GENERAL

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the condensed consolidated financial statements and related notes included elsewhere in this report. Our condensed consolidated financial statements are not directly comparable from period to period due to acquisitions and dispositions of selected assets of radio stations and acquisitions of non-broadcast businesses. See Note 3 of our condensed consolidated financial statements for additional information.

We believe that we are the largest commercial U.S. radio broadcasting company, measured by number of stations and audience coverage, providing programming targeted at audiences interested in Christian and family-themed radio programming. Our core business is the ownership and operation of radio stations in large metropolitan markets. Upon completion of all announced transactions, we will own a national portfolio of 94 radio stations in 38 markets, including 58 stations in 23 of the top 25 markets, which consists of 29 FM stations and 65 AM stations. We are one of only four commercial radio broadcasters with radio stations in all of the top 10 markets. We are the seventh largest operator measured by number of stations overall and the third largest operator measured by number of stations in the top 25 markets.

Our radio business is focused on the clustering of three strategic formats:
Christian Teaching and Talk, Contemporary Christian Music and conservative News Talk. We recently introduced a fourth strategic format, Spanish Christian Teaching and Talk on a small number of stations. The Spanish Christian Teaching and Talk format is similar to our core Christian Teaching and Talk format in that it broadcasts biblically based programming, however, almost all of the block programming is local rather than national. We also own and operate Salem Radio Network® ("SRN"), a national radio network that syndicates music, news and talk to approximately 2,000 affiliated radio stations, in addition to our owned and operated stations. Salem Radio Representatives® ("SRR") is a national radio advertising sales firm with offices in 12 U.S. cities.

We also own Salem Web Network™ ("SWN") and Townhall®.com, that we believe to be a premiere Internet platform serving the audience interested in Christian and conservative content. SWN's content, both in text and audio, can be accessed through our national portals which include OnePlace.com, Crosswalk.com, Christianity.com, Townhall.com, and through our 96 radio station websites, which provide local content of interest to our local radio station listeners. We also own Salem Publishing™, a magazine publisher serving the Christian audience and the Christian music industry as well as Xulon Press, a provider of print-on-demand publishing services targeted to the Christian audience.

Our principal business strategy is to improve our national radio platform and to invest in and build non-broadcast businesses as the breadth of the media marketplace also expands to deliver compelling content to audiences interested in Christian and family-themed programming and conservative news talk. Our national presence in broadcasting, Internet and publishing gives advertisers a platform that is a unique and powerful way to reach Christian audiences. We program 42 of our stations with our Christian Teaching and Talk format, which is talk programming with Christian and family themes. A key programming strategy on our Christian Teaching and Talk radio stations is to sell blocks of time to a variety of charitable organizations that create compelling radio programs. We also program 26 News Talk and 12 Contemporary Christian Music stations and five of our stations in Spanish-language Christian Teaching and Talk format. SRN supports our strategy by allowing us to reach listeners in markets where we do not own or operate stations. Additionally, we operate numerous Internet websites and publish periodicals and books that target similar audiences in order to provide cross-platform synergies.

We maintain a website at www.salem.cc. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to those reports are available free of charge through our website as soon as reasonably practicable after those reports are electronically filed with or furnished to the Securities and Exchange Commission ("SEC"). Any information found on our website is not a part of, or incorporated by reference into, this or any other report of the Company filed with, or furnished to, the SEC.

As a radio broadcasting company with a national radio network, we derive our broadcast revenue primarily from the sale of broadcast time and radio advertising on a national and local basis.

Historically, our principal sources of revenue have been:

·

the sale of block program time, both to national and local program producers,

·

the sale of advertising time on our radio stations, both to national and local advertisers, and

·

the sale of advertising time on our national radio network.

The rates we are able to charge for broadcast time and advertising time are dependent upon several factors, including:

·

audience share,

·

how well our stations perform for our clients,

·

the size of the market,

·

the general economic conditions in each market, and

·

supply and demand on both a local and national level.

Our sources of revenue and product offerings also increasingly include non-broadcast businesses, including our Internet and publishing businesses.

Our broadcast revenue is affected primarily by the program rates our radio stations charge, the level of broadcast air time sold and by the advertising rates our radio stations and networks charge. The rates for block programming time are based upon our stations' ability to attract audiences that will support the program producers through contributions and purchases of their products. Advertising rates are based upon the demand for advertising time, which in turn is based on our stations' and networks' ability to produce results for their advertisers. We do not subscribe to traditional audience measuring services for our Christian Teaching and Talk stations. Instead, we have marketed ourselves to advertisers based upon the responsiveness of our audiences. In selected markets, for our Contemporary Christian music and conservative News Talk stations, we subscribe to Arbitron, which develops quarterly reports to measure a radio station's audience share in the demographic groups targeted by advertisers. Each of our radio stations and our networks has a pre-determined level of time that they make available for block programming and/or advertising, which may vary at different times of the day.

As is typical in the radio broadcast industry, our second and fourth quarter advertising revenue generally exceeds our first and third quarter advertising revenue. This seasonal fluctuation in advertising revenue corresponds with quarterly fluctuations in the retail advertising industry. Quarterly revenue from the sale of block programming time does not tend to vary significantly because block program rates are generally set annually and recognized on a per program basis.

Our cash flow has historically been affected by a transitional period experienced by radio stations when, due to the nature of the radio station, our plans for the market and other circumstances, we find it beneficial to change its format. This transitional period is when we develop a radio station's listener and customer base. During this period, a station may generate negative or insignificant cash flow.

In the broadcast industry, radio stations often utilize trade or barter agreements to exchange advertising time for goods or services in lieu of cash. In order to preserve the sale of our advertising time for cash, we generally enter into trade agreements only if the goods or services bartered to us will be used in our business. We have minimized our use of trade agreements and have generally sold most of our advertising time for cash. During 2007, we sold 97% of our advertising time for cash. It is our general policy not to preempt advertising paid for in cash with advertising paid for in trade. In addition, we generally do not pay commissions to sales people for advertising paid in trade.

The primary operating expenses incurred in the ownership and operation of our radio stations include: (i) employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses such as rent and utilities, (iii) marketing and promotional expenses and (iv) music license fees. In addition to these expenses, our network incurs programming costs and lease expenses for

Salem Web Network™ and Townhall.com, our Internet businesses, earn their revenues from the sales of streaming services, sales of advertising and, to a lesser extent, sales of software and software support contracts. Salem Publishing™, our publishing business, earns its revenue by selling advertising in and subscriptions to its publications and by selling books. Xulon Press earns its revenues from the publishing of books. The revenue and related operating expenses of these businesses are reported as "non-broadcast" on our Condensed Consolidated Statement of Operations.

SAME STATION DEFINITION

In the discussion of our results of operations below, we compare our results between periods on an as reported basis (that is, the results of operations of all radio stations and network formats owned or operated at any time during either period) and on a "same station" basis. With regard to fiscal quarters, we include in our same station comparisons the results of operations of radio stations or radio station clusters and networks that we own or operate in the same format during the quarter, as well as the corresponding quarter of the prior year. Same station results for a full year are based on the sum of the same station results for the four quarters of that year.

RESULTS OF OPERATIONS

The following table sets forth certain statements of operations data for the
periods indicated and shows percentage changes:

                              Three Months Ended                           Six months Ended
                                   June 30,                                    June 30,
                            2007             2008         % Change        2007           2008        % Change
                                                        (Dollars in thousands)
Net broadcast
revenue                   $   52,594       $    49,938       (5.1)%    $   102,137    $   97,855        (4.2)%
Non-broadcast
revenue                        6,174             7,524        21.9%         11,462        13,654         19.1%
Total revenue                 58,768            57,462       (2.2)%        113,599       111,509        (1.8)%
Operating expenses:
    Broadcast
    operating
    expenses                  32,788            31,906       (2.7)%         64,498        63,692        (1.2)%
    Non-broadcast
    operating
    expenses                   5,351             6,849        28.0%         10,309        13,087         26.9%
    Corporate
    expenses                   5,496             4,482      (18.4)%         11,310         9,759       (13.7)%
    Depreciation               2,876             3,230        12.3%          5,919         6,477          9.4%
    Amortization                 776               673      (13.3)%          1,586         1,341       (15.4)%
    (Gain) loss on
    disposal of
    assets                       631                10      (98.4)%        (2,638)       (6,004)        127.6%
Total operating
expenses                      47,918            47,150       (1.6)%         90,984        88,352        (2.9)%
Operating income
from continuing
operations                    10,850            10,312       (5.0)%         22,615        23,157          2.4%
Other income
(expense):
    Interest income               48               113       135.4%            108           134         24.1%
    Interest expense         (6,308)           (5,488)      (13.0)%       (12,762)      (11,562)        (9.4)%
    Other income
    (expense), net               182              (49)     (126.9)%            147         (100)      (168.0)%
Income from
continuing
operations before
income taxes                   4,772             4,888         2.4%         10,108        11,629         15.0%
Provision for income
taxes                          1,896             1,996         5.3%          4,337         5,135         18.4%
Income from
continuing
operations                     2,876             2,892         0.6%          5,771         6,494         12.5%
Income from
discontinued
operations, net of
tax                               48               632     1,216.7%            118         2,053      1,639.8%
Net income                $    2,924       $     3,524        20.5%     $    5,889     $   8,547         45.1%

                                      Three Months Ended                  Six months Ended
                                           June 30,                           June 30,
                                     2007             2008              2007             2008
Net broadcast revenue                  90 %             87 %              90 %             88 %
Non-broadcast revenue                  10 %             13 %              10 %             12 %
Total revenue                         100 %            100 %             100 %            100 %
Operating expenses:
    Broadcast operating
    expenses                           56 %             56 %              57 %             57 %
    Non-broadcast operating
    expenses                            9 %             12 %               9 %             11 %
    Corporate expenses                 10 %              8 %              10 %              9 %
    Depreciation                        5 %              5 %               5 %              6 %
    Amortization                        1 %              1 %               1 %              1 %
    (Gain) loss on disposal
    of assets                           1 %              - %             (2) %            (5) %
    Total operating
    expenses                           82 %             82 %              80 %             79 %
Operating income from
continuing operations                  18 %             18 %              20 %             21 %
Other income (expense):
    Interest income                     - %              - %               - %              - %
    Interest expense                 (10) %           (10) %            (11) %           (10) %
    Other expense, net                  - %              - %               - %              - %
Income from continuing
operations before income
taxes                                   8 %              8 %               9 %             11 %
Provision for income taxes              3 %              3 %               4 %              5 %
Income from continuing
operations                              5 %              5 %               5 %              6 %
Discontinued operations,
net of tax                              - %              1 %               - %              2 %
Net income                              5 %              6 %               5 %              8 %

Three months ended June 30, 2008 compared to three months ended June 30, 2007

NET BROADCAST REVENUE. Net broadcast revenue decreased $2.7 million or 5.1%, to $49.9 million for the three months ended June 30, 2008, from $52.6 million for the same period of the prior year. On a same station basis, net broadcast revenue declined $2.8 million, or 5.5%, to $48.4 million for the three months ended June 30, 2008, from $51.2 million for the same period of the prior year.
The decline in revenue is attributable to a $2.6 million decrease in local spot sales on our Christian Teaching and Talk, Contemporary Christian Music and News Talk stations and a $0.5 million decrease in national spot sales on our Contemporary Christian Music stations partially offset by a $0.3 million increase in infomercial revenue on our News Talk and Christian Teaching and Talk stations. Revenue from advertising as a percentage of our net broadcast revenue decreased to 47.0% for the three months ended June 30, 2008, from 49.2% for the same period of the prior year. Revenue from block program time as a percentage of our net broadcast revenue increased to 36.5% for the three months ended June 30, 2008, from 35.5% for the same period of the prior year. The trend in the radio broadcasting industry is of declining advertising revenues resulting in the use of block programming or infomercials to offset the declines. We expect this trend to continue; however, we cannot quantify the financial impact on our future operating results.

NON-BROADCAST REVENUE. Non-broadcast revenue increased $1.3 million, or 21.9%, to $7.5 million for the three months ended June 30, 2008, from $6.2 million for the same period of the prior year. The growth in revenue is primarily due to a $0.4 million increase in banner advertising and ministry streaming on our websites, a $0.2 million increase in publishing revenue on Xulon Press and a $0.1 million increase in revenue from our Townhall.com website. Additionally, we generated revenue of $0.4 million from our radio station websites that were redesigned and launched beginning in the second half of 2007.

BROADCAST OPERATING EXPENSES. Broadcast operating expenses decreased $0.9 million or 2.7% to $31.9 million for the three months ended June 30, 2008, from $32.8 million for the same period of the prior year. On a same station basis, broadcast operating expense decreased $1.2 million or 3.7% to $30.6 million for the three months ended June 30, 2008, compared to $31.8

NON-BROADCAST OPERATING EXPENSES. Non-broadcast operating expenses increased $1.4 million, or 28.0%, to $6.8 million for the three months ended June 30, 2008, compared to $5.4 million for the three months ended June 30, 2007. The increase is comprised of a $0.5 million of costs associated with Townhall Magazine, a new publication launched in early 2008, a $0.2 million increase in production and administrative costs on Xulon Press, a $0.2 million increase in personnel related costs on Townhall.com, a $0.2 million increase in personnel and related expenses on OnePlace.com and a $0.1 million increase in streaming expenses on OnePlace.com.

CORPORATE EXPENSES. Corporate expenses decreased $1.0 million, or 18.4%, to $4.5 million for the three months ended June 30, 2008, compared to $5.5 million for the same period of the prior year. The decrease is attributable to an overall cost reduction initiative, including headcount reductions resulting in a $0.9 million savings in personnel related costs.

DEPRECIATION. Depreciation expense increased $0.3 million, or 12.3%, to $3.2 million for the three months ended June 30, 2008, compared to $2.9 million for the same period of the prior year. The increase is due to capital expenditures, including $5.5 million during the year ended December 31, 2007, that are primarily associated with computer software and office equipment which have an estimated useful life from three to ten years.

AMORTIZATION. Amortization expense decreased $0.1 million, or 13.3%, to $0.7 million for the three months ended June 30, 2008, compared to $0.8 million for the same period of the prior year. The decrease is due to higher amortization being recognized in early 2007 on intangibles such as advertising agreements and other business contracts that were acquired in 2006 with an estimated useful life of one year.

LOSS ON DISPOSAL OF ASSETS. The loss on disposal of assets of $10,000 for the three months ended June 30, 2008 was comprised of various fixed assets disposals compared to a $0.6 million loss for the same period of the prior year due to a $0.5 million pre-tax loss recognized on the sale of radio station WVRY-FM, Nashville, Tennessee in addition to various fixed asset disposals.

OTHER INCOME (EXPENSE). Interest income of $113,000 for the three months ended June 30, 2008 and $48,000 for the same period of the prior year was interest earned on excess cash. Interest expense decreased $0.8 million, or 13.0%, to $5.5 million for the three months ended June 30, 2008, compared to $6.3 million for the same period of the prior year due to a lower outstanding revolving debt balance as well as lower interest rates. Other expense, net, of $49,000 for the three months ended June 30, 2008 represents bank commitment fees associated with the credit facilities offset by a non-recurring item. Other income, net of $0.2 million for the three months ended June 30, 2007 consisted primarily of royalty income from real estate properties offset with bank commitment fees associated with the credit facilities.

PROVISION FOR INCOME TAXES. We adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN No. 48") as of January 1, 2007.
Provision for income taxes was $2.0 million for the three months ended June 30, 2008 compared to $1.9 million for the same period of the prior year. Provision for income taxes as a percentage of income before income taxes (that is, the effective tax rate) was 40.8% for the three months ended June 30, 2008 compared to 39.7% for the same period of the prior year. The effective tax rate for each period differs from the federal statutory income rate of 35.0% due to the effect of state income taxes, certain expenses that are not deductible for tax purposes, and changes in the valuation allowance from the utilization of certain state net operating loss carryforwards.

INCOME FROM DISCONTINUED OPERATIONS, NET OF TAX. The income from discontinued operations of $0.6 million, net of taxes, for the three months ended June 30, 2008 and $48,000, net of taxes for the same period of the prior year, includes the operating results of WFZH-FM, Milwaukee, through the date of sale, the operating results of WRFD-AM in Columbus, Ohio, and the pre-tax gain on the sale of WFZH-FM, Milwaukee, Wisconsin, of $1.4 million.

NET INCOME. We recognized net income of $3.5 million for the three months ended June 30, 2008 compared to net income of $2.9 million for the same period of the prior year. The increase of $0.6 million, or 20.5%, is due primarily to the gain recognized on the sale of WFZH-FM, Milwaukee, Wisconsin, reported as a component of discontinued operations, for $1.4 million offset by a $0.6 million decrease in operating income from all continued operations.

NET BROADCAST REVENUE. Net broadcast revenue decreased $4.2 million or 4.2%, to $97.9 million for the six months ended June 30, 2008, from $102.1 million for the same period of the prior year. On a same station basis, net broadcast revenue declined $4.8 million, or 4.8%, to $94.5 million for the six months ended June 30, 2008, from $99.3 million for the same period of the prior year.
The decline in revenue is attributable to decreases in local spot revenue of $3.4 million across all of our station formats and a $1.6 million decline in national spot revenue on our Contemporary Christian Music and Christian Teaching and Talk stations offset by an increase of $0.5 million in infomercial revenue and a $0.2 million increase local political revenue on our Contemporary Christian Music stations. Revenue from advertising as a percentage of our net broadcast revenue decreased to 46.3% for the six months ended June 30, 2008, from 49.0% for the same period of the prior year. Revenue from block program time as a percentage of our net broadcast revenue increased to 37.8% for the six months ended June 30, 2008, from 36.4% for the same period of the prior year.
The trend in the radio broadcasting industry is of declining advertising revenues resulting in the use of block programming or infomercials to offset the declines. We expect this trend to continue; however, we cannot quantify the financial impact on our future operating results.

NON-BROADCAST REVENUE. Non-broadcast revenue increased $2.2 million, or 19.1%, to $13.7 million for the six months ended June 30, 2008, from $11.5 million for the same period of the prior year. The increase is primarily due to a $0.5 million increase in revenue on Xulon Press, a $0.5 million increase in ministry streaming and banner advertising revenue on OnePlace.com, and $0.2 million of revenue from Salem Consumer Products, an entity established in the second half of 2007. Additionally, we generated revenue of $0.8 million from our radio station websites that were redesigned and launched beginning in the second half of 2007.

BROADCAST OPERATING EXPENSES. Broadcast operating expenses decreased $0.8 million, or 1.2%, to $63.7 million for the six months ended June 30, 2008, from $64.5 million for the same period of the prior year. On a same station basis, broadcast operating expense decreased $1.7 million or 2.7% to $60.6 million for the six months ended June 30, 2008, compared to $62.3 million for same period of the prior year. The decline in broadcast operating expenses is comprised of a $2.6 million decrease in advertising expenses, a $1.0 million decrease in personnel related costs and a $0.2 million decrease in national commissions associated with lower revenues, partially offset by a $2.4 million increase in bad debt expense and a $0.6 million increase in facility related expenses due primarily to lease renewals in the New York and Boston markets.

NON-BROADCAST OPERATING EXPENSES. Non-broadcast operating expenses increased $2.8 million, or 26.9%, to $13.1 million for the six months ended June 30, 2008, compared to $10.3 million for the six months ended June 30, 2007. The increase is comprised of a $0.6 million of costs associated with Townhall.com Magazine, a new publication launched in early 2008, a $0.5 million increase in production and administrative costs on Xulon Press, a $0.3 million increase in personnel related costs on Townhall.com, a $0.4 million increase in advertising costs on OnePlace.com, a $0.2 million increase in costs associated with operating Salem Consumer Products, a new entity launched during the second half of 2007, and a $0.1 million increase in personnel related costs on OnePlace.com.

CORPORATE EXPENSES. Corporate expenses decreased $1.5 million, or 13.7%, to $9.8 million for the six months ended June 30, 2008, compared to $11.3 million for the same period of the prior year. The decrease is attributable to an overall cost reduction initiative, that includes a reduction in headcount and lower personnel related costs of $1.1 million.

DEPRECIATION. Depreciation expense increased $0.6 million, or 9.4%, to $6.5 million for the six months ended June 30, 2008, compared to $5.9 million for the . . .