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 broadcast 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 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 Media Representatives®, formerly called Salem Radio Representatives®, a national 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 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, 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.

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.

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. Revenue for the nine months ended September 30, 2009 is down 36% compared to the same period of the prior year at our KLTY-FM station in Dallas, Texas as a result of new PPM ratings. It is not yet clear what level of decline other ratings sensitive stations will experience as a result of the PPM.

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, 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 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 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 revenue by selling advertising in and subscriptions to its publications and by selling books. Xulon Press generally earns revenue from the publishing of books. The revenue and related operating expenses of these businesses are reported as "non-broadcast" on our Condensed Consolidated Statements 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 broadcast segment and non-broadcast segment. We expect this trend to continue 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%,
(6) requiring all employees to use accrued vacation balances by March 31, 2009 and (7) consolidating programming on most of our Contemporary Christian Music stations. 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

·

Material 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                         Nine Months Ended
                                September 30,                              September 30,
                              2008           2009       % Change        2008            2009       % Change
                                                        (Dollars in thousands)
Net broadcast revenue       $   47,371     $  41,994     (11.4)%      $   145,226    $  127,595      (12.1)%
Non-broadcast revenue            7,057         6,856      (2.8)%           20,711        19,662       (5.1)%
Total revenue                   54,428        48,850     (10.2)%          165,937       147,257      (11.3)%
Operating expenses:
   Broadcast operating
   expenses                     30,942        26,914     (13.0)%           94,634        81,059      (14.3)%
   Non-broadcast
   operating expenses            6,477         6,163      (4.8)%           19,564        17,400      (11.1)%
   Corporate expenses            6,555         3,440     (47.5)%           16,314        10,054      (38.4)%
   Depreciation                  3,506         3,345      (4.6)%            9,983        10,084         1.0%
   Amortization                    712           334     (53.1)%            2,053         1,339      (34.8)%
   Cost of denied
   tower site and
   abandoned projects                -             -          -%                -         1,111         100%
   Impairment of
   goodwill and
   indefinite-lived
   assets                       20,320        14,146     (30.4)%           20,320        27,809        36.9%
   (Gain) loss on
   disposal of assets              142            54     (62.0)%          (5,862)         1,670     (128.5)%
Total operating
expenses                        68,654        54,396     (20.8)%          157,006       150,526       (4.1)%
Operating income
(loss) from continuing
operations                    (14,226)       (5,546)     (61.0)%            8,931       (3,269)     (136.6)%
Other income
(expense):
   Interest income                  47            91       93.6%              181           238        31.5%
   Interest expense            (5,453)       (4,291)     (21.3)%         (17,015)      (12,929)      (24.0)%
   Change in fair
   value of interest
   rate swaps                        -         (842)        100%                -         1,534         100%
   Gain on bargain
   purchase                          -         1,634        100%                -         1,634         100%
   Gain on early
   redemption of
   long-term debt                    -             -          -%                -           660         100%
   Other income
   (expense), net                  278          (24)    (108.6)%              178          (72)     (140.4)%
Loss from continuing
operations before
income taxes                  (19,354)       (8,978)     (53.6)%          (7,725)      (12,204)        58.0%
Benefit from income
taxes                          (8,235)       (4,317)     (47.6)%          (3,100)       (5,272)        70.1%
Loss from continuing
operations                    (11,119)       (4,661)     (58.1)%          (4,625)       (6,932)        49.9%
Income from
discontinued
operations, net of tax              77            25     (67.5)%            2,130           168      (92.1)%
Net loss                   $  (11,042)    $  (4,636)     (58.0)%     $    (2,495)    $  (6,764)       171.1%

                                      Three Months Ended                Nine Months Ended
                                        September 30,                     September 30,
                                    2008             2009             2008             2009
Net broadcast revenue                 87 %             86 %             88 %             87 %
Non-broadcast revenue                 13 %             14 %             12 %             13 %
Total revenue                        100 %            100 %            100 %            100 %
Operating expenses:
    Broadcast operating
    expenses                          57 %             55 %             57 %             55 %
    Non-broadcast operating
    expenses                          12 %             12 %             12 %             12 %
    Corporate expenses                12 %              7 %             10 %              7 %
    Depreciation                       7 %              7 %              6 %              6 %
    Amortization                       1 %              1 %              1 %              1 %
    Cost of denied tower
    site and abandoned
    projects                           - %              - %              - %              1 %
    Impairment of goodwill
    and indefinite-lived
    assets                            37 %             29 %             12 %             19 %
    (Gain) loss on disposal
    of assets                          - %              - %            (3) %              1 %
    Total operating
    expenses                         126 %            111 %             95 %            102 %
Operating income (loss)
from continuing operations          (26) %           (11) %              5 %            (2) %
Other income (expense):
    Interest income                    - %              - %              - %              - %
    Interest expense                (10) %            (9) %           (10) %            (8) %
    Change in fair value of
    interest rate swaps                - %            (1) %              - %              1 %
    Gain on bargain
    purchase                           -                3 %              -                1 %
    Gain on early
    redemption of long-term
    debt                               - %              - %              - %              - %
    Other expense, net                 - %              - %              - %              - %
Loss from continuing
operations before income
taxes                               (36) %           (18) %            (5) %            (8) %
Benefit from income taxes           (15) %            (9) %            (2) %            (4) %
Loss from continuing
operations                          (21) %            (9) %            (3) %            (4) %
Discontinued operations,
net of tax                             - %              - %              1 %              - %
Net loss                            (21) %            (9) %            (2) %            (4) %

Three months ended September 30, 2009 compared to the three months ended September 30, 2008

NET BROADCAST REVENUE. Net broadcast revenue decreased $5.4 million, or 11.4%, to $42.0 million for the three months ended September 30, 2009, from $47.4 million for the same period of the prior year. On a same station basis, net broadcast revenue declined $5.7 million, or 12.2%, to $40.9 million for the three months ended September 30, 2009, from $46.6 million for the same period of the prior year. Revenue from advertising as a percentage of our net broadcast revenue decreased to 43.6% for the three months ended September 30, 2009, from 46.2% for the same period of the prior year. Revenue from block program time as a percentage of our net broadcast revenue increased to 40.5% for the three months ended September 30, 2009, from 38.7% for the same period of the prior year. The decline in net broadcast revenue is comprised of a $3.8 million decrease in local advertising revenue across all formats, a $1.3 million decrease in program revenue primarily on our Christian Teaching and Talk format, a $0.2 million decrease in infomercial revenue primarily on our News Talk and Christian Teaching and Talk formats and a $0.2 million decrease in event revenue. The trend in the radio broadcast industry is of declining advertising revenues. We expect these trends to continue; however, we cannot quantify the financial impact on our future operating results.

NON-BROADCAST REVENUE. Non-broadcast revenue decreased $0.2 million, or 2.8%, to $6.9 million for the three months ended September 30, 2009, from $7.1 million for the same period of the prior year. The decrease is comprised of a $0.3 million decrease in publishing revenue associated with our print magazines partially offset by a $0.1 million increase in advertising revenues generated from our Internet businesses.

BROADCAST OPERATING EXPENSES. Broadcast operating expenses decreased $4.0 million, or 13.0%, to $26.9 million for the three months ended September 30, 2009, from $30.9 million for the same period of the prior year. On a same station basis, broadcast operating expense decreased $4.1 million, or 13.5%, to $25.8 million for the three months ended September 30, 2009, compared to $29.9 million for the same period of the prior year. The decline in broadcast operating expenses is comprised of a $3.0 million decrease in personnel-related costs including commissions, a $0.5 million decrease in advertising expenses, a $0.3 million decrease in facility-related costs and a $0.1 million decrease in production and programming expenses. The reduction in personnel-related costs reflects our overall cost reduction initiative, including a reduction in work force and salary reductions. We expect our staffing levels to remain at reduced levels given the weakened United States economy. We also expect increasing levels of bad debt charges that may have a material impact on our consolidated financial position, results of operations, and cash flows.

NON-BROADCAST OPERATING EXPENSES. Non-broadcast operating expenses decreased $0.3 million, or 4.8%, to $6.2 million for the three months ended September 30, 2009, compared to $6.5 million for the same period of the prior year. The decrease is comprised a $0.4 million decrease in advertising expenses on our Internet businesses and a $0.2 million decline in circulation expenses associated with print magazines and books, partially offset by a $0.1 million increase in facility-related costs related to a payment made in connection with renegotiating leased facilities to reduce available square footage.

CORPORATE EXPENSES. Corporate expenses decreased $3.2 million, or 47.5%, to $3.4 million for the three months ended September 30, 2009, compared to $6.6 million for the same period of the prior year. The decrease reflects the impact of an overall cost reduction initiative that including a reduction in work force and salary reductions resulting in a $1.4 million reduction in personnel-related costs, a $0.1 million decrease in research services. In addition, there was a $1.6 million decline in non-cash stock-based compensation expense due to the accelerated vesting of unvested options voluntarily surrendered by members of senior management in September 2008.

DEPRECIATION. Depreciation expense decreased $0.2 million, or 4.6%, to $3.3 million for the three months ended September 30, 2009, compared to $3.5 million for the same period of the prior year. The decrease reflects the overall impact of reduced capital expenditures and reduced station acquisitions as compared to prior years.

AMORTIZATION. Amortization expense decreased $0.4 million, or 53.1%, to $0.3 million for the three months ended September 30, 2009, compared to $0.7 million for the same period of the prior year. The decrease is due to reduced levels of acquisitions and capital expenditures, including the offset of higher run rates in early 2008 resulting from intangible acquisition made in 2007 for items such as advertising agreements that had an estimated useful life of one year.

IMPAIRMENT OF GOODWILL AND INDEFINITE-LIVED ASSETS. We reviewed the carrying values of our FCC broadcast licenses, goodwill, and other non-amortizable intangible assets for impairment as of the three months ended September 30, 2009 based on continued declines in broadcast revenues. As a result of our internal review and independent third-party appraisals obtained by Bond & Pecaro, we recognized a pre-tax impairment charge of $14.1 million associated with the FCC Licenses in the Atlanta, Georgia Detroit, Michigan, Portland, Oregon and Cleveland, Ohio markets compared to a loss of $20.3 million for the same period of the prior year associated the FCC licenses in the Cleveland, Ohio markets during the quarter ended September 30, 2008.

These impairment charges 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 Financial Accounting Standards Board Accounting Standard Codification ("FASB ASC") Topic 350 (previously SFAS No. 142.) As a result of this prior amortization, the fair value of our FCC licenses and resulting goodwill may exceed the carrying value in certain markets. The markets for which impairment charges were recorded during the three months ended September 30, 2009 accounted for 13.1% of total revenues for the period.

GAIN (LOSS) ON DISPOSAL OF ASSETS. The loss on disposal of assets of $0.1 million for the three months ended September 30, 2009 and $0.1 million for the same period of the prior year was comprised of various fixed assets and equipment disposals.

GAIN ON BARGAIN PURCHASE. In accordance with FASB ASC Topic 805, effective as of January 1, 2009, any excess of fair value of the acquired net assets over the acquisition consideration shall be recognized as a gain on a bargain purchase.
Prior to recording a gain, the acquiring entity must reassess whether all acquired assets and assumed liabilities have been identified and recognized and perform re-measurements to verify that the consideration paid, assets acquired, and liabilities assumed have been properly valued. We underwent such a reassessment, and as a result, have recorded a gain on the bargain purchase WZAB-AM in Miami, Florida, of $1.6 million. If new information is obtained during the measurement period about facts and circumstances that existed as of the acquisition date that, if known, would have affected the measurement of the . . .