Salon City (SALN) 10-Q Quarterly report

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-Q
	Page No.
PART I
Item 1.  Financial Statements	3
Item 2.  Management's Discussion and Analysis of Financial Condition And Results of Operations	9
Item 3.  Quantitative and Qualitative Disclosures on Market Risk	12
Item 4T. Controls and Procedures	12
PART II
Item 1.  Legal Proceedings	13
Item 1A. Risk Factors	13
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3.  Defaults Upon Senior Securities	13
Item 4.  Submission of Matters to a Vote of Security Holders	13
Item 5.  Other Information	13
Item 6.  Exhibits and Reports on Form 8-K	13

2

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

SALON CITY, INC.
Balance Sheet
At September 30, 2008
			2008	2007
			Unaudited	Audited
Assets:
	Current assets
		Cash	$              24,214	$           111,735
		Accounts receivable	188,404	8,549
	Total current assets		212,618	120,284
	Fixed assets
		Equipment	27,631	27,631
		Accumulated depreciation	(26,631)	(18,883)
	Total fixed assets		1,000	8,748
Total assets			$            213,618	$           129,032
Liabilities and Stockholders' Deficit
	Current liabilities
		Accounts payable and accrued expenses	$            456,203	$           409,931
		Current portion of bank loans payable	25,085	81,869
		Related party advances	264,233	234,903
		Deferred Revenue	107,794	-
	Total current liabilities		853,315	726,703
	Long-term bank loans payable		100,116	23,833
	Total liabilities		953,431	750,536
	Stockholders' Deficit
		Preferred stock, (50,000,000 shares authorized, -0- shares
		issued or outstanding, par value $ .001 per share)	-	-
		Common stock, (2,000,000,000 shares authorized, 993,716,592
		shares issued and outstanding, par value $.001 per share)	993,717	984,083
		Additional paid-in capital	2,251,091	2,231,833
		Treasury 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

SALON CITY, INC.
Statements of Operations
For the Three and Nine Months Ended September 30, 2008 and 2007
	Three Months			Three Months			Nine Months			Nine Months
	9/30/2008			9/30/2007			9/30/2008			9/30/2007
Advertising income	$	5,094		$	182,302		$	118,118		$	411,126
Distributors, conference and other income		-			-			65,815			140
Total revenue		5,094			182,302			183,933			411,266
Cost 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			455,009
Net 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

SALON CITY, INC.
Statements of Cash Flows
For the Nine Months ended September 30, 2008 and 2007
	Nine Months			Nine Months
	Ended			Ended
	9/30/2008			9/30/2007
CASH 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			1,822
Par value of shares returned to treasury		-			12,156
Fair value of rent provided by officer		-			6,750
Increase 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			174,216
NET 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		-			46,037
Incurrences (repayment of) related pary advances		29,330			147,212
Proceeds from bank loans		19,499			56,662
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES		48,829			249,911
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS		(87,521	)		16,993
CASH AND CASH EQUIVALENTS:
Beginning of period		111,735			89,316
End of period	$	24,214		$	106,309
SUPPLEMENTAL CASH FLOW DISCLOSURES AND NON-CASH
FINANCING  INFORMATION:
Cash paid for interest	$	21,572		$	30,258
Cash paid for income taxes	$	-		$	-
The accompanying notes are an integral part of these financial statements

6

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

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

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

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 30th the 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 talks with 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 first and 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.

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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.

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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 PROCEDURES

The 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.

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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

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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 Casciola
		Steven Casciola President, CEO, CFO

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INDEX TO EXHIBITS

Exhibit No.	Description
31.1	Certification of Chief Executive Officer/Chief Financial Officer
32.1	Statement required by 18 U.S.C. Section 1350, as adopted pursuant to section 906 of the Sarbanes-Oxley Act of 2002.