GENERAL

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the consolidated financial statements and related notes included elsewhere in this report. Our consolidated financial statements are not directly comparable from period to period because of our acquisition and disposition of selected assets of radio stations and our acquisitions of non-broadcast businesses. See Note 2 to our consolidated financial statements under Item 8 for additional information.

OVERVIEW

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.

The following table shows the percentage of net broadcast revenue for each broadcast revenue source.

                                                Year Ended December 31,
                                    2006                  2007                 2008
                                                (Dollars in thousands)
  Block program time:
      National               $   40,602    19.8%   $   44,826   21.9%   $   41,999   21.8%
      Local                      30,629     15.0       30,553    15.0       31,851    16.6
                                 71,231     34.8       75,379    36.9       73,850    38.4
  Advertising:
      National                   16,869      8.2       14,889     7.3       13,388     7.0
      Local                      89,814     43.9       84,938    41.6       75,615    39.3
                                106,683     52.1       99,827    48.9       89,003    46.3
      Infomercials                7,752      3.8        8,459     4.1        8,656     4.5
      Network                    14,834      7.3       15,247     7.5       15,583     8.1
      Other                       4,061      2.0        5,397     2.6        5,265     2.7
   Net broadcast revenue     $  204,561     100%   $  204,309    100%   $  192,357    100%

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 we do subscribe to Arbitron, which develops quarterly reports to measure a radio station's audience share in the demographic groups targeted

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 broadcasting 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, however, because program rates are generally set annually and are 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 broadcasting 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. In 2008, we sold 97% of our advertising time for cash. In addition, it is our general policy not to preempt advertising paid for in cash with advertising paid for 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 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 and existing and future borrowings.

Salem Web Network™ and Townhall.com®, our Internet businesses, earn 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 generally earns its revenue from the publishing of books. The revenue and related operating expenses of these businesses are reported as "non-broadcast" on our Consolidated Statement of Operations.

KNOWN TRENDS AND UNCERTAINTIES

Domestic radio revenues continue to decline. We believe this is primarily the result of the struggling United States economy and corresponding reductions in discretionary advertising spending by our customers. Beginning in July 2007, our advertising revenue has been negatively impacted by declining advertising from our customers, particularly in the financial services and auto industries.
The decline in advertising revenue impacts both our broadcasting segment and non-broadcasting segment. We expect this trend to continue for as long as the United States economy is weak, 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) limiting capital expenditures, (5) reducing the base salary for all employees by 5% as of February 1, 2009 with certain members of executive management reduced by 10%, and (6) requiring all employees to use accrued vacation balances by March 31, 2009. We continue to pursue opportunities to sell assets, particularly stations that are in non-strategic formats 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;

Increasing 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

We have reclassified our Statements of Operations Data for all prior periods presented to reflect the operating results of WTSJ-AM, Cincinnati, Ohio, WBOB-AM, Cincinnati, Ohio, WBTK-AM, Richmond, Virginia, WITH-AM, Baltimore, Maryland, WBGB-FM, Jacksonville, Florida, WJGR-AM, Jacksonville, Florida, WZNZ-AM, Jacksonville, Florida, and WZAZ-AM, Jacksonville, Florida, as discontinued operations for the year ended December 31, 2006. The Company entered into agreements to sell these radio stations during 2005 and 2006 and completed the sale of these entities during the year ended December 31, 2006.

The Statements of Operations Data for all periods presented have been reclassified to reflect the operating results of WRRD-AM, Milwaukee, Wisconsin and WFZH-FM, Milwaukee, Wisconsin as discontinued operations. In 2007, the Company had a plan in place to sell these radio stations and completed the sale of entities during the year ended December 31, 2008.

The Statements of Operations Data for all periods presented have been reclassified to reflect the operating results of CCM Magazine as a discontinued operation as of the March 2008 publication.

The Statements of Operations Data for all periods presented have been reclassified to reflect the operating results of WRFD-AM, Columbus, Ohio as discontinued operations. The Company entered into an agreement to sell this station and exit the market on July 31, 2008.

                                         Year Ended December 31,
                                      2006          2007        2008       2007 over 2006    2008 over 2007
                                              (in thousands)                           % change
Net broadcast revenue              $   204,561    $204,309    $ 192,357            (0.1)%            (5.8)%
Non-broadcast revenue                   17,896      24,622       28,362             37.6%             15.2%
Total revenue                          222,457     228,931      220,719              2.9%            (3.6)%
Operating expenses:
   Broadcast operating expenses        128,192     129,448      123,534              1.0%            (4.6)%
   Terminated transaction costs
   and abandoned
   license upgrades                          -           -        1,275                 -            100.0%
   Non-broadcast operating
   expenses                             16,680      22,921       25,866             37.4%             12.8%
   Corporate expenses                   24,043      22,314       20,040            (7.2)%           (10.2)%
   Impairment of goodwill and
   indefinite-lived assets                   -           -       73,010                -%            100.0%
   Depreciation                         11,832      11,988       13,299              1.3%             10.9%
   Amortization                          3,120       3,035        2,803            (2.7)%            (7.6)%
   Gain on disposal of assets         (18,674)     (2,192)      (6,892)           (88.3)%            214.4%
Total operating expenses               165,193     187,514      252,935             13.5%             34.9%
Operating income (loss) from
continuing
operations                              57,264      41,417     (32,216)           (27.7)%          (177.8)%
Other income (expense):
   Interest income                         210         183          247           (12.9)%             35.0%
   Interest expense                   (26,342)    (25,488)     (22,381)            (3.2)%           (12.2)%
   Change in fair value of
   interest rate swaps                       -           -      (4,827)                -%          (100.0)%
   Gain (loss) on early
   redemption of long-term debt        (3,625)           -        4,664          (100.0)%            100.0%
   Other income (expense), net           (420)         164          121          (139.0)%           (26.2)%
Income (loss) from continuing
operations
before income taxes                     27,087      16,276     (54,392)           (39.9)%          (434.2)%
Provision for (benefit from)
income taxes                            10,922       7,266     (19,302)           (33.5)%          (365.7)%
Income (loss) from continuing
 operations                             16,165       9,010     (35,090)           (44.3)%          (489.5)%
Income (loss) from discontinued
operations,
net of tax                               2,834       (835)        2,004          (129.5)%          (339.9)%
Net income (loss)                    $  18,999    $  8,175    $(33,086)           (57.0)%          (504.7)%

                                                        Year Ended December 31,
                                               2006            2007             2008

 Net broadcast revenue                             92 %            89 %             87 %
 Non-broadcast revenue                              8 %            11 %             13 %
 Total revenue                                    100 %           100 %            100 %
 Operating expenses:
      Broadcast operating expenses                 58 %            57 %             56 %
      Terminated transaction costs and
      abandoned license upgrades                    - %             - %              1 %
      Non-broadcast operating expenses              7 %            10 %             12 %
      Corporate expenses                           11 %            10 %              9 %
      Impairment of goodwill and
      indefinite-lived assets                       - %             - %             33 %
      Depreciation                                  5 %             5 %              6 %
      Amortization                                  1 %             1 %              1 %
      Gain on disposal of assets                  (8) %           (1) %            (3) %

      Total operating expenses                     74 %            82 %            115 %

 Operating income (loss) from continuing
 operations                                        26 %            18 %           (15) %
 Other income (expense):
      Interest income                               - %             - %              - %
      Interest expense                           (12) %          (11) %           (10) %
      Change in fair value of interest
      rate swaps                                    - %             - %            (2) %
      Gain (loss) on early redemption of
      long-term debt                              (2) %             - %              2 %
      Other expense, net                            - %             - %              - %
 Income (loss) from continuing
 operations before income taxes                    12 %             7 %           (25) %
 Provision for (benefit from) income
 taxes                                              5 %             3 %            (9) %

 Income (loss) from continuing
 operations                                         7 %             4 %           (16) %
 Income from discontinued operations,
 net of tax                                         1 %             - %              1 %
 Net income (loss)                                  8 %             4 %           (15) %

Year ended December 31, 2008 compared to year ended December 31, 2007

NET BROADCAST REVENUE. Net broadcast revenue decreased $11.9 million, or 5.8%, to $192.4 million for the year ended December 31, 2008, from $204.3 million for the same period of the prior year. On a same station basis, net broadcast revenue declined $12.1 million, or 6.2%, to $185.0 million for the year ended December 31, 2008, from $197.1 million for the same period of the prior year.
The decline in revenue includes a $9.3 million decrease in local advertising revenue on all of our radio station formats, a $2.8 million decrease in national program revenue principally on our Christian Teaching and Talk stations, and a $0.5 million decline in event revenue on our Contemporary Christian Music format stations, offset by a $0.2 million increase in infomercial revenue. Revenue from advertising as a percentage of our net broadcast revenue decreased to 46.3% for the year ended December 31, 2008, from 48.9% for the same period of the prior year. Revenue from block program time as a percentage of our net broadcast revenue increased to 38.4% for the year ended December 31, 2008, from 36.9% for the same period of the prior year. Block programming revenue has continued to increase as a percentage of our total broadcast revenue, particularly on our Christian Teaching and Talk stations. 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.
Additionally, the growth of block programming and infomercial revenue has slowed. 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 $3.8 million, or 15.2%, to $28.4 million for the year ended December 31, 2008, from $24.6 million for the same period of the prior year. The increase is comprised of a $0.9 million increase in revenue on Xulon Press, a $0.7 million increase in advertising revenue on Townhall.com, a $0.9 million increase in ministry streaming and banner advertising revenue on OnePlace.com, a $0.3 million increase in revenue from Salem Consumer Products, an entity launched in the second half of 2007, a $0.4 million increase in revenue associated with Townhall Magazine, a new publication launched in early 2008, and a $1.0 million increase in revenue generated from our radio station websites that were redesigned and launched beginning in the second half of 2007 offset by a $0.2 million decrease in our CCM magazines.

TERMINATED TRANSACTION COSTS AND ABANDONED LICENSE UPGRADES. Terminated transaction costs and abandoned license upgrades of $1.3 million for the year ended December 31, 2008 consist of capital projects that were abandoned during the year and fees associated with the termination of our agreement to purchase KTRO-AM in Portland, Oregon.

NON-BROADCAST OPERATING EXPENSES. Non-broadcast operating expenses increased $3.0 million, or 12.8%, to $25.9 million for the year ended December 31, 2008, compared to $22.9 million for the same period of the prior year. The increase includes $1.2 million of costs associated with Townhall Magazine, a $0.6 million increase in advertising costs, a $0.3 million increase in production costs associated with Xulon Press, a $0.3 million increase in streaming expenses on OnePlace.com, a $0.2 million increase in operating costs associated with Salem Consumer Products, a $0.6 million increase in salary and related expenses on Townhall.com, and a $0.3 million increase in costs associated with maintenance of radio station websites.

CORPORATE EXPENSES. Corporate expenses decreased $2.3 million, or 10.2%, to $20.0 million for the year ended December 31, 2008, compared to $22.3 million for the same period of the prior year. The decrease is attributable to an overall cost reduction initiative, including a reduction in headcount that resulted in lower personnel related costs of $3.0 million, a decrease of $1.2 million of non-cash stock based compensation expense due primarily to substantially no new grants being offered, and a decrease of $1.3 million in accounting service fees and public reporting costs, offset by a $1.6 million charge for non-cash stock-based compensation expense associated with the accelerated expensing of unvested options voluntarily surrendered by members of senior management in September 2008, a $0.4 million increase in bad debt expenses, and a $1.2 million increase in salary expense associated with employee severance packages as a result of staff reductions. We expect the trend of increasing bad debt expense to continue given the weakened United States economy

DEPRECIATION. Depreciation expense increased $1.3 million, or 10.9%, to $13.3 million for the year ended December 31, 2008, compared to $12.0 million for the same period of the prior year. The increase reflects the impact of approximately $5.8 million of capital expenditures made during the year ended December 31, 2007, that were primarily associated with computer software, data processing and office equipment that have shorter estimated useful lives.

AMORTIZATION. Amortization expense decreased $0.2 million, or 7.6%, to $2.8 million for the year ended December 31, 2008, compared to $3.0 million for the same period of the prior year. The decrease is due to higher amortization recognized in early 2007 on intangible assets such as advertising agreements and other business contracts that were acquired in 2006 with an estimated useful life of one year.

(GAIN) LOSS ON DISPOSAL OF ASSETS. Gain on disposal of assets of $6.9 million for the year ended December 31, 2008 was primarily comprised of the sale of radio station WRVI-FM, Louisville, Kentucky for $3.0 million resulting in a pre-tax gain of $1.1 million, the sale of radio station KTEK-AM, Houston, Texas for $7.8 million resulting in a pre-tax gain of $6.1 million, partially offset by various fixed assets disposals. A gain on disposal of assets of $2.2 million for the year ended December 31, 2007 was comprised of the sale of selected assets of radio station WKNR-AM in Cleveland, Ohio, for $7.0 million which resulted in a pre-tax gain of $3.4 million offset by the loss recognized on the sale of selected assets of radio station WVRY-FM, Nashville, Tennessee for $0.9 million resulting in a pre-tax loss of $0.5 million and $0.7 million associated with various fixed asset disposals.

IMPAIRMENT OF GOODWILL AND INDEFINITE-LIVED ASSETS. In accordance with Statement of Financial Accounting Standards ("SFAS") No. 142, we review the recorded values of our FCC broadcast licenses, goodwill, and other non-amortizable intangible assets on an annual basis or more frequently if conditions indicate that we may have an impairment. During the year ended December 31, 2008, we recorded an impairment charge of $73.0 million associated with the FCC Licenses and goodwill in the Boston, Detroit, Cleveland, Louisville, Tampa, Miami, Orlando, Sacramento, Omaha, and Nashville market clusters. The impairment charge resulted from weakening radio station valuations as a result of lower revenues and lower growth expectations. These trends are not specific to any of our individual market clusters, but rather are affecting valuations in the industry as a whole. We acquired radio stations at various times over the last thirty four years, many of which were amortized prior to the adoption of SFAS No. 142. As a result, the carrying value of our FCC licenses and goodwill may exceed the fair value in many of our markets. For the years ended

OTHER INCOME (EXPENSE). Interest income of approximately $0.2 million for each of the years ended December 31, 2008 and 2007 was primarily from interest earned on excess cash. Interest expense decreased $3.1 million or 12.2% to $22.4 million for the year ended December 31, 2008, compared to $25.5 million for the same period of the prior year due to a lower net outstanding debt balance and lower interest rates during the year. Change in fair value of interest rate swaps of $4.8 million represents the change in the fair market value of our swaps in accordance with SFAS No. 157. Other income, net, of $0.1 million for the year ended December 31, 2008 consists of non-recurring reimbursements received, including $0.2 million associated with the terminated sale of KKMO-AM . . .