of common stock to investors
                
                
                -
                
                
                
                46,037Incurrences
      (repayment of) related pary advances
                
                
                29,330
                
                
                
                147,212Proceeds
      from bank loans
                
                
                19,499
                
                
                
                56,662NET
      CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
                
                
                48,829
                
                
                
                249,911NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
                
                
                (87,521
                )
                
                
                16,993CASH
      AND CASH EQUIVALENTS:Beginning
      of period
                
                
                111,735
                
                
                
                89,316End
      of period
                
                $
                24,214
                
                
                $
                106,309SUPPLEMENTAL
      CASH FLOW DISCLOSURES AND NON-CASHFINANCING  INFORMATION:Cash
      paid for interest
                
                $
                21,572
                
                
                $
                30,258Cash
      paid for income taxes
                
                $
                -
                
                
                $
                -The
      accompanying notes are an integral part of these financial
      statements
  6
 Table of Contents
  SALON CITY, INC.
 NOTES
TO FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 (UNAUDITED)
  NOTE A -
BASIS OF PRESENTATION
 
 The
accompanying unaudited condensed financial statements have been prepared in
accordance with accounting principles generally accepted in the United States of
America for interim financial information and pursuant to the rules and
regulations of the Securities and Exchange Commission. Accordingly, they do not
include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements.
 
 In the
opinion of management, the unaudited condensed financial statements contain all
adjustments consisting only of normal recurring accruals considered necessary to
present fairly the Company's financial position at September 30, 2008 and the
results of operations for the period ended September 30, 2008.
 
 Management’s Use of
Estimates - The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that effect the reported
amounts of assets and liabilities, disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
 
 Fair Value of Financial
Instruments – The carrying amounts of financial instruments including
accounts receivable, other current assets, equipment and related depreciation,
accounts payable and accrued expenses and bank loans payable approximated fair
value because of the immediate short-term maturity of these
instruments.
 
 Income Taxes – Income
taxes are provided for the tax effects of transactions reported in the financial
statements and consist of deferred taxes related primarily to differences
between the basis of certain assets and liabilities for financial and tax
reporting and net operating loss-carry forwards. Deferred taxes represent the
future tax return consequences of those differences, which will either be
taxable or deductible when the assets and liabilities are recovered or
settled.
 
 The
income tax benefit consists of taxes currently refundable due to net operating
loss carry back provisions less the effects of accelerated depreciation for the
federal government. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion
or the entire deferred tax asset will not be realized. Deferred tax assets and
liabilities are adjusted for the effect of changes in tax laws and rates on the
date of enactment.
 
 Earnings (Loss) Per
Share - The Company reports earnings (loss) per share in accordance with
Statement of Financial Accounting Standard (SFAS) No.128. This statement
requires dual presentation of basic and diluted earnings (loss) with a
reconciliation of the numerator and
  denominator
of the loss per share computations. Basic earnings per share amounts are based
on the weighted average shares of common outstanding. If applicable, diluted
earnings per share assume the conversion, exercise or issuance of all common
stock instruments such as options, warrants and convertible securities, unless
the effect is to reduce a loss or increase earnings per share. Accordingly, this
presentation has been adopted for the periods presented. There were no
adjustments required to net income for the period presented in the computation
of diluted earnings per share. There were no common stock equivalents (CSE)
necessary for the computation of diluted loss per share.
 
 Fixed Assets – Fixed
assets are recorded at cost and include expenditures that substantially increase
the productive lives of the existing assets. Maintenance and repair costs are
expensed as incurred. Depreciation is provided using the straight-line method.
Depreciation of property and equipment is calculated over the management
prescribed recovery periods, which range from 5 years for equipment to 7 years
for furniture and fixtures.
 
 When a
fixed asset is disposed of, its cost and related accumulated depreciation are
removed from the accounts. The difference between undepreciated cost and
proceeds from disposition is recorded as a gain or loss.
 
 Advertising Costs -
Advertising costs are expensed as incurred. The Company does not incur any
direct-response advertising costs.
 
 Revenue Recognition
-
 
 Advertising Revenue - Revenue
from advertising is recognized when advertising services are earned and
measurable based upon completed performance. For advertising services,
performance becomes complete when the actual printing of the magazine is
finished and the customer is billed with accompanied proof of
printing.
 
 Distributor Revenue - Revenue
from distributors for retail sales of publications is recognized at the point it
is earned and measurable based upon completed performance. For revenue from
distributors, performance becomes complete at a subsequent date when the
distributor reports the actual number of publication units sold.
 
 Conference Revenue -
Conference revenue is earned and measurable based upon completed performance,
unless it is for non-refundable deposits related to ticket sales and
sponsorships. Performance becomes complete for conferences at the end of the
conference.
 
 All
revenue transactions are reviewed for credit worthiness prior to commencement of
the revenue process.
 
 7
 Table of Contents
 
 SALON CITY, INC.
 NOTES
TO FINANCIAL STATEMENTS
 SEPTEMBER
30, 2008 (UNAUDITED)
  Comprehensive Income
(Loss) - The Company adopted Financial Accounting Standards Board
Statement of Financial Accounting Standards No. 130, “Reporting Comprehensive
Income”, which establishes standards for the reporting and display of
comprehensive income and its components in the financial statements. There were
no items of comprehensive income (loss) applicable to the Company during the
year covered in the financial statements.
 
 Long-Lived Assets -
In accordance with SFAS No. 144, the Company reviews and evaluates its
long-lived assets for impairment whenever events or changes in circumstances
indicate that their net book value may not be recoverable. When such factors and
circumstances exist, including those noted above, the Company compares the
assets’ carrying amounts against the estimated undiscounted cash flows to be
generated by those assets over their estimated useful lives. If the carrying
amounts are greater than the undiscounted cash flows, the fair values of those
assets are estimated by discounting the projected cash flows. Any excess of the
carrying amounts over the fair values are recorded as impairments in that fiscal
period.
 
 Cash and Cash
Equivalents - For purposes of the Statements of Cash Flows, the Company
considers liquid investments with an original maturity of three months or less
to be cash equivalents.
 
 Recent Accounting
Pronouncements - In September, 2006, the FASB issued SFAS No. 157, "Fair
Value Measurements", which defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. SFAS No. 157 is effective for fiscal
years beginning after November 15, 2007. The adoption of this standard on
January 1, 2008 did not have a material effect on the Company's financial
statements.
 
 In
September, 2006, the FASB issued SFAS No. 158, "Employers' Accounting for
Defined Benefit Pension and Other Postretirement Plans - An Amendment of FASB
Statements No. 87, 88, 106 and 132(R)". SFAS No. 158 requires an employer to (i)
recognize in its statement of financial position an asset for a plan's
overfunded status or a liability for a plan's underfunded status; (ii) measure a
plan's assets and its benefit obligations that determine its funded status as of
the end of the employer's fiscal year (with limited exceptions); and (iii)
recognize changes in the funded status of a defined benefit postretirement plan
in the year in which the changes occur. Those changes will be reported in
comprehensive income. The Company previously adopted in 2006 the requirement to
recognize the funded status of a benefit plan and the disclosure requirements.
The requirement to measure plan assets and benefit obligations to determine the
funded status as of the end of the fiscal year and to recognize changes in the
funded status in the year in which the changes occur is effective for fiscal
years ending after December 15, 2008. The adoption of the measurement date
provisions of this standard is not expected to have a material effect on the
Company's financial statements.
  In
February, 2007, the FASB issued SFAS No. 159, "The Fair Value Option for
Financial Assets and Financial Liabilities". SFAS No. 159 permits entities to
choose to measure many financial assets and financial liabilities at fair value.
Unrealized gains and losses on items for which the fair value option has been
elected are reported in earnings. SFAS No. 159 is effective for fiscal years
beginning after November 15, 2007. The Company is not electing to measure its
financial assets or liabilities at fair value pursuant to this
statement.
 
 In
December, 2007, the FASB issued No. 141, (revised 2007) "Business Combinations"
("SFAS No. 141R"). SFAS No. 141R replaces SFAS No. 141, which the Company
previously adopted. SFAS No. 141R revises the standards for accounting and
reporting of business combinations. In summary, SFAS No. 141R requires the
acquirer of a business combination to measure, at fair value, the assets
acquired, the liabilities assumed, and any noncontrolling interest in the
acquiree at the acquisition date, with limited exceptions. SFAS No. 141R applies
to all business combinations for which the acquisition date is on or after the
beginning of the first annual reporting period beginning on or after December
15, 2008. The Company does not believe that the adoption of this statement on
January 1, 2009 will have a material effect on the Company's financial
statements.
 
 In
December, 2007, the FASB issued SFAS No. 160, "Noncontrolling Interests in
Consolidated Financial Statements", which requires consolidated net income to be
reported at amounts that include the amounts attributable to both the parent and
noncontrolling interest. SFAS No. 160 is effective for fiscal years beginning on
or after December 15, 2008. The adoption of this standard is not expected to
have a material effect on the Company's financial statements.
 
 In March,
2008, the FASB issued SFAS No. 161, "Disclosures about Derivative Instruments
and Hedging Activities". SFAS No. 161 changes the reporting requirements for
derivative instruments and hedging activities under SFAS No. 133, "Accounting
for Derivatives and Hedging Activities", by requiring enhanced disclosures about
(a) how and why an entity uses derivative instruments, (b) how derivative
instruments are accounted for under SFAS No. 133 and (c) the effect of
derivative instruments and hedging activities on an entity's financial position,
financial performance and cash flows. SFAS No. 161 is effective for fiscal years
beginning after November 15, 2008. The Company does not believe that the
adoption of this statement will have a material effect on the Company's
financial statements.
 
 In
May 2008, the FASB released SFAS No. 162, “The Hierarchy of Generally Accepted
Accounting Principles.” SFAS No. 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements of nongovernmental entities that presented
in conformity with generally accepted accounting principles in the United States
of America. SFAS No. 162 will be effective 60 days following the SEC’s approval
of the PCAOB amendments to AU Section 411, The Meaning of Present
Fairly
  in Conformity With Generally
Accepted Accounting Principles. The Company does not believe SFAS 162
will have a significant impact on the Company’s financial
statements.
 NOTE B –
EQUITY
 During
the nine months ended September 30, 2008, the Company issued 9,633,334 common
shares to outside consultants for payment of services during this period. The
transactions were valued at the stock prices on the dates of issuances ranging
from $.001 to $.0045 per share. $28,891 was expensed and is included in the
accompanying statements of operations. This amount also reasonably approximates
the fair market value of services received.
 
 NOTE C -
GOING CONCERN
 
 As shown
in the accompanying financial statements, the Company has suffered recurring
losses from operation to date. The Company has a net loss and negative cash
flows from operations of $147,200 and $136,350 for the nine months ending
September 30, 2008, respectively. These factors raise substantial doubt about
its ability to continue as a going concern.
 
 Management's
plans in regard to this matter are to raise equity capital and seek strategic
relationships and alliances in order to increase revenues in an effort to
generate positive cash flow. Additionally, we must continue to rely upon equity
infusions from investors in order to improve liquidity and sustain operations.
The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
  NOTE D –
SUBSEQUENT EVENTS
 
 Subsequent
to September 30, 2008 and pursuant to the Company’s by-laws and Nevada Revised
Statute 78:320, on September 25, 2008, holders of a majority of the Company’s
outstanding shares held a special meeting and approved a 1-for-100 reverse-split
of its common stock, so that every current shareholder as of November 28, 2008
(the “Record Date”) shall be issued one share of the Company’s common voting
stock in exchange for every 100 shares of the Company’s common voting stock held
as of the record date, with fractional shares being rounded up to the next whole
share.  The effective date of the reverse split set for December 1,
2008.
  Subsequent
to September 30, 2008, the Company's board of directors approved the
issuance of 37,380,952 restrcited common shares to GreenTree Financial Group,
Inc. for services rendered in such quarter. The shares have not yet been issued
as of this filing as the transfer agent is currently processing
them.
  8
 Table of Contents
  ITEM 2.MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATION
 
 As used
herein the terms "we", "us", "our," the “Registrant,” and the "Company" means,
Salon City, Inc., a Nevada corporation.
 
 GENERAL
DESCRIPTION OF BUSINESS
  Introduction
 
 Headquartered
in Los Angeles, California, we publish Salon City magazine, where
Life is Beautiful(SM). It is distributed, retailed and sold nationally and
internationally into select salons and on newsstands and
bookstores.  As an emerging media company for beauty entertainment and
a lifestyle brand for future products and services, we want to appeal to a
global audience of consumers who want to be empowered to lead a healthier, more
positive lifestyle.
 
 We were
incorporated in Nevada on January 4, 2005 and have a fiscal year end of December
31.  We represent the formal incorporation of a 10-year-old media,
entertainment and distribution sole proprietorship. From our inception in 1997,
known then as Salon City Press Club, we have published print and online media,
most notably through our trade publication Salon City Star
magazine.  In March 2007, we re-positioned the six-year old
professional trade publication (Salon City Star) to the new
web site, and then launched the first edition of the 100% consumer-focused
publication, Salon
City. Through 2008, the company will still be in the introductory stages
of establishing the magazine’s presence in retail stores and in select
salons.
 
 To reach
consumers, many of whom are the end-users for salons and spas, we chose to sell
the print version of Salon
City magazine to parallel distribution channels consisting of the
professional salon and retail newsstand market.  The advantage of
having both markets available to the company is that it allows us to maximize
and safeguard the branding and exposure for Salon City’s name and products. To
increase our international reach, we also are distributing the magazine in
selected newsstands and markets. Overall, the company is still in the rollout
stages and will expect to continue to do so until such time as the market
warrants further expansion. Salon City magazine’s reach
now extends to bookstores and newsstands throughout the USA and Canada, and in
additional locations internationally, including, but not limited to, Australia,
Dubai, Germany, Hong Kong, Italy, Mexico, New Zealand, Singapore and the United
Kingdom. Our aim in 2009 is to service the most profitable markets and achieve
the greatest amount of exposure.
 
 Competition
 
 Salon
City’s long-standing relationship with the professional salon industry helps to
mitigate the highly competitive nature of the marketplace. Nevertheless, as we
ramp up and diversify our media and product base, we will continue to face broad
competition for audiences and advertising revenue from other media companies
that produce magazines, newspapers and online content. Overall, competitive
factors that influence our revenues include the financial ability to print more
issues, and thus, charge more for ad rates. Long-existing consumer awareness of
the Salon City brand, our financial capabilities to market and cross promote our
magazine and new media on TV, Internet, at events and in other integrated
branding opportunities, also affects our competitive
strengths.  Despite these challenges, and since our rollout last year,
Salon City has been able to establish a product-positioning place on newsstands,
create consumer editorial content, generate newsstand and subscription sales for
the magazine, print and display a quality publication that is comparable to the
top publications in the world, and offer the product at a price that is
competitive with other major magazines in the marketplace.
 
 Competition
for advertising dollars is primarily based on the magazine’s frequency and
copies printed. The more a magazine publisher can print, the more it can
charge.  Competition is also based on advertising rates and reach,
which are in a direct relationship to the amount of copies a company can
print.  To garner more revenue out of the marketplace, a magazine must
continue to develop its content and expand its readership. Overall, it should
trigger a consumer’s response to the people, products and brands featured in the
publication. In Salon City’s case, in less than two years on the newsstands with
our new publication, we have been able to establish a beginning foothold in this
lucrative marketplace.
 
 Salon City magazine is
generally placed among the top leading magazines in women’s interest and home
and lifestyle sections of retail outlets. Our salon distribution, which is just
beginning to re-emerge, will emphasize placing the magazine in well-seen areas.
Our point of difference is our content and cultural positioning; it’s all about
becoming a center of influence that attracts beauty professionals, their clients
and the ever-growing market of socially conscious consumers. This fast-growing
segment of the population is highly sought after by upscale advertisers. They
have also been considered to be a demographic with strong barriers of entry. In
the aggregate, Salon City appeals to a global demographic of mainstream
sophisticated consumers that many advertisers are seeking.
 
 As Salon
City and the magazine increase its exposure in both the retail and professional
arena, we believe that we can attract an even wider audience to our existing and
future products.  In essence, the printed publication is becoming more
of a lead-in marketing tool to introduce a worldwide consumer to the many
appealing facets of Salon City’s ‘lifestyle brand.’
 
 Employees
 
 To
maintain cost-cutting objectives, we currently have over 40 independent
contractors working as needed with the company in various capacities ranging
from business, marketing and editorial. We have two full time employees.
Effectively managing and maintaining a base of independent consultants requires
a highly communicative and positive atmosphere, one that Salon City tries to
provide for all of its vendors and working relationships.
 
 We have
never experienced any material labor disruption and believe that relations with
our employees and independent contractors are good.
 
 9
 Table of Contents
  RESULTS OF OPERATIONS FOR
THE THREE AND NINE MONTHS ENDED SEPTEMBR 30, 2008 AND 2007
 
 The
following discussion should be read in conjunction with the financial statements
included in this report and is qualified in its entirety by the
foregoing.
  FORWARD
LOOKING STATEMENTS
 
 Certain
statements in this report, including statements of our expectations, intentions,
plans and beliefs, including those contained in or implied by "Management's
Discussion and Analysis" and the Notes to Financial Statements, are
"forward-looking statements", within the meaning of Section 21E of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"), that are
subject to certain events, risks and uncertainties that may be outside our
control. The words “believe”, “expect”, “anticipate”, “optimistic”, “intend”,
“will”, 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 on which they are made. We undertake no obligation to
update or revise any forward-looking statements. These forward-looking
statements include statements of management's plans and objectives for our
future operations and statements of future economic performance, information
regarding our expansion and possible results from expansion, our expected
growth, our capital budget and future capital requirements, the availability of
funds and our ability to meet future capital needs, the realization of our
deferred tax assets, and the assumptions described in this report underlying
such forward-looking statements. Actual results and developments could differ
materially from those expressed in or implied by such statements due to a number
of factors, including, without limitation, those described in the context of
such forward-looking statements.
 
 CRITICAL
ACCOUNTING POLICIES
  Revenue
recognition
 
 Revenue
is recognized when advertising services are earned and measurable based upon
completed performance. All revenue transactions are reviewed for credit
worthiness prior to commencement of the revenue process.
 
 Fixed
Assets
 
 Fixed
assets are recorded at cost and include expenditures that substantially increase
the productive lives of the existing assets. Maintenance and repair costs are
expensed as incurred. Depreciation is provided using the straight-line method.
Depreciation of equipment is calculated over the management prescribed recovery
periods, which range from 5 years for equipment to 7 years for furniture and
fixtures.
 
 Expenditures
for maintenance and repairs are expensed as incurred.
 
 
 Management
Comments
 
 The third
quarter of 2008, ended September 30, was the second full quarter that Salon
City, Inc. had been trading as an over-the-counter bulletin board company. The
process of moving to the bulletin board took nearly two years to achieve and
came at a high cost in relationship to the size of the company at present.
Initially, in late 2006, management felt that we would gain final approval from
both the SEC and FINRA, and commence trading, as early as fall 2007. However,
SEC approval did not come until December 2007; approval from FINRA arrived in
late March 2008, following the submission of a required annual report. (Initial
2007 plans for post-OTCBB status included addressing the proper capitalization
and funding needs of the company so management could expand roll-out
opportunities that came with the introduction of our first consumer print
publication, Salon
City, as well as the launch of new media marketing initiatives that could
influence the growth of the company's revenues.)
 
 Since
April 2008, management's focus has been to reduce and/or eliminate unnecessary
expenses while we identify our course of action for expansion.  We
have been able to reduce both expenses and costs of goods during this
process.
 
 Since May
2008, management has been assembling a new consulting team that would prepare
the company for fundraising and growth opportunities. Ideally, these
opportunities would attract a much larger sphere of microcap and institutional
investors. As of today, we are actively preparing to take the steps necessary to
improve our capital structure, increase working capital, and support our
projections for expansion and development of our new revenue generating
products.
 
 During Q3 2008, management
continued to recruit a new advertising and sales agency that would represent us
in the consumer and trade advertising markets. By September 30ththe end of our third
quarter, we have yet to enter into a long-standing contract with the intended
agency. Until such time as an agency is contracted, the company will continue to
handle its advertising and sales in house.
 
 September’s disruptive impact of the
global economic
situation has delayed our plans, including the contractual
talkswith sales
agencies and the expectations of a stronger 2009 media buying season, which
began in earnest on September 30, 2008. The company’s initial sales expectations
and plans for Q3 and Q4, 2008 have been pushed back at least 3-6 months into the
firstand second quarters of 2009.
Also delayed was the company’s ability to hire a new sales
agency by September. Now because of the delays and the marketplace, there are no
assurances that they will be the chosen and hired agency to represent the
company.  Management will continue to seek
effective sales agency representation, and in the interim as mentioned, will
handle ad sales in house.
 
 In Q4, management will remain focused
on the completion of it capital restructuring, securing funding opportunities,
reduction of expenses, generating sales and market awareness plans for our new
products. While the economy remains difficult and highly uncertain, management
will continue to offer attractive ad rates, branding buying and sponsorship
opportunities to cost-conscious buyers.
 
 To successfully execute our current
strategy, we will need to improve our working capital position through increased
sales, debt or equity financing.  There can be no assurance that we
will be able to complete any additional debt or equity financings on favorable
terms or at all, or that any such financings, if completed, will be adequate to
meet our capital requirements. Any additional equity or convertible debt
financings could result in substantial dilution to our shareholders. If adequate
funds are not available, we may be required to delay, reduce or eliminate some
or all of our planned activities.  Our inability to fund our capital
requirements would have a material adverse effect on the Company.
 
 In
summary, management will continue to stay focused on increasing revenues,
reducing costs, and seeking ways to improve working capital.
 
 Net
Income / Loss
 
 We had a
net loss of $43,184 and $ 310,301 for the three months ended September 30, 2008
and 2007, respectively. The net (loss) in these periods was due primarily to
operational expenses, which were $23,864 and $312,171 for the three months ended
September 30, 2008 and 2007, respectively. It is also a function of revenues,
cost of sales and other expenses as described in the upcoming paragraphs
below.
 
 We had a
net loss of $147,200 and $537,539 for the nine months ended September 30, 2008
and 2007, respectively. The net loss in these periods was due primarily to
operational expenses, which were $146,865 and $455,009 for the nine months ended
September 30, 2008 and 2007, respectively. It is also a function of revenues,
cost of sales and other expenses as described in the upcoming paragraphs
below.
 
 10
 Table of Contents
  Revenue
 
 We
recorded revenues of $5,094 and $182,302 for the three months ended September
30, 2008 and 2007, respectively. The decrease in revenues was attributable to
market conditions, global volatility and our transitioning from limited trade
advertising revenue to much higher potential consumer advertising revenue. This
influenced the first three months of 2008 results.
 
 We
recorded revenues of $183,933 and $411,266 for the nine months ended September
30, 2008 and 2007, respectively. The decrease in revenues was attributable to
market conditions, global volatility and our transitioning from limited trade
advertising revenue to much higher potential consumer advertising revenue. This
influenced the first nine months of 2008 results.
 
 To inform
the reader and provide more decision usefulness herein, the following paragraphs
were written describing more of what we do, the services we provide and the
magazine we distribute.
 
 Our
concept arises from our core mission to offer the public positively oriented
news and products that relate to a consumer’s desire to live a life of health
and wellness. We intend to organize a consumer membership consisting of salons,
spas and clients–what we call the “Salon City Society”–as it grows and emerges
in the world of beauty, entertainment and lifestyle branding. We are in the
process of building a globally respected brand associated with a positive,
balanced lifestyle and vision for both the public and the beauty industry. While
our redesigned consumer publication, Salon City magazine, has
generated most of our revenues in 2008, other initiatives, including our new web
shows, online entertainment and publication, will be unfolding during 2009. We
believe our expanded media and product platform will add to our overall
revenues.
 
 After six
years as a trade publication, Salon City Star magazine was
renamed, redesigned and re-launched on February 27, 2007. Our Hollywood-based
magazine, Salon City,
is now 100% consumer focused. Salon City is currently sold
through thousands of national retailers like Hudson News, Barnes & Noble,
Borders, Target, Kmart, Rite Aid and major grocery and drug chains throughout
the USA and Canada, and in additional locations internationally in over 30
countries, including, but not limited to, Australia, Dubai, Germany, Hong Kong,
Italy, Mexico, New Zealand, Singapore and the United Kingdom. Salon City features news from
celebrities, everyday people and world beautymakers in music, art, literature
and politics. Beauty entertainment and lifestyle news is the focus. Salon City, currently in its
roll-out stages, has had an introductory circulation of approximately 75,000
copies per issue and a frequency of up to eight times per year, resulting in a
total annual circulation of 600,000.  Over the next five years the
magazine is being strategically positioned to become a high sales volume
publication with circulation that could exceed 750,000 copies per issue. With
increased funding and a new national ad sales agency in place, the company aims
in 2009 to increase revenues each year for the next five years.
 
 The
magazine’s revenues will also be enhanced beginning in 2009 with a digital
edition, which can be purchased on our internet site, www.saloncity.com.
Additional media products are being planned to be sold on the site, including a
professional-only publication and regularly produced webisodes of Salon City’s
new award-winning web show, Hollywood CeleBeauty, featuring original
content.
 
 In June
2008, Salon City
magazine began a limited roll-out of its mobile text service, which is in the
early stages of content development and consumer marketing. At some point in
time after the economy shows improvement, Salon City plans to add paid for
services, such as browsing for news, text alerts, shopping at CityShop and
entering competitions. The mobile service can give Salon City magazine a
platform for advertisers to find out more about its readers, such as the type of
content and products they are interested in. It is being offered worldwide and
designed to drive consumers to Salon City’s mobile web portal.
 
 We are
continuing to develop the new mobile service, website, web show and Salon City
Network (consisting of Salon City produced video programs that appear as part of
our online entertainment) for 2009. All of our mobile and online initiatives
will be self-funded (magazine advertising and sponsorship revenue).
 
 The
company will continue to invite new sponsors and advertisers to participate in
the branding of their products in exchange for contractual agreements that may
generate revenue.
  Cost
of Goods Sold
 
 Cost of
goods sold for the three months ended September 30, 2008 and 2007 were $20,089
and $171,968. The company realized a significant reduction in cost of goods sold
for the three months ended September 30, 2008 compared to 2007. The reason for
the decrease in cost of goods sold for the three months ended September 30, 2008
is due to management’s effectiveness at reducing printing and shipping costs and
other general expenses.  Due to the decrease in revenue gross profits
for the three months ended September 30, 2008 were $(14,995) compared to $10,334
for the same period in 2007.
 
 Cost of
goods sold for the nine months ended September 30, 2008 and 2007 were $162,699
and $463,537. The company realized a significant reduction in cost of goods sold
for the nine months ended September 30, 2008 compared to 2007. The reason for
the decrease in cost of goods sold for the nine months ended September 30, 2008
is due to management’s effectiveness at reducing printing and shipping costs and
other general expenses.  As a result, gross profits improved for the
nine months ended September 30, 2008 to $21,234 compared to $(52,271) for the
same period in 2007.
 
 Expenses
 
 Operating
expenses for the three months ended September 30, 2008 and 2007 were $23,864 and
$312,171, respectively. Operating expenses for the nine months ended September
30, 2008 and 2007 were $146,862 and $455,009 respectively. Professional fees
were the primary reason for the decrease in operating expenses in the nine month
period ended September 30, 2008, in that we issued $28,891 worth of our common
shares for services rendered by a consultant during the period as compared to
$221,800 worth of our common shares for services rendered by a consultant during
the nine months ended September 30, 2007. The consultant provided advice to
undertake for and consult with us concerning management, marketing, consulting,
strategic planning, corporate organization and structure, financial matters in
connection with the operation of our business, expansion of services,
acquisitions and business opportunities, and review and advise us regarding its
overall progress, needs and condition. We recorded compensation expense for the
nine months ended September 30, 2008 of $28,891 according to the closing stock
prices on the dates of issuances. This approximated the fair value of services
received. The 2007 services had a charge of $221,800 in comparison as common
shares were issued to consultants for services rendered during the nine months
then ended but at much higher quoted stock prices in 2007.
 
 Due to
odd months scheduling and a summer delay in our publishing schedule, we did not
print our last issue in time to be recognized in this
quarter.  Management took strong cost-cutting actions as a result. The
company will continue to minimize cost of goods sold and all other expenses to
improve efficiencies and gross profits. The steps taken have lowered printing,
operational costs and marketing costs. Continued lower printing costs may
interfere with our ability to maintain distribution and sales growth in our
domestic and international distribution. While our last three issues have
shown a slight increase in newsstand sales, we may not be able to maintain this
level unless we have the ability to market and promote the brand.
 
 Our
elevation to OTCBB status will continue to cause a marked increase in
professional fees and various expenses associated with the type of quarterly and
annual reporting expected from an OTCBB company. Management expects certain
OTCBB related costs will remain high in order to maintain its Bulletin Board
trading status and as a fully-reporting public company.
 
 11
 Table of Contents
  Liquidity
and Capital Resources
 
 Net cash
flows used in operating activities were $136,350 and $231,485 for the nine
months ended September 30, 2008 and 2007, respectively. This was primarily
attributable to net losses, which were $147,200 and $537,539 for the nine months
ended September 30, 2008 and 2007, respectively, offset by the non-cash charges
for common shares issued for services rendered during the nine months ended
September 30, 2008 and 2007 in the amounts of $28,891 and $221,800
respectively, as discussed above.
 
 Net cash
flows used in investing activities for the nine months ending September 30, 2008
and 2007 were $0 and $1,433, respectively. The cash flows used in investing
activities for the nine months ended September 30, 2007 was solely used for the
purchase of office related equipment in the amount of $1,433.
 
 Net cash
flows provided by financing activities were $48,829 and $249,911 for the nine
months ended September 30, 2008, and 2007, respectively. This was mainly
attributable to $46,037 in proceeds from the sale of common stock in 2007,
$29,330 and $147,212 in receipt of loans from an officer in 2008 and 2007,
respectively, and $19,499 and $56,662 in proceeds from bank loans for the nine
months ended September 30, 2008 and 2007, respectively.
  Overall,
we have funded all of our cash needs from inception through September 30, 2008
with proceeds from issuances of common stock and shareholder loans.
  On
September 30, 2008, we had cash of $24,214 on hand. We do not have or anticipate
having within the next twelve months any cash flow or liquidity problems and we
are not in default or in breach of any note, loan, lease or other indebtedness
or financing arrangement requiring us to make payments.
 
 No
significant amount of our trade payables has been unpaid within the stated trade
term. We are not subject to any unsatisfied judgments, liens or settlement
obligations.
 
 ITEM 3. QUANTITATIVE AND
QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
 The
information to be reported under this item is not required of smaller reporting
companies.
 
 ITEM 4T. CONTROLS AND
PROCEDURES.
  DISCLOSURE CONTROLS AND
      PROCEDURESThe Company’s management,
      including its Principal Executive Officer and Principal Financial Officer,
      has evaluated the design, operation, and effectiveness of the Company’s
      disclosure controls and procedures pursuant to Rule 13a-15 under the
      Securities Exchange Act of 1934 (the “Exchange Act”). There are inherent
      limitations to the effectiveness of any system of disclosure controls and
      procedures, including the possibility of human error and the circumvention
      or overriding of the controls and procedures. Accordingly, even effective
      disclosure controls and procedures can only provide reasonable assurance
      of achieving their control objectives. Based upon the evaluation performed
      by the Company’s management, including its Principal Executive Officer and
      Principal Financial Officer, it was determined that, as of the end of the
      period covered by this quarterly report, the Company’s disclosure controls
      and procedures were effective to provide reasonable assurance that
      information required to be disclosed in the reports filed or submitted
      pursuant to the Exchange Act is recorded, processed, summarized, and
      reported within the time periods specified in the rules and forms of the
      SEC, and that such information is accumulated and communicated to the
      Company’s management, including its Principal Executive Officer and
      Principal Financial Officer, or persons performing similar functions, as
      appropriate to allow timely decisions regarding
  disclosures
  Changes in Internal Control
Over Financial Reporting
 
 The
Company's Principal Executive Officer and Principal Financial Officer have
determined that, during the period covered by this quarterly report, there were
no changes in the Company's internal control over financial reporting that
materially affected, or are reasonably likely to materially affect, the
Company’s internal control over financial reporting. They have also concluded
that there were no significant changes in the Company’s internal controls after
the date of the evaluation.
 
 12
 Table of Contents
  PART II. OTHER
INFORMATION
 
 ITEM
1. LEGAL PROCEEDINGS
 
 We are
not aware of any qualifying pending or threatened legal proceedings, in which we
are involved. In addition, we are not aware of any pending or threatened legal
proceedings in which entities affiliated with our officers, directors or
beneficial owners are involved.
  ITEM
1A. RISK FACTORS
  Information
regarding risk factors appears in Part I, “Item 2. Management’s Discussion
and Analysis of Financial Condition and Results of Operations” under the
captions “General Description of Business” and “Cautionary Note Regarding
Forward-Looking Statements” contained in this Quarterly Report on Form 10-Q and
in “Item 1A. RISK FACTORS” of our 2007 Annual Report on Form 10-KSB. There
have been no material changes from the risk factors previously disclosed in our
2007 Annual Report on Form 10-KSB.
 
 ITEM
2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  None.
 
 ITEM
3. DEFAULTS UPON SENIOR SECURITIES
 
 None.
 
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
 Pursuant
to the Company’s by-laws and Nevada Revised Statute 78:320, on September 25,
2008, holders of a majority of the outstanding shares of common stock of Salon
City, Inc. ("SLON") called and held a special meeting and approved a 1-for-100
reverse-split of its common stock, so that every current shareholder of SLON’s
common stock as of November 28, 2008 (the “Record Date”) shall be issued one
share of SLON’s $0.001 par value common voting stock in exchange for every 100
shares of SLON’s $0.001 par value common voting stock held as of the record
date, with fractional shares being rounded up to the next whole share.  The
effective date of the reverse split set for December 1, 2008.
 
 Shareholders
holding approximately 81% of the common shares eligible to vote, or 808,067,122
shares out of 993,716,592 issued shares, approved the resolution authorizing the
reverse split. There were no dissenting or abstaining votes, and no other
matters were taken up or voted upon at the special meeting of the majority
shareholders.
 
 ITEM
5. OTHER INFORMATION
 
 None.
 
 ITEM
6. EXHIBITS AND REPORTS ON FORM 8-K
 
 31.1 CEO
Certification Pursuant to Section 302
 31.2 CFO
Certification Pursuant to Section 302 (included in Exhibit 31.1)
 32.1
CEO Certification Pursuant to Section 906
 32.2 CFO
Certification Pursuant to Section 906 (included in Exhibit 32.1)
 
 Reports on Form 8-K
filed
  None
 
 13
 Table of Contents
  SIGNATURES
 
 Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, there
unto duly authorized.
  SALON
      CITY, INC.Date:
      November 18, 2008
              By:
              /s/
      Steven CasciolaSteven
      Casciola
                President,
      CEO, CFO
  14
 Table of Contents
  INDEX
TO EXHIBITS
  Exhibit
      No.
              
              Description31.1
              
              Certification of Chief Executive Officer/Chief Financial
      Officer32.1
              
              Statement required by 18 U.S.C. Section 1350, as adopted
      pursuant to section 906 of the Sarbanes-Oxley Act of
2002.