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 93 radio stations in 36 markets, including 58 stations in 22 of the top 25 markets, which consists of 27 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 strategic formats: Christian Teaching and Talk, Contemporary Christian Music, conservative News Talk, and our latest format, Spanish Christian Teaching and Talk. 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.

In addition to our radio broadcast business, we also own and operate a non-broadcast media division. This division consists of Salem Web Network™ ("SWN"), a provider of online Christian content and streaming, Salem Publishing™, a publisher of Christian magazines and Xulon Press, a provider of print-on-demand publishing services targeting the Christian audience. SWN's content, both in text and audio, can be accessed through our national portals which include OnePlace.com, Crosswalk.com, Christianity.com and Townhall.com®.
SWN's content can also be accessed through our local radio station websites, which provide content of interest to local listeners.

Our principal business strategy is to improve our national radio platform and to invest in and build non-broadcast businesses 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 40 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 11 Contemporary Christian Music stations and seven 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.

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.

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.

·

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 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. During 2008, 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 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

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.

Based on the current conditions of the economy and the capital markets and the continuing decline in radio revenues, it may be difficult for us to refinance our pending debt maturities in 2010. If we are unable to do so, we will be in default under our credit facility and 7¾% Notes. Should we default, we may need to either obtain additional amendments or waivers from lenders or reorganize our capital structure.

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
                                                    March 31,
                                               2008           2009        % Change
                                             (Dollars in thousands)
     Net broadcast revenue                  $    47,917    $    42,031     (12.3)%
     Non-broadcast  revenue                       6,133          6,261        2.1%
     Total revenue                               54,050         48,292     (10.7)%
     Operating expenses:
         Broadcast operating expenses            31,787         26,344     (17.1)%
         Non-broadcast operating
         expenses                                 6,240          5,798      (7.1)%
         Corporate expenses                       5,277          3,343     (36.6)%
         Depreciation                             3,247          3,374        3.9%
         Amortization                               668            607      (9.1)%
         (Gain) loss on disposal of
         assets                                 (6,014)              1    (100.0)%
     Total operating expenses                    41,205         39,467      (4.2)%
     Operating income from continuing
     operations                                  12,845          8,825     (31.3)%
     Other income (expense):
         Interest income                             21             74      252.4%
         Interest expense                       (6,074)        (4,359)     (28.2)%
         Change in fair value of
         interest rate swaps                          -             80      100.0%
         Other expense, net                        (51)           (21)     (58.8)%
     Income from continuing operations
     before income taxes                          6,741          4,599     (31.8)%
     Provision for income taxes                   3,139          1,744     (44.4)%
     Income from continuing operations            3,602          2,855     (20.7)%
     Income from discontinued
     operations, net of tax                       1,421             34     (97.6)%
     Net income                            $      5,023     $    2,889     (42.5)%

The following table presents selected financial data for the periods indicated as a percentage of total revenue.

                                                               Three Months Ended
                                                                    March 31,
                                                                2008          2009
   Net broadcast revenue                                           89 %         87 %
   Non-broadcast revenue                                           11 %         13 %
   Total revenue                                                  100 %        100 %
   Operating expenses:
      Broadcast operating expenses                                 59 %         55 %
      Non-broadcast operating expenses                             11 %         12 %
      Corporate expenses                                           10 %          7 %
      Depreciation                                                  6 %          7 %
      Amortization                                                  1 %          1 %
      (Gain) loss on disposal of assets                          (11) %          - %
      Total operating expenses                                     76 %         82 %
   Operating income from continuing operations                     24 %         18 %
   Other income (expense):
      Interest income                                               - %          - %
      Interest expense                                           (11) %        (9) %
      Change in fair value of interest rate swaps                   - %          - %
      Other expense, net                                            - %          - %
   Income from continuing operations before income taxes           13 %          9 %
   Provision for income taxes                                       6 %          4 %
   Income from continuing operations                                7 %          5 %
   Income from discontinued operations, net of tax                  2 %          - %
   Net income                                                       9 %          5 %

Three months ended March 31, 2009 compared to the three months ended March 31, 2008

NET BROADCAST REVENUE. Net broadcast revenue decreased $5.9 million, or 12.3%, to $42.0 million for the three months ended March 31, 2009, from $47.9 million for the same period of the prior year. On a same station basis, net broadcast revenue declined $5.7 million, or 12.5%, to $40.3 million for the three months ended March 31, 2009, from $46.0 million for the same period of the prior year.
Revenue from advertising as a percentage of our net broadcast revenue decreased to 41.9% for the three months ended March 31, 2009, from 45.6% for the same period of the prior year. Revenue from block program time as a percentage of our net broadcast revenue increased to 42.0% for the three months ended March 31, 2009, from 39.2% for the same period of the prior year. The decline in net broadcast revenue includes a $4.0 million decrease in local advertising revenues, a $0.2 million decrease in national advertising revenue, a $1.2 million decrease in national program revenue, and a $0.5 million decrease in infomercial revenue. Block programming revenues continue to increase as a percentage of our total broadcasting 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. 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 $0.2 million, or 2.1%, to $6.3 million for the three months ended March 31, 2009, from $6.1 million for the same period of the prior year. The increase is comprised of higher revenues associated with Townhall.com, Salem Consumer Products and Salem Publishing, specifically Townhall Magazine, offset by small declines in revenue on Salem Web Network and Xulon Press.

BROADCAST OPERATING EXPENSES. Broadcast operating expenses decreased $5.5 million, or 17.1% to $26.3 million for the three months ended March 31, 2009, from $31.8 million for the same period of the prior year. On a same station basis, broadcast operating expense decreased $5.6 million, or 18.3%, to $24.8 million for the three months ended March 31, 2009, compared to $30.4 million for the same period of the prior year. The decline in broadcast operating expenses include a $4.8 million decrease in personnel related costs, and a $1.0 million decrease in advertising expenses, offset by a $0.3 million increase in bad debt expense. The reduction in personnel related costs reflects our overall cost reduction initiative, including a reduction in work force, salary reductions and redemption of accrued vacation benefits required by March 31, 2009. We expect our staffing levels to remain at reduced levels given

NON-BROADCAST OPERATING EXPENSES. Non-broadcast operating expenses decreased $0.4 million, or 7.1%, to $5.8 million for the three months ended March 31, 2009, compared to $6.2 million for the same period of the prior year. The decrease includes a $0.3 million decline in circulation expenses associated with print magazines on Salem Publishing and a $0.2 million reduction in advertising and promotion expenses on Salem Web Network, offset by a $0.1 million increase in streaming expenses on Salem Web Network.

CORPORATE EXPENSES. Corporate expenses decreased $2.0 million, or 36.6%, to $3.3 million for the three months ended March 31, 2009, compared to $5.3 million for the same period of the prior year. The decrease is attributable to an overall cost reduction initiative, including a reduction in work force, salary reductions and redemption of accrued vacation benefits required by March 31, 2009, resulting in a $1.3 million reduction in personnel related costs, and a $0.5 million decrease in non-cash stock based compensation expense due primarily to substantially no new grants being offered, as well as a $0.1 million decrease in professional services and fees.

DEPRECIATION. Depreciation expense increased $0.2 million, or 3.9%, to $3.4 million for the three months ended March 31, 2009, compared to $3.2 million for the same period of the prior year. The increase reflects the impact of recent capital expenditures associated with computer software, data processing and office equipment that have shorter estimated useful lives than towers and broadcast assets.

AMORTIZATION. Amortization expense decreased $0.1 million, or 9.1%, to $0.6 million for the three months ended March 31, 2009, compared to $0.7 million for the same period of the prior year. The decrease is due to higher amortization recognized in early 2008 on intangibles such as advertising agreements and other business contracts that were acquired in 2007 with an estimated useful life of one year.

GAIN ON DISPOSAL OF ASSETS. The gain on disposal of assets of $6.0 million for the three months ended March 31, 2008, was primarily comprised of the sale of radio station KTEK-AM, Houston, Texas for $7.8 million resulting in a pre-tax gain of $6.1 million offset by various fixed assets disposals.

OTHER INCOME (EXPENSE). Interest income of $74,000 for the three months ended March 31, 2009 and $21,000 for the same period of the prior year was interest earned on excess cash. Interest expense decreased $1.7 million, or 28.2%, to $4.4 million for the three months ended March 31, 2009, compared to $6.1 million for the same period of the prior year due to a lower outstanding debt balance and lower interest rates. Change in fair value of interest rate swaps of $0.1 million for the three months ended March 31, 2009, represents the change in the fair market value of our swaps. Other expense, net, decreased to $21,000 from $51,000 primarily due to bank commitment fees associated with our credit facility offset with royalty income from real estate properties.

PROVISION FOR INCOME TAXES. In accordance with FASB Interpretation No. 48, "Accounting for Uncertainty in Income Taxes" ("FIN No. 48"), our provision for income taxes was $1.7 million for the three months ended March 31, 2009 compared to $3.1 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 37.9% for the three months ended March 31, 2009 compared to 46.6% 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 $34,000, net of taxes, for the three months ended March 31, 2009 includes the operating results of WRFD-AM, Columbus, Ohio. The $1.4 million, net of taxes, income from discontinued operations for the same period of the prior year, includes the operating results of WRFD-AM, Columbus, Ohio, the operating results of WRRD-AM, Milwaukee, Wisconsin and WFZH-FM, Milwaukee, Wisconsin through the date of the sale, and the $2.2 million pre-tax gain on the sale of WFZH-FM, Milwaukee, and the operating results of the CCM Magazine.

NET INCOME. We recognized net income of $2.9 million for the three months ended March 31, 2009 compared to net income of $5.0 million for the same period of the prior year. This decrease of $2.1 million is primarily due to a decrease in operating income from continuing operations of $4.1 million and income from discontinued operations of $1.4 million, offset by a decrease of interest expense of $1.7 million and a decrease in our tax provision of $1.4 million.

The performance of a radio broadcasting company is customarily measured by the ability of its stations to generate station operating income. We define station operating income ("SOI") as net broadcasting revenue less broadcasting operating expenses. Accordingly, changes in net broadcasting revenue and broadcasting expenses, as explained above, have a direct impact on changes in SOI.

SOI is not a measure of performance calculated in accordance with GAAP; as a result it should be viewed as a supplement to and not a substitute for our results of operations presented on the basis of GAAP. Management believes that SOI is a useful non-GAAP financial measure to investors, when considered in conjunction with operating income, the most directly comparable GAAP financial measure, because it is generally recognized by the radio broadcasting industry as a tool in measuring performance and in applying valuation methodologies for companies in the media, entertainment and communications industries. This measure is used by investors and analysts who report on the industry to provide comparisons between broadcasting groups. Additionally, our management uses SOI as one of the key measures of operating efficiency and profitability. SOI does not purport to represent cash provided by operating activities. Our statement of cash flows presents our cash flow activity and our income statement presents our historical performance prepared in accordance with GAAP. SOI as defined by and used by our company is not necessarily comparable to similarly titled measures employed by other companies.

Three months ended March 31, 2009 compared to the three months ended March 31, 2008

STATION OPERATING INCOME. SOI decreased $0.4 million, or 2.7%, to $15.7 million for the three months ended March 31, 2009, compared to $16.1 million for the same period of the prior year. As a percentage of net broadcast revenue, SOI increased to 37.3% for the three months ended March 31, 2009 from 33.7% for the same period of the prior year. On a same station basis, SOI decreased $0.2 million, or 0.9%, to $15.4 million for the three months ended March 31, 2009 from $15.6 million for the same period of the prior year. As a percentage of same station net broadcast revenue, same station SOI increased to 38.3% for the three months ended March 31, 2009 compared to 33.8% for the same period of the prior year.

The following table provides a reconciliation of SOI (a non-GAAP financial measure) to operating income (as presented in our financial statements) for the three months ended March 31, 2008 and 2009:

. . .