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 4 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 59 stations in 23 of the top 25 markets, which consists of 28 FM stations and 66 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 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, 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 41 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 24 News Talk and 12 Contemporary Christian Music stations and six 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 our broadcast 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.

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.

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.

Arbitron has developed new technology to collect data for its ratings service. The Portable People Meter TM (PPM TM ) is a small, pager-sized device that does not require active manipulation by the end user and is capable of automatically measuring radio, television, Internet, satellite radio and satellite television signals that are encoded for the service by the broadcaster. The PPM offers a number of advantages over the traditional diary ratings collection system including ease of use, more reliable ratings data and shorter time periods between when advertising runs and when audience listening or viewing habits can be reported. This service is already in a number of our markets and is scheduled to be introduced more markets in the future. It is not yet clear what impact, if any, the introduction of the PPM will have on our revenues for stations which subscribe to Arbitron.

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.

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 satellite communication facilities. We also incur and will continue to incur significant depreciation, amortization and interest expense as a result of completed and future acquisitions of radio stations and existing and future borrowings.

KNOWN TRENDS AND UNCERTAINTIES

Domestic radio revenues have continued to decline during 2008. We believe this is primarily the result of the struggling United States economy and corresponding reductions in discretionary advertising spending by our customers.
Our advertising revenue has been negatively impacted by declining advertising from our customers, particularly in the financial services and auto industries.
We expect this trend to continue, however, we cannot quantify the financial impact on our future operating results. In response to these economic challenges, we have initiated several cost reduction strategies including (1) reducing headcount, (2) temporarily suspending the Company match on 401(k) contributions as of July 2008, (3) temporarily suspending the management bonus program, (4) requiring all employees to use accrued vacation balances by March 31, 2009, (5) limiting capital expenditures and (6) implementing pay freezes as of the fourth quarter of 2008. We continue to pursue opportunities to sell assets, particularly stations that are in non-strategic formats and/or are underperforming, the proceeds of which may be used to pay down debt.

This period of economic uncertainty increases our exposure to several risks, including but not limited to:

·

Substantially increasing our exposure to interest expense due to some of our indebtedness being at a variable rate of interest and the cost of refinancing our debt if we are unable to meet key financial and liquidity ratios;

·

Increasing pressure to sell advertising and block programming time at discounted rates;

·

An increase in uncollectible accounts as our customers face tight credit markets;

·

Ministries are experiencing lower level of donations that could negatively impact their ability to purchase and pay for block programming time;

·

Limiting our ability to obtain additional financing to fund working capital, capital expenditures, acquisitions and other corporate requirements; and

·

Impairment losses on the value of our FCC licenses and other long-lived intangible assets including goodwill .

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                          Nine Months Ended
                                  September 30,                              September 30,
                              2007            2008         % Change       2007           2008        % Change
                                                         (Dollars in thousands)
Net broadcast revenue       $   50,864      $    47,371      (6.9)%    $   153,001    $   145,226       (5.1)%
Non-broadcast revenue            6,018            7,057       17.3%         17,480         20,711        18.5%
Total revenue                   56,882           54,428      (4.3)%        170,481        165,937       (2.7)%
Operating expenses:
    Broadcast
    operating expenses          31,925           30,942      (3.1)%         96,423         94,634       (1.9)%
    Non-broadcast
    operating expenses           5,594            6,477       15.8%         15,903         19,564        23.0%
    Corporate expenses           5,425            6,555       20.8%         16,735         16,314       (2.5)%
    Depreciation                 2,926            3,506       19.8%          8,845          9,983        12.9%
    Amortization                   748              712      (4.8)%          2,334          2,053      (12.0)%
    Impairment of
    long-lived assets                -           20,320      100.0%              -         20,320       100.0%
    (Gain) loss on
    disposal of assets             309              142     (54.0)%        (2,329)        (5,862)       151.7%
Total operating
expenses                        46,927           68,654       46.3%        137,911        157,006        13.8%
Operating income
(loss) from continuing
operations                       9,955         (14,226)    (242.9)%         32,570          8,931      (72.6)%
Other income
(expense):
    Interest income                 52               47      (9.6)%            160            181        13.1%
    Interest expense           (6,375)          (5,453)     (14.5)%       (19,137)       (17,015)      (11.1)%
    Other income, net               83              278      234.9%            230            178      (22.6)%
Income (loss) from
continuing operations
before income taxes              3,715         (19,354)    (621.0)%         13,823        (7,725)     (155.9)%
Provision for (benefit
from) income taxes               1,698          (8,235)    (585.0)%          6,035        (3,100)     (151.4)%
Income (loss) from
continuing operations            2,017         (11,119)    (651.3)%          7,788        (4,625)     (159.4)%
Income from
discontinued
operations, net of tax              81               77      (4.9)%            199          2,130       970.3%
Net income (loss)           $    2,098    $    (11,042)    (626.3)%     $    7,987    $   (2,495)     (131.2)%

                                      Three Months Ended                  Nine Months Ended
                                         September 30,                      September 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 %             57 %               57 %             57 %
    Non-broadcast operating
    expenses                            9 %             12 %                9 %             12 %
    Corporate expenses                 10 %             12 %               10 %             10 %
    Depreciation                        5 %              7 %                5 %              6 %
    Amortization                        1 %              1 %                1 %              1 %
    Impairment of
    long-lived assets                   - %             37 %                - %             12 %
    (Gain) loss on disposal
    of assets                           1 %              - %              (2) %            (3) %
    Total operating
    expenses                           82 %            126 %               80 %             95 %
Operating income (loss)
from continuing operations             18 %           (26) %               20 %              5 %
Other income (expense):
    Interest income                     - %              - %                - %              - %
    Interest expense                 (10) %           (10) %             (11) %           (10) %
    Other income, net                   - %              - %                - %              - %
Income (loss) from
continuing operations
before income taxes                     8 %           (36) %                9 %            (5) %
Provision for (benefit
from) income taxes                      3 %           (15) %                4 %            (2) %
Income (loss) from
continuing operations                   5 %           (21) %                5 %            (3) %
Discontinued operations,
net of tax                              - %              - %                - %              1 %
Net income (loss)                       5 %           (21) %                5 %            (2) %

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

NET BROADCAST REVENUE. Net broadcast revenue decreased $3.5 million, or 6.9%, to $47.4 million for the three months ended September 30, 2008, from $50.9 million for the same period of the prior year. On a same station basis, net broadcast revenue declined $3.4 million, or 6.9%, to $45.5 million for the three months ended September 30, 2008, from $48.9 million for the same period of the prior year. The decline in revenue includes a $3.2 million combined decrease in local spot sales on all of our radio station formats, a $0.8 million decline in national block programming revenue on our Christian Teaching and Talk stations and a $0.2 million decline in infomercial revenue on our Christian Teaching and Talk stations partially offset by a $0.5 million increase in program revenue on our new Spanish Christian Teaching and Talk format stations. Revenue from advertising as a percentage of our net broadcast revenue decreased to 46.2% for the three months ended September 30, 2008, from 48.4% for the same period of the prior year. Revenue from block program time as a percentage of our net broadcast revenue increased to 38.7% for the three months ended September 30, 2008, from 37.1% 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. Further, the growth in block programming and infomercial revenues is slowing. We expect these trends to continue; however, we cannot quantify the financial impact on our future operating results.

NON-BROADCAST REVENUE. Non-broadcast revenue increased $1.1 million, or 17.3%, to $7.1 million for the three months ended September 30, 2008, from $6.0 million for the same period of the prior year. The growth in revenue is primarily due to a $0.2 million increase in banner advertising and ministry streaming on OnePlace.com, a $0.2 million increase in publishing revenue on Xulon Press and a $0.2 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 $1.0 million, or 3.1%, to $30.9 million for the three months ended September 30, 2008, from $31.9 million for the same period of the prior year. On a same station basis, broadcast operating expense decreased $1.3 million, or 4.0%, to $29.0 million for the three months ended September 30, 2008, compared to $30.3 million for same period of the prior year. The decline in broadcast operating expenses is primarily due to reduced expenses,

NON-BROADCAST OPERATING EXPENSES. Non-broadcast operating expenses increased $0.9 million, or 15.8%, to $6.5 million for the three months ended September 30, 2008, compared to $5.6 million for the same period of the prior year. The increase includes a $0.3 million increase in advertising and promotion costs, $0.2 million in costs associated with Townhall Magazine, a new publication launched in early 2008, and a $0.3 million increase in net costs associated with operating and maintaining websites, including radio station websites.

CORPORATE EXPENSES. Corporate expenses increased $1.2 million, or 20.8%, to $6.6 million for the three months ended September 30, 2008, compared to $5.4 million for the same period of the prior year. The increase consists of $1.6 million in non-cash stock-based compensation associated with the accelerated expensing of unvested options that were voluntarily surrendered by senior management in September 2008, a $0.4 million increase in salary expense associated with employee severance packages offered through our staff reduction efforts partially offset by a $0.4 million decrease in non-cash stock based compensation primarily due to a reduction in grants offered to employees, and a $0.2 million decrease in travel and entertainment expenses.

DEPRECIATION. Depreciation expense increased $0.6 million, or 19.8%, to $3.5 million for the three months ended September 30, 2008, compared to $2.9 million for the same period of the prior year. The increase is due to the purchase of capital expenditures associated with computer software and office equipment that typically carry a shorter economic useful life of three to ten years compared to broadcasting towers and leasehold improvements.

AMORTIZATION. Amortization expense was $0.7 million for the three months ended September 30, 2008 and 2007.

IMPAIRMENT OF LONG-LIVED ASSETS. We recognized a loss of $20.3 million associated with the decline in fair value of our broadcast licenses in the Cleveland, Ohio market in accordance with SFAS No. 142, "Goodwill and Other Intangible Assets."

LOSS ON DISPOSAL OF ASSETS. The loss on disposal of assets of $0.3 million for the three months ended September 30, 2008 and $0.1 million for the same period of the prior year was comprised of various fixed assets and equipment disposals.

OTHER INCOME (EXPENSE). Interest income of $47,000 for the three months ended September 30, 2008 and $52,000 for the same period of the prior year was interest earned on excess cash. Interest expense decreased $0.9 million, or 14.5%, to $5.5 million for the three months ended September 30, 2008, compared to $6.4 million for the same period of the prior year due to a lower outstanding revolving debt balance as well as lower interest rates. Other income, net of $0.3 million for the three months ended September 30, 2008 consists of non-recurring reimbursements received, including $0.2 million associated with the terminated sale of KKMO-AM in Seattle, Washington, offset with bank commitment fees associated with our credit facilities. Other income, net of $0.1 million for the three months ended September 30, 2007 consists of a non-recurring royalty payment from real estate properties offset by bank commitment fees associated with our credit facilities.

PROVISION FOR (BENEFIT FROM) INCOME TAXES. We adopted FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN No. 48") as of January 1, 2007. Benefit from income taxes was $8.2 million for the three months ended September 30, 2008 compared to a provision for $1.7 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 42.5% for the three months ended September 30, 2008 compared to 45.7% 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 $0.1 million, net of taxes, for the three months ended September 30, 2008 and for the same period of the prior year, includes the operating results of WFZH-FM, Milwaukee, through the date of sale, and the operating results of WRFD-AM in Columbus, Ohio.

NET INCOME (LOSS). We recognized a net loss of $11.0 million for the three months ended September 30, 2008 compared to net income of $2.1 million for the same period of the prior year. The decrease of $13.1 million is due primarily to the $20.3 million impairment of long-lived assets and a $4.0 million decrease in operating income exclusive of the impairment loss offset by a $9.9 million favorable impact on the income tax provision as a result of the impairment loss.

NET BROADCAST REVENUE. Net broadcast revenue decreased $7.8 million, or 5.1%, to $145.2 million for the nine months ended September 30, 2008, from $153.0 million for the same period of the prior year. On a same station basis, net broadcast . . .