10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2011

OR

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM              TO             

COMMISSION FILE NUMBER 000-26497

SALEM COMMUNICATIONS CORPORATION

(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE	77-0121400
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)	(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
4880 SANTA ROSA ROAD CAMARILLO, CALIFORNIA	93012
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)	(ZIP CODE)

REGISTRANT’S TELEPHONE NUMBER, INCLUDING AREA CODE: (805) 987-0400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files.)    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨  (Do not check if a Smaller Reporting Company)	Smaller Reporting Company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Class A	Outstanding at November 3, 2011
Common Stock, $0.01 par value per share	18,725,555 shares
Class B	Outstanding at November 3, 2011
Common Stock, $0.01 par value per share	5,553,696 shares

SALEM COMMUNICATIONS CORPORATION

INDEX

		PAGE NO.
COVER PAGE
INDEX
FORWARD LOOKING STATEMENTS			2
PART I—FINANCIAL INFORMATION
	Item 1. Condensed Consolidated Financial Statements.		3
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.		18
	Item 3. Quantitative and Qualitative Disclosures About Market Risk.		34
	Item 4. Controls and Procedures.		34
PART II—OTHER INFORMATION			34
	Item 1. Legal Proceedings.		34
	Item 1A. Risk Factors.		35
	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.		35
	Item 3. Defaults Upon Senior Securities.		35
	Item 4. (Removed and Reserved)		35
	Item 5. Other Information.		35
	Item 6. Exhibits.		35
SIGNATURES			36
EXHIBIT INDEX			37

1

FORWARD-LOOKING STATEMENTS

From time to time, in both written reports (such as this report) and oral statements, Salem Communications Corporation (“Salem” or the “company,” including references to Salem by “we,” “us” and “our”) makes “forward-looking statements” within the meaning of federal and state securities laws. Disclosures that use words such as the company “believes,” “anticipates,” “estimates,” “expects,” “intends,” “will,” “may” or “plans” and similar expressions are intended to identify forward-looking statements, as defined under the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect the company’s current expectations and are based upon data available to the company at the time the statements are made. Such statements are subject to certain risks and uncertainties that could cause actual results to differ materially from expectations. These risks, as well as other risks and uncertainties, are detailed in Salem’s reports on Forms 10-K, 10-Q and 8-K filed with or furnished to the Securities and Exchange Commission. Forward-looking statements made in this report speak as of the date hereof. Except as required by law, the company undertakes no obligation to update or revise any forward-looking statements made in this report. Any such forward-looking statements, whether made in this report or elsewhere, should be considered in context with the various disclosures made by Salem about its business. These projections or forward-looking statements fall under the safe harbors of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

2

PART I – FINANCIAL INFORMATION

SALEM COMMUNICATIONS CORPORATION

ITEM 1. CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

SALEM COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollars in thousands, except share and per share data)

	December 31, 2010			September 30, 2011
	(Note 1)			(Unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	828		$	19
Restricted cash		100			—
Trade accounts receivable (less allowance for doubtful accounts of $10,040 in 2010 and $10,244 in 2011)		29,363			30,748
Other receivables		623			1,018
Prepaid expenses		3,320			4,654
Deferred income taxes		5,974			5,842
Total current assets		40,208			42,281
Property, plant and equipment (net of accumulated depreciation of $117,212 in 2010 and $123,214 in 2011)		115,867			112,382
Broadcast licenses		378,362			369,370
Goodwill		18,361			20,343
Other indefinite-lived intangible assets		1,961			1,961
Amortizable intangible assets (net of accumulated amortization of $20,496 in 2010 and $22,414 in 2011)		5,528			7,276
Deferred financing costs		7,349			5,584
Notes receivable		2,327			2,761
Other assets		4,523			1,253
Total assets	$	574,486		$	563,211
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	961		$	2,166
Accrued expenses		6,020			5,804
Accrued compensation and related expenses		7,730			6,585
Accrued interest		1,264			7,052
Deferred revenue		6,513			8,049
Income tax payable		210			7
Current portion of long-term debt and capital lease obligations		111			119
Total current liabilities		22,809			29,782
Long-term debt and capital lease obligations, less current portion		304,416			277,586
Deferred income taxes		42,296			45,451
Deferred revenue		7,898			7,893
Other liabilities		663			229
Total liabilities		378,082			360,941
Commitments and contingencies (Note 14)
Stockholders’ equity:
Class A common stock, $0.01 par value; authorized 80,000,000 shares; 21,000,193 and 21,043,205 issued and 18,682,543 and 18,725,555 outstanding at December 31, 2010 and September 30, 2011, respectively		209			210
Class B common stock, $0.01 par value; authorized 20,000,000 shares; 5,553,696 issued and outstanding at December 31, 2010 and September 30, 2011		56			56
Additional paid-in capital		230,947			231,640
Retained earnings (loss)		(802	)		4,370
Treasury stock, at cost (2,317,650 shares at December 31, 2010 and September 30, 2011)		(34,006	)		(34,006	)
Total stockholders’ equity		196,404			202,270
Total liabilities and stockholders’ equity	$	574,486		$	563,211

See accompanying notes

3

SALEM COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Dollars in thousands, except share and per share data)

(Unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011
Net broadcast revenue	$	43,507		$	44,793		$	130,386		$	132,929
Internet revenue		5,052			7,079			14,254			20,873
Publishing revenue		2,832			3,024			8,198			9,009
Total revenue		51,391			54,896			152,838			162,811
Operating expenses:
Broadcast operating expenses—exclusive of depreciation and amortization shown below (including $317 and $324 for the three months ended September 30, 2010 and 2011, respectively, and $948 and $972 for the nine months ended September 30, 2010 and 2011, respectively, paid to related parties)		27,940			29,198			82,921			86,054
Internet operating expenses—exclusive of depreciation and amortization shown below		4,432			5,724			12,246			17,243
Publishing operating expenses—exclusive of depreciation and amortization shown below		2,962			2,890			8,270			8,541
Corporate expenses—exclusive of depreciation and amortization shown below (including $30 and $53 for the three months ended September 30, 2010 and 2011, and $164 and $379 for the nine months ended September 30, 2010 and 2011, respectively, paid to related parties)		4,154			4,285			12,140			13,040
Depreciation (including $2,329, $443, $61 and $293 related to broadcast, Internet, publishing and corporate, respectively, for the three months ended September 30, 2010 and $2,182, $522, $87 and $311 related to broadcast, Internet, publishing and corporate, respectively, for the three months ended September 30, 2011. Also including $7,100, $1,277, $187 and $851 related to broadcast, Internet, publishing and corporate, respectively for the nine months ended September 30, 2010 and $6,670, $1,574, $224 and $935 related to broadcast, Internet, publishing and corporate, respectively for the nine months ended September 30, 2011)		3,126			3,102			9,415			9,403
Amortization (including $22, $496, $68 and $1 related to broadcast, Internet, publishing and corporate, respectively, for the three months ended September 30, 2010 and $35, $627, $18 and $0 related to broadcast, Internet, publishing and corporate, respectively, for the three months ended September 30, 2011. Also including $58, $1,196, $217 and $4 related to broadcast, Internet, publishing and corporate, respectively for the nine months ended September 30, 2010 and $101, $1,766, $114 and $1 related to broadcast, Internet, publishing and corporate, respectively for the nine months ended September 30, 2011)		587			680			1,475			1,982
(Gain) loss on disposal of assets		18			32			13			(4,343	)
Total operating expenses		43,219			45,911			126,480			131,920
Operating income		8,172			8,985			26,358			30,891
Other income (expense):
Interest income		48			57			142			154
Interest expense		(7,435	)		(6,826	)		(22,903	)		(21,125	)
Loss on early retirement of long-term debt		—			(305	)		(1,050	)		(1,395	)
Other income (expense), net		13			3			(18	)		(20	)
Income before income taxes		798			1,914			2,529			8,505
Provision for income taxes		455			429			1,284			3,333
Net income	$	343		$	1,485		$	1,245		$	5,172
Basic earnings per share data:	$	0.01		$	0.06		$	0.05		$	0.21
Diluted earnings per share data:	$	0.01		$	0.06		$	0.05		$	0.21
Basic weighted average shares outstanding		24,357,042			24,546,056			23,966,797			24,448,722
Diluted weighted average shares outstanding		24,822,412			24,746,164			24,602,258			24,665,649

See accompanying notes

4

SALEM COMMUNICATIONS CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Dollars in thousands)

(Unaudited)

	Nine Months Ended September 30,
	2010			2011
OPERATING ACTIVITIES
Net income	$	1,245		$	5,172
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash stock-based compensation		1,109			646
Excess tax benefit from stock options exercised		(135	)		(29	)
Depreciation and amortization		10,890			11,385
Amortization of deferred financing costs		1,214			1,253
Amortization and accretion of financing items		141			140
Provision for bad debts		1,280			2,242
Deferred income taxes		1,113			3,316
(Gain) loss on disposal of assets		13			(4,343	)
Loss on early retirement of long-term debt		1,050			1,395
Changes in operating assets and liabilities:
Accounts receivable		(2,068	)		(1,745	)
Prepaid expenses and other current assets		(449	)		(1,334	)
Accounts payable and accrued expenses		5,271			5,473
Deferred revenue		690			(182	)
Other liabilities		(368	)		2,799
Income taxes payable		(62	)		(203	)
Net cash provided by operating activities		20,934			25,985
INVESTING ACTIVITIES
Capital expenditures		(5,866	)		(6,032	)
Deposits on radio station acquisitions and equipment		—			248
Purchases of broadcast assets and radio stations		(3,090	)		(550	)
Purchases of Internet businesses and assets		(5,245	)		(6,000	)
Deposit received on pending sale of broadcast business		1,000			—
Proceeds from eminent domain		996			—
Proceeds from disposal of assets		36			12,744
Related party residential purchase		(676	)		—
Other		(67	)		(592	)
Net cash used in investing activities		(12,912	)		(182	)
FINANCING ACTIVITIES
Payments of costs related to bank credit facility		(96	)		(52	)
Payments of bond issue costs		(659	)		(43	)
Payment of bond premium in connection with early retirement		(525	)		(669	)
Payments to redeem 95/8% Notes		(17,500	)		(22,500	)
Proceeds from borrowings under bank credit facility		29,000			52,700
Payments on bank credit facility		(26,500	)		(57,200	)
Proceeds from exercise of stock options		278			19
Excess tax benefit from stock options exercised		135			29
Payments on capital lease obligations		(65	)		(86	)
Release of restricted cash		—			100
Book overdraft		—			1,090
Net cash used in financing activities		(15,932	)		(26,612	)
Net increase (decrease) in cash and cash equivalents		(7,910	)		(809	)
Cash and cash equivalents at beginning of year		8,945			828
Cash and cash equivalents at end of period	$	1,035		$	19
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest	$	15,982		$	13,937
Income taxes	$	270		$	250
Non-cash activities:
Note receivable acquired in exchange for radio station	$	—		$	1,000
Assets acquired under capital leases	$	189		$	8
Trade revenue		3,703			3,967
Trade expense		3,539			3,416

See accompanying notes

5

SALEM COMMUNICATIONS CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

NOTE 1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of Salem Communications Corporation (“Salem,” “we” or the “company”) include the company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Information with respect to the three and nine months ended September 30, 2010 and 2011 is unaudited. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows of the company. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2010.

The balance sheet at December 31, 2010 included in this report has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP.

Description of Business

Salem is a domestic multi-media company with integrated business operations covering radio broadcasting, publishing and the Internet. Our programming is intended for all audiences interested in Christian and family-themed content and complementary programming. Our primary business is the ownership and operation of radio stations in large metropolitan markets. Upon the close of all announced transactions, we will own and/or operate 96 radio stations across the United States. We also own and operate Salem Radio Network^® (“SRN”), SRN News Network (“SNN”), Salem Music Network (“SMN”), Solid Gospel Network (“SGN”), Salem Media Representatives (“SMR”) and Vista Media Representatives (“VMR”). SRN, SNN, SMN and SGN are radio networks that produce and distribute programming, such as talk, news and music segments to radio stations throughout the United States, including Salem owned and operated stations. SMR and VMR sell commercial air time to national advertisers on radio stations and networks that we own, as well as on independent radio station affiliates.

We also operate Salem Web Network™ (“SWN”), our Internet businesses that provide Christian and conservative-themed content, audio and video streaming, and other resources on the web. SWN’s Internet portals include OnePlace.com, Jesus.org, HotAir.com, Crosswalk.com^®, Christianity.com, GodTube.com, Townhall.com^®, Samaritan Fundraising and WorshipHouse Media. SWN’s content is accessible through our radio station websites that feature content of interest to local listeners throughout the United States. SWN operates these Salem radio station websites as well as Salem Consumer Products, a website offering books, DVD’s and editorial content that is developed by many of our on-air radio personalities and are available for purchase. The revenues generated from this segment are reported as Internet revenue on our Condensed Consolidated Statements of Operations.

We also operate Salem Publishing™, that produces and distributes Christian and conservative opinion print magazines. Salem Publishing operates Xulon Press™, a print-on-demand self-publishing service for Christian authors. The revenues generated from this segment are reported as publishing revenue on our Condensed Consolidated Statements of Operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant areas for which management uses estimates are allowance for bad debts, income tax valuation allowance, impairment analysis for indefinite-lived intangible assets including broadcast licenses and goodwill, impairment analysis on other long-lived assets, stock-based compensation expense, and liabilities incurred under our partial self-insurance plan.

6

NOTE 2. RECLASSIFICATIONS

Certain reclassifications were made to the prior year financial statements to conform to the current year presentation. These reclassifications include the separation of our non-broadcast segment into two components, Internet and Publishing. We believe that this information regarding our non-broadcast segments is useful to readers of our financial statements. Additionally, due to growth within our Internet operations, including the acquisition of WorshipHouse Media as discussed in Note 4, our Internet segment qualifies for disclosure as a reportable segment. All prior periods have been updated to reflect the separation of these non-broadcast segments.

NOTE 3. IMPAIRMENT OF GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

We account for goodwill and other indefinite-lived intangible assets in accordance with the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 350 “Intangibles—Goodwill and Other.” We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired. We complete our annual impairment tests in the fourth quarter of each year unless events or circumstances indicate that an asset may be impaired. There were no indications of impairment present during the period ending September 30, 2011. Broadcast licenses account for approximately 95% of our indefinite-lived intangible assets. Goodwill and magazine mastheads account for the remaining 5%.

NOTE 4. SIGNIFICANT TRANSACTIONS

On September 6, 2011, we repurchased $5.0 million of our 9⁵/₈% senior secured second lien notes due 2016 (the “9⁵/₈% Notes”) for $5.1 million, or at a price equal to 102⁷/₈% of the face value. This transaction resulted in a $0.3 million pre-tax loss on the early retirement of debt, including approximately $26,000 of unamortized discount and $0.1 million of bond issues costs associated with the 9⁵/₈% Notes.

On June 1, 2011, we redeemed $17.5 million of our 9⁵/₈% Notes for $18.0 million, or at a price equal to 103% of the face value. This transaction resulted in a $1.1 million pre-tax loss on the early retirement of debt, including $0.1 million of unamortized discount and $0.5 million of bond issues costs associated with the 9⁵/₈% Notes.

On March 28, 2011, we completed the acquisition of the Internet business, WorshipHouse Media, an on-line church media and video ministry website, for $6.0 million in cash. WorshipHouse Media offers users worship and small group resources, including movie illustrations, song tracks, worship backgrounds, small group video curriculum and worship software, to churches that may face budget, time and in-house talent constraints. The site also includes WorshipHouse Kids, which offers similar products crafted to meet the needs of children's ministry media in the church. The accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations reflect the operating results and net assets of this entity as of the acquisition date. The acquisition resulted in goodwill of $2.1 million representing the excess value of the business as a result of the integrated business model and services already established that provide future economic benefit to us.

On March 14, 2011, we completed the acquisition of radio station WDDZ-AM, Pawtucket, Rhode Island, for $0.6 million in cash. We began operating the station as WBZS-AM upon the close of the transaction. The accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations reflect the operating results and net assets of this entity as of the acquisition date.

On March 1, 2011, we sold radio station WAMD-AM in Aberdeen, Maryland resulting in a pre-tax loss of $0.2 million that was previously recognized upon entering into the agreement in September 2010.

On February 25, 2011, we sold radio station KXMX-AM in Los Angeles, California for $12.0 million, which was comprised of $11.0 million in cash and a $1.0 million promissory note. The $1.0 million promissory note has a three-year term, bearing interest at 7% compounded annually, due on February 25, 2016. The sale resulted in a pre-tax gain of $2.1 million.

7

On January 6, 2011, we sold radio station KKMO-AM in Seattle, Washington for $2.7 million in cash resulting in a pre-tax gain of $2.4 million.

On January 3, 2011, we began programming radio station KVCE-AM, Highland Park, Texas pursuant to a long-term Time Brokerage Agreement (“TBA”).

A summary of our business acquisitions for the nine months ended September 30, 2011, none of which were material to our condensed consolidated financial position as of the respective date of acquisition, is as follows:

Acquisition Date	Description	Total Cost
		(Dollars in thousands)
March 28, 2011	WorshipHouse Media	$	6,000
March 14, 2011	WBZS-AM, Pawtucket, Rhode Island		550
		$	6,550

Under the acquisition method of accounting as specified in FASB ASC Topic 805, the total acquisition consideration is allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of the transaction. We obtained an independent third-party appraisal of the estimated fair value of the acquired net assets as of the acquisition date for the transaction noted.

The total acquisition consideration was allocated to the net assets acquired as follows:

	Net Broadcast Assets Acquired		Net Internet Assets Acquired		Net Assets Acquired
					(Dollars in thousands)
Asset
Property and equipment	$	408	$	8	$	416
Broadcast licenses		141		—		141
Goodwill		1		2,143		2,144
Customer lists and contracts		—		80		80
Domain and brand names		—		457		457
Internally developed software		—		311		311
Customer relationships		—		2,451		2,451
Other amortizable intangible assets		—		550		550
	$	550	$	6,000	$	6,550

Pending Transactions:

On March 5, 2010, we entered into an agreement to re-acquire radio station KTEK-AM, Houston, Texas for $3.7 million, which includes forgiveness of the promissory note that we received upon our original sale of the station. We began programming the station pursuant to a TBA with the current owner on March 8, 2010. The accompanying Condensed Consolidated Statements of Operations reflect the operating results of this entity as of the TBA date. The purchase is subject to the approval by the FCC and is expected to close in the fourth quarter of 2011.

NOTE 5. STOCK OPTION PLAN

The company has one stock option plan. The Amended and Restated 1999 Stock Incentive Plan (the “Plan”) allows the company to grant stock options to employees, directors, officers and advisors of the company. A maximum of 3,100,000 shares are authorized under the Plan. Options generally vest over a four year period and have a maximum term of five years from the vesting date. The Plan provides that vesting may be accelerated in certain corporate transactions of the company. The Plan provides that the Board of Directors, or a committee appointed by the Board, has discretion, subject to certain limits, to modify the terms of outstanding options. We recognize non-cash stock-based compensation expense related to the estimated fair value of stock options granted in accordance with FASB ASC Topic 718 “Compensation—Stock Compensation.”

8

The following table reflects the components of stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011
	(Dollars in thousands)
Stock option compensation expense included in corporate expenses	$	221		$	97		$	739		$	395
Restricted stock compensation expense included in corporate expenses		5			—			12			4
Stock option compensation expense included in broadcast operating expenses		118			51			278			195
Stock option compensation expense included in Internet operating expenses		24			15			71			47
Stock option compensation expense included in Publishing operating expenses		5			2			9			5
Total stock-based compensation expense, pre-tax		373		$	165			1,109		$	646
Tax provision for stock-based compensation expense		(213	)		(37	)		(573	)		(247	)
Total stock-based compensation expense, net of tax	$	160		$	128		$	536		$	399

Stock option and restricted stock grants

The Plan allows the company to grant stock options and shares of restricted stock to employees, directors, officers and advisors of the company. The option exercise price is set at the closing price of the company’s common stock on the date of grant, and the related number of shares granted is fixed at that point in time. The Plan also provides for grants of restricted stock. Eligible employees may receive stock options annually with the number of shares and type of instrument generally determined by the employee’s salary grade and performance level. In addition, certain management and professional level employees typically receive a stock option grant upon commencement of employment. Non-employee directors of the company have been awarded restricted stock grants that vest one year from the date of issuance as well as stock options that vest immediately. The Plan does not allow key employees and directors (restricted persons) to exercise options during pre-defined black out periods. Employees may participate in 10b5-1 Plans that allow them to exercise options according to predefined criteria.

We use the Black-Scholes option valuation model to estimate the fair value of stock options as of the grant date. The expected volatility considers the historical volatility of our stock as determined by the closing price over a six to ten year term that is generally commensurate with the expected term of the option. The expected dividend is zero as the 2010 distribution is not expected to be recurring in nature. The expected term of the options are based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rates for periods within the expected term of the option are based on the U.S. Treasury yield curve in effect during the period the options were granted. We use historical data to estimate future forfeiture rates to apply against the gross amount of compensation expense determined using the option valuation model.

The weighted-average assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model were as follows for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010	2011			2010			2011
Expected volatility	n/a		101.52	%		94.26	%		101.49	%
Expected dividends	n/a		—	%		—	%		—	%
Expected term (in years)	n/a		7.5			7.3			7.5
Risk-free interest rate	n/a		1.59	%		3.11	%		1.64	%

Stock option information with respect to the company’s stock-based compensation plans during the nine months ended September 30, 2011 is as follows (Dollars in thousands, except weighted average exercise price and weighted average grant date fair value):

Options	Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2011		1,151,998		$	6.83	$	5.36	5.0 years	$	748
Granted		630,000			2.43		2.05			—
Exercised		(33,012	)		0.57		0.41			109
Forfeited or expired		(41,961	)		12.78		7.94			3
Outstanding at September 30, 2011		1,707,025		$	5.18	$	4.17	5.5 years	$	420
Exercisable at September 30, 2011		680,528		$	8.00	$	5.42	3.1 years	$	358
Expected to Vest		974,659		$	3.29	$	3.30	7.1 years	$	59

9

The aggregate intrinsic value represents the difference between the company’s closing stock price on September 30, 2011 of $2.25 and the option exercise price of the shares for stock options that were in the money, multiplied by the number of shares underlying such options. The total fair value of options vested during the nine months ended September 30, 2010 and 2011 was $0.9 million and $0.8 million, respectively.

The fair values of shares of restricted stock are determined based on the closing price of the company’s common stock on the grant dates. Information regarding the company’s restricted stock during the nine months ended September 30, 2011 is as follows:

Restricted Stock Units	Shares			Weighted Average Grant Date Fair Value
Non-Vested at January 1, 2011		10,000		$	2.03
Granted		—			—
Lapsed		(10,000	)	$	(2.03	)
Forfeited		—			—
Non-Vested at September 30, 2011		—			—

As of September 30, 2011, there was $2.1 million of total unrecognized compensation cost related to non-vested awards of stock options and restricted shares. This cost is expected to be recognized over a weighted-average period of 2.3 years.

NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS

With the exception of those listed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2011, as compared to the recent accounting pronouncements described in the annual report on Form 10-K for the year ended December 31, 2010 that are of material significance, or have potential material significance, on our financial position, results of operations or cash flows.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Testing Goodwill for Impairment” (“ASU No. 2011-08”), which is intended to simplify goodwill impairment testing. Entities will be allowed to perform a qualitative assessment on goodwill impairment to determine whether a quantitative assessment is necessary. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASC No. 2011-08 will not impact our financial position, results of operations, cash flows, or presentation thereof.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income” (“ASU No. 2011-05”), which is an update to ASC Topic 220, “Comprehensive Income”, eliminating the option to present other comprehensive income and its components in the statement of shareholders’ equity. We can elect to present the items of net income and other comprehensive income in a single continuous statement of comprehensive income or in two separate, but consecutive, statements. Under either method the statement would need to be presented with equal prominence as the other primary financial statements. The amended guidance, which must be applied retroactively, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with earlier adoption permitted. The adoption of ASC No. 2011-05 will not impact our financial position, results of operations, cash flows, or presentation thereof.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” ("ASU No. 2011-04"), which amends ASC Topic 820, “Fair Value Measurement”. ASU No. 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or International Financial Reporting Standards. ASU No. 2011-14 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU No. 2011-14 clarifies the FASB's intent about the application of existing fair value measurements. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011, and is applied prospectively. We will adopt this guidance at the beginning of our first quarter of fiscal year 2012. We not expect the adoption of ASU No. 2011-04 to have a material impact on our financial position, results of operations or cash flows.

NOTE 7. EQUITY TRANSACTIONS

We account for stock-based compensation expense in accordance with FASB ASC Topic 718 “Compensation—Stock Expense.” As a result, $0.2 million and $0.6 million of non-cash stock-based compensation expense has been recorded to additional paid-in capital for the three and nine months ended September 30, 2011, respectively, in comparison to $0.4 million and $1.1 million for the three and nine months ended September 30, 2010.

10

NOTE 8. NOTES PAYABLE AND LONG-TERM DEBT

Senior Credit Facility

On December 1, 2009, our parent company, Salem Communications Corporation entered into a senior credit facility which is a revolver (“Revolver”). We amended the Revolver on November 1, 2010 to increase the borrowing capacity from $30 million to $40 million. The amendment allows us to use borrowings under the Revolver, subject to the “Available Amount” as defined by the terms of the Credit Agreement, to redeem applicable portions of the 9⁵/₈% Notes. The calculation of the “Available Amount” also pertains to the payment of dividends when the leverage ratio is above 5.0 to 1. The Revolver is a three-year credit facility, which includes a $5 million subfacility for standby letters of credit and a subfacility for swingline loans of up to $5 million, subject to the terms and conditions of the Credit Agreement relating to the Revolver. Amounts outstanding under the Revolver bear interest at a rate based on LIBOR plus a spread of 3.50% per annum or at the Base Rate (as defined in the Credit Agreement) plus a spread of 2.50% per annum, at our option as of the date of determination. Additionally, we pay a commitment fee on the unused balance of 0.75% per year. If an event of default occurs, the interest rate may increase by 2.00% per annum. Amounts outstanding under the Revolver may be paid and then reborrowed at Salem’s discretion without penalty or premium. At September 30, 2011, the blended interest rate on amounts outstanding under the Revolver was 3.73%. We believe that the Revolver will allow us to meet our ongoing operating requirements, fund capital expenditures, and satisfy our debt service requirements.

With respect to financial covenants, the Credit Agreement includes a maximum leverage ratio of 7.0 to 1.0 and a minimum interest coverage ratio of 1.5 to 1. The Credit Agreement also includes other negative covenants that are customary for credit facilities of this type, including covenants that, subject to exceptions described in the Credit Agreement, restrict the ability of Salem and the guarantors: (i) to incur additional indebtedness; (ii) to make investments; (iii) to make distributions, loans or transfers of assets; (iv) to enter into, create, incur, assume or suffer to exist any liens; (v) to sell assets; (vi) to enter into transactions with affiliates; (vii) to merge or consolidate with, or dispose of all or substantially all assets to, a third party; (viii) to prepay indebtedness; and (ix) to pay dividends. As of September 30, 2011, our leverage ratio was 5.25 to 1 and our interest coverage ratio was 1.88 to 1. We were in compliance with our debt covenants at September 30, 2011 and we remain in compliance.

Our parent company, Salem Communications Corporation, has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several, and any subsidiaries of the parent company other than the subsidiary guarantors are minor.

Senior Secured Second Lien Notes

On December 1, 2009, we issued $300.0 million principal amount of 9⁵/₈% Notes at a discount for $298.1 million resulting in an effective yield of 9.75%. Interest is due and payable on June 15 and December 15 of each year, commencing June 15, 2010 until maturity. We are not required to make principal payments on the 9⁵/₈% Notes that are due in full in December 2016. The 9⁵/₈% Notes are guaranteed by all of our existing domestic restricted subsidiaries. Upon issuance, we were required to pay $28.9 million per year in interest on the then outstanding 9⁵/ ₈% Notes. As of December 31, 2010 and September 30, 2011, accrued interest on the 9⁵/₈% Notes was $1.2 million and $7.0 million, respectively. The discount is being amortized to interest expense over the term of the 9⁵/₈% Notes based on the effective interest method. For each of the three and nine months ended September 30, 2010 and 2011, approximately $48,000 and $0.1 million, respectively, of the discount has been recognized as interest expense.

On September 6, 2011, we repurchased $5.0 million of the 9⁵/₈% Notes for $5.1 million, or at a price equal to 102⁷/₈% of the face value. This transaction resulted in a $0.3 million pre-tax loss on the early retirement of debt, including approximately $26,000 of unamortized discount and $0.1 million of bond issues costs associated with the 9⁵/₈% Notes.

On June 1, 2011, we redeemed an additional $17.5 million of the 9⁵/₈% Notes for $18.0 million, or at a price equal to 103% of the face value. This transaction resulted in a $1.1 million pre-tax loss on the early retirement of debt, including $0.1 million of unamortized discount and $0.5 million of bond issues costs associated with the 9⁵/₈% Notes.

11

Information regarding retirements of the 9⁵/₈% Notes are as follows:

Date	Principal Redeemed		Premium Paid		Unamortized Discount		Bond Issue Costs
	(Dollars in thousands)
June 1, 2010		$17,500	$	525	$	105	$	417
December 1, 2010		12,500		375		70		334
June 1, 2011		17,500		525		93		472
September 6, 2011		5,000		144		26		135

The carrying value of the 9⁵/₈% Notes was $268.5 million and $246.2 million at December 31, 2010 and September 30, 2011, respectively.

Summary of long-term debt obligations

Long-term debt consisted of the following:

	As of December 31, 2010			As of September 30, 2011
	(Dollars in thousands)
Revolver under senior credit facility	$	35,000		$	30,500
95/8% senior secured second lien notes due 2016		268,479			246,238
Capital leases and other loans		1,048			967
		304,527			277,705
Less current portion		(111	)		(119	)
	$	304,416		$	277,586

In addition to the amounts listed above, we also have interest payments related to our long-term debt as follows as of September 30, 2011:

• Outstanding borrowings of $30.5 million under the Revolver, with interest payments due at LIBOR plus 3.50% or at prime rate plus 2.50%;

• $247.5 million 9⁵/ ₈% Notes with semi-annual interest payments at an annual rate of 9⁵/₈%; and

• Commitment fees of 0.75% on the unused portion of the Revolver.

Other Debt

We lease various office equipment under agreements that are accounted for as capital leases. The liability recorded at December 31, 2010 and September 30, 2011 represents the present value of future commitments under these lease agreements.

Maturities of Long-Term Debt

Principal repayment requirements under all long-term debt agreements outstanding at September 30, 2011 for each of the next five years and thereafter are as follows:

	Amount
For the Twelve Months Ended September 30,	(Dollars in thousands)
2012	$	119
2013		30,605
2014		94
2015		80
2016		62
Thereafter		246,745
	$	277,705

12

NOTE 9. DEFERRED FINANCING COSTS

Deferred financing costs consist of bond issue costs and bank loan fees associated with the 9⁵/ ₈% Notes and our Revolver. The capitalized costs are being amortized over the debt term on a straight-line basis. Deferred financing costs consist of the following:

	As of December 31, 2010		As of September 30, 2011
	(Dollars in thousands)
Bond issue costs	$	6,084	$	4,780
Bank loan fees		1,265		804
	$	7,349	$	5,584

NOTE 10. AMORTIZABLE INTANGIBLE ASSETS

The following tables provide details, by major category, of the significant classes of amortizable intangible assets:

	As of September 30, 2011
	Cost		Accumulated Amortization			Net
	(Dollars in thousands)
Customer lists and contracts	$	15,556	$	(11,113	)	$	4,443
Domain and brand names		8,143		(6,233	)		1,910
Favorable and assigned leases		1,649		(1,513	)		136
Other amortizable intangible assets		4,342		(3,555	)		787
	$	29,690	$	(22,414	)	$	7,276
	As of December 31, 2010
	Cost		Accumulated Amortization			Net
	(Dollars in thousands)
Customer lists and contracts	$	12,881	$	(10,313	)	$	2,568
Domain and brand names		7,695		(5,492	)		2,203
Favorable and assigned leases		1,649		(1,444	)		205
Other amortizable intangible assets		3,799		(3,247	)		552
	$	26,024	$	(20,496	)	$	5,528

Based on the amortizable intangible assets as of September 30, 2011, we estimate amortization expense for the next five years to be as follows:

Year Ending December 31,	Amortization Expense
	(Dollars in thousands)
2011 (Oct – Dec)	$	656
2012		2,144
2013		1,803
2014		1,396
2015		804
Thereafter		473
Total	$	7,276

NOTE 11. BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share has been computed using the weighted average number of Class A and Class B shares of common stock outstanding during the period. Diluted net earnings per share is computed using the weighted average number of shares of Class A and Class B common stock outstanding during the period plus the dilutive effects of stock options.

13

Options to purchase 1,250,999 and 1,707,025 shares of Class A common stock were outstanding at September 30, 2010 and 2011, respectively. Also outstanding on September 30, 2010 were unvested restricted stock shares of 10,000. Diluted weighted average shares outstanding exclude outstanding stock options whose exercise price is in excess of the average price of the company’s stock price. These options are excluded from the respective computations of diluted net income or loss per share because their effect would be anti-dilutive. As of September 30, 2010 and 2011, there were 465,370 and 200,108 dilutive shares, respectively.

NOTE 12. FAIR VALUE ACCOUNTING

FASB ASC Topic 820 “Fair Value Measurements and Disclosures” established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring fair value. This framework defined three levels of inputs to the fair value measurement process and requires that each fair value measurement be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety. The three broad levels of inputs defined by the FASB ASC Topic 820 hierarchy are as follows:

• Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;

• Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and

• Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).

As of September 30, 2011, the carrying value of cash and cash equivalents, trade accounts receivables, accounts payable, accrued expenses and accrued interest approximates fair value due to the short-term nature of such instruments. The carrying value of other long-term liabilities approximates fair value as the related interest rates approximate rates currently available to the company.

NOTE 13. INCOME TAXES

We account for income taxes in accordance with FASB ASC Topic 740 “Income Taxes.” We recorded an increase in our unrecognized tax benefits of $0.1 million as of September 30, 2010. At December 31, 2010, we had $3.7 million in liabilities for unrecognized tax benefits. Included in this liability amount were $0.1 million accrued for the related interest, net of federal income tax benefits, and $0.05 million for the related penalty recorded in income tax expense on our Condensed Consolidated Statements of Operations. We recorded an increase in our unrecognized tax benefits of $0.4 million as of September 30, 2011.

Valuation Allowance (Deferred Taxes)

For financial reporting purposes, we recorded a valuation allowance of $2.7 million as of September 30, 2011 to offset a portion of the deferred tax assets related to the state net operating loss carryforwards. Management regularly reviews our financial forecasts in an effort to determine our ability to utilize the net operating loss carryforwards for tax purposes. Accordingly, the valuation allowance is adjusted periodically based on management’s estimate of the benefit the company will receive from such carryforwards.

NOTE 14. COMMITMENTS AND CONTINGENCIES

The company enters into various agreements in the normal course of business that contain minimum guarantees. The typical minimum guarantee is tied to future revenue amounts that exceed the contractual level. Accordingly, the fair value of these arrangements is zero.

We and our subsidiaries, incident to our business activities, at various times are parties to a number of legal proceedings, lawsuits, arbitration and other claims. Such matters are subject to many uncertainties and outcomes that are not predictable with assurance. We maintain insurance that may provide coverage for such matters. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters. We believe, at this time, that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon our consolidated financial position, results of operations or cash flows.

14

On July 10, 2010, Asia Vision, Inc. and Rehan Siddiqi amended a complaint they had previously filed against third parties in the 152nd Judicial District Court of Harris County, Houston, Texas, naming Salem Communications Corporation, South Texas Broadcasting, Inc. and one of Salem’s officers as defendants. In their complaint, Asia Vision claims that the Salem defendants interfered with Asia Vision’s contractual right to purchase radio station KTEK-AM from Business Radio Licensee, LLC. In their complaint, Asia Vision and Rehan Siddiqi make a claim for injunctive relief and monetary damages. On July 21, 2010, Salem Communications and South Texas Broadcasting were served with the complaint but the Salem officer has not been served. Salem has retained counsel, has tendered defense of the matter to several insurance companies, and will vigorously defend this action.

On March 7, 2011, Salem entered into a tentative settlement of the matter. The court approved the settlement on October 27, 2011. Third parties now have until November 28 to file an appeal. If no appeal is filed, the order will become final at that time and we should close on the purchase mid-December following final FCC approval.

NOTE 15. SEGMENT DATA

FASB ASC Topic 280 “Segment Reporting” requires companies to provide certain information about their operating segments. We have two reportable operating segments, radio broadcasting and Internet. The remaining non-reportable segment consists of our publishing businesses, Salem Publishing and Xulon Press™, which do not meet the reportable segment quantitative thresholds. The radio-broadcasting segment also owns and operates radio networks.

Management uses operating income before depreciation, amortization and (gain) loss on disposal of assets, as its measure of profitability for purposes of assessing performance and allocating resources.

15

NOTE 15. SEGMENT DATA Continued.

	Radio Broadcast			Internet			Publishing			Corporate			Consolidated
	(Dollars in thousands)
Three Months Ended September 30, 2011
Net revenue	$	44,793		$	7,079		$	3,024		$	—		$	54,896
Operating expenses		29,198			5,724			2,890			4,285			42,097
Operating income (loss) before depreciation, amortization and (gain) loss on disposal of assets	$	15,595		$	1,355		$	134		$	(4,285	)	$	12,799
Depreciation		2,182			522			87			311			3,102
Amortization		35			627			18			—			680
(Gain) loss on disposal of assets		53			(28	)		—			7			32
Operating income (loss)	$	13,325		$	234		$	29		$	(4,603	)	$	8,985
Three Months Ended September 30, 2010
Net revenue	$	43,507		$	5,052		$	2,832		$	—		$	51,391
Operating expenses		27,940			4,432			2,962			4,154			39,488
Operating income (loss) before depreciation, amortization and (gain) loss on disposal of assets	$	15,567		$	620		$	(130	)	$	(4,154	)	$	11,903
Depreciation		2,329			443			61			293			3,126
Amortization		22			496			68			1			587
(Gain) loss on disposal of assets		9			7			2			—			18
Operating income (loss)	$	13,207		$	(326	)	$	(261	)	$	(4,448	)	$	8,172
	Radio Broadcast			Internet			Publishing			Corporate			Consolidated
	(Dollars in thousands)
Nine months Ended September 30, 2011
Net revenue	$	132,929		$	20,873		$	9,009		$	—		$	162,811
Operating expenses		86,054			17,243			8,541			13,040			124,878
Operating income (loss) before depreciation, amortization and (gain) loss on disposal of assets	$	46,875		$	3,630		$	468		$	(13,040	)	$	37,933
Depreciation		6,670			1,574			224			935			9,403
Amortization		101			1,766			114			1			1,982
(Gain) loss on disposal of assets		(4,487	)		(12	)		—			156			(4,343	)
Operating income (loss)	$	44,591		$	302		$	130		$	(14,132	)	$	30,891
Nine months Ended September 30, 2010
Net revenue	$	130,386		$	14,254		$	8,198		$	—		$	152,838
Operating expenses		82,921			12,246			8,270			12,140			115,577
Operating income (loss) before depreciation, amortization and (gain) loss on disposal of assets	$	47,465		$	2,008		$	(72	)	$	(12,140	)	$	37,261
Depreciation		7,100			1,277			187			851			9,415
Amortization		58			1,196			217			4			1,475
(Gain) loss on disposal of assets		(9	)		7			10			5			13
Operating income (loss)	$	40,316		$	(472	)	$	(486	)	$	(13,000	)	$	26,358
	Radio Broadcast			Internet			Publishing			Corporate			Consolidated
	(Dollars in thousands)
As of September 30, 2011
Total property, plant and equipment, net	$	96,089		$	5,910		$	1,179		$	9,204		$	112,382
Goodwill		3,871			15,127			1,337			8			20,343
As of December 31, 2010
Total property, plant and equipment, net	$	99,621		$	5,517		$	969		$	9,760		$	115,867
Goodwill		4,006			13,010			1,337			8			18,361

16

NOTE 16. SUBSEQUENT EVENTS

On October 17, 2011, we entered an agreement acquire KTNO-AM, Dallas, Texas for $2.2 million. We began programming the station pursuant to a Time Brokerage Agreement with the current owner on November 1, 2011

Subsequent events reflect all applicable transactions through the date of the filing.

17

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

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 various Internet and publishing businesses. See Note 4 of our condensed consolidated financial statements for additional information.

Salem is a domestic multi-media company with integrated business operations covering radio broadcasting, publishing and the Internet. Our programming is intended for all audiences interested in Christian and family-themed content and complementary programming.

Our primary business is the ownership and operation of radio stations in large metropolitan markets. Upon completion of all announced transactions, we will own/operate a national portfolio of 96 radio stations in 37 markets, including 60 stations in 22 of the top 25 markets, which consists of 27 FM stations and 69 AM stations. We believe that we are the largest commercial U.S. radio broadcasting company providing programming targeting audiences interested in Christian and family-themed content, and complementary programming as measured by number of stations and audience coverage. We are one of only three 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. We also program the Family Talk™ Christian-themed talk format station on SiriusXM Channel 131.

Our radio segment focuses on the clustering of strategic formats, mainly Christian Teaching and Talk, Contemporary Christian Music, conservative News Talk and Business News. We also own and operate Salem Radio Network^® (“SRN”), SRN News Network (“SNN”), Salem Music Network (“SMN”), Solid Gospel Network (“SGN”), Salem Media Representatives (“SMR”) and Vista Media Representatives (“VMR”). SRN, SNN, SMN and SGN are radio networks that produce and distribute programming, such as talk, news and music segments to radio stations throughout the United States, including Salem owned and operated stations. SMR and VMR sell commercial air time to national advertisers on radio stations and networks that we own, as well as on independent radio station affiliates.

We also operate Salem Web Network™ (“SWN”), our Internet businesses that provide Christian and conservative-themed content, audio and video streaming, and other resources on the web. SWN’s Internet portals include OnePlace.com, Jesus.org, HotAir.com, Crosswalk.com^®, Christianity.com, GodTube.com, Townhall.com^®, Samaritan Fundraising and WorshipHouse Media. SWN’s content is also accessible through our radio station websites that feature content of interest to local listeners throughout the United States. SWN operates our radio station websites and Salem Consumer Products, a website offering books, DVD’s and editorial content that is developed by many of our on-air radio personalities and are available for purchase. The revenues generated from this segment are reported as Internet revenue on our Condensed Consolidated Statements of Operations.

We also operate Salem Publishing™, that produces and distributes Christian and conservative opinion print magazines. Salem Publishing includes Xulon Press™, a print-on-demand self-publishing service for Christian authors. The revenues generated from this segment are reported as publishing revenue on our Condensed Consolidated Statements of Operations.

Our principal business strategy is to expand our national presence in order to reach all audiences interested in Christian and family-themed content as well as conservative news talk and complementary programming. To do this, we must continually improve our radio platform and invest in and build our Internet and publishing businesses as the marketplace expands. We are fundamentally committed to content that emphasizes Christian, conservative news talk and family themes. As part of this business philosophy, we may choose not to switch to other formats or pursue potentially more profitable business opportunities in response to changing audience preferences.

We program 39 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 religious and charitable organizations that create compelling radio programs. Typically, more than 90% of our block programming partners annually renew their respective relationships with us. Based on these renewal rates, we believe that block programming provides a steady and consistent stream of revenue and cash flow. Our top ten programmers have averaged nearly 25 years on-air and have remained relatively constant. Total programming revenue has comprised 35% to 41% of total net broadcast revenue from 2007 through 2011. We also program 24 News Talk stations, 11 Contemporary Christian Music stations, 11 Business format stations, and six Spanish-language Christian Teaching and Talk stations. 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.

18

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

Our radio segment derives revenue primarily from the sale of broadcast time and radio advertising on a national and local basis.

Our principal sources of broadcast revenue include:

• 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 principal sources of Internet revenue include:

• the sale of internet advertising;

• the support and promotion to stream third-party content on our websites;

• sales of software and support services; and

• product sales and royalties for on-air host materials.

Our principal sources of publishing revenue include:

• subscription fees for our magazines;

• the sale of print magazine advertising;

• fees from authors for book publishing; and

• the sale of books.

Radio Segment

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

	Three Months Ended September 30,										Nine Months Ended September 30,
	2010		2010			2011		2011			2010		2010			2011		2011
	(Dollars in thousands)
Block program time:
National	$	9,923		22.8	%	$	10,913		24.3	%	$	28,718		22.0	%	$	32,034		24.1	%
Local		7,978		18.3	%		7,673		17.1	%		23,717		18.2	%		22,760		17.1	%
		17,901		41.1	%		18,586		41.4	%		52,435		40.2	%		54,794		41.2	%
Advertising:
National		3,473		8.0	%		3,424		7.6	%		10,328		7.9	%		9,987		7.5	%
Local		15,412		35.4	%		15,750		35.2	%		45,787		35.1	%		47,328		35.6	%
		18,885		43.4	%		19,174		42.8	%		56,115		43.0	%		57,315		43.1	%
Infomercials		1,528		3.5	%		1,603		3.6	%		5,079		3.9	%		4,742		3.6	%
Network		3,631		8.4	%		3,521		7.9	%		11,808		9.1	%		10,841		8.2	%
Other		1,562		3.6	%		1,909		4.3	%		4,949		3.8	%		5,237		3.9	%
Net broadcast revenue	$	43,507		100.0	%	$	44,793		100.0	%	$	130,386		100.0	%	$	132,929		100.0	%

Our broadcast revenues are impacted by the program rates our radio stations charge, the level of broadcast airtime sold and by the advertising rates our radio stations and networks charge. The rates for block programming time are based upon our stations’ ability

19

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 most of our radio 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 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 technology to collect data for its ratings service. The PPM is a 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 methodology 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 in more markets in the future. It is not clear what long-term impact, if any, the introduction of the PPM methodology will have on our revenues for stations that 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.

Historically, our cash flow is affected by a transitional period experienced when we change a radio station format. At various times due to the nature of the radio station, our plans for the market in which the station operates, or other circumstances, we find it beneficial to change a station format. This transitional period occurs when we develop the radio station’s listener and customer base. During this transitional 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 the nine months ending September 30, 2011, we sold 97% of our net broadcast revenue 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 expect to continue to incur significant depreciation, amortization and interest expense as a result of completed and future acquisitions and existing and future borrowings.

Internet Segment

Salem Web Network™ and our Internet business earns revenues from the sales of streaming services, sales of advertising and, to a lesser extent, sales of software and software support contracts. The revenues of these businesses are reported as Internet revenue on our Condensed Consolidated Statements of Operations.

The primary operating expense incurred in the ownership and operation of our Internet businesses 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) streaming costs.

Publishing Segment

Our publishing business, Salem Publishing™, earns revenues by selling advertising in and subscriptions to its publications and by selling books. Xulon Press™ generally earns its revenue from fees paid by authors in association with the publishing of their books. The revenues of these businesses are reported as Publishing on our Condensed Consolidated Statements of Operations.

The primary operating expenses incurred by Salem Publishing™ 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) printing and production costs, including paper costs.

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.

20

RESULTS OF OPERATIONS

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

	Three Months Ended September 30,									Nine Months Ended September 30,
							%									%
	2010			2011			Change			2010			2011			Change
	(Dollars in thousands)
Net broadcast revenue	$	43,507		$	44,793			3.0	%	$	130,386		$	132,929			2.0	%
Internet revenue		5,052			7,079			40.1	%		14,254			20,873			46.4	%
Publishing revenue		2,832			3,024			6.8	%		8,198			9,009			9.9	%
Total revenue		51,391			54,896			6.8	%		152,838			162,811			6.5	%
Operating expenses:
Broadcast operating expenses		27,940			29,198			4.5	%		82,921			86,054			3.8	%
Internet operating expenses		4,432			5,724			29.1	%		12,246			17,243			40.8	%
Publishing operating expenses		2,962			2,890			(2.4	)%		8,270			8,541			3.3	%
Corporate expenses		4,154			4,285			3.2	%		12,140			13,040			7.4	%
Depreciation		3,126			3,102			(0.8	)%		9,415			9,403			(0.1	)%
Amortization		587			680			15.8	%		1,475			1,982			34.4	%
Loss on disposal of assets		18			32			77.8	%		13			(4,343	)		(33,507.7	)%
Total operating expenses		43,219			45,911			6.2	%		126,480			131,920			4.3	%
Operating income		8,172			8,985			10.0	%		26,358			30,891			17.2	%
Other income (expense):
Interest income		48			57			18.8	%		142			154			8.5	%
Interest expense		(7,435	)		(6,826	)		(8.2	)%		(22,903	)		(21,125	)		(7.8	)%
Loss on early retirement of long-term debt		—			(305	)		(100.0	)%		(1,050	)		(1,395	)		32.9	%
Other income (expense), net		13			3			(76.9	)%		18			(20	)		11.1	%
Income before income taxes		798			1,914			139.9	%		2,529			8,505			236.3	%
Provision for (benefit from) income taxes		455			429			(5.7	%)		1,284			3,333			159.6	%
Net income	$	343		$	1,485			333.1	%	$	1,245		$	5,172			315.5	%

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011
Net broadcast revenue		85	%		82	%		85	%		82	%
Internet revenue		10	%		13	%		9	%		13	%
Publishing revenue		5	%		5	%		6	%		5	%
Total revenue		100	%		100	%		100	%		100	%
Operating expenses:
Broadcast operating expenses		55	%		53	%		55	%		53	%
Internet operating expenses		9	%		11	%		8	%		11	%
Publishing operating expenses		5	%		5	%		5	%		5	%
Corporate expenses		7	%		8	%		8	%		8	%
Depreciation		7	%		6	%		6	%		6	%
Amortization		1	%		1	%		1	%		1	%
Loss on disposal of assets		—	%		—	%		—	%		(3	) %
Total operating expenses		84	%		84	%		83	%		81	%
Operating income		16	%		16	%		17	%		19	%
Other income (expense):
Interest income		—	%		—	%		—	%		—	%
Interest expense		(14	)%		(12	) %		(15	)%		(13	) %
Loss on early retirement of long-term debt		—	%		(1	) %		—	%		(1	) %
Other income (expense), net		—	%		—	%		—	%		—	%
Income from before income taxes		2	%		3	%		2	%		5	%
Provision for income taxes		1	%		1	%		1	%		2	%
Net income		1	%		2	%		1	%		3	%

21

Three months ended September 30, 2011 compared to the three months ended September 30, 2010

NET BROADCAST REVENUE. Net broadcast revenue increased $1.3 million, or 3.0%, to $44.8 million for the three months ended September 30, 2011, from $43.5 million for the same period of the prior year. On a same station basis, net broadcast revenue increased $1.8 million, or 4.2%, to $44.3 million for the three months ended September 30, 2011, from $42.5 million for the same period of the prior year. Revenue from advertising as a percentage of our net broadcast revenue decreased to 42.8% for the three months ended September 30, 2011, from 43.4% for the same period of the prior year. Revenue from block program time as a percentage of our net broadcast revenue increased to 41.5% for the three months ended September 30, 2011, from 41.1% for the same period of the prior year.

Included in the increase in net broadcast revenue is a $1.0 million increase in national program revenue primarily on our Christian Teaching and Talk and Business format stations. We benefited from rate increases as well as from our new sales strategy in which we sold bundles of available air time to programmers at discounted rates that allowed us to monetize what might have otherwise been unsold air time.

Also included in the increase in net broadcast revenue is a $1.3 million increase in local advertising revenue on our Contemporary Christian Music stations in our major metropolitan markets partially offset by declines of $0.7 million in local advertising revenue across other station formats. The increase in our larger markets is attributable to a combination of higher rates driven by increases in our ratings and an increase in the number of advertisers. Local advertising remains challenging in markets outside of these areas. We also saw a $0.2 million increase in broadcast revenues from non-traditional sources, such as auction and discount shopping shows.

Our results for the three months ended September 30, 2011, were also impacted by a loss of revenue from politically driven sources of approximately $0.9 million compared to the same period of the prior year.

INTERNET REVENUE. Internet revenue increased $2.0 million, or 40.1%, to $7.1 million for the three months ended September 30, 2011, from $5.1 million for the same period of the prior year. Contributing to this increase is an increase of $0.7 million in downloadable content from WorshipHouse Media, which we acquired in March of 2011, a $0.6 million increase in banner advertising revenue primarily due to increases in volume and from GodTube, which was acquired in June of 2010, $0.3 million of revenue generated from Samaritan Fundraising, which we acquired in September of 2010, and a $0.3 million increase in revenue generated from our radio station websites that include new vendor discount programs and similar half-price deals.

PUBLISHING REVENUE. Publishing revenue increased $0.2 million, or 6.8%, to $3.0 million for the three months ended September 30, 2011, from $2.8 million for the same period of the prior year. This increase is comprised of a $0.2 million increase in submission fees and book sales primarily due to increased volume from Xulon Press, our print-on-demand publisher.

BROADCAST OPERATING EXPENSES. Broadcast operating expenses increased $1.3 million, or 4.5%, to $29.2 million for the three months ended September 30, 2011, from $27.9 million for the same period of the prior year. On a same station basis, broadcast operating expense increased $1.5 million, or 5.5%, to $28.7 million for the three months ended September 30, 2011, compared to $27.2 million for the same period of the prior year. Contributing to this increase is a $0.4 million increase in production and programming expenses, a $0.3 million increase in personnel related costs including sales commissions, a $0.2 million increase in professional services and a $0.2 million increase in advertising costs.

INTERNET OPERATING EXPENSES. Internet operating expenses increased $1.3 million, or 29.1%, to $5.7 million for the three months ended September 30, 2011, compared to $4.4 million for the same period of the prior year. Included in this increase is a $0.4 million increase in personnel-related costs including sales commissions, a $0.6 million increase in operating expenses for Samaritan Fundraising, which we acquired in September of 2010 and a $0.5 million increase in operating expense for WorshipHouse Media which we acquired in March of 2011 partially offset by a $0.1 million decline in bad debt expenses.

PUBLISHING OPERATING EXPENSES. Publishing operating expenses decreased $0.1 million or 2.4%, to $2.9 million for the three months ended September 30, 2011, compared to $3.0 million for the same period of the prior year.

CORPORATE EXPENSES. Corporate expenses increased $0.1 million, or 3.2%, to $4.3 million for the three months ended September 30, 2011, compared to $4.2 million for the same period of the prior year. Included in this increase are a $0.4 million increase in personnel-related costs partially offset by a $0.1 million decrease in non-cash stock based compensation expense as a result of reduced option awards as compared to the same period of the prior year and a $0.2 million decline in operating expense including facility costs and repairs.

22

DEPRECIATION. Depreciation expense remained consistent at $3.1 million for the three months ended September 30, 2011 and 2010.

AMORTIZATION. Amortization expense increased $0.1 million, or 15.8%, to $0.7 million for the three months ended September 30, 2011, compared to $0.6 million for the same period of the prior year. The increase is due to amortization of intangible assets acquired during 2010, including HotAir.com, GodTube and Samaritan Fundraising as well as early 2011, including WorshipHouse Media with useful lives between one and three years.

(GAIN) LOSS ON DISPOSAL OF ASSETS. The net loss on disposal of assets of $32,000 for the three months ended September 30, 2011 represent gains and losses from various fixed asset and equipment disposals. The net loss on disposal of assets of $18,000 for the three months ended September 30, 2010, is comprised of a $0.3 million pre-tax gain associated with the seizure of our property by Eminent Domain of the Dallas County School District offset by a $0.2 million pre-tax loss pending the probable sale of WAMD-AM, Aberdeen, Maryland, and various fixed assets and equipment disposals.

OTHER INCOME (EXPENSE). Interest income represents earnings on excess cash that remained consistent at $0.1 million for the three months ended September 30, 2011 and 2010. Interest expense decreased $0.6 million, or 8.2%, to $6.8 million for the three months ended September 30, 2011, compared to $7.4 million for the same period of the prior year due to the lower principal outstanding on the 9⁵/₈% Notes, partially offset with increased interest on our Revolver. Loss on early retirement of debt of $0.3 million for the three months ended September 30, 2011 represents the open market repurchase of $5.0 million of the 9⁵/₈% Notes for $5.1 million, or at a price equal to 102⁷/₈% of the face value. Other expense, net, of $3,000 for the three months ended September 30, 2011 and $13,000 for the same period of the prior year relates 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 ASC Topic 740 “Income Taxes,” our provision for income taxes was $0.4 million for the three months ended September 30, 2011 compared to $0.5 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 22.4% for the three months ended September 30, 2011 compared to 57.0% 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.

NET INCOME. We recognized net income of $1.5 million for the three months ended September 30, 2011 compared to $0.3 million for the same period of the prior year. The increase of $1.2 million or 327.5% includes a $3.5 million or 6.8% increase in net revenue combined with a $2.7 million or 6.2% increase in operating expenses and a $0.6 million or 8.2% decline in interest expense.

Nine months ended September 30, 2011 compared to the nine months ended September 30, 2010

NET BROADCAST REVENUE. Net broadcast revenue increased $2.5 million, or 2.0%, to $132.9 million for the nine months ended September 30, 2011, from $130.4 million for the same period of the prior year. On a same station basis, net broadcast revenue increased $3.5 million, or 2.8%, to $130.8 million for the nine months ended September 30, 2011, from $127.3 million for the same period of the prior year. Revenue from advertising as a percentage of our net broadcast revenue increased to 43.1% for the nine months ended September 30, 2011, from 43.0% for the same period of the prior year. Revenue from block program time as a percentage of our net broadcast revenue increased to 41.2% for the nine months ended September 30, 2011, from 40.2% for the same period of the prior year.

Included in the increase in net broadcast revenue is a $3.3 million increase in national program revenue primarily on our Christian Teaching and Talk, News Talk and Business format stations. We benefited from rate increases as well as from a new sales strategy in which we sold bundles of available air time to programmers at discounted rates that allowed us to monetize what might have otherwise been unsold air time. Also included in the increase in net broadcast revenue is a $1.5 million increase in local advertising revenue primarily due to higher rates, particularly on our ratings driven stations in larger metropolitan areas. These increases were partially offset by a decline of $1.0 million in network revenues primarily due to decreases in political source revenues, a $1.0 million decrease in local programs, and a $0.3 million decline in national advertising revenues due to a more competitive rate structure.

INTERNET REVENUE. Internet revenue increased $6.6 million, or 46.4%, to $20.9 million for the nine months ended September 30, 2011, from $14.3 million for the same period of the prior year. Included in this increase is $1.6 million of revenue generated from Samaritan Fundraising, which we acquired in September of 2010 and $1.7 million of revenue generated from downloadable content on WorshipHouse Media, which we acquired in March of 2011. Also included in this increase is a $2.0 million increase in banner advertising revenues generated due to increases in volume and to our acquisition of GodTube in June of 2010 as well as banner advertisements sold by SRN. Internet revenue generated from our radio stations, including listener purchasing programs, increased $0.7 million compared to the same period of the prior year while streaming revenues increased $0.2 million.

23

PUBLISHING REVENUE. Publishing revenue increased $0.8 million, or 9.9%, to $9.0 million for the nine months ended September 30, 2011, from $8.2 million for the same period of the prior year. Included in this increase is a $0.9 million increase in submission fees and book sales primarily due to increased volume from Xulon Press, our print-on-demand publisher offset by a $0.1 million decline in print magazine revenues.

BROADCAST OPERATING EXPENSES. Broadcast operating expenses increased $3.2 million, or 3.8%, to $86.1 million for the nine months ended September 30, 2011, from $82.9 million for the same period of the prior year. On a same station basis, broadcast operating expense increased $3.9 million, or 4.8%, to $84.3 million for the nine months ended September 30, 2011, compared to $80.4 million for the same period of the prior year. Included in this increase is a $1.4 million increase in personnel-related costs, a $0.8 million increase in production and programming expenses, a $0.8 million increase in bad debt expense due to the favorable impact on the prior year of a past due collection, and a $0.2 million increase in music license fees.

INTERNET OPERATING EXPENSES. Internet operating expenses increased $5.0 million, or 40.8%, to $17.2 million for the nine months ended September 30, 2011, compared to $12.2 million for the same period of the prior year. Included in this increase is a $2.1 million increase in operating expenses of Samaritan Fundraising, which was acquired in September of 2010 and $1.3 million of operating expense associated with WorshipHouse Media, which was acquired in March 2011. Additionally, we recognized a $1.1 million increase in personnel-related costs that includes sales commissions, a $0.4 million increase in advertising expenses that were incurred to further promote our Internet businesses, and a $0.7 million increase in streaming and hosting expenses associated with higher site traffic that were partially offset by a $0.1 million decrease in bad debt expense, a $0.1 million decrease in royalty fees and a $0.1 million decrease in legal fees.

PUBLISHING OPERATING EXPENSES. Publishing operating expenses increased $0.2 million, or 3.3%, to $8.5 million for the nine months ended September 30, 2011, compared to $8.3 million for the same period of the prior year. Included in the increase are a $0.3 million increase in production and paper costs resulting from higher sales volumes and a $0.2 million increase in advertising expenses incurred to promote our publishing operations.

CORPORATE EXPENSES. Corporate expenses increased $0.9 million, or 7.4%, to $13.0 million for the nine months ended September 30, 2011, compared to $12.1 million for the same period of the prior year. Included in this increase are a $1.2 million increase in personnel-related costs and a $0.3 million increase in travel expenses, partially offset by a $0.4 million decrease in non-cash stock based compensation expense as a result of reduced option awards as compared to the same period of the prior year and a $0.2 million decline in operating expense including facility costs and repairs.

DEPRECIATION. Depreciation expense remained consistent at $9.4 million for the nine months ended September 30, 2011 and 2010.

AMORTIZATION. Amortization expense increased $0.5 million, or 34.4%, to $2.0 million for the nine months ended September 30, 2011, compared to $1.5 million for the same period of the prior year. The increase is due to amortization of intangible assets acquired during 2010, including HotAir.com, GodTube and Samaritan Fundraising as well as early 2011, including WorshipHouse Media with useful lives between one and three years.

(GAIN) LOSS ON DISPOSAL OF ASSETS. The net gain on disposal of assets of $4.3 million for the nine months ended September 30, 2011, includes a $2.4 million pre-tax gain on the sale of KKMO-AM in Seattle, Washington and a $2.1 million pre-tax gain on the sale of KXMX-AM in Los Angeles, California, offset by various fixed asset and equipment disposals. The net loss on disposal of assets of $13,000 for the three months ended September 30, 2010, is comprised of a $0.3 million pre-tax gain associated with the seizure of our property by Eminent Domain of the Dallas County School District offset by a $0.2 million pre-tax loss pending the probable sale of WAMD-AM, Aberdeen, Maryland, and various fixed assets and equipment disposals.

OTHER INCOME (EXPENSE). Interest income represents earnings on excess cash that remained consistent at $0.1 million for the nine months ended September 30, 2011 compared to the same period of the prior year. Interest expense decreased $1.8 million, or 7.8%, to $21.1 million for the nine months ended September 30, 2011, compared to $22.9 million for the same period of the prior year due to the lower principal outstanding on the 9⁵/₈% Notes, partially offset by higher interest on our Revolver. Loss on early retirement of debt of $1.4 million for the nine months ended September 30, 2011 compared to $1.1 million for the same period of the prior year represents the redemption in each period of $17.5 million of the 9⁵/₈% Notes for $18.0 million, or at a price equal to 103% of the face value and an open market repurchase of $5.0 million of bonds in September 2011 for $5.1 million, or at a price equal to 102⁷/₈% of the face value. Other expense, net, of $20,000 for the nine months ended September 30, 2011 relates to bank commitment fees

24

associated with our credit facility offset with royalty income from real estate properties. Other expense, net of $18,000 for the nine months ended September 30, 2010 includes a $0.2 million loss related to debt forgiveness on a promissory note not associated with our operating activities offset by the APA termination fee of $0.2 million received from escrow upon the termination of the sale agreement for WRFD-AM, Columbus, Ohio.

PROVISION FOR INCOME TAXES. In accordance with FASB ASC Topic 740 “Income Taxes,” our provision for income taxes was $3.4 million for the nine months ended September 30, 2011 compared to $1.3 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 39.2% for the nine months ended September 30, 2011 compared to 50.8% 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.

NET INCOME. We recognized net income of $5.2 million for the nine months ended September 30, 2011 compared to $1.2 million for the same period of the prior year. The increase of $4.0 million, or 313.9%, reflects a $10.0 million increase in net operating revenue and a $5.4 million increase in operating expenses.

NON-GAAP FINANCIAL MEASURES

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 broadcast revenue less broadcast operating expenses. Accordingly, changes in net broadcast revenue and broadcast operating expenses, as explained above, have a direct impact on changes in SOI.

SOI is not a measure of performance calculated in accordance with GAAP. SOI 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, profitability and our internal review associated with our impairment analysis of indefinite-lived intangible assets. 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 September 30, 2011 compared to the three months ended September 30, 2010

STATION OPERATING INCOME. SOI remained consistent at $15.6 million for the three months ended September 30, 2011 and 2010. As a percentage of net broadcast revenue, SOI decreased to 34.8% for the three months ended September 30, 2011 from 35.8% for the same period of the prior year. On a same station basis, SOI remained increased $0.3 million, or 1.7%, to $15.6 million for the three months ended September 30, 2011 from $15.3 million for the same period of the prior year. As a percentage of same station net broadcast revenue, same station SOI decreased to 35.2% for the three months ended September 30, 2011 from 36.0% for the same period of the prior year. The decline in SOI is primarily due to the political revenue generated on our networks during the same period of the prior year.

Nine months ended September 30, 2011 compared to the nine months ended September 30, 2010

STATION OPERATING INCOME. SOI decreased $0.6 million, or 1.2%, to $46.9 million for the nine months ended September 30, 2011, compared to $47.5 million for the same period of the prior year. As a percentage of net broadcast revenue, SOI decreased to 35.3% for the nine months ended September 30, 2011 from 36.4% for the same period of the prior year. On a same station basis, SOI decreased $0.3 million, or 0.7%, to $46.5 million for the nine months ended September 30, 2011 from $46.8 million for the same period of the prior year. As a percentage of same station net broadcast revenue, same station SOI decreased to 35.6% for the nine months ended September 30, 2011 from 36.8% for the same period of the prior year. The decline in SOI is primarily due to the political revenue generated on our networks during the same period of the prior year.

25

The following table provides a reconciliation of SOI (a non-GAAP financial measure) to operating income (as presented in our condensed consolidated financial statements) for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011
	(Dollars in thousands)
Station operating income	$	15,567		$	15,595		$	47,465		$	46,875
Plus Internet revenue		5,052			7,079			14,254			20,873
Plus Publishing revenue		2,832			3,024			8,198			9,009
Less Internet operating expenses		(4,432	)		(5,724	)		(12,246	)		(17,243	)
Less Publishing operating expenses		(2,962	)		(2,890	)		(8,270	)		(8,541	)
Less corporate expenses		(4,154	)		(4,285	)		(12,140	)		(13,040	)
Less deprecation and amortization		(3,713	)		(3,782	)		(10,890	)		(11,385	)
Less gain (loss) on disposal of assets		(18	)		(32	)		(13	)		4,343
Operating income	$	8,172		$	8,985		$	26,358		$	30,891

CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The discussion and analysis of our financial condition and results of operations are based upon our condensed consolidated financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to acquisitions and upgrades of radio station and network assets, revenue recognition, allowance for doubtful accounts, goodwill and other non-intangible assets, uncertain tax positions, valuation allowance (deferred taxes), long-term debt and debt covenant compliance, and stock-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following accounting policies and the related judgments and estimates are critical accounting policies that affect the preparation of our condensed consolidated financial statements.

Accounting for acquisitions and upgrades of radio station and network assets

A majority of our radio station acquisitions have consisted primarily of the FCC licenses to broadcast in a particular market. We often do not acquire the existing format, or we change the format upon acquisition when we find it beneficial. As a result, a substantial portion of the purchase price for the assets of a radio station is allocated to the broadcast license. It is our policy generally to retain third-party appraisers to value radio stations, networks or non-broadcast properties. The allocations assigned to acquired broadcast licenses and other assets are subjective by their nature and require our careful consideration and judgment. We believe the allocations represent appropriate estimates of the fair value of the assets acquired. As part of the valuation and appraisal process, the third-party appraisers prepare reports that assign values to the various asset categories in our financial statements. Our management reviews these reports and determines the reasonableness of the assigned values used to record the acquisition of the radio station, network or non-broadcast properties at the close of the transaction.

We undertake projects from time to time to upgrade our radio station technical facilities and/or FCC broadcast licenses. Our policy is to capitalize costs incurred up to the point where the project is complete, at which time we transfer the costs to the appropriate fixed asset and/or intangible asset categories. When the completion of a project is contingent upon FCC or other regulatory approval, we assess the probable future benefit of the asset at the time that it is recorded and monitor it through the FCC or other regulatory approval process. In the event the required approval is not considered probable or the project is abandoned, we write-off the capitalized costs of the project.

Accounting for Property, Plant and Equipment

Property, plant and equipment are recorded at cost less accumulated depreciation. Cost represents the historical cost of acquiring the asset, including the costs necessarily incurred to bring it to the condition and location necessary for its intended use. For assets constructed for our own use, such as towers and building that are discrete projects for which costs are separately accumulated and for which construction takes considerable time, we record capitalized interest. The amount capitalized is the cost that could have been avoided had the asset not been constructed and is based on the average accumulated expenditures incurred over the capitalization period at the weighted average rate applicable to our outstanding variable rate debt. Repair and maintenance costs are charged to expense as incurred. Capital improvements are capitalized when they extend the life of the asset or enhance the quality or ability of the asset to benefit operations. Depreciation is computed using the straight-line method over estimated useful lives.

26

The carrying value of property, plant and equipment is evaluated periodically in relation to the operating performance and anticipated future cash flows of the underlying radio stations and businesses for indicators of impairment. When indicators of impairment are present and the cash flows estimated to be generated from these assets is less than the carrying value of these assets, an adjustment to reduce the carrying value to the fair market value of the assets is recorded, if necessary.

Accounting for Internally Developed Software and Website Development Costs

We capitalize costs incurred during the application development stage related to the development of internal-use software as specified in FASB ASC Topic 350-40 “Internal-Use Software.” Capitalized costs are generally amortized over the estimated useful life of three years. Costs incurred related to the conceptual design and maintenance of internal-use software are expensed as incurred. Website development activities include planning, design and development of graphics and content for new websites and operation of existing sites. Costs incurred that involve providing additional functions and features to the website are capitalized. Costs associated with website planning, maintenance, content development and training are expensed as incurred. Capitalized costs are generally amortized over the estimated useful life of three years.

Accounting for Amortizable Intangible Assets

Intangible assets are recorded at cost less accumulated amortization. Typically, intangible assets have been acquired in conjunction with the acquisition of various radio stations and non-broadcast businesses. They are being amortized over their estimated useful lives using the straight-line method.

The carrying value of amortizable intangible assets are evaluated periodically in relation to the operating performance and anticipated future cash flows of the underlying radio stations and businesses for indicators of impairment. In accordance with FASB ASC Topic 360 “Property, Plant and Equipment,” when indicators of impairment are present and the undiscounted cash flows estimated to be generated from these assets are less than the carrying amounts of these assets, an adjustment to reduce the carrying value to the fair market value of these assets is recorded, if necessary.

Gain or Loss on Disposal of Assets

We record gains or losses on the disposal of assets equal to the proceeds, if any, compared to the net book value. Exchange transactions are accounted for in accordance with FASB ASC Topic 845 “Non-Monetary Transactions.”

Leases

We lease various facilities including broadcast tower and transmitter sites. When a lease is entered, we determine the classification of the lease as either a capital or operating lease based on the factors listed in FASB ASC Topic 840 “Leases.” Lease terms generally range from one to twenty-five years with rent expense recorded on a straight line basis for financial reporting purposes. We also sublease owned towers under various agreements with other broadcasters. Lease terms generally cover a sixty year term, over which time we recognize rental income on a straight-line basis.

Leasehold Improvements

We may elect to construct or otherwise invest in leasehold improvements to properties. We capitalize the cost of the improvements that are then amortized over the shorter of the useful life of the improvement or the remaining lease term.

Bond Issue Costs and Bank Loan Fees

Bond issue costs represent costs incurred in conjunction with the issuance of the 9⁵/₈% Notes on December 1, 2009. The costs are being amortized over the term of the 9⁵/₈% Notes as an adjustment to interest expense. Bank loan fees represent costs incurred with the new Senior Credit Facility, which is a revolving credit facility (“Revolver”) entered on December 1, 2009. The costs are being amortized over the three-year term of the Revolver as an adjustment to interest expense.

27

Partial Self-Insurance on Employee Health Plan

We provide health insurance benefits to eligible employees under a self-insured plan whereby the company pays actual medical claims subject to certain stop loss limits. We record self-insurance liabilities based on actual claims filed and an estimate of those claims incurred but not reported. Any projection of losses concerning our liability is subject to a high degree of variability. Among the causes of this variability are unpredictable external factors such as future inflation rates, changes in severity, benefit level changes, medical costs and claim settlement patterns. Should a different amount of claims occur compared to what was estimated or costs of the claims increase or decrease beyond what was anticipated, reserves may need to be adjusted in the future.

Local Programming and Marketing Agreement Fees

We enter into Local Marketing Agreement (“LMA”) or Time Brokerage Agreements (“TBA”) in connection with acquisitions of radio stations that are pending FCC regulatory approval of transfer of the broadcast licenses. Under the terms of these agreements, we make specified periodic payments to the owner in exchange for the right to program and sell advertising for a specified portion of the station’s inventory of broadcast time. We record revenues and expenses associated with the portion of the station’s inventory of broadcast time it manages. Nevertheless, as the holder of the FCC license, the owner-operator retains control and responsibility for the operation of the station, including responsibility over all programming broadcast on the station. We also enter into LMA’s in connection with dispositions of radio stations. In such cases, we may receive periodic payments in exchange for allowing the buyer to program and sell advertising for a portion of the station’s inventory of broadcast time.

Revenue Recognition

Revenues are recognized when pervasive evidence of an arrangement exists, delivery has occurred or the service has been rendered, the price to the customer is fixed or determinable and collection of the arrangement fee is reasonably assured.

Revenues from radio programs and commercial advertising are recognized when the program or advertisement is broadcast. Revenue is reported net of agency commissions, which are calculated based on a stated percentage applied to gross billing. Our customers principally include not-for-profit charitable organizations and commercial advertisers. Revenue from the sale of products and services from our non-broadcast businesses are recognized when the products are shipped and the services are rendered. Revenues from the sale of advertising in our magazines are recognized upon publication. Revenue from the sale of subscriptions to our publications are recognized over the life of the subscription. Revenue from book sales are recorded when shipment occurs.

Advertising by the radio stations exchanged for goods and services is recorded as the advertising is broadcast and is valued at the estimated value of goods or services received or to be received. The value of the goods and services received in such barter transactions is charged to expense when used. Barter advertising revenue included in broadcast revenue for the nine months ended September 30, 2011 and 2010 was approximately $4.0 million and $3.7 million, respectively, and barter expenses were approximately the same as barter revenue for each period. We record broadcast advertising provided in exchange for goods and services as broadcast revenue and the goods or services received in exchange for such advertising as broadcast operating expenses.

Multiple-Deliverables

We may enter bundled advertising agreements that include spot advertisements on our radio stations, Internet banner placements, print magazine advertisements and booth space at specific events or some combination thereof. The multiple deliverables contained in each agreement are accounted for separately over their respective delivery period provided that they are separate units of accounting. The selling price used for each deliverable is based on vendor specific objective evidence if available or estimated selling price if vendor specific objective evidence is not available. Objective evidence of fair value includes the price charged for each element when it is sold separately. The estimated selling price is the price that we would transact if the deliverable were sold regularly on a standalone basis. Arrangement consideration is allocated at the inception of each arrangement to all deliverables using the relative selling price method. The relative selling price method allocates any discount in the arrangement proportionally to each deliverable on the basis of each deliverable’s selling price. The adoption of ASU No, 2009-13 did not change the units of accounting, how we allocate consideration to various units of accounting, or the timing of revenue recognition.

Allowance for Doubtful Accounts

We maintain allowances for doubtful accounts for estimated losses resulting from the inability of our customers to make required payments. An analysis is performed by applying various percentages based on the age of the receivable and other subjective and historical analysis. A considerable amount of judgment is required in assessing the likelihood of ultimate realization of these receivables including the current creditworthiness of each customer. If the financial condition of our customers were to deteriorate, resulting in an impairment of their ability to make payments, additional allowances may be required.

28

Accounting for Discontinued Operations

We regularly review underperforming stations, particularly those in non-strategic formats, to determine if a sale might be a better way to monetize the station assets. When a station or group of stations is considered for sale, we review the transaction to determine if or when the entity qualifies as a discontinued operation in accordance with the criteria of FASB ASC Topic 205-20 “Discontinued Operations.” This pronouncement specifies that the operations and cash flow of the entity disposed of (to be sold) have or will be eliminated from the ongoing operations as a result of the disposal and that we will not have significant continuing involvement in the operations after the disposal transaction. We define a cluster as a group of radio stations operating in the same geographic market, sharing the same building and equipment and being managed by a single general manager. General managers are compensated based on the results of their cluster as a whole, not the results of any individual radio stations. Therefore, we have determined that an entity qualifies for a discontinued operation when management, having the authority to approve the action, commits to a plan to sell the asset (disposal group), the sale is probable, and the sale will result in the exit of a particular geographic market.

Goodwill and Indefinite-Lived Intangible Assets

Approximately 69% of our total assets as of September 30, 2011, consist of indefinite-lived intangible assets, such as broadcast licenses, goodwill and mastheads, the value of which depends significantly upon the operating results of our businesses. In the case of our radio stations, we would not be able to operate the properties without the related FCC license for each property. Broadcast licenses are renewed with the FCC every eight years for a nominal cost that is expensed as incurred. We continually monitor our stations’ compliance with the various regulatory requirements. Historically, all of our broadcast licenses have been renewed at the end of their respective periods, and we expect that all broadcast licenses will continue to be renewed in the future. Accordingly, we consider our broadcast licenses to be indefinite-lived intangible assets in accordance with Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 350, “Intangibles – Goodwill and Other.” We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment at least annually or more frequently if events or circumstances indicate that an asset may be impaired. The unit of accounting used to test broadcast licenses is the cluster level, which we define as a group of radio stations operating in the same geographic market, sharing the same building and equipment and managed by a single general manager. The cluster level is the lowest level for which discrete financial information is available and the level reviewed by management to analyze operating results. Goodwill and mastheads, primarily attributable to our Internet and publishing operating segments, are tested at the business unit level, which we define by publication or website. Broadcast licenses account for approximately 95% of our indefinite-lived intangible assets. Goodwill and magazine mastheads account for the remaining 5%. We complete our annual impairment tests in the fourth quarter of each year unless events or circumstances indicate that an asset may be impaired. There were no indications of impairment present for the period ended September 30, 2011.

The valuation of intangible assets is subjective and based on estimates rather than precise calculations. If actual future results are not consistent with the assumptions and estimates used, we may be exposed to impairment charges in the future, the amount of which may be material. The fair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. The unobservable inputs are defined in FASB ASC Topic 820 “Fair Value Measurements and Disclosures” as Level 3 inputs discussed in detail in Note 12 to our Condensed Consolidated Financial Statements.

Income Taxes and Uncertain Tax Positions

We account for income taxes in accordance with FASB ASC Topic 740 “Income Taxes.” We recorded an increase in our unrecognized tax benefits of $0.4 million as of September 30, 2011. At December 31, 2010, we had $3.7 million in liabilities for unrecognized tax benefits. Included in this liability amount were $0.1 million accrued for the related interest, net of federal income tax benefits, and $0.05 million for the related penalty recorded in income tax expense on our Condensed Consolidated Statements of Operations.

Valuation Allowance (Deferred Taxes)

For financial reporting purposes, we recorded a valuation allowance of $2.7 million as of September 30, 2011 to offset a portion of the deferred tax assets related to the state net operating loss carryforwards. Management regularly reviews our financial forecasts in an effort to determine our ability to utilize the net operating loss carryforwards for tax purposes. Accordingly, the valuation allowance is adjusted periodically based on management’s estimate of the benefit the company will receive from such carryforwards.

29

Fair Value Accounting

FASB ASC Topic 820 “Fair Value Measurements and Disclosures” established a single definition of fair value in generally accepted accounting principles and expanded disclosure requirements about fair value measurements. The provision applies to other accounting pronouncements that require or permit fair value measurements. This includes applying the fair value concept to (i) nonfinancial assets and liabilities initially measured at fair value in business combinations; (ii) reporting units or nonfinancial assets and liabilities measured at fair value in conjunction with goodwill impairment testing; (iii) other nonfinancial assets measured at fair value in conjunction with impairment assessments; and (iv) asset retirement obligations initially measured at fair value. As of September 30, 2011, the carrying value of cash and cash equivalents, trade accounts receivables, accounts payable, accrued expenses and accrued interest approximates fair value due to the short-term nature of such instruments. The carrying value of other long-term liabilities approximates fair value as the related interest rates approximate rates currently available to the company.

Long-Term Debt and Debt Covenant Compliance

Our classification of borrowings under our Revolver as long-term debt on our balance sheet is based on our assessment that, under the terms of our Credit Agreement and after considering our projected operating results and cash flows for the coming year, no principal payments are required to be made. These projections are estimates dependent upon a number of factors including developments in the markets in which we are operating in and economic and political factors, among other factors. Accordingly, these projections are inherently uncertain and our actual results could differ from these estimates.

Stock-Based Compensation

We have one stock option plan, The Amended and Restated 1999 Stock Incentive Plan, (the “Plan”) under which stock options and restricted stock awards are granted to employees, directors, officers and advisors of the company. A maximum of 3,100,000 shares are authorized under the Plan, of which 1,707,024 are outstanding and 680,528 are exercisable as of September 30, 2011.

We account for stock-based compensation under the provisions of FASB ASC Topic 718 “Compensation – Stock Compensation.” We record equity awards under the fair value method with share-based compensation measured at the fair value of the award as of the grant date. The exercise price for options is equal to the closing market price of Salem Communications common stock on the date of grant. We use the straight-line attribution method to recognize share-based compensation costs over the service period of the award. Upon exercise, cancellation, forfeiture, or expiration of stock options, or upon vesting or forfeiture of restricted stock awards, deferred tax assets for options and restricted stock awards with multiple vesting dates are eliminated for each vesting period on a first-in, first-out basis as if each vesting period was a separate award. Total stock based compensation expense for the three and nine months ended September 30, 2011 was $0.2 million and $0.6 million compared to $0.4 million and $1.1 million for the three and nine months ended September 30, 2010.

Segments

FASB ASC Topic 280 “Segment Reporting” requires companies to provide certain information about their operating segments. We have two reportable operating segments, radio broadcasting and Internet. The remaining non-reportable segment consists of our publishing businesses, Salem Publishing and Xulon Press™, which do not meet the reportable segment quantitative thresholds. The radio-broadcasting segment also owns and operates radio networks.

Concentrations of Business and Credit Risks

The majority of our operations are conducted in multiple locations across the country. Our credit risk is spread across a large number of customers, none of which account for a significant volume of revenue or outstanding receivables. We do not normally require collateral on credit sales; however, credit histories are reviewed before extending substantial credit to any customer. We establish an allowance for doubtful accounts based on customers’ payment history and perceived credit risks. Bad debt expense has been within management’s expectations.

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant areas for which management uses estimates are allowance for bad debts, income tax valuation allowance, impairment analysis for indefinite-lived intangible assets including broadcast licenses and goodwill, impairment analysis on other long-lived assets, stock-based compensation expense, and liabilities incurred under our partial self-insurance plan.

30

LIQUIDITY AND CAPITAL RESOURCES

We have historically financed acquisitions through borrowings, including borrowings under credit facilities and, to a lesser extent, from operating cash flow and selected asset dispositions. We expect to fund future acquisitions from cash on hand, proceeds from debt and equity offerings, borrowings under our credit facility, operating cash flow and possibly through the sale of income-producing assets. We have historically funded, and will continue to fund, expenditures for operations, administrative expenses, capital expenditures and debt service required by the senior credit facility and the notes from operating cash flow, borrowings under our credit facility and, if necessary, proceeds from the sale of selected assets or radio stations.

Cash Flows

Cash and cash equivalents decreased $0.8 million to $19,000 as of September 30, 2011 compared to $0.8 million as of December 31, 2010. Working capital decreased $4.9 million to $12.5 million as of September 30, 2011, compared to $17.4 million as of December 31, 2010.

The following events impacted our liquidity and capital resources during the nine months ended September 30, 2011:

• We retired $22.5 million of the 9⁵/₈% Notes for $23.1 million;

• We collected $12.7 million from the sale of radio station assets;

• We invested $6.6 million to acquire an Internet business and a radio station;

• We invested $6.0 million in capital expenditures including approximately $1.4 million in software related expenditures;

• We made net repayments of $4.5 million on our Revolver;

• Consolidated net receivables increased $1.9 million to $31.8 million from $29.9 million as of December 31, 2010; and

• Our net income increased $4.0 million to $5.2 million from $1.2 million for the same period of the prior year.

Credit Facilities

The Revolver has been entered into, and the 9⁵/₈% Notes were issued by Salem Communications Corporation, our parent company. Salem Communications Corporation has no independent assets or operations. All of the subsidiaries of Salem Communications Corporation are currently guarantors of the Revolver and the 9⁵/ ₈% Notes. The guarantees are full and unconditional and joint and several, and any subsidiaries of the parent company other than the subsidiary guarantors are minor.

Senior Credit Facility

On December 1, 2009, our parent company, Salem Communications Corporation entered into a senior credit facility which is a revolver (“Revolver”). We amended the Revolver on November 1, 2010 to increase the borrowing capacity from $30 million to $40 million. The amendment allows us to use borrowings under the Revolver, subject to the “Available Amount” as defined by the terms of the Credit Agreement, to redeem applicable portions of our 9⁵/ ₈% Notes. The calculation of the “Available Amount” also pertains to the payment of dividends when the leverage ratio is above 5.0 to 1. The Revolver is a three-year credit facility, which includes a $5 million subfacility for standby letters of credit and a subfacility for swingline loans of up to $5 million, subject to the terms and conditions of the Credit Agreement relating to the Revolver. Amounts outstanding under the Revolver bear interest at a rate based on LIBOR plus a spread of 3.50% per annum or at the Base Rate (as defined in the Credit Agreement) plus a spread of 2.50% per annum, at our option as of the date of determination. Additionally, we pay a commitment fee on the unused balance of 0.75% per year. If an event of default occurs, the interest rate may increase by 2.00% per annum. Amounts outstanding under the Revolver may be paid and then reborrowed at Salem’s discretion without penalty or premium. At September 30, 2011, the blended interest rate on amounts outstanding under the Revolver was 3.73%. We believe that the Revolver will allow us to meet our ongoing operating requirements, fund capital expenditures, and satisfy our debt service requirements.

During the nine months ended September 30, 2011, the amounts outstanding under our Revolver ranged from $13.0 million to $37.6 million. During the first quarter of 2011 cash flows from operations were used to pay down the Revolver to $13.0 million which was offset by a $6.0 million increase to fund the acquisition of WorshipHouse Media. During the second quarter we increased the amount outstanding under the Revolver up to $18.6 million, of which $1.6 million was repaid as of the third quarter. The net increase in the Revolver during the second quarter of 2011 of $17.0 million was used to redeem $17.5 million of principal on the 9⁵/ ₈% Notes. During the third quarter we increased the amount outstanding under the Revolver up to $35.5 million of which of which $5.0 million was repaid as of the end of the third quarter. Similarly to the prior quarter, the largest draw on the Revolver of $7.0 million was used primarily toward the repurchase of $5.0 million of the 9⁵/₈% Notes.

31

With respect to financial covenants, the Credit Agreement includes a maximum leverage ratio of 7.0 to 1.0 and a minimum interest coverage ratio of 1.5 to 1. The Credit Agreement also includes other negative covenants that are customary for credit facilities of this type, including covenants that, subject to exceptions described in the Credit Agreement, restrict the ability of Salem and the guarantors: (i) to incur additional indebtedness; (ii) to make investments; (iii) to make distributions, loans or transfers of assets; (iv) to enter into, create, incur, assume or suffer to exist any liens; (v) to sell assets; (vi) to enter into transactions with affiliates; (vii) to merge or consolidate with, or dispose of all or substantially all assets to, a third party; (viii) to prepay indebtedness; and (ix) to pay dividends. As of September 30, 2011, our leverage ratio was 5.25 to 1 and our interest coverage ratio was 1.88 to 1. We were and remain compliant with our debt covenants.

Our parent company, Salem Communications Corporation, has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several, and any subsidiaries of the parent company other than the subsidiary guarantors are minor.

Senior Secured Second Lien Notes

On December 1, 2009, we issued $300.0 million principal amount of 9⁵/ ₈% Notes at a discount for $298.1 million resulting in an effective yield of 9.75%. Interest is due and payable on June 15 and December 15 of each year, commencing June 15, 2010 until maturity. We are not required to make principal payments on the 9⁵/₈% Notes that are due in full in December 2016. The 9⁵/₈% Notes are guaranteed by all of our existing domestic restricted subsidiaries. Upon issuance, we were required to pay $28.9 million per year in interest on the then outstanding 9⁵/ ₈% Notes. As of December 31, 2010 and September 30, 2011, accrued interest on the 9⁵/₈% Notes was $1.2 million and $7.0 million, respectively. The discount is being amortized to interest expense over the term of the 9⁵/₈% Notes based on the effective interest method. For each of the three and nine months ended September 30, 2010 and 2011, approximately $48,000 and $0.1 million, respectively, of the discount has been recognized as interest expense.

On September 6, 2011, we repurchased $5.0 million of our 9⁵/₈% Notes for $5.1 million, or at a price equal to 102⁷/₈% of the face value. This transaction resulted in a $0.3 million pre-tax loss on the early retirement of debt, including approximately $26,000 of unamortized discount and $0.1 million of bond issues costs associated with the 9⁵/₈% Notes.

On June 1, 2011, we redeemed an additional $17.5 million of the 9⁵/₈% Notes for $18.0 million, or at a price equal to 103% of the face value. This transaction resulted in a $1.1 million pre-tax loss on the early retirement of debt, including $0.1 million of unamortized discount and $0.5 million of bond issues costs associated with the 9⁵/₈% Notes.

Information regarding retirements of the 9⁵/₈% Notes are as follows:

Date	Principal Redeemed		Premium Paid		Unamortized Discount		Bond Issue Costs
	(Dollars in thousands)
June 1, 2010	$	17,500	$	525	$	105	$	417
December 1, 2010		12,500		375		70		334
June 1, 2011		17,500		525		93		472
September 6, 2011		5,000		144		26		135

The carrying value of the 9⁵/₈% Notes was $268.5 million and $246.2 million at December 31, 2010 and September 30, 2011, respectively.

Summary of long-term debt obligations

Long-term debt consisted of the following:

	As of December 31, 2010			As of September 30, 2011
	(Dollars in thousands)
Revolver under senior credit facility	$	35,000		$	30,500
95/8% senior secured second lien notes due 2016		268,479			246,238
Capital leases and other loans		1,048			967
		304,527			277,705
Less current portion		(111	)		(119	)
	$	304,416		$	277,586

32

In addition to the amounts listed above, we also have interest payments related to our long-term debt as follows as of September 30, 2011:

• Outstanding borrowings of $30.5 million under the Revolver, with interest payments due at LIBOR plus 3.50% or at prime rate plus 2.50%;

• $247.5 million 9⁵/ ₈% Notes with semi-annual interest payments at an annual rate of 9⁵/₈%; and

• Commitment fees of 0.75% on the unused portion of the Revolver.

Impairment Losses on Goodwill and Indefinite-Lived Intangible Assets

In prior years, we incurred significant impairment losses with regard to our broadcast indefinite-lived intangible assets. These losses are attributable to estimated increases in the weighted-average cost of capital, a decline in the estimated terminal or exit values assigned to broadcast licenses because of industry wide declines in radio station transaction multiples, decreases in projected future cash flows, and a significant decline in projected revenues as of the impairment dates as compared to prior periods.

In prior years, we also incurred significant impairment losses with regard to indefinite-lived intangible assets within our publishing businesses. These losses are attributable to an increase in the weighted average cost of capital, a decline in the estimated terminal or exit values assigned to the assets because of industry wide declines in the total number of magazines sold, a decrease in projected future cash flows, and a significant decline in projected profit margins.

Cash flows and operating income for each of our reporting units is contingent upon the ability of the entity to generate revenues. Our radio stations are to varying degrees dependent upon advertising for their revenues. Our Internet and publishing operating entities are also dependent upon advertising revenue. The economic downturn that began during 2007 negatively impacted our ability to generate revenues. Included in the broadcast valuation estimates prepared by Bond & Pecaro on a market participant basis for the testing period ended December 31, 2010, are increases in revenue of 2.5% to 3.1% for 2011 as compared to 2010 followed by increases of 0.25% to 1.6% in 2012 as compared to 2011. Included in the publishing valuation estimates prepared by Bond & Pecaro on a market participant basis are projected profit margins of 2.0% for 2011. Failure to achieve these anticipated growth rates may result in future impairment losses, the amount of which may be material.

Given the current economic environment and uncertainties surrounding the potential negative impact on our business, there can be no assurance that our estimates and assumptions regarding the duration of the economic downturn, or the period and strength of recovery, made for the purpose of our indefinite-lived intangible fair value estimates will prove to be accurate. Using market indicators from several industry analysts, our valuation estimates prepared by Bond & Pecaro on a market participant basis anticipate revenues to show improvements of between 2.5% to 3.1% for the year ended December 31, 2011 as compared to the year ended December 31, 2010.

The valuation of intangible assets is subjective and based on estimates rather than precise calculations. If actual future results are not consistent with the assumptions and estimates used, we may be exposed to impairment charges in the future, the amount of which may be material. The fair value measurements for our indefinite-lived intangible assets use significant unobservable inputs that reflect our own assumptions about the estimates that market participants would use in measuring fair value including assumptions about risk. If actual future results are not consistent with the assumptions and estimates used, we may be exposed to impairment charges in the future, the amount of which may be material. Discount rate assumptions are based on an assessment of the risk inherent in the future cash flows of the respective market clusters and reporting units.

The impairment charges that have been recognized were non-cash in nature and did not result in a violation of our then existing credit facilities or Revolver. However, the potential of future impairment charges can be viewed as a negative factor with regard to forecasted future performance and cash flows. We believe that we have adequately considered the economic downturn in our valuation models and do not believe that the impairments in and of themselves are a liquidity risk.

OFF-BALANCE SHEET ARRANGEMENTS

At September 30, 2011, Salem did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, which would have been established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. As such, Salem is not materially exposed to any financing, liquidity, market or credit risk that could arise if Salem had engaged in such relationships.

33

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

DERIVATIVE INSTRUMENTS

We are exposed to fluctuations in interest rates. We actively monitor these fluctuations and use derivative instruments from time to time to manage the related risk. In accordance with our risk management strategy, we may use derivative instruments only for the purpose of managing risk associated with an asset, liability, committed transaction, or probable forecasted transaction that is identified by management. Our use of derivative instruments may result in short-term gains or losses that may increase the volatility of our earnings.

Under FASB ASC Topic 815 “Derivatives and Hedging” the effective portion of the gain or loss on a derivative instrument designated and qualifying as a cash flow hedging instrument shall be reported as a component of other comprehensive income (outside earnings) and reclassified into earnings in the same period or periods during which the hedged forecasted transaction affects earnings. The remaining gain or loss on the derivative instrument, if any, shall be recognized currently in earnings.

ITEM 4. CONTROLS AND PROCEDURES.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act. Based upon such evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2011.

There was no change in our internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS.

We and our subsidiaries, incident to our business activities, at various times are parties to a number of legal proceedings, lawsuits, arbitration and other claims. Such matters are subject to many uncertainties and outcomes that are not predictable with assurance. We maintain insurance that may provide coverage for such matters. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters. We believe, at this time, that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon our annual consolidated financial position, results of operations or cash flows.

On July 10, 2010, Asia Vision, Inc. and Rehan Siddiqi amended a complaint they had previously filed against third parties in the 152nd Judicial District Court of Harris County, Houston, Texas, naming Salem Communications Corporation, South Texas Broadcasting, Inc. and one of Salem’s officers as defendants. In their complaint, Asia Vision claims that the Salem defendants interfered with Asia Vision’s contractual right to purchase radio station KTEK-AM from Business Radio Licensee, LLC. In their complaint, Asia Vision and Rehan Siddiqi make a claim for injunctive relief and monetary damages. On July 21, 2010, Salem Communications and South Texas Broadcasting were served with the complaint but the Salem officer has not been served. Salem has retained counsel, has tendered defense of the matter to several insurance companies, and will vigorously defend this action.

On March 7, 2011, Salem entered into a tentative settlement of the matter. The court approved the settlement on October 27, 2011. Third parties now have until November 28 to file an appeal. If no appeal is filed, the order will become final at that time and we should close on the purchase mid-December following final FCC approval.

34

ITEM 1A. RISK FACTORS.

We have included in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2010, a description of certain risks and uncertainties that could affect our business, future performance or financial condition (the “Risk Factors”). The Risk Factors are hereby incorporated in Part II, Item 1A of this Form 10-Q. Investors should consider the Risk Factors prior to making an investment decision with respect to our stock.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULT UPON SENIOR SECURITIES.

None.

ITEM 4. (REMOVED AND RESERVED).

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS.

35

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, Salem Communications Corporation has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	SALEM COMMUNICATIONS CORPORATION
November 4, 2011
	By: /s/ EDWARD G. ATSINGER III
	Edward G. Atsinger III
	Chief Executive Officer
	(Principal Executive Officer)
November 4, 2011
	By: /s/ EVAN D. MASYR
	Evan D. Masyr
	Senior Vice President and Chief Financial Officer
	(Principal Financial Officer)

36

EXHIBIT INDEX

Exhibit Number	Exhibit Description	Form	File No.	Date of First Filing	Exhibit Number	Filed Herewith
10.02.05	Employment Agreement, dated July 1, 2011 between Salem Communications Holding Corporation and Stuart W. Epperson	8-K	000-26497	06/22/2011	99.1
10.05.03	Employment Agreement, effective as of September 15, 2011 between Salem Communications Holding Corporation and David A.R. Evans	8-K	000-26497	06/22/2011	99.2
23.3	Consent of Bond & Pecaro, Inc.					X
31.1	Certification of Edward G. Atsinger III Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.					X
31.2	Certification of Evan D. Masyr Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.					X
32.1	Certification of Edward G. Atsinger III Pursuant to 18 U.S.C. Section 1350.					X
32.2	Certification of Evan D. Masyr Pursuant to 18 U.S.C. Section 1350.					X
101	The following financial information from the Quarterly Report on Form 10Q for the fiscal quarter ended September 30, 2011, formatted in XBRL (Extensible Business Reporting Language) and furnished electronically herewith: (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (iii) the Condensed Consolidated Statements of Cash Flows; and (iv) the Notes to the Condensed Consolidated Financial Statements.					X

37

EX-23.3

EXHIBIT 23.3

[Bond & Pecaro, Inc. letterhead]

September 30, 2011

VIA E-MAIL: evanm@salem.cc

Mr. Evan D. Masyr

Senior Vice President and Chief Financial Officer

Salem Communications Corp.

4880 Santa Rosa Road #300

Camarillo, CA 93012

Dear Mr. Masyr:

Bond & Pecaro, Inc. hereby grants permission to Salem Communications Corp. to use the Bond & Pecaro, Inc. name and data from our work product as of September 30, 2011 in public filings with the Securities and Exchange Commission.

I hope that this letter is responsive to your needs at this time. Please do not hesitate to let us know if you need anything additional.

Sincerely,

/s/ Timothy S. Pecaro

Timothy S. Pecaro

cc. Jim Brown

EX-31.1

EXHIBIT 31.1

I, Edward G. Atsinger III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Salem Communications Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 4, 2011

/s/ EDWARD G. ATSINGER III

Edward G. Atsinger III

President and Chief Executive Officer

EX-31.2

EXHIBIT 31.2

I, Evan D. Masyr, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Salem Communications Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15(d)-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent functions):

(a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

(b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

Date: November 4, 2011

/s/ EVAN D. MASYR

Evan D. Masyr

Senior Vice President and Chief Financial Officer

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, in his capacity as Chief Executive Officer of Salem Communications Corporation (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on his knowledge:

• the Quarterly Report of the Company on Form 10-Q for the period ended September 30, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

• the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 4, 2011
	By: /s/ EDWARD G. ATSINGER III
	Edward G. Atsinger III
	President and Chief Executive Officer

EX-32.2

EXHIBIT 32.2

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350,

AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, in his capacity as Senior Vice President and Chief Financial Officer of Salem Communications Corporation (the “Company”), for purposes of 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that based on his knowledge:

• the Quarterly report of the Company on Form 10-Q for the period ended September 30, 2011 (the “Report”) fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934; and

• the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Dated: November 4, 2011
	By: /s/ EVAN D. MASYR
	Evan D. Masyr
	Senior Vice President and Chief Financial Officer

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) (USD $) In Thousands, except Share data	Sep. 30, 2011	Dec. 31, 2010
Trade accounts receivable, allowance for doubtful accounts	$ 10,244	$ 10,040
Property, plant and equipment, accumulated depreciation	123,214	117,212
Amortizable intangible assets, accumulated amortization	$ 22,414	$ 20,496
Treasury stock, shares	2,317,650	2,317,650
Class A Common Stock
Common stock, par value	$ 0.01	$ 0.01
Common stock, authorized	80,000,000	80,000,000
Common stock, issued	21,043,205	21,000,193
Common stock, outstanding	18,725,555	18,682,543
Class B Common stock
Common stock, par value	$ 0.01	$ 0.01
Common stock, authorized	20,000,000	20,000,000
Common stock, issued	5,553,696	5,553,696
Common stock, outstanding	5,553,696	5,553,696

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (USD $) In Thousands, except Share data	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Net broadcast revenue	$ 44,793	$ 43,507	$ 132,929	$ 130,386
Internet revenue	7,079	5,052	20,873	14,254
Publishing revenue	3,024	2,832	9,009	8,198
Total revenue	54,896	51,391	162,811	152,838
Operating expenses:
Broadcast operating expenses exclusive of depreciation and amortization	29,198	27,940	86,054	82,921
Internet operating expenses-exclusive of depreciation and amortization shown below	5,724	4,432	17,243	12,246
Publishing operating expenses-exclusive of depreciation and amortization shown below	2,890	2,962	8,541	8,270
Corporate expenses exclusive of depreciation and amortization	4,285	4,154	13,040	12,140
Depreciation	3,102	3,126	9,403	9,415
Amortization	680	587	1,982	1,475
(Gain) loss on disposal of assets	32	18	(4,343)	13
Total operating expenses	45,911	43,219	131,920	126,480
Operating income	8,985	8,172	30,891	26,358
Other income (expense):
Interest income	57	48	154	142
Interest expense	(6,826)	(7,435)	(21,125)	(22,903)
Loss on early retirement of long-term debt	(305)		(1,395)	(1,050)
Other income (expense), net	3	13	(20)	(18)
Income before income taxes	1,914	798	8,505	2,529
Provision for income taxes	429	455	3,333	1,284
Net income	$ 1,485	$ 343	$ 5,172	$ 1,245
Basic earnings per share data:	$ 0.06	$ 0.01	$ 0.21	$ 0.05
Diluted earnings per share data:	$ 0.06	$ 0.01	$ 0.21	$ 0.05
Basic weighted average shares outstanding	24,546,056	24,357,042	24,448,722	23,966,797
Diluted weighted average shares outstanding	24,746,164	24,822,412	24,665,649	24,602,258

XML

Document and Entity Information	9 Months Ended
	Sep. 30, 2011	Nov. 03, 2011 Class A Common Stock	Nov. 03, 2011 Class B Common stock
Document Information [Line Items]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Year Focus	2011
Document Fiscal Period Focus	Q3
Trading Symbol	SALM
Entity Registrant Name	SALEM COMMUNICATIONS CORP /DE/
Entity Central Index Key	0001050606
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Entity Common Stock, Shares Outstanding		18,725,555	5,553,696

XML

RECENT ACCOUNTING PRONOUNCEMENTS

9 Months Ended

Sep. 30, 2011

RECENT ACCOUNTING PRONOUNCEMENTS

NOTE 6. RECENT ACCOUNTING PRONOUNCEMENTS

With the exception of those listed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended September 30, 2011, as compared to the recent accounting pronouncements described in the annual report on Form 10-K for the year ended December 31, 2010 that are of material significance, or have potential material significance, on our financial position, results of operations or cash flows.

In September 2011, the FASB issued Accounting Standards Update No. 2011-08, “Testing Goodwill for Impairment” (“ASU No. 2011-08”), which is intended to simplify goodwill impairment testing. Entities will be allowed to perform a qualitative assessment on goodwill impairment to determine whether a quantitative assessment is necessary. The revised standard is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. The adoption of ASC No. 2011-08 will not impact our financial position, results of operations, cash flows, or presentation thereof.

In June 2011, the FASB issued Accounting Standards Update No. 2011-05, “Presentation of Comprehensive Income” (“ASU No. 2011-05”), which is an update to ASC Topic 220, “Comprehensive Income”, eliminating the option to present other comprehensive income and its components in the statement of shareholders’ equity. We can elect to present the items of net income and other comprehensive income in a single continuous statement of comprehensive income or in two separate, but consecutive, statements. Under either method the statement would need to be presented with equal prominence as the other primary financial statements. The amended guidance, which must be applied retroactively, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with earlier adoption permitted. The adoption of ASC No. 2011-05 will not impact our financial position, results of operations, cash flows, or presentation thereof.

In May 2011, the FASB issued ASU No. 2011-04, “Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs” ("ASU No. 2011-04"), which amends ASC Topic 820, “Fair Value Measurement”. ASU No. 2011-04 does not extend the use of fair value accounting, but provides guidance on how it should be applied where its use is already required or permitted by other standards within U.S. GAAP or International Financial Reporting Standards. ASU No. 2011-14 changes the wording used to describe many requirements in U.S. GAAP for measuring fair value and for disclosing information about fair value measurements. Additionally, ASU No. 2011-14 clarifies the FASB's intent about the application of existing fair value measurements. ASU No. 2011-04 is effective for interim and annual periods beginning after December 15, 2011, and is applied prospectively. We will adopt this guidance at the beginning of our first quarter of fiscal year 2012. We not expect the adoption of ASU No. 2011-04 to have a material impact on our financial position, results of operations or cash flows.

XML

BASIC AND DILUTED NET EARNINGS PER SHARE

9 Months Ended

Sep. 30, 2011

BASIC AND DILUTED NET EARNINGS PER SHARE

NOTE 11. BASIC AND DILUTED NET EARNINGS PER SHARE

Basic net earnings per share has been computed using the weighted average number of Class A and Class B shares of common stock outstanding during the period. Diluted net earnings per share is computed using the weighted average number of shares of Class A and Class B common stock outstanding during the period plus the dilutive effects of stock options.

Options to purchase 1,250,999 and 1,707,025 shares of Class A common stock were outstanding at September 30, 2010 and 2011, respectively. Also outstanding on September 30, 2010 were unvested restricted stock shares of 10,000. Diluted weighted average shares outstanding exclude outstanding stock options whose exercise price is in excess of the average price of the company’s stock price. These options are excluded from the respective computations of diluted net income or loss per share because their effect would be anti-dilutive. As of September 30, 2010 and 2011, there were 465,370 and 200,108 dilutive shares, respectively.

XML

RECLASSIFICATIONS

9 Months Ended

Sep. 30, 2011

RECLASSIFICATIONS

NOTE 2. RECLASSIFICATIONS

Certain reclassifications were made to the prior year financial statements to conform to the current year presentation. These reclassifications include the separation of our non-broadcast segment into two components, Internet and Publishing. We believe that this information regarding our non-broadcast segments is useful to readers of our financial statements. Additionally, due to growth within our Internet operations, including the acquisition of WorshipHouse Media as discussed in Note 4, our Internet segment qualifies for disclosure as a reportable segment. All prior periods have been updated to reflect the separation of these non-broadcast segments.

XML

NOTES PAYABLE AND LONG-TERM DEBT

9 Months Ended

Sep. 30, 2011

NOTES PAYABLE AND LONG-TERM DEBT

NOTE 8. NOTES PAYABLE AND LONG-TERM DEBT

Senior Credit Facility

On December 1, 2009, our parent company, Salem Communications Corporation entered into a senior credit facility which is a revolver (“Revolver”). We amended the Revolver on November 1, 2010 to increase the borrowing capacity from $30 million to $40 million. The amendment allows us to use borrowings under the Revolver, subject to the “Available Amount” as defined by the terms of the Credit Agreement, to redeem applicable portions of the 9⁵/₈% Notes. The calculation of the “Available Amount” also pertains to the payment of dividends when the leverage ratio is above 5.0 to 1. The Revolver is a three-year credit facility, which includes a $5 million subfacility for standby letters of credit and a subfacility for swingline loans of up to $5 million, subject to the terms and conditions of the Credit Agreement relating to the Revolver. Amounts outstanding under the Revolver bear interest at a rate based on LIBOR plus a spread of 3.50% per annum or at the Base Rate (as defined in the Credit Agreement) plus a spread of 2.50% per annum, at our option as of the date of determination. Additionally, we pay a commitment fee on the unused balance of 0.75% per year. If an event of default occurs, the interest rate may increase by 2.00% per annum. Amounts outstanding under the Revolver may be paid and then reborrowed at Salem’s discretion without penalty or premium. At September 30, 2011, the blended interest rate on amounts outstanding under the Revolver was 3.73%. We believe that the Revolver will allow us to meet our ongoing operating requirements, fund capital expenditures, and satisfy our debt service requirements.

With respect to financial covenants, the Credit Agreement includes a maximum leverage ratio of 7.0 to 1.0 and a minimum interest coverage ratio of 1.5 to 1. The Credit Agreement also includes other negative covenants that are customary for credit facilities of this type, including covenants that, subject to exceptions described in the Credit Agreement, restrict the ability of Salem and the guarantors: (i) to incur additional indebtedness; (ii) to make investments; (iii) to make distributions, loans or transfers of assets; (iv) to enter into, create, incur, assume or suffer to exist any liens; (v) to sell assets; (vi) to enter into transactions with affiliates; (vii) to merge or consolidate with, or dispose of all or substantially all assets to, a third party; (viii) to prepay indebtedness; and (ix) to pay dividends. As of September 30, 2011, our leverage ratio was 5.25 to 1 and our interest coverage ratio was 1.88 to 1. We were in compliance with our debt covenants at September 30, 2011 and we remain in compliance.

Our parent company, Salem Communications Corporation, has no independent assets or operations, the subsidiary guarantees are full and unconditional and joint and several, and any subsidiaries of the parent company other than the subsidiary guarantors are minor.

Senior Secured Second Lien Notes

On December 1, 2009, we issued $300.0 million principal amount of 9⁵/₈% Notes at a discount for $298.1 million resulting in an effective yield of 9.75%. Interest is due and payable on June 15 and December 15 of each year, commencing June 15, 2010 until maturity. We are not required to make principal payments on the 9⁵/₈% Notes that are due in full in December 2016. The 9⁵/₈% Notes are guaranteed by all of our existing domestic restricted subsidiaries. Upon issuance, we were required to pay $28.9 million per year in interest on the then outstanding 9⁵/₈% Notes. As of December 31, 2010 and September 30, 2011, accrued interest on the 9⁵/₈% Notes was $1.2 million and $7.0 million, respectively. The discount is being amortized to interest expense over the term of the 9⁵/₈% Notes based on the effective interest method. For each of the three and nine months ended September 30, 2010 and 2011, approximately $48,000 and $0.1 million, respectively, of the discount has been recognized as interest expense.

On September 6, 2011, we repurchased $5.0 million of the 9⁵/₈% Notes for $5.1 million, or at a price equal to 102⁷/₈% of the face value. This transaction resulted in a $0.3 million pre-tax loss on the early retirement of debt, including approximately $26,000 of unamortized discount and $0.1 million of bond issues costs associated with the 9⁵/₈% Notes.

On June 1, 2011, we redeemed an additional $17.5 million of the 9⁵/₈% Notes for $18.0 million, or at a price equal to 103% of the face value. This transaction resulted in a $1.1 million pre-tax loss on the early retirement of debt, including $0.1 million of unamortized discount and $0.5 million of bond issues costs associated with the 9⁵/₈% Notes.

Information regarding retirements of the 9⁵/₈% Notes are as follows:

Date	Principal Redeemed		Premium Paid		Unamortized Discount		Bond Issue Costs
	(Dollars in thousands)
June 1, 2010		$17,500	$	525	$	105	$	417
December 1, 2010		12,500		375		70		334
June 1, 2011		17,500		525		93		472
September 6, 2011		5,000		144		26		135

The carrying value of the 9⁵/₈% Notes was $268.5 million and $246.2 million at December 31, 2010 and September 30, 2011, respectively.

Summary of long-term debt obligations

Long-term debt consisted of the following:

	As of December 31, 2010			As of September 30, 2011
	(Dollars in thousands)
Revolver under senior credit facility	$	35,000		$	30,500
95/8% senior secured second lien notes due 2016		268,479			246,238
Capital leases and other loans		1,048			967
		304,527			277,705
Less current portion		(111	)		(119	)
	$	304,416		$	277,586

In addition to the amounts listed above, we also have interest payments related to our long-term debt as follows as of September 30, 2011:

• Outstanding borrowings of $30.5 million under the Revolver, with interest payments due at LIBOR plus 3.50% or at prime rate plus 2.50%;

• $247.5 million 9⁵/₈% Notes with semi-annual interest payments at an annual rate of 9⁵/₈%; and

• Commitment fees of 0.75% on the unused portion of the Revolver.

Other Debt

We lease various office equipment under agreements that are accounted for as capital leases. The liability recorded at December 31, 2010 and September 30, 2011 represents the present value of future commitments under these lease agreements.

Maturities of Long-Term Debt

Principal repayment requirements under all long-term debt agreements outstanding at September 30, 2011 for each of the next five years and thereafter are as follows:

	Amount
For the Twelve Months Ended September 30,	(Dollars in thousands)
2012	$	119
2013		30,605
2014		94
2015		80
2016		62
Thereafter		246,745
	$	277,705

XML

INCOME TAXES

9 Months Ended

Sep. 30, 2011

INCOME TAXES

NOTE 13. INCOME TAXES

We account for income taxes in accordance with FASB ASC Topic 740 “Income Taxes.” We recorded an increase in our unrecognized tax benefits of $0.1 million as of September 30, 2010. At December 31, 2010, we had $3.7 million in liabilities for unrecognized tax benefits. Included in this liability amount were $0.1 million accrued for the related interest, net of federal income tax benefits, and $0.05 million for the related penalty recorded in income tax expense on our Condensed Consolidated Statements of Operations. We recorded an increase in our unrecognized tax benefits of $0.4 million as of September 30, 2011.

Valuation Allowance (Deferred Taxes)

For financial reporting purposes, we recorded a valuation allowance of $2.7 million as of September 30, 2011 to offset a portion of the deferred tax assets related to the state net operating loss carryforwards. Management regularly reviews our financial forecasts in an effort to determine our ability to utilize the net operating loss carryforwards for tax purposes. Accordingly, the valuation allowance is adjusted periodically based on management’s estimate of the benefit the company will receive from such carryforwards.

XML

DEFERRED FINANCING COSTS

9 Months Ended

Sep. 30, 2011

DEFERRED FINANCING COSTS

NOTE 9. DEFERRED FINANCING COSTS

Deferred financing costs consist of bond issue costs and bank loan fees associated with the 9⁵/₈% Notes and our Revolver. The capitalized costs are being amortized over the debt term on a straight-line basis. Deferred financing costs consist of the following:

	As of December 31, 2010		As of September 30, 2011
	(Dollars in thousands)
Bond issue costs	$	6,084	$	4,780
Bank loan fees		1,265		804
	$	7,349	$	5,584

XML

EQUITY TRANSACTIONS

9 Months Ended

Sep. 30, 2011

EQUITY TRANSACTIONS

NOTE 7. EQUITY TRANSACTIONS

We account for stock-based compensation expense in accordance with FASB ASC Topic 718 “Compensation—Stock Expense.” As a result, $0.2 million and $0.6 million of non-cash stock-based compensation expense has been recorded to additional paid-in capital for the three and nine months ended September 30, 2011, respectively, in comparison to $0.4 million and $1.1 million for the three and nine months ended September 30, 2010.

XML

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $) In Thousands	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
OPERATING ACTIVITIES
Net income	$ 5,172	$ 1,245
Adjustments to reconcile net income to net cash provided by operating activities:
Non-cash stock-based compensation	646	1,109
Excess tax benefit from stock options exercised	(29)	(135)
Depreciation and amortization	11,385	10,890
Amortization of deferred financing costs	1,253	1,214
Amortization and accretion of financing items	140	141
Provision for bad debts	2,242	1,280
Deferred income taxes	3,316	1,113
(Gain) loss on disposal of assets	(4,343)	13
Loss on early retirement of long-term debt	1,395	1,050
Changes in operating assets and liabilities:
Accounts receivable	(1,745)	(2,068)
Prepaid expenses and other current assets	(1,334)	(449)
Accounts payable and accrued expenses	5,473	5,271
Deferred revenue	(182)	690
Other liabilities	2,799	(368)
Income taxes payable	(203)	(62)
Net cash provided by operating activities	25,985	20,934
INVESTING ACTIVITIES
Capital expenditures	(6,032)	(5,866)
Deposits on radio station acquisitions and equipment	248
Purchases of broadcast assets and radio stations	(550)	(3,090)
Purchases of Internet businesses and assets	(6,000)	(5,245)
Deposit received on pending sale of broadcast business		1,000
Proceeds from eminent domain		996
Proceeds from disposal of assets	12,744	36
Related party residential purchase		(676)
Other	(592)	(67)
Net cash used in investing activities	(182)	(12,912)
FINANCING ACTIVITIES
Payments of costs related to bank credit facility	(52)	(96)
Payments of bond issue costs	(43)	(659)
Payment of bond premium in connection with early retirement	(669)	(525)
Payments to redeem 95/8% Notes	(22,500)	(17,500)
Proceeds from borrowings under bank credit facility	52,700	29,000
Payments on bank credit facility	(57,200)	(26,500)
Proceeds from exercise of stock options	19	278
Excess tax benefit from stock options exercised	29	135
Payments on capital lease obligations	(86)	(65)
Release of restricted cash	100
Book overdraft	1,090
Net cash used in financing activities	(26,612)	(15,932)
Net increase (decrease) in cash and cash equivalents	(809)	(7,910)
Cash and cash equivalents at beginning of year	828	8,945
Cash and cash equivalents at end of period	19	1,035
Cash paid during the period for:
Interest	13,937	15,982
Income taxes	250	270
Non-cash activities:
Note receivable acquired in exchange for radio station	1,000
Assets acquired under capital leases	8	189
Trade revenue	3,967	3,703
Trade expense	$ 3,416	$ 3,539

XML

IMPAIRMENT OF GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2011

IMPAIRMENT OF GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

NOTE 3. IMPAIRMENT OF GOODWILL AND OTHER INDEFINITE-LIVED INTANGIBLE ASSETS

We account for goodwill and other indefinite-lived intangible assets in accordance with the Financial Accounting Standards Board Accounting Standards Codification (“FASB ASC”) Topic 350 “Intangibles—Goodwill and Other.” We do not amortize goodwill or other indefinite-lived intangible assets, but rather test for impairment annually or more frequently if events or circumstances indicate that an asset may be impaired. We complete our annual impairment tests in the fourth quarter of each year unless events or circumstances indicate that an asset may be impaired. There were no indications of impairment present during the period ending September 30, 2011. Broadcast licenses account for approximately 95% of our indefinite-lived intangible assets. Goodwill and magazine mastheads account for the remaining 5%.

XML

SIGNIFICANT TRANSACTIONS

9 Months Ended

Sep. 30, 2011

SIGNIFICANT TRANSACTIONS

NOTE 4. SIGNIFICANT TRANSACTIONS

On September 6, 2011, we repurchased $5.0 million of our 9⁵/₈% senior secured second lien notes due 2016 (the “9⁵/₈% Notes”) for $5.1 million, or at a price equal to 102⁷/₈% of the face value. This transaction resulted in a $0.3 million pre-tax loss on the early retirement of debt, including approximately $26,000 of unamortized discount and $0.1 million of bond issues costs associated with the 9⁵/₈% Notes.

On June 1, 2011, we redeemed $17.5 million of our 9⁵/₈% Notes for $18.0 million, or at a price equal to 103% of the face value. This transaction resulted in a $1.1 million pre-tax loss on the early retirement of debt, including $0.1 million of unamortized discount and $0.5 million of bond issues costs associated with the 9⁵/₈% Notes.

On March 28, 2011, we completed the acquisition of the Internet business, WorshipHouse Media, an on-line church media and video ministry website, for $6.0 million in cash. WorshipHouse Media offers users worship and small group resources, including movie illustrations, song tracks, worship backgrounds, small group video curriculum and worship software, to churches that may face budget, time and in-house talent constraints. The site also includes WorshipHouse Kids, which offers similar products crafted to meet the needs of children's ministry media in the church. The accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations reflect the operating results and net assets of this entity as of the acquisition date. The acquisition resulted in goodwill of $2.1 million representing the excess value of the business as a result of the integrated business model and services already established that provide future economic benefit to us.

On March 14, 2011, we completed the acquisition of radio station WDDZ-AM, Pawtucket, Rhode Island, for $0.6 million in cash. We began operating the station as WBZS-AM upon the close of the transaction. The accompanying Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Operations reflect the operating results and net assets of this entity as of the acquisition date.

On March 1, 2011, we sold radio station WAMD-AM in Aberdeen, Maryland resulting in a pre-tax loss of $0.2 million that was previously recognized upon entering into the agreement in September 2010.

On February 25, 2011, we sold radio station KXMX-AM in Los Angeles, California for $12.0 million, which was comprised of $11.0 million in cash and a $1.0 million promissory note. The $1.0 million promissory note has a three-year term, bearing interest at 7% compounded annually, due on February 25, 2016. The sale resulted in a pre-tax gain of $2.1 million.

On January 6, 2011, we sold radio station KKMO-AM in Seattle, Washington for $2.7 million in cash resulting in a pre-tax gain of $2.4 million.

On January 3, 2011, we began programming radio station KVCE-AM, Highland Park, Texas pursuant to a long-term Time Brokerage Agreement (“TBA”).

A summary of our business acquisitions for the nine months ended September 30, 2011, none of which were material to our condensed consolidated financial position as of the respective date of acquisition, is as follows:

Acquisition Date	Description	Total Cost
		(Dollars in thousands)
March 28, 2011	WorshipHouse Media	$	6,000
March 14, 2011	WBZS-AM, Pawtucket, Rhode Island		550
		$	6,550

Under the acquisition method of accounting as specified in FASB ASC Topic 805, the total acquisition consideration is allocated to the assets acquired and liabilities assumed based on their estimated fair values as of the date of the transaction. We obtained an independent third-party appraisal of the estimated fair value of the acquired net assets as of the acquisition date for the transaction noted.

The total acquisition consideration was allocated to the net assets acquired as follows:

	Net Broadcast Assets Acquired		Net Internet Assets Acquired		Net Assets Acquired
					(Dollars in thousands)
Asset
Property and equipment	$	408	$	8	$	416
Broadcast licenses		141		—		141
Goodwill		1		2,143		2,144
Customer lists and contracts		—		80		80
Domain and brand names		—		457		457
Internally developed software		—		311		311
Customer relationships		—		2,451		2,451
Other amortizable intangible assets		—		550		550
	$	550	$	6,000	$	6,550

Pending Transactions:

On March 5, 2010, we entered into an agreement to re-acquire radio station KTEK-AM, Houston, Texas for $3.7 million, which includes forgiveness of the promissory note that we received upon our original sale of the station. We began programming the station pursuant to a TBA with the current owner on March 8, 2010. The accompanying Condensed Consolidated Statements of Operations reflect the operating results of this entity as of the TBA date. The purchase is subject to the approval by the FCC and is expected to close in the fourth quarter of 2011.

XML

FAIR VALUE ACCOUNTING

9 Months Ended

Sep. 30, 2011

FAIR VALUE ACCOUNTING

NOTE 12. FAIR VALUE ACCOUNTING

FASB ASC Topic 820 “Fair Value Measurements and Disclosures” established a hierarchal disclosure framework associated with the level of pricing observability utilized in measuring fair value. This framework defined three levels of inputs to the fair value measurement process and requires that each fair value measurement be assigned to a level corresponding to the lowest level input that is significant to the fair value measurement in its entirety. The three broad levels of inputs defined by the FASB ASC Topic 820 hierarchy are as follows:

• Level 1 Inputs—quoted prices (unadjusted) in active markets for identical assets or liabilities that the reporting entity has the ability to access at the measurement date;

• Level 2 Inputs—inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. If the asset or liability has a specified (contractual) term, a Level 2 input must be observable for substantially the full term of the asset or liability; and

• Level 3 Inputs—unobservable inputs for the asset or liability. These unobservable inputs reflect the entity’s own assumptions about the assumptions that market participants would use in pricing the asset or liability, and are developed based on the best information available in the circumstances (which might include the reporting entity’s own data).

As of September 30, 2011, the carrying value of cash and cash equivalents, trade accounts receivables, accounts payable, accrued expenses and accrued interest approximates fair value due to the short-term nature of such instruments. The carrying value of other long-term liabilities approximates fair value as the related interest rates approximate rates currently available to the company.

XML

STOCK OPTION PLAN

9 Months Ended

Sep. 30, 2011

STOCK OPTION PLAN

NOTE 5. STOCK OPTION PLAN

The company has one stock option plan. The Amended and Restated 1999 Stock Incentive Plan (the “Plan”) allows the company to grant stock options to employees, directors, officers and advisors of the company. A maximum of 3,100,000 shares are authorized under the Plan. Options generally vest over a four year period and have a maximum term of five years from the vesting date. The Plan provides that vesting may be accelerated in certain corporate transactions of the company. The Plan provides that the Board of Directors, or a committee appointed by the Board, has discretion, subject to certain limits, to modify the terms of outstanding options. We recognize non-cash stock-based compensation expense related to the estimated fair value of stock options granted in accordance with FASB ASC Topic 718 “Compensation—Stock Compensation.”

The following table reflects the components of stock-based compensation expense recognized in the Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended September 30,						Nine Months Ended September 30,
	2010			2011			2010			2011
	(Dollars in thousands)
Stock option compensation expense included in corporate expenses	$	221		$	97		$	739		$	395
Restricted stock compensation expense included in corporate expenses		5			—			12			4
Stock option compensation expense included in broadcast operating expenses		118			51			278			195
Stock option compensation expense included in Internet operating expenses		24			15			71			47
Stock option compensation expense included in Publishing operating expenses		5			2			9			5
Total stock-based compensation expense, pre-tax		373		$	165			1,109		$	646
Tax provision for stock-based compensation expense		(213	)		(37	)		(573	)		(247	)
Total stock-based compensation expense, net of tax	$	160		$	128		$	536		$	399

Stock option and restricted stock grants

The Plan allows the company to grant stock options and shares of restricted stock to employees, directors, officers and advisors of the company. The option exercise price is set at the closing price of the company’s common stock on the date of grant, and the related number of shares granted is fixed at that point in time. The Plan also provides for grants of restricted stock. Eligible employees may receive stock options annually with the number of shares and type of instrument generally determined by the employee’s salary grade and performance level. In addition, certain management and professional level employees typically receive a stock option grant upon commencement of employment. Non-employee directors of the company have been awarded restricted stock grants that vest one year from the date of issuance as well as stock options that vest immediately. The Plan does not allow key employees and directors (restricted persons) to exercise options during pre-defined black out periods. Employees may participate in 10b5-1 Plans that allow them to exercise options according to predefined criteria.

We use the Black-Scholes option valuation model to estimate the fair value of stock options as of the grant date. The expected volatility considers the historical volatility of our stock as determined by the closing price over a six to ten year term that is generally commensurate with the expected term of the option. The expected dividend is zero as the 2010 distribution is not expected to be recurring in nature. The expected term of the options are based on evaluations of historical and expected future employee exercise behavior. The risk-free interest rates for periods within the expected term of the option are based on the U.S. Treasury yield curve in effect during the period the options were granted. We use historical data to estimate future forfeiture rates to apply against the gross amount of compensation expense determined using the option valuation model.

The weighted-average assumptions used to estimate the fair value of the stock options using the Black-Scholes option valuation model were as follows for the three and nine months ended September 30, 2010 and 2011:

	Three Months Ended September 30,				Nine Months Ended September 30,
	2010	2011			2010			2011
Expected volatility	n/a		101.52	%		94.26	%		101.49	%
Expected dividends	n/a		—	%		—	%		—	%
Expected term (in years)	n/a		7.5			7.3			7.5
Risk-free interest rate	n/a		1.59	%		3.11	%		1.64	%

Stock option information with respect to the company’s stock-based compensation plans during the nine months ended September 30, 2011 is as follows (Dollars in thousands, except weighted average exercise price and weighted average grant date fair value):

Options	Shares			Weighted Average Exercise Price		Weighted Average Grant Date Fair Value		Weighted Average Remaining Contractual Term	Aggregate Intrinsic Value
Outstanding at January 1, 2011		1,151,998		$	6.83	$	5.36	5.0 years	$	748
Granted		630,000			2.43		2.05			—
Exercised		(33,012	)		0.57		0.41			109
Forfeited or expired		(41,961	)		12.78		7.94			3
Outstanding at September 30, 2011		1,707,025		$	5.18	$	4.17	5.5 years	$	420
Exercisable at September 30, 2011		680,528		$	8.00	$	5.42	3.1 years	$	358
Expected to Vest		974,659		$	3.29	$	3.30	7.1 years	$	59

The aggregate intrinsic value represents the difference between the company’s closing stock price on September 30, 2011 of $2.25 and the option exercise price of the shares for stock options that were in the money, multiplied by the number of shares underlying such options. The total fair value of options vested during the nine months ended September 30, 2010 and 2011 was $0.9 million and $0.8 million, respectively.

The fair values of shares of restricted stock are determined based on the closing price of the company’s common stock on the grant dates. Information regarding the company’s restricted stock during the nine months ended September 30, 2011 is as follows:

Restricted Stock Units	Shares			Weighted Average Grant Date Fair Value
Non-Vested at January 1, 2011		10,000		$	2.03
Granted		—			—
Lapsed		(10,000	)	$	(2.03	)
Forfeited		—			—
Non-Vested at September 30, 2011		—			—

As of September 30, 2011, there was $2.1 million of total unrecognized compensation cost related to non-vested awards of stock options and restricted shares. This cost is expected to be recognized over a weighted-average period of 2.3 years.

XML

SEGMENT DATA

9 Months Ended

Sep. 30, 2011

SEGMENT DATA

NOTE 15. SEGMENT DATA

FASB ASC Topic 280 “Segment Reporting” requires companies to provide certain information about their operating segments. We have two reportable operating segments, radio broadcasting and Internet. The remaining non-reportable segment consists of our publishing businesses, Salem Publishing and Xulon Press™, which do not meet the reportable segment quantitative thresholds. The radio-broadcasting segment also owns and operates radio networks.

Management uses operating income before depreciation, amortization and (gain) loss on disposal of assets, as its measure of profitability for purposes of assessing performance and allocating resources.

	Radio Broadcast			Internet			Publishing			Corporate			Consolidated
	(Dollars in thousands)
Three Months Ended September 30, 2011
Net revenue	$	44,793		$	7,079		$	3,024		$	—		$	54,896
Operating expenses		29,198			5,724			2,890			4,285			42,097
Operating income (loss) before depreciation, amortization and (gain) loss on disposal of assets	$	15,595		$	1,355		$	134		$	(4,285	)	$	12,799
Depreciation		2,182			522			87			311			3,102
Amortization		35			627			18			—			680
(Gain) loss on disposal of assets		53			(28	)		—			7			32
Operating income (loss)	$	13,325		$	234		$	29		$	(4,603	)	$	8,985
Three Months Ended September 30, 2010
Net revenue	$	43,507		$	5,052		$	2,832		$	—		$	51,391
Operating expenses		27,940			4,432			2,962			4,154			39,488
Operating income (loss) before depreciation, amortization and (gain) loss on disposal of assets	$	15,567		$	620		$	(130	)	$	(4,154	)	$	11,903
Depreciation		2,329			443			61			293			3,126
Amortization		22			496			68			1			587
(Gain) loss on disposal of assets		9			7			2			—			18
Operating income (loss)	$	13,207		$	(326	)	$	(261	)	$	(4,448	)	$	8,172
	Radio Broadcast			Internet			Publishing			Corporate			Consolidated
	(Dollars in thousands)
Nine months Ended September 30, 2011
Net revenue	$	132,929		$	20,873		$	9,009		$	—		$	162,811
Operating expenses		86,054			17,243			8,541			13,040			124,878
Operating income (loss) before depreciation, amortization and (gain) loss on disposal of assets	$	46,875		$	3,630		$	468		$	(13,040	)	$	37,933
Depreciation		6,670			1,574			224			935			9,403
Amortization		101			1,766			114			1			1,982
(Gain) loss on disposal of assets		(4,487	)		(12	)		—			156			(4,343	)
Operating income (loss)	$	44,591		$	302		$	130		$	(14,132	)	$	30,891
Nine months Ended September 30, 2010
Net revenue	$	130,386		$	14,254		$	8,198		$	—		$	152,838
Operating expenses		82,921			12,246			8,270			12,140			115,577
Operating income (loss) before depreciation, amortization and (gain) loss on disposal of assets	$	47,465		$	2,008		$	(72	)	$	(12,140	)	$	37,261
Depreciation		7,100			1,277			187			851			9,415
Amortization		58			1,196			217			4			1,475
(Gain) loss on disposal of assets		(9	)		7			10			5			13
Operating income (loss)	$	40,316		$	(472	)	$	(486	)	$	(13,000	)	$	26,358
	Radio Broadcast			Internet			Publishing			Corporate			Consolidated
	(Dollars in thousands)
As of September 30, 2011
Total property, plant and equipment, net	$	96,089		$	5,910		$	1,179		$	9,204		$	112,382
Goodwill		3,871			15,127			1,337			8			20,343
As of December 31, 2010
Total property, plant and equipment, net	$	99,621		$	5,517		$	969		$	9,760		$	115,867
Goodwill		4,006			13,010			1,337			8			18,361

XML

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (Parenthetical) (USD $) In Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Broadcast operating expenses exclusive of depreciation and amortization	$ 29,198	$ 27,940	$ 86,054	$ 82,921
Corporate expenses exclusive of depreciation and amortization	4,285	4,154	13,040	12,140
Depreciation	3,102	3,126	9,403	9,415
Amortization	680	587	1,982	1,475
Related Party A
Broadcast operating expenses exclusive of depreciation and amortization	324	317	972	948
Corporate expenses exclusive of depreciation and amortization	53	30	379	164
Broadcasting
Depreciation	2,182	2,329	6,670	7,100
Amortization	35	22	101	58
Internet Business
Depreciation	522	443	1,574	1,277
Amortization	627	496	1,766	1,196
Publishing Business
Depreciation	87	61	224	187
Amortization	18	68	114	217
Corporate
Depreciation	311	293	935	851
Amortization	$ 0	$ 1	$ 1	$ 4

XML

SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2011

SUBSEQUENT EVENTS

NOTE 16. SUBSEQUENT EVENTS

On October 17, 2011, we entered an agreement acquire KTNO-AM, Dallas, Texas for $2.2 million. We began programming the station pursuant to a Time Brokerage Agreement with the current owner on November 1, 2011

Subsequent events reflect all applicable transactions through the date of the filing.

XML

BASIS OF PRESENTATION

9 Months Ended

Sep. 30, 2011

BASIS OF PRESENTATION

NOTE 1. BASIS OF PRESENTATION

The accompanying condensed consolidated financial statements of Salem Communications Corporation (“Salem,” “we” or the “company”) include the company and its wholly-owned subsidiaries. All significant intercompany balances and transactions have been eliminated.

Information with respect to the three and nine months ended September 30, 2010 and 2011 is unaudited. The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by GAAP for complete financial statements. In the opinion of management, the unaudited interim financial statements contain all adjustments, consisting of normal recurring accruals, necessary for a fair presentation of the financial position, results of operations and cash flows of the company. The results of operations for the interim periods are not necessarily indicative of the results of operations for the full year. For further information, refer to the consolidated financial statements and footnotes thereto included in our annual report on Form 10-K for the year ended December 31, 2010.

The balance sheet at December 31, 2010 included in this report has been derived from the audited financial statements at that date, but does not include all of the information and footnotes required by GAAP.

Description of Business

Salem is a domestic multi-media company with integrated business operations covering radio broadcasting, publishing and the Internet. Our programming is intended for all audiences interested in Christian and family-themed content and complementary programming. Our primary business is the ownership and operation of radio stations in large metropolitan markets. Upon the close of all announced transactions, we will own and/or operate 96 radio stations across the United States. We also own and operate Salem Radio Network^® (“SRN”), SRN News Network (“SNN”), Salem Music Network (“SMN”), Solid Gospel Network (“SGN”), Salem Media Representatives (“SMR”) and Vista Media Representatives (“VMR”). SRN, SNN, SMN and SGN are radio networks that produce and distribute programming, such as talk, news and music segments to radio stations throughout the United States, including Salem owned and operated stations. SMR and VMR sell commercial air time to national advertisers on radio stations and networks that we own, as well as on independent radio station affiliates.

We also operate Salem Web Network™ (“SWN”), our Internet businesses that provide Christian and conservative-themed content, audio and video streaming, and other resources on the web. SWN’s Internet portals include OnePlace.com, Jesus.org, HotAir.com, Crosswalk.com^®, Christianity.com, GodTube.com, Townhall.com^®, Samaritan Fundraising and WorshipHouse Media. SWN’s content is accessible through our radio station websites that feature content of interest to local listeners throughout the United States. SWN operates these Salem radio station websites as well as Salem Consumer Products, a website offering books, DVD’s and editorial content that is developed by many of our on-air radio personalities and are available for purchase. The revenues generated from this segment are reported as Internet revenue on our Condensed Consolidated Statements of Operations.

We also operate Salem Publishing™, that produces and distributes Christian and conservative opinion print magazines. Salem Publishing operates Xulon Press™, a print-on-demand self-publishing service for Christian authors. The revenues generated from this segment are reported as publishing revenue on our Condensed Consolidated Statements of Operations.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Significant areas for which management uses estimates are allowance for bad debts, income tax valuation allowance, impairment analysis for indefinite-lived intangible assets including broadcast licenses and goodwill, impairment analysis on other long-lived assets, stock-based compensation expense, and liabilities incurred under our partial self-insurance plan.

XML

AMORTIZABLE INTANGIBLE ASSETS

9 Months Ended

Sep. 30, 2011

AMORTIZABLE INTANGIBLE ASSETS

NOTE 10. AMORTIZABLE INTANGIBLE ASSETS

The following tables provide details, by major category, of the significant classes of amortizable intangible assets:

	As of September 30, 2011
	Cost		Accumulated Amortization			Net
	(Dollars in thousands)
Customer lists and contracts	$	15,556	$	(11,113	)	$	4,443
Domain and brand names		8,143		(6,233	)		1,910
Favorable and assigned leases		1,649		(1,513	)		136
Other amortizable intangible assets		4,342		(3,555	)		787
	$	29,690	$	(22,414	)	$	7,276
	As of December 31, 2010
	Cost		Accumulated Amortization			Net
	(Dollars in thousands)
Customer lists and contracts	$	12,881	$	(10,313	)	$	2,568
Domain and brand names		7,695		(5,492	)		2,203
Favorable and assigned leases		1,649		(1,444	)		205
Other amortizable intangible assets		3,799		(3,247	)		552
	$	26,024	$	(20,496	)	$	5,528

Based on the amortizable intangible assets as of September 30, 2011, we estimate amortization expense for the next five years to be as follows:

Year Ending December 31,	Amortization Expense
	(Dollars in thousands)
2011 (Oct – Dec)	$	656
2012		2,144
2013		1,803
2014		1,396
2015		804
Thereafter		473
Total	$	7,276

XML

COMMITMENTS AND CONTINGENCIES

9 Months Ended

Sep. 30, 2011

COMMITMENTS AND CONTINGENCIES

NOTE 14. COMMITMENTS AND CONTINGENCIES

The company enters into various agreements in the normal course of business that contain minimum guarantees. The typical minimum guarantee is tied to future revenue amounts that exceed the contractual level. Accordingly, the fair value of these arrangements is zero.

We and our subsidiaries, incident to our business activities, at various times are parties to a number of legal proceedings, lawsuits, arbitration and other claims. Such matters are subject to many uncertainties and outcomes that are not predictable with assurance. We maintain insurance that may provide coverage for such matters. Consequently, we are unable to ascertain the ultimate aggregate amount of monetary liability or the financial impact with respect to these matters. We believe, at this time, that the final resolution of these matters, individually and in the aggregate, will not have a material adverse effect upon our consolidated financial position, results of operations or cash flows.

On July 10, 2010, Asia Vision, Inc. and Rehan Siddiqi amended a complaint they had previously filed against third parties in the 152nd Judicial District Court of Harris County, Houston, Texas, naming Salem Communications Corporation, South Texas Broadcasting, Inc. and one of Salem’s officers as defendants. In their complaint, Asia Vision claims that the Salem defendants interfered with Asia Vision’s contractual right to purchase radio station KTEK-AM from Business Radio Licensee, LLC. In their complaint, Asia Vision and Rehan Siddiqi make a claim for injunctive relief and monetary damages. On July 21, 2010, Salem Communications and South Texas Broadcasting were served with the complaint but the Salem officer has not been served. Salem has retained counsel, has tendered defense of the matter to several insurance companies, and will vigorously defend this action.

On March 7, 2011, Salem entered into a tentative settlement of the matter. The court approved the settlement on October 27, 2011. Third parties now have until November 28 to file an appeal. If no appeal is filed, the order will become final at that time and we should close on the purchase mid-December following final FCC approval.

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (USD $) In Thousands	Sep. 30, 2011	Dec. 31, 2010
Current assets:
Cash and cash equivalents	$ 19	$ 828
Restricted cash		100
Trade accounts receivable (less allowance for doubtful accounts of $10,040 in 2010 and $10,244 in 2011)	30,748	29,363
Other receivables	1,018	623
Prepaid expenses	4,654	3,320
Deferred income taxes	5,842	5,974
Total current assets	42,281	40,208
Property, plant and equipment (net of accumulated depreciation of $117,212 in 2010 and $123,214 in 2011)	112,382	115,867
Broadcast licenses	369,370	378,362
Goodwill	20,343	18,361
Other indefinite-lived intangible assets	1,961	1,961
Amortizable intangible assets (net of accumulated amortization of $20,496 in 2010 and $22,414 in 2011)	7,276	5,528
Deferred financing costs	5,584	7,349
Notes receivable	2,761	2,327
Other assets	1,253	4,523
Total assets	563,211	574,486
Current liabilities:
Accounts payable	2,166	961
Accrued expenses	5,804	6,020
Accrued compensation and related expenses	6,585	7,730
Accrued interest	7,052	1,264
Deferred revenue	8,049	6,513
Income tax payable	7	210
Current portion of long-term debt and capital lease obligations	119	111
Total current liabilities	29,782	22,809
Long-term debt and capital lease obligations, less current portion	277,586	304,416
Deferred income taxes	45,451	42,296
Deferred revenue	7,893	7,898
Other liabilities	229	663
Total liabilities	360,941	378,082
Commitments and contingencies (Note 14)
Stockholders' equity:
Additional paid-in capital	231,640	230,947
Retained earnings (loss)	4,370	(802)
Treasury stock, at cost (2,317,650 shares at December 31, 2010 and September 30, 2011)	(34,006)	(34,006)
Total stockholders' equity	202,270	196,404
Total liabilities and stockholders' equity	563,211	574,486
Class A Common Stock
Stockholders' equity:
Common Stock	210	209
Class B Common stock
Stockholders' equity:
Common Stock	$ 56	$ 56