SALON MEDIA GROUP INC (SALNC)

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULT OF OPERATIONS

Salon Media Group, Inc. is an Internet media company that produces a total network of ten subject-specific, Websites, and two online communities - The Well and Table Talk. Salon was incorporated in July 1995 and launched its initial Websites in November 1995. Salon has averaged approximately 3.5-3.8 million unique visitors per month. A unique user is an individual visitor to Salon's network.

Most of Salon's revenues are advertising revenues, derived from the sale of promotional space on its Websites. Services that have been offered range from short-term advertisements to long-term arrangements and may have included the development of co-branded, integrated Websites. During the year ended March 31, 2002, most advertisements were of short duration, generally less than ninety days, and did not include any co-branded, integrated Websites. Salon also generated advertising income by offering HTML leads to content partners who provided dynamic headlines on Salon's Websites.

Salon began offering Salon Premium, a paid subscription service, in April 2001. Salon Premium's rates are $6 for a one-month subscription, $30 for a one-year subscription and $50 for a two-year subscription. Benefits of Salon Premium include access to exclusive new content; the option to view Salon content without advertising banners, pop-ups or other forms of advertisements; full access to premium-only content (abridged versions are available free for non-subscribers) and the ability to easily download content in text format, a convenience that enables readers to view additional Salon articles when not connected to the Internet. In October 2001, Salon began featuring its unabridged stories found in its News and Politics Websites exclusively to Salon Premium members. Revenue is recognized ratably over the period that services are provided. During the year ended March 31, 2002, Salon received $1.1 million in cash, recognized $0.6 million of revenue for this service, and recorded $0.5 million as deferred revenue. Salon can not determine if it will be able to sustain comparable growth for the year ending March 31, 2003 or what renewal rate to expect.

Salon offers The Well and Table Talk, monthly subscription services, for access to on-line discussion forums. Revenue is recognized ratably over the subscription period. Salon generates revenue from the licensing of content that previously appeared in Salon's Websites. Salon has generated minimal income from product sales.

Salon has generated barter revenue in which Salon exchanges advertising space on its Websites for reciprocal advertising space on other Websites 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 Websites. Barter expenses are recorded when Salon's advertisements are run on the reciprocal Websites, which is typically in the same period as when advertisements are run on Salon's Websites. Barter revenues represented none, 0.9%, and 17.8% of total revenues for the fiscal years ended March 31, 2002, 2001, and 2000, respectively.

Production, content and product expenses consist primarily of salaries and related expenses for Salon's editorial, artistic, audio and production staffs, online communities staff, payments to freelance writers and artists, and telecommunications and computer related expenses for the support and delivery of Salon's Websites 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 years ended March 31, 2002, 2001 and 2000.

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. During the year ended March 31, 2001, Salon capitalized $0.7 million of costs related to enhancing Salon's Website management software. During the year ended March 31, 2002 Salon discontinued all direct effort to market and sell this software to focus its efforts on its core content, production and maintenance efforts. Accordingly, Salon determined that this asset was impaired and recorded an impairment charge of $0.7 million. Prior to June 2000, Salon expensed all costs related to enhancing its Websites, and since then, has not incurred any material costs for enhancement or to add substantial additional functionality on 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. Through March 31, 2002 amortization of such assets was 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 partially impaired and recorded an impairment charge of $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. As part of the MP3Lit acquisition, 888,000 shares of common stock were issued and held in escrow, of which 317,000 shares were issued in May 2001. The remaining shares are to be issued over a two-year period to certain former stockholders of MP3Lit. The issuance of 317,000 shares was valued at $0.1 million and resulted in additional purchase consideration classified as goodwill. As determined during the fiscal year ended March 31, 2001, all the goodwill associated with the acquisition was impaired, and as a result, the additional goodwill resulting from this additional stock award was written off during the fiscal year ended March 31, 2002. The remaining 571,000 contingent common shares will be recorded at their fair value on the respective issue dates as additional purchase consideration, classified as goodwill, and immediately written off as an impaired asset as Salon is no longer attempting to generate revenue from the acquired business. Contingent shares of 412,100 were issued subsequent to March 31, 2002 with the value being immaterial. The remaining contingent shares of 158,500 are to be issued in May 2003 and Salon cannot predict their financial impact at this time.

Salon has incurred significant net losses and negative cash flows from operations since its inception. As of March 31, 2002, Salon had an accumulated deficit of $76.6 million. These losses have been funded primarily through the issuance of preferred stock and Salon's initial public offering of common stock in June 1999.

Salon believes that it will incur negative cash flows from operations for the year ending March 31, 2003. Although Salon has targeted positive cash flows from operations for the fourth quarter of fiscal year 2003, because of the rapid and unexpected sharp deterioration of the general business climate in the past year and a half, Salon may not 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, 2002 Salon had net operating loss carryforwards for federal income tax purposes of $50.6 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 $25.2 million that 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 $2.7 million during the year ended March 31, 2002 to $19.7 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.

The preparation of financial statements in conformity with generally accepted accounting principles requires Salon to utilize accounting policies and make estimates and assumptions that affect our reported amounts. Salon's significant accounting policies are described in Note 2 to the consolidated financial statements. Salon believes policies and estimates related to revenue recognition and prepaid advertising rights represent our critical accounting policies and estimates. Future results may differ from these estimates under different assumptions or conditions.

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

Most of Salon's revenues are advertising revenues, derived from the sale of promotional space on its Websites. The duration of the advertisements are generally short term, usually less than ninety days. Revenues derived from such arrangements are recognized during the period the advertising space is provided, as long as 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, if mutually agreeable with an advertiser. If these "make good" impressions are not agreeable to an advertiser, no further revenue is recognized.

Salon offers The Well and Table Talk, monthly subscription services, for access to on-line discussion forums. Revenue is recognized ratably over the subscription period.

In December 1999, Salon sold 1,125,000 shares of common stock to Rainbow Media Holdings and received $11.8 million of advertising credits that could be utilized for up to ten years. The credits were valued at $8.1 million, based on the price of Salon's stock on the date the transaction was finalized. This long-lived asset is subject to a periodic review of impairment.

Salon's net revenue decreased 50% to $3.6 million in the year ended March 31, 2002 from $7.2 million in the fiscal year ended March 31, 2001.

Advertising revenues decreased 68% to $1.9 million for the year ended March 31, 2002 from $6.2 million for the year ended March 31, 2001. The decrease in advertising revenue was attributable to an overall contraction in the United States economy, e-commerce or Internet businesses reducing advertising without compensating increases from more established advertisers, most advertisers choosing to place advertisements in the largest Websites, the September 11, 2001 terrorist acts and advertisers' concern with Salon's financial viability. Salon did not record any barter sales for the year ended March 31, 2002 and $0.1 million of barter sales during the year ended March 31, 2001. Based on the continuing weak United States economy, Salon cannot predict what advertising revenues will be generated during the year ending March 31, 2003.

Subscription revenues increased 121% to $1.2 million for the year ended March 31, 2002 from $0.5 million for the year ended March 31, 2001. The increase is attributable to Salon Premium, a paid subscription service launched in late April 2001, which generated $0.6 million in revenue during its approximately eleven months of operation. Salon estimates it could generate at least $1.0 million of Salon Premium revenue for the year ending March 31, 2003.

Salon recognized $0.2 million of Website management software sales during the year ended March 31, 2002 and no comparable amounts in prior years. Salon does not anticipate generating additional software sales for the year ending March 31, 2003.

All other sources of revenue accounted for $0.3 million for the year ended March 31, 2002 compared to $0.5 million for the year ended March 31, 2001. The decrease of $0.2 million was primarily due to a decline in licensing revenues between years.

Production and content expenses during the year ended March 31, 2002 were $5.0 million versus $9.8 million for the year ended March 31, 2001, a decline of $4.8 million or 49%. The decrease is primarily due to an elimination of approximately forty positions between April 1, 2000 and March 31, 2002, and the effect of a 15% salary reduction initiated April 1, 2001, which combined to reduce expenses by $2.8 million. Reduced purchases of freelance articles yielded additional savings of $0.9 million and curtailment of travel activities reduced expenses an additional $0.3 million. Salon does not anticipate further staff reductions or reductions in salaries during its fiscal year ending March 31, 2003 and feels that other expenditures have been reduced to minimal levels.

Sales and marketing expenses during the year ended March 31, 2002 were $2.7 million versus $7.2 million for the year ended March 31, 2001, a decline of $4.5 million or 62%. The decrease in sales and marketing expenses is primarily attributable to an elimination of approximately thirty positions between April 1, 2000 and March 31, 2002, and the effect of a 15% salary reduction initiated April 1, 2001, which combined reduced expenses by $2.4 million. Curtailment of non-essential advertising, marketing and distribution expenditures resulted in savings of an additional $1.3 million, and a reduction in travel reduced expenses an additional $0.2 million. Salon does not anticipate further staff reductions or reductions in salaries during its fiscal year ending March 31, 2003 and feels that other expenditures have been reduced to minimal levels.

Included in sales and marketing expenses are non-cash advertising expenses related to an investment in Salon by Rainbow Media Holdings, Inc. in the form of prepaid advertising rights valued at $8.1 million which is being amortized as used. Amortized amounts were $0.8 million for each of the years ended March 31, 2002 and 2001.

Research and development expenses during the year ended March 31, 2002 were $0.7 million versus $1.6 million for the year ended March 31, 2001, a decline of $0.9 million or 56%. Of the decrease, $0.5 million is attributable to an elimination of approximately fourteen positions between April 1, 2000 and March 31, 2002, and the effect of a 15% salary reduction initiated April 1, 2001 and $0.4 million is due to a general contraction in spending. Salon does not anticipate further staff reductions or reductions in salaries during its fiscal year ending March 31, 2003 and feels that other expenditures have been reduced to minimal levels.

General and administrative expenses during the year ended March 31, 2002 were $1.9 million versus $3.5 million for the year ended March 31, 2001, a decline of $1.6 million or 45%. Of the decrease, $0.5 million is attributable to an elimination of approximately five positions between April 1, 2000 and March 31, 2002 and the effect of a 15% salary reduction initiated April 1, 2001, a decline in general corporate expenses, partially offset by an increase in bad debt expense due to the write-off of a $0.2 million long-term note receivable. The results for the year ended March 31, 2001 included $0.6 million of administrative expenses related to attempts to seek venture capital and to market and sell Salon's proprietary software used to manage content on Websites. No comparable expenses were incurred during the year ended March 31, 2002 as Salon discontinued such efforts. Salon does not anticipate further staff reductions or reductions in salaries during its fiscal year ending March 31, 2003 and feels that other expenditures have been reduced to minimal levels.

Amortization of intangible expenses during the year ended March 31, 2002 was $0.5 million versus $1.2 million for the year ended March 31, 2001, a decline of $0.7 million or 61%. During the year ended March 31, 2001 goodwill resulting from the acquisition of The Well and MP3Lit.com was written-off as impaired. The resulting reduction in these components of intangible assets resulted in the $0.7 million decline in amortization expense.

During the year ended March 31, 2001, Salon capitalized $0.7 million of expenditures to enhance Salon's proprietary software as Salon contemplated marketing the software. During the quarter ended June 30, 2001, Salon discontinued all development and dedicated internal marketing efforts to focus on its core content, production and maintenance. Accordingly, Salon determined that this asset was impaired and recorded an impairment charge of $0.7 million during the year ended March 31, 2002.

In May 2000, Salon acquired MP3Lit.com in a transaction that included contingently issuable common stock. As a consequence, Salon issued 317,000 shares of common stock valued at $0.1 million in May 2001 resulting in additional purchase consideration classified as goodwill. As determined during the fiscal year ended March 31, 2001, all the goodwill associated with the acquisition was impaired, and as a result, the goodwill resulting from this additional stock award was written off during the year ended March 31, 2002. Contingent shares of 412,100 were issued subsequent to March 31, 2002 with the value being immaterial. Additional contingent shares of 158,500 are to be issued in May 2003 and Salon cannot predict their financial impact at this time.

INTEREST INCOME Interest income during the year ended March 31, 2002 was $0.1 million versus $0.6 million for the year ended March 31, 2001, a decline of $0.5 million or 86%. The decrease between years is primarily attributable to a decrease in cash between periods, as Salon has been utilizing its cash to fund operations.

The preferred deemed dividend of $3.2 million for the year ended March 31, 2002 represents a non-cash charge resulting from the difference between the offering price of Salon's Series A redeemable convertible preferred stock sold in August and September 2001 and the fair value of Salon's common stock into which the preferred stock is convertible on the dates of the transactions, as well as the effect of an immediate redemption right of the preferred stock issued, after allocating the proceeds between preferred stock and warrants.

As a result of the above factors, Salon recorded a net loss attributable to common stockholders of $11.3 million or $0.83 per share for the fiscal year ended March 31, 2002 compared to a net loss of $19.2 or $1.48 per share for the fiscal year ended March 31, 2001.

Salon's net revenue decreased 10% to $7.2 million in the year ended March 31, 2001 from $8.0 million in the 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.

Production and content expenses during the year ended March 31, 2001 was $9.8 million versus $10.2 million for the year ended March 31, 2000, a decline of $0.4 million or 4%. 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.

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 during the year ended March 31, 2001 was $7.2 million versus $15.6 million for the year ended March 31, 2000, a decline of $8.4 million or 54%. 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 ended March 31, 2001 and $1.4 million for the year ended March 31, 2000.

The decrease in expenses between 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.

Included in sales and marketing expenses are non-cash advertising expenses related to an investment in Salon by Rainbow Media Holdings, Inc. in the form of prepaid advertising rights valued at $8.1 million which is being amortized as used. Amortized amounts were $0.8 million and $0.2 million for the year ended March 31, 2002 and March 31, 2001, respectively.

Research and development expenses were $1.6 million for both 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.

During the 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. No comparable expenditures were incurred during the 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.

General and administrative expenses during the year ended March 31, 2001 was $3.5 million versus $2.5 million for the year ended March 31, 2000, an increase of $1.0 million or 40%. 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.

Amortization of intangibles increased 18% to $1.2 million for year ended March 31, 2001 from $1.0 million in the 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.

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 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 that 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 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 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 dropped $0.5 million to $0.6 million for the year ended March 31, 2001 compared to $1.1 million for the 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.

During the 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 year ended March 31, 2001.

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.

As of March 31, 2002, Salon had approximately $1.5 million in available cash from the issuance of preferred stock during the year ended March 31, 2002. Salon also had $0.6 million of restricted cash held primarily as deposits for various lease arrangements.

Net cash used in operations was $5.0 million for the year ended March 31, 2002, compared to $13.4 million for the year ended March 31, 2001. The principal use of cash during the year ended March

31, 2002 was to fund the $8.0 million net loss for the period and a $0.8 million decrease in liabilities, offset partly by non-cash charges of $3.3 million and an increase in deferred revenue of $0.3 million. The principal use of cash during the year ended March 31, 2001 was to fund the $19.2 million net loss for the period and a $1.8 million decrease in liabilities, offset partly by non-cash charges of $6.9 million and a decrease of $1.7 million in receivables.

Net cash used in investing activities was immaterial for the year ended March 31, 2002, compared to $1.4 million for the year ended March 31, 2001. Salon does not expect any significant capital expenditures during the next fiscal year. During the year ended March 31, 2001, net cash used for investing activities consisted of $0.4 million for an acquisition and $1.0 million for the purchase of property and equipment.

Net cash from financing activities provided $3.5 million for the year ended March 31, 2002 from the issuance of preferred stock with net proceeds of $3.7 million, offset by $0.2 million from nominal payments for capital lease obligations. This compares to an outflow of $0.1 million for the year ended March 31, 2001 primarily for nominal payments of capital lease obligations.

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 or reestablished with another financial institution. Standby letters of credit previously issued by the bank were subsequently collateralized by like amounts in certificates of deposit with the bank. Lessors required the standby letters of credit. As of March 31, 2002, Salon had $0.6 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.

The following summarizes Salon's contractual obligations as of March 31, 2002, and the effect these contractual obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

Payments Due By Period ---------------------------------------------------- 1 Year 1 - 3 After 3 Total or Less Years Years ---------- ---------- ---------- ---------- Operating leases $ 7,752 $ 1,093 $ 3,173 $ 3,486 Capital leases 344 262 82 -- ---------- ---------- ---------- ---------- Total $ 8,096 $ 1,355 $ 3,255 $ 3,486 ========== ========== ========== ==========

As of March 31, 2002, Salon's available cash resources were sufficient to meet working capital needs for approximately three to four months depending on revenues generated during the period. Salon's auditors have included a paragraph in their report indicating that substantial doubt exists as to its ability to continue as a going concern because it has recurring operating losses and negative cash flows, and an accumulated deficit. Salon has eliminated various positions, not filled positions opened by attrition, implemented a wage reduction of 15% effective April 1, 2001, and has cut discretionary spending to minimal amounts, but due to a weak U.S. economy in general, and limited visibility of advertising activity, it is unable to accurately predict if and when it will reach cash-flow break even.

Salon needs to raise additional funds and is currently in the process of exploring financing options. If it is unable to complete the financial transactions it is pursuing or if it is unable to fund its other liquidity needs, then it may be unable to continue as a going concern. Liquidity continues to be a

constraint on business operations, including Salon's ability to react to competitive pressures or to take advantage of unanticipated opportunities. If Salon raises additional funds by selling equity securities, or instruments that convert into equity securities, the percentage ownership of Salon's current 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 stockholders.

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS No. 141, "Business Combinations" (SFAS No. 141). This standard eliminates the pooling-of-interests method of accounting for business combinations, except for qualifying business combinations that were initiated prior to July 1, 2001, and applies to all business combinations accounted for under the purchase method that are completed after June 30, 2001. The implementation of SFAS No. 141 did not have a significant impact on Salon's financial condition or results of operations.

In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" (SFAS No. 142). This standard eliminates the amortization of goodwill, and requires goodwill to be reviewed at least annually for impairment, the useful lives of previously recognized intangible assets to be reassessed and the remaining amortization periods to be adjusted accordingly. Salon will implement this standard effective April 1, 2002. The effect of such implementation will be to reduce goodwill amortization expense by $0.1 million annually. No material changes to the $0.2 million carrying value of goodwill or the $0.7 million carrying value of intangible assets are anticipated as a result of the adoption of SFAS No. 142.

In October 2001, the FASB issued SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" (SFAS No. 144). SFAS No. 144 supersedes "Accounting for the Impairment of Long- Lived Assets and for Long-Lived Assets to Be Disposed Of" (SFAS No.121), however it retains the fundamental provisions of SFAS No. 121 for (1) the recognition and measurement of the impairment of long-lived assets to be held and used and (2) the measurement of long-lived assets to be disposed of by sale. SFAS No. 144 develops a single accounting model for long-lived assets to be disposed of by sale, whether previously held and used or newly acquired assets and consequently amends Accounting Principles Board Opinion No. 30, "Reporting Results of Operations -Reporting the Effects of Disposal of a Division of a Business." Additionally, SFAS No. 144 expands the scope of discontinued operations to include all components of an entity with operations that (1) can be distinguished from the rest of the entity and (2) will be eliminated from the ongoing operations of the entity in a disposal transaction. SFAS No. 144 is effective for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years. Salon is currently assessing the impact of the adoption of this standard on its financial statements.

In November 2001, the Emerging Issues Task Force (EITF) reached a consensus on Issue 1(a) of EITF Issue 00-18, "Accounting Recognition for Certain Transactions Involving Equity Instruments Granted to Other Than Employees" that an asset acquired in exchange for the issuance of fully vested, non-forfeitable equity instruments should be displayed in the balance sheet of the grantor as an asset rather than as a reduction of stockholders' equity. While no specific transition guidance was provided in connection with this consensus, Salon has adopted this consensus effective December 31, 2001 and such adoption resulted in reclassifying prepaid advertising rights received from a stockholder in exchange for common stock as a non-current asset as of December 31, 2001. The March 31, 2001 balance sheet has been reclassified to conform to this presentation. The impact of this reclassification was to increase total assets by $6,266 and $7,075 at March 31, 2002 and March 31, 2001 respectively, and to increase total stockholders' equity and total liabilities and stockholders' equity by similar amounts at the same dates. In connection with this reclassification, Salon has updated its assessment of the carrying value of this long-

lived asset and believes, based on the credit worthiness of the stockholder from which Salon acquired the advertising rights, as well as Salon's ability and intention to utilize this right, that the asset is not impaired at March 31, 2002.

In May 2000, the EITF issued EITF Issue No. 00-14, "Accounting for Certain Sales Incentives." EITF Issue No. 00-14 addresses the recognition, measurement, and income statement classification for sales incentives that a vendor voluntarily offers to customers (without charge), which the customer can use in, or exercise as a result of, a single exchange transaction. Salon adopted EITF 00-14 on January 1, 2002 and there was no impact on the results of operations, or its financial position upon adoption and no reclassifications of prior results were required for the years ending March 31, 2002, 2001 and 2000.

Salon has a history of significant losses and expects to incur operating losses in the near future. For the year ended March 31, 2002, Salon had net losses attributable to common stockholders of $11.3 million and had an accumulated deficit of $76.6 million. If and when Salon does achieve profitability, Salon may not be able to sustain or increase profitability on a quarterly or annual basis in the future. If revenues grow more slowly than Salon anticipates or operating expenses exceed expectations, financial results will most likely be severely harmed and the ability of Salon to continue its operations will be seriously jeopardized.

Salon's independent outside auditors provided a "going-concern" audit opinion on the consolidated financial statements for the years ended March 31, 2002, 2001 and 2000. The audit opinion reported substantial doubt about Salon's ability to continue as a going concern, citing issues such as the history of losses and absence of current profitability. As a result of the "going-concern" opinion Salon's stock price and investment prospects may be adversely affected, thus limiting financing choices and raising concerns about the realization of value on assets and operations.

During August and September 2001 and March 2002 Salon raised approximately $3.7 million in a private placement of Series A and B preferred stock. Even though Salon has eliminated various positions, not filled positions opened by attrition, implemented a wage reduction of 15% effective April 1, 2001 and has cut discretionary spending to minimum amounts, due to a weak U.S. economy in general, and a weak advertising market in particular, it is unable to predict if and when it will reach cash-flow break even. Salon therefore needs to raise additional funds within the next three to four months. If Salon raises additional funds by selling equity securities, or instruments that 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 may be unable to continue as a going concern and its ability to react to competitive pressures and take advantage of unanticipated opportunities will be substantially limited. In addition, Salon's business could be significantly adversely affected.

The "going-concern" opinion from Salon's auditors limits Salon's ability to access certain types of financing, and the circumstances which prompted this opinion, may limit or prevent Salon from obtaining suitable financing, if at all.

Shares of Salon's common stock were listed on the NASDAQ National Market until September 25, 2001, at which time they were moved to the NASDAQ SmallCap Market due to Salon's inability to meet the continued listing requirements of the NASDAQ National Market. Listing retention on the NASDAQ SmallCap Market requires continuing compliance with NASDAQ listing standards. One of the conditions of continued listing is that Salon's common stock achieve and maintain a closing bid price of at least $1.00 per share for at least ten consecutive trading days. After panel review, NASDAQ agreed to continue the date by which Salon must demonstrate that its stock has traded above $1.00 until August 13, 2002. Salon cannot predict whether the price of its common stock will meet the minimum bid requirements in that time period, which creates a risk of possible delisting proceedings due to Salon's inability to meet the minimum bid requirements.

If the market price for Salon's common stock remains below $1.00 per share, its common stock may be deemed to be penny stock. If its common stock were considered penny stock, it would be subject to rules that impose additional sales practices on broker-dealers who sell its securities. For example, broker dealers must make a special suitability determination for the purchaser, receive the purchaser's written consent to the transaction prior to sale, and make special disclosures regarding sales commissions, current stock price quotations, recent price information and information on the limited market in penny stock. Because of these additional obligations, some brokers may not effect transactions in penny stocks, which could adversely affect the liquidity of Salon's common stock.

If the market price for Salon's common stock stays above $1.00 but the value of Salon's common stock not held by its directors, executive officers and affiliates does not stay above $1,000,000 for a sustained period of time, Salon may not qualify for continued listing on the NASDAQ SmallCap Market. Listing on the NASDAQ SmallCap Market would enable Salon to return to the NASDAQ National Market if and when it achieved compliance with the other NASDAQ National Market continuing listing requirements. If Salon's shares are not eligible for listing on the NASDAQ SmallCap Market, then they would not be eligible for listing again on any NASDAQ market absent compliance with the NASDAQ initial listing requirements, which are significantly more stringent than the continued listing requirements.

If Salon's common stock is delisted from NASDAQ SmallCap Market, it will likely be traded on the over-the-counter bulletin board (OTCBB). If Salon's common stock is traded on the OTCBB, its value may be negatively impacted because stocks, which trade over-the-counter, tend to be less liquid and trade with larger variations between the bid and ask price.

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:

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

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

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

In addition, the NASDAQ SmallCap Market 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.

With the weakened demand for advertising, Salon has begun to depend more on cash generated from Salon Premium, a paid subscription service implemented in April 2001. Salon estimates that as of March 31, 2002, approximately thirty to thirty-five percent of its content is available to Salon Premium subscribers only. The implementation of Salon Premium may therefore adversely restrict and reduce the number of impressions available to sell to advertisers. Salon believes recent content restrictions and reduction in sellable impressions have reduced theoretical advertising capacity but have not created practical shortages, and Salon has the means to create useful space as demand increases.

SALON HAS AN ACTIVE SUBSCRIPTION PROGRAM BUT THE REVENUE RESULTS ARE NOT CERTAIN

Salon has had a subscription business since it acquired The Well, an online forum, in March 1999. The Well has now been in operation for over ten years. In July 2001, Salon's previously free Table Talk online forum, which it developed internally, was transitioned to a subscription service. In April 2001, Salon launched Salon Premium, which provides Salon readers with certain benefits in exchange for a subscription for a year or more. In October 2001, Salon continued its efforts to expand its subscriber base, in part, by making unabridged News and Politics stories only available to Salon Premium members. In December 2001, Salon began offering one-month subscriptions to Salon Premium. Salon Premium members for the most part, however, choose to view Salon's content without any advertisements. While traditional media properties commonly operate with advertising within subscriber-purchased pages, Salon has not implemented this model. Dividing some of our Websites between abridged content accompanied by advertising and unabridged content accompanied by subscription revenue may not achieve acceptable circulation or revenue goals.

IF SALON PREMIUM DOES NOT ACHIEVE AN ACCEPTABLE RENEWAL RATE, SALON'S RESULTS OF

Salon began offering one and two year subscriptions to Salon Premium in April 2001. In December 2001, Salon began offering one-month subscriptions to Salon Premium. Since Salon Premium is still within its first year of operation, Salon does not have operating history to utilize in predicting renewal rates. If it does not achieve significant renewal rates, its results of operations will suffer.

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:

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

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

o the impact of national economic and diplomatic concerns on the advertising and news business; and,

In order to attract and maintain Salon's user base, Salon 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 Salon's revenues in a particular quarter are lower than it anticipates, Salon may be unable to reduce spending in that quarter. As a result, any shortfall in revenues would likely harm its 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 Salon's 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 its common stock may decline.

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

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

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

Salon's dependence on advertising subjects it to the risk of revenue shortfalls because the sales cycles for advertising vary significantly, and during these cycles Salon may expend substantial funds and management resources while not obtaining advertising revenues. If sales are delayed or do not occur, Salon's financial results for 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 Salon has little or no control, including:

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

As of March 31, 2002 Salon had leasehold improvements recorded at cost at $1.0 million with a net book value of $0.7 million, as well as $0.6 million of office lease deposits. The leasehold improvements are being depreciated over the term of its respective lease. If Salon were to shorten the lease term of various lease agreements for any reason, or terminate lease agreements, these assets could be adversely affected.

SALON MUST DETERMINE WHETHER TO ESTABLISH OR MAINTAIN DISTRIBUTION RELATIONSHIPS

In past periods Salon depended on distribution relationships with high-traffic Websites to increase its user base. There has been intense competition for relationships with these Websites, and Salon may not be able to, or want to, enter into such relationships on favorable terms or at all. Even if Salon enters into distribution relationships with these Websites, its Websites may not attract significant numbers of users, and its Websites may not attract additional users from these relationships. Moreover, Salon has paid, and may in the future pay, significant fees to establish these relationships. Salon also has commenced relationships designed to promote and sell subscriptions to Salon Premium. These relationships are new and Salon is unable to predict they will prove effective and economic.

Salon's success depends upon its ability to attract and retain a large number of users by delivering original and compelling Internet content and services. If Salon is unable to develop content and services that allow it to attract, retain and expand a loyal user base possessing high-value demographic characteristics, Salon will be unable to generate advertising revenues, and its revenues and operating results will be severely harmed. The content and services Salon provides on its Websites may not appeal to a sufficient number of Internet users to generate advertising revenues. Salon's ability to develop compelling content depends on several factors, including:

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 Salon's network of Websites. Internet users can freely navigate and instantly switch among a large number of Websites, many of which offer content and services that compete with Salon. In addition, many Websites offer very specific, highly targeted content that could have greater appeal than Salon's network to particular subsets of its target user base.

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

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

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

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

Due to recurring operating losses, our current financial position and potential NASDAQ SmallCap delisting, Salon may experience difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Salon may be unable to retain its current key employees or attract, integrate or retain other qualified employees in the future. If Salon does not succeed in attracting new personnel or integrating, retaining and motivating its current personnel, its business could be harmed.

RIGHTS OR TO DEFEND CLAIMS OF INFRINGEMENT BY THIRD PARTIES, AND IF SALON IS NOT

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

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

In April 1999 Salon acquired the Internet address www.salon.com. Because www.salon.com is the address of the main home page to its network of Websites and incorporates its company name, it is a vital part of our intellectual property assets. Salon does 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 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, its business could be harmed.

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

Salon relies on a number of third party suppliers for various services, including Web hosting, advertising delivery, and Internet traffic measurement. While Salon believes that it could obtain these services from other qualified suppliers on similar terms and conditions, a disruption in the supply of these services by its current suppliers could severely harm its business.

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

Salon uses third-party software to measure traffic on its network of Websites. This type of software does not always perform as expected. If this software malfunctions or does not accurately measure its user traffic, Salon may not be able to justify its advertising rates, and its advertising revenues could be reduced.

For certain clients, Salon uses third-party services to deliver advertising features and/or measure advertising delivery. This type of service is outside its direct control, and if the service arrangement under performs, its advertising delivery may perform below expectations and its advertising revenues could be adversely affected.

Salon's success is highly dependent on an increase in the use of the Internet. If the markets for Internet advertising or electronic commerce does not continue to develop, its 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 Salon expects, its business could be harmed. Within the industry, its advertising audience may be low and inhibit its 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 its future advertising rates and revenues. Any failure to adapt to pricing models that develop or respond to competitive pressures could reduce its 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 its business.

Advertisers continue to be attracted by new products, promotional vehicles and offerings delivered via the Internet. This interest in new products requires that the company identify advertiser interests, develop and launch new advertising products or formats, create appropriate pricing schedules, train the sales force in the use and sale of new products, manage the obsolescence of earlier products, and restructure the Salon.com Website to effectively deliver, track and report new products. New product design, development and launch involve creativity, expense, technology modifications and learning processes. While the company has integrated this activity into its existing operations, the rate of change could create an environment where the company is unable to effectively develop, deliver or track the delivery of products acceptable to the market.

Advertisers are increasingly selecting shorter campaign lengths with less lead-time until launch. These campaigns have less flexibility in delivery requirements and limit the ability of the company to precisely identify future revenues.

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, Salon's 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 its information needs, particularly to support its internal business requirements and those of its advertisers and sponsors. The absence or insufficiency of this information could limit its ability to attract and retain advertisers and sponsors.

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

Salon's 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, it may not be able to increase revenues from advertising and this may harm our business. 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, its results of operations could be harmed.

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

Increased competition could result in advertising 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 its present and potential competitors are likely to enjoy substantial competitive advantages over us. 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 harmed.

As a publisher and distributor of content over the Internet, including user-generated content on Salon's online communities, Salon faces potential liability for defamation, negligence, copyright, patent

or trademark infringement and other claims based on the nature, content or ownership of the material that is published on or distributed from its network of Websites. These types of claims have been brought, sometimes successfully, against online services, Websites and print publications in the past. Although Salon carries general liability insurance, its insurance may not be adequate to indemnify us for all liability that may be imposed. Any liability that is not covered by its insurance or is in excess of its insurance coverage could severely harm its financial condition and business.

Salon could be exposed to liability with respect to the selection of third-party Websites that may be accessible through Salon.com. These claims might include, among others, that by linking to Websites operated by third parties, Salon may be liable for copyright or trademark infringement or other unauthorized actions by these third-party Websites. Other claims may be based on errors or false or misleading information provided on linked Websites, including information deemed to constitute professional advice such as legal, medical, financial or investment advice. Other claims may be based on its links to sexually explicit Websites and our provision of sexually explicit advertisements when this content is displayed. Salon's 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 its 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 ELECTRONIC COMMERCE PROGRAMS BY

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

Salon may be required to expend significant capital and other resources to protect against the threat of security breaches or to alleviate problems caused by these breaches. 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.

Substantially all of Salon's communications hardware and computer hardware operations for its Websites are located at Verio, Inc. facilities in San Francisco, California. Fire, floods, earthquakes, power loss, telecommunications failures, break-ins, supplier failure to meet commitments, and similar events could damage these systems and cause interruptions in its services. Computer viruses, electronic break-ins or other similar disruptive problems could cause users to stop visiting its network of Websites and could cause advertisers to terminate any agreements with us. In addition, Salon could lose advertising revenues during these interruptions and user satisfaction could be negatively impacted if the service is slow or unavailable. If any of these circumstances occurred, its business could be harmed.

Salon's insurance policies may not adequately compensate it for any losses that may occur due to any failures of or interruptions in our systems. Salon does not presently have a formal disaster recovery plan.

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

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

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 its costs of operations and harm its 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 its business.

Salon has a policy against using personally identifiable information obtained from users of its Websites and services without the user's permission. In the past, the Federal Trade Commission has investigated companies that have used personally identifiable information without permission or in violation of a stated privacy policy. If Salon uses this information without permission or in violation of its policy, Salon may face potential liability for invasion of privacy for compiling and providing information to its corporate customers and electronic commerce merchants. In addition, legislative or

regulatory requirements may heighten these concerns if businesses must notify Internet users that the data may be used by marketing entities to direct product promotion and advertising to the user. Other countries and political entities, such as the European Union, have adopted such legislation or regulatory requirements. The United States may adopt similar legislation or regulatory requirements. If consumer privacy concerns are not adequately addressed, our business, financial condition and results of operations could be materially harmed.

Salon generally does not collect sales or other taxes from individuals who sign up for Salon subscriptions. 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 Salon should collect sales or other taxes on the exchange of merchandise on its network or to tax revenue generated from Salon subscriptions, its financial results could be harmed.

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

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

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

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

A Delaware corporation may opt out of the Delaware anti-takeover laws if its certificate of incorporation or bylaws so provide. 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 Salon.

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

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

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

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

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

In addition, 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.

'MAY NOT BE ABLE TO CONTINUE AS A GOING CONCERN': As of March 31, 2002, SALON.COM had an accumulated deficit of $76.6 million...

It's all George Bush's fault, isn't it Mr. Talbot. A full collapse appears imminent. That's what you get for supporting and batting for the treasonous, evil one Billiam Klintoon.

A Management's analysis of result of operations is quite revealing in this 10k form. All sorts of variables cited concerning the fragility of Salon(and Salon-like businesses)

Ok, FReepers, rip away!

THE CONTROVERSIAL CONTENT OF SALON'S WEBSITES MAY LIMIT ITS REVENUES

They just don't get it, do they?

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