UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q



| |  | [X] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR
      15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
| |  | --- | --------------------------------------------------------------------------------------------

FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2004

OR



| |  | [   ] | TRANSITION REPORT PURSUANT TO SECTION 13 OR
      15(d) OF THE SECURITIESEXCHANGE 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(STATE OR
      OTHER JURISDICTION OFINCORPORATION OR ORGANIZATION)         |  | 77-0121400(I.R.S. EMPLOYERIDENTIFICATION NUMBER)
|4880 SANTA ROSA ROAD
CAMARILLO, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES) |  | 93012(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 [   ]



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Indicate by check mark
whether the registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2). YES [X] NO [   ]

As of April 30, 2004,
there were 17,991,442 shares of Class A common stock and 5,553,696 shares of
Class B common stock of Salem Communications Corporation outstanding.







SALEM COMMUNICATIONS CORPORATIONINDEX

|                               |                                                                                               |  |          |    | 
|------------------------------ | --------------------------------------------------------------------------------------------- |  | -------- | -- | 
|                               |                                                                                               |  | PAGE NO.
|                               |                                                                                               |  |         
|COVER PAGE                     |                                                                                               |  | 1        |   
|INDEX                          |                                                                                               |  | 2        |   
|PART I - FINANCIAL INFORMATION |                                                                                               |  | 4        |   
|                               | Item 1. Financial Statements                                                                  |  |          | 4  | 
|                               | Item 2.
Managements Discussion and Analysis of Financial Condition and Results of Operations |  |          | 19 | 
|                               | Item 3. Quantitative and Qualitative Disclosures About Market
      Risk                      |  |          | 31 | 
|                               | Item 4. Controls and Procedures                                                               |  |          | 32 | 
|PART II - OTHER INFORMATION    |                                                                                               |  | 33       |   
|                               | Item 1. Legal Proceedings                                                                     |  |          | 33 | 
|                               | Item 2. Changes In Securities, Use of
    Proceeds and Issuer Purchases of Equity Securities  |  |          | 33 | 
|                               | Item 3. Defaults Upon Senior Securities                                                       |  |          | 33 | 
|                               | Item 4. Submission of Matters to a Vote of Security
      Holders                             |  |          | 33 | 
|                               | Item 5. Other Information                                                                     |  |          | 33 | 
|                               | Item 6. Exhibits and Reports on Form 8-K                                                      |  |          | 34 | 
|SIGNATURES                     |                                                                                               |  | 36       |   
|EXHIBIT INDEX                  |                                                                                               |  | 37       |   

2



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SPECIAL CAUTIONARY NOTICE REGARDING 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, 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 from time to
time in Salems reports on Forms 10-K, 10-Q and 8-K filed with the Securities
and Exchange Commission (the SEC). Forward-looking statements made in this
report speak as of the date hereof. 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).

3



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PART I - FINANCIAL INFORMATION

SALEM COMMUNICATIONS CORPORATION

ITEM 1. FINANCIAL STATEMENTS (UNAUDITED)







4



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SALEM COMMUNICATIONS CORPORATIONCONDENSED CONSOLIDATED
BALANCE SHEETS(IN THOUSANDS, EXCEPT SHARE DATA)

|                                                                                                    |                                                                                                                                                                                          |                                      |         |              |  |             |         |         |  | 
|--------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------ | ------- | ------------ |  | ----------- | ------- | ------- |  | 
|                                                                                                    |                                                                                                                                                                                          |                                      |         | December 31, |  | March 31,  
|                                                                                                    |                                                                                                                                                                                          |                                      |         | 2003         |  | 2004       
|                                                                                                    |                                                                                                                                                                                          |                                      |         |              |  |            
|                                                                                                    |                                                                                                                                                                                          |                                      |         | (Note 1)     |  | (Unaudited)
|                                                                                                    |                                                                                                                                                                                          | ASSETS                               |         |              |  |             |         |         |  | 
|Current assets:                                                                                    
|                                                                                                    | Cash and cash equivalents                                                                                                                                                                |                                      | $       | 5,620        |  |             | $       | 4,159   | 
|                                                                                                    | Accounts
      receivable (less allowance for doubtful accounts of $9,423 in 2003 and
      $8,827 in 2004)                                                                              |                                      |         | 31,509       |  |             |         | 29,787  | 
|                                                                                                    | Other receivables                                                                                                                                                                        |                                      |         | 3,071        |  |             |         | 1,410   | 
|                                                                                                    | Prepaid expenses                                                                                                                                                                         |                                      |         | 1,747        |  |             |         | 1,671   | 
|                                                                                                    | Due from stockholders                                                                                                                                                                    |                                      |         | 83           |  |             |         | 42      | 
|                                                                                                    | Deferred income taxes                                                                                                                                                                    |                                      |         | 4,754        |  |             |         | 4,290   | 
|                                                                                                    |                                                                                                                                                                                          |                                      |         |              |  |             |         |        
|Total current assets                                                                                |                                                                                                                                                                                          |                                      | 46,784  |              |  |             | 41,359  |        
|Property,
      plant and equipment, net                                                            |                                                                                                                                                                                          |                                      | 97,393  |              |  |             | 98,240  |        
|Broadcast licenses                                                                                  |                                                                                                                                                                                          |                                      | 381,740 |              |  |             | 381,740 |        
|Goodwill                                                                                            |                                                                                                                                                                                          |                                      | 11,129  |              |  |             | 11,129  |        
|Amortizable
intangible assets, net of accumulated amortization of $4,736 in 2003 and $5,118 in 2004 |                                                                                                                                                                                          |                                      | 4,262   |              |  |             | 3,882   |        
|Bond issue costs                                                                                    |                                                                                                                                                                                          |                                      | 5,631   |              |  |             | 5,441   |        
|Fair value
      of interest rate swap                                                              |                                                                                                                                                                                          |                                      | 6,045   |              |  |             | 6,806   |        
|Other assets                                                                                        |                                                                                                                                                                                          |                                      | 7,027   |              |  |             | 8,179   |        
|                                                                                                    |                                                                                                                                                                                          |                                      |         |              |  |             |         |        
|Total assets                                                                                        |                                                                                                                                                                                          | $                                    | 560,011 |              |  | $           | 556,776 |        
|                                                                                                    |                                                                                                                                                                                          |                                      |         |              |  |             |         |        
|                                                                                                    |                                                                                                                                                                                          | LIABILITIES AND STOCKHOLDERS EQUITY |         |              |  |             |         |         |  | 
|Current liabilities:                                                                               
|                                                                                                    | Accounts payable                                                                                                                                                                         |                                      | $       | 535          |  |             | $       | 101     | 
|                                                                                                    | Accrued expenses                                                                                                                                                                         |                                      |         | 5,454        |  |             |         | 4,875   | 
|                                                                                                    | Accrued
      compensation and related expenses                                                                                                                                          |                                      |         | 4,661        |  |             |         | 5,150   | 
|                                                                                                    | Accrued interest                                                                                                                                                                         |                                      |         | 7,127        |  |             |         | 6,382   | 
|                                                                                                    | Deferred revenue                                                                                                                                                                         |                                      |         | 1,163        |  |             |         | 1,285   | 
|                                                                                                    | Income taxes payable                                                                                                                                                                     |                                      |         |             |  |             |         | 90      | 
|                                                                                                    | Current
      portion of long-term debt and capital lease obligations                                                                                                                    |                                      |         | 15           |  |             |         | 16      | 
|                                                                                                    |                                                                                                                                                                                          |                                      |         |              |  |             |         |        
|Total current liabilities                                                                           |                                                                                                                                                                                          |                                      | 18,955  |              |  |             | 17,899  |        
|Long-term
      debt and capital lease obligations, less current portion                            |                                                                                                                                                                                          |                                      | 330,046 |              |  |             | 325,041 |        
|Fair value
      in excess of book value of debt hedged with interest rate swap                     |                                                                                                                                                                                          |                                      | 6,045   |              |  |             | 6,806   |        
|Deferred income taxes                                                                               |                                                                                                                                                                                          |                                      | 28,999  |              |  |             | 29,060  |        
|Deferred revenue                                                                                    |                                                                                                                                                                                          |                                      | 3,472   |              |  |             | 3,510   |        
|Other liabilities                                                                                   |                                                                                                                                                                                          |                                      | 672     |              |  |             | 803     |        
|                                                                                                    |                                                                                                                                                                                          |                                      |         |              |  |             |         |        
|Total liabilities                                                                                   |                                                                                                                                                                                          |                                      | 388,189 |              |  |             | 383,119 |        
|                                                                                                    |                                                                                                                                                                                          |                                      |         |              |  |             |         |        
|Commitments and contingencies                                                                      
|Stockholders equity:                                                                              
|                                                                                                    | Class A
common stock, $0.01 par value; authorized 80,000,000 shares; issued and outstanding 17,956,567 and 17,984,217 shares at
      December 31, 2003 and March 31, 2004, respectively |                                      |         | 180          |  |             |         | 180     | 
|                                                                                                    | Class B common stock, $0.01 par value; authorized 20,000,000
      shares; issued and outstanding 5,553,696 shares                                                                       |                                      |         | 56           |  |             |         | 56      | 
|                                                                                                    | Additional paid-in capital                                                                                                                                                               |                                      |         | 148,538      |  |             |         | 149,130 | 
|                                                                                                    | Retained earnings                                                                                                                                                                        |                                      |         | 23,048       |  |             |         | 24,291  |  | 
|                                                                                                    |                                                                                                                                                                                          |                                      |         |              |  |             |         |        
|Total stockholders equity                                                                          |                                                                                                                                                                                          |                                      | 171,822 |              |  |             | 173,657 |        
|                                                                                                    |                                                                                                                                                                                          |                                      |         |              |  |             |         |        
|Total
      liabilities and stockholders equity                                                    |                                                                                                                                                                                          | $                                    | 560,011 |              |  | $           | 556,776 |        
|                                                                                                    |                                                                                                                                                                                          |                                      |         |              |  |             |         |        

See accompanying notes

5



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SALEM COMMUNICATIONS CORPORATIONCONDENSED CONSOLIDATED
STATEMENTS OF OPERATIONS(IN THOUSANDS, EXCEPT SHARE AND PER SHARE DATA)(UNAUDITED)

|                                                  |                                                                                                                                                                                                                     |   |                    |        |      |   |            |        |  
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | - | ------------------ | ------ | ---- | - | ---------- | ------ | -
|                                                  |                                                                                                                                                                                                                     |   | Three Months Ended |       
|                                                  |                                                                                                                                                                                                                     |   | March 31,          |       
|                                                  |                                                                                                                                                                                                                     |   |                   
|                                                  |                                                                                                                                                                                                                     |   | 2003               |        | 2004 |  
|                                                  |                                                                                                                                                                                                                     |   |                    |        |     
|Gross broadcasting revenue                        |                                                                                                                                                                                                                     | $ | 42,056             |        |      | $ | 47,054     |       
|Less agency commissions                           |                                                                                                                                                                                                                     |   | 3,350              |        |      |   | 3,897      |       
|                                                  |                                                                                                                                                                                                                     |   |                    |        |      |  
|Net broadcasting revenue                          |                                                                                                                                                                                                                     |   | 38,706             |        |      |   | 43,157     |        |  
|Other media revenue                               |                                                                                                                                                                                                                     |   | 1,921              |        |      |   | 1,946      |       
|                                                  |                                                                                                                                                                                                                     |   |                    |        |      |  
|Total revenue                                     |                                                                                                                                                                                                                     |   | 40,627             |        |      |   | 45,103     |       
|Operating expenses:                              
|                                                  | Broadcasting operating expenses, exclusive of depreciation and
      amortization shown below (including $291 and $273 for the quarters ended
      March 31, 2003 and 2004, respectively, paid to related parties) |   |                    | 26,338 |      |   |            | 27,544 |  
|                                                  | Costs of
      denied tower site and license upgrade                                                                                                                                                                |   |                    | 2,202  |      |   |            |       |  
|                                                  | Other
      media operating expenses, exclusive of depreciation and amortization shown below                                                                                                                        |   |                    | 1,860  |      |   |            | 2,162  |  
|                                                  | Corporate
      expenses, exclusive of depreciation and amortization shown below
      (including $150 and $81 for the quarters ended March 31, 2003 and 2004,
      respectively, paid to related parties)         |   |                    | 4,044  |      |   |            | 4,304  |  
|                                                  | Depreciation and amortization (including $292 and $268 for the
      quarters ended March 31, 2003 and 2004, respectively,
      for other media businesses)                                                        |   |                    | 3,025  |      |   |            | 3,097  |  
|                                                  |                                                                                                                                                                                                                     |   |                    |        |      |  
|Total operating expenses                          |                                                                                                                                                                                                                     |   | 37,469             |        |      |   | 37,107     |       
|                                                  |                                                                                                                                                                                                                     |   |                    |        |      |  
|Operating income                                  |                                                                                                                                                                                                                     |   | 3,158              |        |      |   | 7,996      |       
|Other income (expense):                          
|                                                  | Interest income                                                                                                                                                                                                     |   |                    | 154    |      |   |            | 29     |  
|                                                  | Interest expense                                                                                                                                                                                                    |   |                    | (6,636 | )    |   |            | (5,670 | )
|                                                  | Loss on
      early redemption of long-term debt                                                                                                                                                                    |   |                    | (6,440 | )    |   |            |       |  
|                                                  | Loss on sale of assets                                                                                                                                                                                              |   |                    |       |      |   |            | (224   | )
|                                                  | Other expense, net                                                                                                                                                                                                  |   |                    | (69    | )    |   |            | (111   | )
|                                                  |                                                                                                                                                                                                                     |   |                    |        |      |  
|Income (loss) before income taxes                 |                                                                                                                                                                                                                     |   | (9,833             | )      |      |   | 2,020      |       
|Provision (benefit) for income taxes              |                                                                                                                                                                                                                     |   | (3,745             | )      |      |   | 777        |       
|                                                  |                                                                                                                                                                                                                     |   |                    |        |      |  
|Net income (loss)                                 |                                                                                                                                                                                                                     | $ | (6,088             | )      |      | $ | 1,243      |       
|                                                  |                                                                                                                                                                                                                     |   |                    |        |      |  
|                                                 
|Basic earnings (loss) per share                   |                                                                                                                                                                                                                     | $ | (0.26              | )      |      | $ | 0.05       |       
|                                                 
|                                                 
|Diluted
      earnings (loss) per share           |                                                                                                                                                                                                                     | $ | (0.26              | )      |      | $ | 0.05       |       
|                                                  |                                                                                                                                                                                                                     |   |                    |        |      |   |            |       
|Basic
      weighted average shares outstanding   |                                                                                                                                                                                                                     |   | 23,484,113         |        |      |   | 23,526,105 |       
|                                                  |                                                                                                                                                                                                                     |   |                    |        |      |  
|Diluted
      weighted average shares outstanding |                                                                                                                                                                                                                     |   | 23,484,113         |        |      |   | 23,678,124 |       
|                                                  |                                                                                                                                                                                                                     |   |                    |        |      |  

See accompanying notes

6



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SALEM COMMUNICATIONS CORPORATIONCONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS(IN THOUSANDS)(UNAUDITED)

|                                                                                               |                                                     |                                                 |         |                    |        |      |         |       |        |  
|---------------------------------------------------------------------------------------------- | --------------------------------------------------- | ----------------------------------------------- | ------- | ------------------ | ------ | ---- | ------- | ----- | ------ | -
|                                                                                               |                                                     |                                                 |         | Three Months Ended
|                                                                                               |                                                     |                                                 |         | March 31,         
|                                                                                               |                                                     |                                                 |         |                   
|                                                                                               |                                                     |                                                 |         | 2003               |        | 2004
|                                                                                               |                                                     |                                                 |         |                    |        |     
|OPERATING ACTIVITIES                                                                           |                                                     |                                                 |         |                    |        |      |         |      
|Net income (loss)                                                                              |                                                     | $                                               | (6,088  | )                  |        | $    | 1,243   |      
|Adjustments to reconcile net income (loss) to net cash provided by
      operating activities: |                                                     |                                                 |         |                    |        |      |         |      
|                                                                                               | Loss on early retirement of debt                    |                                                 |         | 6,440              |        |      |         |      |       
|                                                                                               | Costs of denied tower site and license upgrade      |                                                 |         | 2,202              |        |      |         |      |       
|                                                                                               | Tax benefit related to stock options exercised      |                                                 |         |                   |        |      |         | 80    |       
|                                                                                               | Depreciation and amortization                       |                                                 |         | 3,025              |        |      |         | 3,097 |       
|                                                                                               | Amortization of bond issue costs and bank loan fees |                                                 |         | 379                |        |      |         | 458   |       
|                                                                                               | Provision for bad debts                             |                                                 |         | 1,416              |        |      |         | 688   |       
|                                                                                               | Deferred income taxes                               |                                                 |         | (4,155             | )      |      |         | 525   |       
|                                                                                               | Loss on sale of assets                              |                                                 |         |                   |        |      |         | 224   |       
|                                                                                               | Changes in
      operating assets and liabilities: 
|                                                                                               |                                                     | Accounts receivable                             |         |                    | 628    |      |         |       | 1,034  |  
|                                                                                               |                                                     | Prepaid
      expenses and other current assets |         |                    | 828    |      |         |       | 1,778  |  
|                                                                                               |                                                     | Accounts
      payable and accrued expenses     |         |                    | (1,091 | )    |         |       | (1,269 | )
|                                                                                               |                                                     | Deferred
      revenue                          |         |                    | 1,593  |      |         |       | 160    |  
|                                                                                               |                                                     | Other liabilities                               |         |                    | (230   | )    |         |       | 131    |  
|                                                                                               |                                                     | Income taxes payable                            |         |                    | (384   | )    |         |       | 90     |  
|                                                                                               |                                                     |                                                 |         |                    |        |      |         |      
|Net cash provided by operating activities                                                      |                                                     |                                                 | 4,563   |                    |        |      | 8,239   |      
|                                                                                              
|INVESTING ACTIVITIES                                                                          
|Capital expenditures                                                                           |                                                     |                                                 | (1,990  | )                  |        |      | (3,784  | )    
|Deposits on radio station acquisitions                                                         |                                                     |                                                 |        |                    |        |      | (1,063  | )    
|Other                                                                                          |                                                     |                                                 | (202    | )                  |        |      | (336    | )    
|                                                                                               |                                                     |                                                 |         |                    |        |      |         |      
|Net cash used in investing activities                                                          |                                                     |                                                 | (2,192  | )                  |        |      | (5,183  | )    
|FINANCING ACTIVITIES                                                                          
|Proceeds
      from issuance of long-term debt and notes payable                               |                                                     |                                                 | 3,000   |                    |        |      | 7,500   |      
|Payments
      of long-term debt and notes payable                                             |                                                     |                                                 | (30,000 | )                  |        |      | (12,500 | )    
|Proceeds
      from exercise of stock options                                                  |                                                     |                                                 |        |                    |        |      | 512     |      
|Payments
      on capital lease obligations                                                    |                                                     |                                                 | (11     | )                  |        |      | (4      | )    
|Payments
      of costs related to bank credit facility and debt refinancing                   |                                                     |                                                 | (170    | )                  |        |      | (25     | )    
|Payments
      of bond issue costs                                                             |                                                     |                                                 | (67     | )                  |        |      |        |      
|                                                                                               |                                                     |                                                 |         |                    |        |      |         |      
|Net cash used in financing activities                                                          |                                                     |                                                 | (27,248 | )                  |        |      | (4,517  | )    
|                                                                                               |                                                     |                                                 |         |                    |        |      |         |      
|Net decrease in cash and cash equivalents                                                      |                                                     |                                                 | (24,877 | )                  |        |      | (1,461  | )    
|Cash and
      cash equivalents at beginning of period                                         |                                                     |                                                 | 26,325  |                    |        |      | 5,620   |      
|                                                                                               |                                                     |                                                 |         |                    |        |      |        
|Cash and
      cash equivalents at end of period                                               |                                                     | $                                               | 1,448   |                    |        | $    | 4,159   |      
|                                                                                               |                                                     |                                                 |         |                    |        |      |        
|Supplemental disclosures of cash flow information:                                             |                                                     |                                                 |         |                    |        |      |         |      
|                                                                                               | Cash paid during the period for:                    |                                                 |         |                    |        |     
|                                                                                               |                                                     | Interest                                        |         | $                  | 10,866 |      |         | $     | 6,882  |  
|                                                                                               |                                                     | Income taxes                                    |         |                    | 793    |      |         |       | 86     |  

See accompanying notes

7



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SALEM COMMUNICATIONS CORPORATIONNOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

Information with respect to
the three months ended March 31, 2004 and 2003 is unaudited.
The accompanying unaudited consolidated financial statements have been prepared
in accordance with generally accepted accounting principles (GAAP) for interim
financial information and with the instructions to Form 10-Q and Article 10 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, for
the periods presented. 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, 2003.

The balance sheet at December 31, 2003
has been derived from the audited financial statements at that date but does not
include all of the information and footnotes required by generally accepted
principles for complete financial statements.

NOTE 2. ACQUISITIONS AND OTHER SIGNIFICANT TRANSACTIONS

On October 15, 2003, the company entered into an agreement to acquire the assets of radio station KJPN-AM in
Honolulu, Hawaii for approximately $0.5 million. We anticipate this transaction to close in the second quarter of 2004.

On March 16, 2004, the company entered into an agreement to acquire the assets of radio station WAFS-AM in
Atlanta, Georgia for approximately $16.4 million. We anticipate this transaction to close in the second quarter
of 2004.

On March 26, 2004, the company entered into an agreement to acquire the assets of radio station WQBH-AM in
Detroit, Michigan for approximately $4.8 million. We anticipate this transaction to close in the third quarter
of 2004.

NOTE 3. STOCK-BASED COMPENSATION

Employee stock options are
accounted for under Accounting Principles Board Opinion No. 25, Accounting for
Stock Issued to Employees, which requires the recognition of expense when
the option price is less than the fair value of the stock at the date of grant.

The Company generally awards
options for a fixed number of shares at an option price equal to the fair value
at the date of grant. The Company has adopted the disclosure-only provisions of SFAS No.
123, Accounting for Stock-Based Compensation and SFAS No. 148 Accounting for Stock-Based
CompensationTransition and Disclosure.

SFAS No. 123, as amended by
SFAS No. 148, permits companies to recognize, as expense over the vesting period,
the fair value of all stock-based awards on the date of grant. The Black-Scholes
option valuation model was developed for use in estimating the fair value of traded
options, which have no vesting restrictions and are fully transferable. Because
the Company's stock-based compensation plans have characteristics significantly
different from those of traded options and because changes in the subjective input
assumptions can materially affect the fair value estimate, management believes
that the existing option valuation models do not necessarily provide a reliable
single measure of the fair value of awards from the plan. Therefore, as permitted,
the Company applies the existing accounting rules under APB No. 25 and provides
pro forma net income (loss) and pro forma earnings (loss) per share disclosures for
stock-based awards made during the year as if the fair value method defined in
SFAS No. 123, as amended, had been applied. Net income (loss) and earnings
(loss) per share for each of the three months ended March 31, 2004 and 2003
would have changed to the following pro forma amounts:

8



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| |                                                                                                                        |   |                                               |   |      |   |       |   | 
| | ---------------------------------------------------------------------------------------------------------------------- | - | --------------------------------------------- | - | ---- | - | ----- | - | 
| |                                                                                                                        |   | Three Months Ended                            |  
| |                                                                                                                        |   | March 31,                                     |  
| |                                                                                                                        |   |                                              
| |                                                                                                                        |   | 2003                                          |   | 2004 |  
| |                                                                                                                        |   |                                               |   |     
| |                                                                                                                        |   | (Dollars in thousands, except per share data)
|
| | Net income (loss), as reported                                                                                         | $ | (6,088                                        | ) |      | $ | 1,243 |  
| | Add: Stock-based compensation, as reported                                                                             |   |                                              |   |      |   |      |  
| | Deduct:
      Total stock-based compensation determined under fair value based method
      for all awards, net of tax |   | (293                                          | ) |      |   | (590  | )
| |                                                                                                                        |   |                                               |   |      |   |      
| | Pro forma net income (loss)                                                                                            | $ | (6,381                                        | ) |      | $ | 653   |  
| |                                                                                                                        |   |                                               |   |      |   |      
| | Earnings (loss) per share:                                                                                             |   |                                               |   |      |   |       |  
| | Basic
      earnings (loss) per share - as reported                                                                    | $ | (0.26                                         | ) |      | $ | 0.05  |  
| | Basic
      earnings (loss) per share - pro forma                                                                      |   | (0.27                                         | ) |      |   | 0.03  |  
| |                                                                                                                        |   |                                               |   |      |   |      
| | Diluted
      earnings (loss) per share - as reported                                                                  | $ | (0.26                                         | ) |      | $ | 0.05  |  
| | Diluted
      earnings (loss) per share - pro forma                                                                    |   | (0.27                                         | ) |      |   | 0.03  |  

9



---

NOTE 4. RECENT ACCOUNTING PRONOUNCEMENTS

Statement of Financial
Accounting Standards No. 145

In April 2002, the Financial
Accounting Standards Board (FASB) issued SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement rescinds SFAS No. 4, Reporting Gains and Losses
from Extinguishment of Debt, and an amendment of that statement, SFAS Statement
No. 64, Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements. In
addition, SFAS No. 145 amends FASB Statement No. 13, Accounting for Leases.
Salem adopted this statement on January 1, 2003 and its adoption resulted in the
classification of any loss on early retirement of debt in other income and
expense rather than as an extraordinary item under the prior rules.

Statement of Financial
Accounting Standards No. 148

In December 2002, the FASB
issued SFAS No. 148, Accounting for Stock-Based CompensationTransition and
Disclosure, an amendment of SFAS No. 123. This statement amends SFAS No. 123,
Accounting for Stock-Based Compensation, to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirement of SFAS No. 123 to require prominent disclosure in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Salem adopted this statement and its adoption did not have a material
impact on Salems financial position, results of operations or cash flows. As
permitted under the statement, Salem continues to measure any expense related to
stock options under the intrinsic value method and provides the required
disclosures under the fair value method in Note 2.

Financial Interpretation No. 46

In January 2003, the Financial
Accounting Standards Board issued Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 requires an
investor with a majority of the variable interests (primary beneficiary) in a
variable interest entity (VIE) to consolidate the entity and also
requires majority and significant variable interest investors to provide certain
disclosures. A VIE is an entity in which the voting equity investors do not have
a controlling financial interest, or the equity investment at risk is insufficient
to finance the entitys activities without receiving additional subordinated financial
support from other parties. For arrangements entered into with VIEs created prior
to January 31, 2003, the provisions of FIN 46 were originally effective as of the
beginning of the three months ended September 27, 2003, however, the FASB
subsequently delayed the effective date of this provision until the first interim
or annual period ending after December 15, 2003. The provisions of FIN 46 were
effective immediately for all arrangements entered into with new VIEs created
after January 31, 2003.

Salem performed
a review of its investments in both non-marketable and marketable
securities as well as other arrangements to determine whether the investee or
other party is a VIE and then whether Salem is the primary beneficiary of
any of the related entities. The review did not identify any VIE that would
require consolidation as March 31, 2004. Provided that Salem
is not the primary beneficiary, the maximum exposure to losses related to any
entity that may be determined to be a VIE is generally limited to the carrying
amount of the investment in the entity.

10



---



NOTE 5. COSTS OF DENIED TOWER SITE AND LICENSE UPGRADE

In April 2003, the San Diego
County Board of Supervisors denied Salems motion to relocate its radio towers
for radio station KCBQ-AM, San Diego, California. As a result of the denial, the
company recorded a write-off of approximately $1.3 million in capitalized costs
related to the project. Additionally, in May 2003, the Federal Communications
Commission (FCC) denied Salems motion to increase the night-time coverage of
radio station WGKA-AM, Atlanta, Georgia. As a result of the denial, the company
recorded a write-off of approximately $0.9 million in capitalized costs related
to the project. These write-offs were recorded in the quarter ended March 31,
2003 in Salems Statement of Operations as Costs of denied tower site and
license upgrade.

NOTE 6. REDEMPTION OF $100.0 MILLION 91⁄2% SENIOR SUBORDINATED
NOTES DUE 2007

On January 22, 2003, Salem
redeemed its $100.0 million 91⁄2% senior subordinated notes due 2007 (91⁄2%
Notes), representing all such notes then outstanding. The redemption resulted
in a loss on early retirement of long-term debt of $6.4 million. Salem used the
proceeds of its $100.0 million 73⁄4% senior subordinated notes due 2010 (73⁄4%
Notes) issued in December 2002, and additional borrowings under Salems credit
facility to redeem the 91⁄2% Notes.

NOTE 7. AMORTIZABLE INTANGIBLE ASSETS

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

|                                          |  |                         |                        |       |              |   |             |        |   |   |       |      
|----------------------------------------- |  | ----------------------- | ---------------------- | ----- | ------------ | - | ----------- | ------ | - | - | ----- | -----
|                                          |  | As of December 31, 2003
|                                          |  |                        
|                                          |  |                         |                        |       |              |   | Accumulated
|                                          |  |                         | Cost                   |       | Amortization |   | Net        
|                                          |  |                         |                        |       |              |   |            
|                                          |  |                         | (Dollars in thousands)
|                                          |  |                         |                       
|Customer lists and contracts              |  | $                       | 4,249                  |       |              | $ | (2,245      | )      |   | $ | 2,004
|Favorable
      and assigned leases       |  |                         | 1,459                  |       |              |   | (923        | )      |   |   | 536  
|Other
      amortizable intangible assets |  |                         | 3,290                  |       |              |   | (1,568      | )      |   |   | 1,722
|                                          |  |                         |                        |       |              |   |             |        |   |   |       |      
|                                          |  |                         | $                      | 8,998 |              |   | $           | (4,736 | ) |   | $     | 4,262
|                                          |  |                         |                        |       |              |   |             |        |   |   |       |      

|                                          |  |                      |                        |       |              |   |             |        |   |   |       |      
|----------------------------------------- |  | -------------------- | ---------------------- | ----- | ------------ | - | ----------- | ------ | - | - | ----- | -----
|                                          |  | As of March 31, 2004
|                                          |  |                     
|                                          |  |                      |                        |       |              |   | Accumulated
|                                          |  |                      | Cost                   |       | Amortization |   | Net        
|                                          |  |                      |                        |       |              |   |            
|                                          |  |                      | (Dollars in thousands)
|                                          |  |                      |                       
|Customer
      lists and contracts        |  | $                    | 4,249                  |       |              | $ | (2,462      | )      |   | $ | 1,787
|Favorable
      and assigned leases       |  |                      | 1,459                  |       |              |   | (939        | )      |   |   | 520  
|Other
      amortizable intangible assets |  |                      | 3,292                  |       |              |   | (1,717      | )      |   |   | 1,575
|                                          |  |                      |                        |       |              |   |             |        |   |   |       |      
|                                          |  |                      | $                      | 9,000 |              |   | $           | (5,118 | ) |   | $     | 3,882
|                                          |  |                      |                        |       |              |   |             |        |   |   |       |      

11



---



Based on the amortizable
intangible assets as of March 31, 2004, we estimate amortization expense for
the next five years to be as follows:

|                         |  |                        |   |      
|------------------------ |  | ---------------------- | - | -----
|Year Ending December 31, |  | Amortization Expense  
|                         |  |                       
|                         |  | (Dollars in thousands)
|                         |  |                       
|2004                     |  |                        | $ | 1,529
|2005                     |  |                        |   | 1,278
|2006                     |  |                        |   | 729  
|2007                     |  |                        |   | 439  
|2008                     |  |                        |   | 65   

NOTE 8. 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 Class A and Class B
shares of common stock outstanding during the period plus the dilutive effects
of outstanding stock options.

Options to purchase 597,065
and 764,616 shares of Class A common stock were outstanding at March 31,
2003 and 2004, respectively. Diluted weighted average shares outstanding
excludes outstanding stock options whose exercise price is in excess of the
average price of the companys stock price. Those options are excluded due to
their antidilutive effect. For periods in which the company has a net loss, all
options are excluded due to their antidilutive effect.

12



---



NOTE 9. 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 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 and may increase volatility in our earnings.

We had two interest rate
swap agreements outstanding as of March 31, 2004, which are used to manage
our exposure to changes in the fair value of a recognized asset or liability
that may result due to changes in interest rates. The counter parties to these
interest rate swap agreements are major financial institutions. Although we are
exposed to credit loss in the event of nonperformance by the counter parties we
do not anticipate nonperformance by the counter parties nor would we expect any
such loss to be material.

At March 31, 2004, an
interest rate swap agreement with a notional principal amount of $66.0 million
was outstanding. This agreement relates to our $150.0 million 9% senior
subordinated notes due 2011 (9% Notes). This agreement expires in 2011 when
the 9% Notes mature, and effectively swaps the 9.0% fixed interest rate on $66.0
million of the 9% Notes for a floating rate equal to the LIBOR rate plus 3.09%.
The estimated fair value of this swap agreement and the excess of fair value
over the book value of the debt hedged by the swap, based on current market
rates, were each $6.7 million at March 31, 2004. Changes in the fair value
of the swap and the changes in the fair value of debt being hedged are recorded
as part of interest expense. The fair value of the swap agreement is included
with long-term assets, and the fair value of the debt hedged by the swap is
recorded in long-term debt consistent with the maturity date of the swap and related debt.
Because this fair value hedge is effective (that is, the change in the fair
value of the hedge instrument is designed to be equal to the change in the fair
value of the item being hedged), there was no income statement effect relative
to the change in the fair value of the swap agreement. Interest expense for the
three months ended March 31, 2004 was reduced by $0.8 million as a result of
the difference between the 9.0% fixed interest rate on our debt and the floating
interest rate under the swap agreement, which was 4.31% for the three months ended
March 31, 2004.

We have a second interest rate swap agreement with a notional principal amount of
$24.0 million. This agreement also relates to our 9% Notes. This agreement
expires in 2011 when the 9% Notes mature, and effectively swaps the 9.0% fixed
interest rate on $24.0 million of the 9% Notes for a floating rate equal to the
LIBOR rate plus 4.86%. The estimated fair value of this swap agreement
and the excess of fair value over the book value of the debt hedged by
the swap, based on current market rates, were each $0.1 million at March 31,
2004. Changes in the fair value of the swap and the changes in the fair value of
debt being hedged are recorded as part of interest expense. The fair value of
the swap agreement is included with long-term liabilities, and the fair value of
the debt hedged by the swap is recorded in long-term debt consistent with the
maturity date of the swap and related debt. Because this fair value hedge is effective (that is,
the change in the fair value of the hedge instrument is designed to be equal to
the change in the fair value of the item being hedged), there was no income
statement effect relative to the change in the fair value of the swap agreement.
Interest expense for the three months ended March 31, 2004 was reduced by
$0.2 million as a result of the difference between the 9.0% fixed interest rate
on our debt and the floating interest rate under the swap agreement, which was
6.08% for the three months ended March 31, 2004.

NOTE 10. CONTINGENCIES

Incident to our business
activities, we are party to a number of legal proceedings, lawsuits and other
claims. Such matters are subject to many uncertainties and outcomes are not
predictable with assurance. Also, we maintain insurance which may provide
coverage for such matters. Consequently, our management is unable to ascertain
the ultimate aggregate amount of monetary liability or the financial impact with
respect to these matters. However, our management believes, at this time, that
the final resolution of these matters, individually and in the aggregate, will
not have a material adverse effect upon our financial position, results of
operations or cash flows.

13



---



NOTE 11. SEGMENT DATA

SFAS No. 131, Disclosures
About Segments of an Enterprise and Related Information, requires companies to
provide certain information about their operating segments. The company has one
reportable operating segmentradio broadcastingwhich includes our talk and
music formats and our various radio networks. The remaining non-reportable
segments consist of the Salem Web Network (our Internet division) and Salem
Publishing  (our publishing business), which do not meet the reportable
segment quantitative threshholds and accordingly are aggregated below as other
media. Revenue and expenses earned and charged between segments are recorded at
fair value.

Management uses operating
income before depreciation, amortization and unusual charges as its measure of
profitability for purposes of assessing performance and allocating
resources.

|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |        |   | 
|---------------------------------------------------------------------------------------------------------------------------------------------- | ------------------ |  |  | - | ------------------ |  | ---- | - | ------ | - | ---------------------- | - |  | - | ------ | - | 
|                                                                                                                                               |                    |  |  |   | Three Months Ended
|                                                                                                                                               |                    |  |  |   | March 31,         
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                       
|                                                                                                                                               |                    |  |  |   |                    |  | 2003 |   | 2004  
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   | (Dollars in thousands)
|                                                                                                                                              
|Net revenue                                                                                                                                   
|                                                                                                                                               | Radio broadcasting |  |  |   |                    |  |      |   |        | $ | 38,706                 |   |  | $ | 43,157 |  
|                                                                                                                                               | Other media        |  |  |   |                    |  |      |   |        |   | 1,921                  |   |  |   | 1,946  |  
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |       
|Consolidated net revenue                                                                                                                       |                    |  |  |   |                    |  |      |   |        | $ | 40,627                 |   |  | $ | 45,103 |  
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |       
|                                                                                                                                              
|Operating
      expenses (excluding depreciation, amortization and costs of
      denied tower site and license upgrade)                      
|                                                                                                                                               | Radio broadcasting |  |  |   |                    |  |      |   |        | $ | 26,338                 |   |  | $ | 27,544 |  
|                                                                                                                                               | Other media        |  |  |   |                    |  |      |   |        |   | 1,860                  |   |  |   | 2,162  |  
|                                                                                                                                               | Corporate          |  |  |   |                    |  |      |   |        |   | 4,044                  |   |  |   | 4,304  |  
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |       
|Consolidated operating expenses (excluding depreciation,
      amortization and costs of denied tower site and license upgrade)                |                    |  |  | $ | 32,242             |  |      | $ | 34,010 |  
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |       
|                                                                                                                                              
|Operating
      income before depreciation, amortization, costs of denied tower site and license upgrade and cost of terminated
      offering
|                                                                                                                                               | Radio broadcasting |  |  |   |                    |  |      |   |        | $ | 12,368                 |   |  | $ | 15,613 |  
|                                                                                                                                               | Other media        |  |  |   |                    |  |      |   |        |   | 61                     |   |  |   | (216   | )
|                                                                                                                                               | Corporate          |  |  |   |                    |  |      |   |        |   | (4,044                 | ) |  |   | (4,304 | )
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |       
|Consolidated operating income before depreciation,
amortization and costs of denied tower site and license upgrade)                            |                    |  |  | $ | 8,385              |  |      | $ | 11,093 |  
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |       
|Depreciation expense                                                                                                                          
|                                                                                                                                               | Radio broadcasting |  |  |   |                    |  |      |   |        | $ | 2,327                  |   |  | $ | 2,396  |  
|                                                                                                                                               | Other media        |  |  |   |                    |  |      |   |        |   | 131                    |   |  |   | 113    |  
|                                                                                                                                               | Corporate          |  |  |   |                    |  |      |   |        |   | 162                    |   |  |   | 205    |  
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |       
|Consolidated depreciation expense                                                                                                              |                    |  |  |   |                    |  |      |   |        | $ | 2,620                  |   |  | $ | 2,714  |  
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |       
|                                                                                                                                              
|Amortization expense                                                                                                                          
|                                                                                                                                               | Radio broadcasting |  |  |   |                    |  |      |   |        | $ | 242                    |   |  | $ | 226    |  
|                                                                                                                                               | Other media        |  |  |   |                    |  |      |   |        |   | 161                    |   |  |   | 154    |  
|                                                                                                                                               | Corporate          |  |  |   |                    |  |      |   |        |   | 2                      |   |  |   | 3      |  
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |       
|Consolidated amortization expense                                                                                                              |                    |  |  |   |                    |  |      |   |        | $ | 405                    |   |  | $ | 383    |  
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |       
|                                                                                                                                              
|Operating
      income before costs of denied tower site and license upgrade                                                                   |                    |  |  |   |                    |  |      |   |        |  
|                                                                                                                                               | Radio broadcasting |  |  |   |                    |  |      |   |        | $ | 9,799                  |   |  | $ | 12,991 |  
|                                                                                                                                               | Other media        |  |  |   |                    |  |      |   |        |   | (231                   | ) |  |   | (483   | )
|                                                                                                                                               | Corporate          |  |  |   |                    |  |      |   |        |   | (4,208                 | ) |  |   | (4,512 | )
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |       
|Consolidated operating
income before costs of denied tower site and license upgrade                                                            |                    |  |  | $ | 5,360              |  |      | $ | 7,996  |  
|                                                                                                                                               |                    |  |  |   |                    |  |      |   |        |   |                        |   |  |   |       

14



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|                                                |                    |   |                        |  |           |   |        |  | 
|----------------------------------------------- | ------------------ | - | ---------------------- |  | --------- | - | ------ |  | 
|                                                |                    |   | December 31,           |  | March 31,
|                                                |                    |   | 2003                   |  | 2004     
|                                                |                    |   |                        |  |          
|                                                |                    |   | (Dollars in thousands)
|                                               
|Total property, plant and equipment, net       
|                                                | Radio broadcasting | $ | 93,055                 |  |           | $ | 93,665
|                                                | Other media        |   | 1,542                  |  |           |   | 1,497 
|                                                | Corporate          |   | 2,796                  |  |           |   | 3,078 
|                                                |                    |   |                        |  |           |  
|Consolidated property, plant and equipment, net |                    | $ | 97,393                 |  |           | $ | 98,240
|                                                |                    |   |                        |  |           |  
|                                               

|                                                                                                                                                      |                                                      |  |  |  |  |                    |        |   |      |   |        |   | 
|----------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------- |  |  |  |  | ------------------ | ------ | - | ---- | - | ------ | - | 
|Reconciliation of operating income before depreciation,
      amortization and costs of denied tower site and license upgrade to pretax income (loss)
|                                                                                                                                                     
|                                                                                                                                                      |                                                      |  |  |  |  | Three Months Ended |       
|                                                                                                                                                      |                                                      |  |  |  |  | March 31,          |       
|                                                                                                                                                      |                                                      |  |  |  |  |                    |        |  
|                                                                                                                                                      |                                                      |  |  |  |  | 2003               |        |   | 2004 |  
|                                                                                                                                                      |                                                      |  |  |  |  |                    |        |   |     
|Operating
      income before depreciation, amortization and costs of denied tower site and license upgrade                                           |                                                      |  |  |  |  | $                  | 8,385  |   |      | $ | 11,093 |  
|                                                                                                                                                      | Depreciation expense                                 |  |  |  |  |                    | (2,620 | ) |      |   | (2,714 | )
|                                                                                                                                                      | Amortization expense                                 |  |  |  |  |                    | (405   | ) |      |   | (383   | )
|                                                                                                                                                      | Costs of
      denied tower site and license upgrade |  |  |  |  |                    | (2,202 | ) |      |   |       |  
|                                                                                                                                                      | Interest income                                      |  |  |  |  |                    | 154    |   |      |   | 29     |  
|                                                                                                                                                      | Loss on sale of assets                               |  |  |  |  |                    |       |   |      |   | (224   | )
|                                                                                                                                                      | Interest expense                                     |  |  |  |  |                    | (6,636 | ) |      |   | (5,670 | )
|                                                                                                                                                      | Loss on
      early redemption of long-term debt     |  |  |  |  |                    | (6,440 | ) |      |   |       |  
|                                                                                                                                                      | Other expense, net                                   |  |  |  |  |                    | (69    | ) |      |   | (111   | )
|                                                                                                                                                      |                                                      |  |  |  |  |                    |        |   |     
|Pretax income (loss)                                                                                                                                  |                                                      |  |  |  |  | $                  | (9,833 | ) |      | $ | 2,020  |  
|                                                                                                                                                      |                                                      |  |  |  |  |                    |        |   |     

15



---



NOTE 12. CONSOLIDATING FINANCIAL STATEMENTS

The following is the
consolidating information of Salem Communications Corporation for purposes of
presenting the financial position and operating results of our wholly-owned
subsidiary, Salem Communications Holding Corporation (Salem Holding) as the issuer of
the $150.0 million 9% Notes and $100.0 million 73⁄4% Notes and its guarantor
subsidiaries on a consolidated basis and the financial position and operating
results of the other guarantors, which are consolidated within the company.
Separate financial information of Salem Holding on an unconsolidated basis is not
presented because Salem Holding has substantially no assets, operations or cash other
than its investments in subsidiaries. On April 1, 2003, the assets of OnePlace,
LLC (OnePlace) were transferred to SCA License Corporation, a wholly-owned
subsidiary of Salem Communications Acquisition Corporation (Salem Acquisition). The
financial position and results of operations for OnePlace are presented with
Salem Publishing in Other Media.

16



---



SALEM COMMUNICATIONS CORPORATION
CONSOLIDATING BALANCE SHEET
(IN THOUSANDS)
(UNAUDITED)

|                                                                                |                                           |   |                      |   |              |   |         |       |         |   |             |       |              |   |         |        |       |   |          |      |   |   |         |        | 
|------------------------------------------------------------------------------- | ----------------------------------------- | - | -------------------- | - | ------------ | - | ------- | ----- | ------- | - | ----------- | ----- | ------------ | - | ------- | ------ | ----- | - | -------- | ---- | - | - | ------- | ------ | 
|                                                                                |                                           |   | As of March 31, 2004
|                                                                                |                                           |   |                     
|                                                                                |                                           |   |                      |   | Issuer and  
|                                                                                |                                           |   |                      |   | Guarantor   
|                                                                                |                                           |   | Guarantors           |   | Subsidiaries
|                                                                                |                                           |   |                      |   |             
|                                                                                |                                           |   |                      |   |              |   | Salem   |       | Other   |   | Salem       |       |              |   |         |        | Salem |  
|                                                                                |                                           |   | Parent               |   | Acquisition  |   | Media   |       | Holding |   | Adjustments |       | Consolidated |  
|                                                                                |                                           |   |                      |   |              |   |         |       |         |   |             |       |              |   |         |        |       |   |          |      |   |   |         |       
|Current assets:                                                                 |                                           |   |                      |   |              |   |         |       |         |   |            
|                                                                                | Cash and cash equivalents                 |   | $                    |  |              |   | $       | 897   |         |   | $           | 889   |              |   | $       | 2,373  |       |   | $        |     |   |   | $       | 4,159 
|                                                                                | Accounts receivable                       |   |                      |  |              |   |         | 1,797 |         |   |             | 1,532 |              |   |         | 26,458 |       |   |          |     |   |   |         | 29,787 | 
|                                                                                | Other receivables                         |   |                      |  |              |   |         | 3     |         |   |             | 110   |              |   |         | 2,126  |       |   |          | (829 | ) |   |         | 1,410 
|                                                                                | Prepaid expenses                          |   |                      |  |              |   |         | 46    |         |   |             | 71    |              |   |         | 1,554  |       |   |          |     |   |   |         | 1,671  | 
|                                                                                | Due from stockholders                     |   |                      |  |              |   |         |      |         |   |             |      |              |   |         | 42     |       |   |          |     |   |   |         | 42    
|                                                                                | Deferred income taxes                     |   |                      |  |              |   |         | (25   | )       |   |             | 176   |              |   |         | 4,377  |       |   |          | (238 | ) |   |         | 4,290  | 
|                                                                                |                                           |   |                      |   |              |   |         |       |         |   |             |       |              |   |         |        |       |   |          |      |   |   |         |       
|Total current assets                                                            |                                           |   |                     |   |              |   | 2,718   |       |         |   | 2,778       |       |              |   | 36,930  |        |       |   | (1,067   | )    |   |   | 41,359 
|Property, plant and equipment, net                                              |                                           |   |                     |   |              |   | 4,377   |       |         |   | 1,109       |       |              |   | 92,754  |        |       |   |         |      |   |   | 98,240  |       
|Broadcast licenses                                                              |                                           |   |                     |   |              |   | 93,602  |       |         |   |            |       |              |   | 288,138 |        |       |   |         |      |   |   | 381,740
|Goodwill                                                                        |                                           |   |                     |   |              |   | 8       |       |         |   | 5,011       |       |              |   | 6,110   |        |       |   |         |      |   |   | 11,129  |       
|Amortizable intangible assets, net                                              |                                           |   |                     |   |              |   |        |       |         |   | 189         |       |              |   | 3,693   |        |       |   |         |      |   |   | 3,882  
|Bond issue costs                                                                |                                           |   |                     |   |              |   |        |       |         |   |            |       |              |   | 5,441   |        |       |   |         |      |   |   | 5,441   |       
|Fair value of interest rate swap                                                |                                           |   |                     |   |              |   |        |       |         |   |            |       |              |   | 6,806   |        |       |   |         |      |   |   | 6,806   |       
|Intercompany receivables                                                        |                                           |   | 260,582              |   |              |   | 1,437   |       |         |   |            |       |              |   | 65,566  |        |       |   | (327,585 | )    |   |   |        |       
|Other assets                                                                    |                                           |   |                     |   |              |   |        |       |         |   | 428         |       |              |   | 7,751   |        |       |   |         |      |   |   | 8,179   |       
|                                                                                |                                           |   |                      |   |              |   |         |       |         |   |             |       |              |   |         |        |       |   |          |      |   |   |         |       
|Total assets                                                                    |                                           | $ | 260,582              |   |              | $ | 102,142 |       |         | $ | 9,515       |       |              | $ | 513,189 |        |       | $ | (328,652 | )    |   | $ | 556,776 |       
|                                                                                |                                           |   |                      |   |              |   |         |       |         |   |             |       |              |   |         |        |       |   |          |      |   |   |        
|Current liabilities:                                                            |                                           |   |                      |   |             
|                                                                                | Accounts payable                          |   | $                    |  |              |   | $       | 4     |         |   | $           | 6     |              |   | $       | 91     |       |   | $        |     |   |   | $       | 101    | 
|                                                                                | Accrued expenses                          |   |                      |  |              |   |         | 222   |         |   |             | 391   |              |   |         | 4,409  |       |   |          | (147 | ) |   |         | 4,875  | 
|                                                                                | Accrued compensation and related expenses |   |                      |  |              |   |         | 190   |         |   |             | 353   |              |   |         | 4,607  |       |   |          |     |   |   |         | 5,150  | 
|                                                                                | Accrued interest                          |   |                      |  |              |   |         |      |         |   |             |      |              |   |         | 6,382  |       |   |          |     |   |   |         | 6,382  | 
|                                                                                | Deferred revenue                          |   |                      |  |              |   |         |      |         |   |             | 1,285 |              |   |         |       |       |   |          |     |   |   |         | 1,285  | 
|                                                                                | Income taxes payable                      |   |                      |  |              |   |         | 11    |         |   |             | 10    |              |   |         | (159   | )     |   |          | (228 | ) |   |         | 90     | 
|                                                                                | Current maturities of long-term debt      |   |                      |  |              |   |         |      |         |   |             |      |              |   |         | 16     |       |   |          |     |   |   |         | 16     | 
|                                                                                |                                           |   |                      |   |              |   |         |       |         |   |             |       |              |   |         |        |       |   |          |      |   |   |         |       
|Total current liabilities                                                       |                                           |   |                     |   |              |   | 427     |       |         |   | 2,045       |       |              |   | 15,346  |        |       |   | 81       |      |   |   | 17,899  |       
|Intercompany payables                                                           |                                           |   | 77,685               |   |              |   | 4,582   |       |         |   | 16,836      |       |              |   | 1,435   |        |       |   | (100,538 | )    |   |   |        |       
|Long-term debt                                                                  |                                           |   |                     |   |              |   |        |       |         |   |            |       |              |   | 325,041 |        |       |   |         |      |   |   | 325,041 |       
|Fair value in excess of book value of debt
      hedged with interest rate swap |                                           |   |                     |   |              |   |        |       |         |   |            |       |              |   | 6,806   |        |       |   |         |      |   |   | 6,806   |       
|Deferred income taxes                                                           |                                           |   | (1,721               | ) |              |   | (1,045  | )     |         |   | (1,322      | )     |              |   | 38,068  |        |       |   | (4,920   | )    |   |   | 29,060  |       
|Deferred revenue                                                                |                                           |   |                     |   |              |   |        |       |         |   |            |       |              |   | 3,510   |        |       |   |         |      |   |   | 3,510   |       
|Other liabilities                                                               |                                           |   |                     |   |              |   |        |       |         |   |            |       |              |   | 803     |        |       |   |         |      |   |   | 803     |       
|Stockholders equity                                                            |                                           |   | 184,618              |   |              |   | 98,178  |       |         |   | (8,044      | )     |              |   | 122,180 |        |       |   | (233,275 | )    |   |   | 173,657 |       
|                                                                                |                                           |   |                      |   |              |   |         |       |         |   |             |       |              |   |         |        |       |   |          |      |   |   |         |       
|Total liabilities and stockholders equity                                      |                                           | $ | 260,582              |   |              | $ | 102,142 |       |         | $ | 9,515       |       |              | $ | 513,189 |        |       | $ | (328,652 | )    |   | $ | 556,776 |       
|                                                                                |                                           |   |                      |   |              |   |         |       |         |   |             |       |              |   |         |        |       |   |          |      |   |   |         |       

17



---



SALEM COMMUNICATIONS CORPORATION
CONSOLIDATING INCOME STATEMENT
(IN THOUSANDS)
(UNAUDITED)

|                                     |                                 |   |                                   |        |              |   |       |        |         |   |             |       |              |   |        |        |       |   |      |        |   |   |        |        |  
|------------------------------------ | ------------------------------- | - | --------------------------------- | ------ | ------------ | - | ----- | ------ | ------- | - | ----------- | ----- | ------------ | - | ------ | ------ | ----- | - | ---- | ------ | - | - | ------ | ------ | -
|                                     |                                 |   | Three Months Ended March 31, 2004
|                                     |                                 |   |                                  
|                                     |                                 |   |                                   |        | Issuer and  
|                                     |                                 |   |                                   |        | Guarantor   
|                                     |                                 |   | Guarantors                        |        | Subsidiaries
|                                     |                                 |   |                                   |        |             
|                                     |                                 |   |                                   |        |              |   | Salem |        | Other   |   | Salem       |       |              |   |        |        | Salem |  
|                                     |                                 |   | Parent                            |        | Acquisition  |   | Media |        | Holding |   | Adjustments |       | Consolidated |  
|                                     |                                 |   |                                   |        |              |   |       |        |         |   |             |       |             
|Gross broadcasting revenue           |                                 | $ |                                  |        |              | $ | 3,091 |        |         | $ |            |       |              | $ | 44,445 |        |       | $ | (482 | )      |   | $ | 47,054 |       
|Less agency commissions              |                                 |   |                                  |        |              |   | (212  | )      |         |   |            |       |              |   | (3,685 | )      |       |   |     |        |   |   | (3,897 | )     
|                                     |                                 |   |                                   |        |              |   |       |        |         |   |             |       |              |   |        |        |       |   |      |        |   |   |        |       
|Net broadcasting revenue             |                                 |   |                                  |        |              |   | 2,879 |        |         |   |            |       |              |   | 40,760 |        |       |   | (482 | )      |   |   | 43,157 |       
|Other media revenue                  |                                 |   |                                  |        |              |   |      |        |         |   | 2,146       |       |              |   |       |        |       |   | (200 | )      |   |   | 1,946  |       
|                                     |                                 |   |                                   |        |              |   |       |        |         |   |             |       |              |   |        |        |       |   |      |        |   |   |        |       
|Total revenue                        |                                 |   |                                  |        |              |   | 2,879 |        |         |   | 2,146       |       |              |   | 40,760 |        |       |   | (682 | )      |   |   | 45,103 |       
|Operating expenses:                 
|                                     | Broadcasting operating expenses |   |                                   |       |              |   |       | 2,160  |         |   |             |      |              |   |        | 25,687 |       |   |      | (303   | ) |   |        | 27,544 |  
|                                     | Other media operating expenses  |   |                                   |       |              |   |       |       |         |   |             | 2,683 |              |   |        | (126   | )     |   |      | (395   | ) |   |        | 2,162  |  
|                                     | Corporate expenses              |   |                                   |       |              |   |       |       |         |   |             |      |              |   |        | 4,304  |       |   |      |       |   |   |        | 4,304  |  
|                                     | Depreciation and amortization   |   |                                   |       |              |   |       | 115    |         |   |             | 152   |              |   |        | 2,830  |       |   |      |       |   |   |        | 3,097  |  
|                                     |                                 |   |                                   |        |              |   |       |        |         |   |             |       |              |   |        |        |       |   |      |        |   |   |        |       
|Total operating expenses             |                                 |   |                                  |        |              |   | 2,275 |        |         |   | 2,835       |       |              |   | 32,695 |        |       |   | (698 | )      |   |   | 37,107 |       
|                                     |                                 |   |                                   |        |              |   |       |        |         |   |             |       |              |   |        |        |       |   |      |        |   |   |        |       
|Operating income (loss)              |                                 |   |                                  |        |              |   | 604   |        |         |   | (689        | )     |              |   | 8,065  |        |       |   | 16   |        |   |   | 7,996  |       
|Other income (expense):              |                                 |   |                                   |       
|                                     | Interest income                 |   |                                   | 1,211  |              |   |       | 8      |         |   |             | 8     |              |   |        | 3,340  |       |   |      | (4,538 | ) |   |        | 29     |  
|                                     | Interest expense                |   |                                   | (2,985 | )            |   |       | (1,211 | )       |   |             | (342  | )            |   |        | (5,670 | )     |   |      | 4,538  |   |   |        | (5,670 | )
|                                     | Loss on sale of assets          |   |                                   |       |              |   |       |       |         |   |             |      |              |   |        | (224   | )     |   |      |       |   |   |        | (224   | )
|                                     | Other expense, net              |   |                                   |       |              |   |       |       |         |   |             |      |              |   |        | (111   | )     |   |      |       |   |   |        | (111   | )
|                                     |                                 |   |                                   |        |              |   |       |        |         |   |             |       |              |   |        |        |       |   |      |        |   |   |        |       
|Income (loss) before income taxes    |                                 |   | (1,774                            | )      |              |   | (599  | )      |         |   | (1,023      | )     |              |   | 5,400  |        |       |   | 16   |        |   |   | 2,020  |        |  
|Provision (benefit) for income taxes |                                 |   | (698                              | )      |              |   | (222  | )      |         |   | (373        | )     |              |   | 2,070  |        |       |   |     |        |   |   | 777    |       
|                                     |                                 |   |                                   |        |              |   |       |        |         |   |             |       |              |   |        |        |       |   |      |        |   |   |        |       
|Net income (loss)                    |                                 | $ | (1,076                            | )      |              | $ | (377  | )      |         | $ | (650        | )     |              | $ | 3,330  |        |       | $ | 16   |        |   | $ | 1,243  |        |  
|                                     |                                 |   |                                   |        |              |   |       |        |         |   |             |       |              |   |        |        |       |   |      |        |   |   |        |       

18



---



NOTE 13. SUBSEQUENT EVENTS

On May 5, 2004 Salem
and certain Salem stockholders sold 3,100,000 shares of Salems Class A
common stock in a registered public offering pursuant to the companys
existing shelf registration statement on file with the Securities and Exchange Commission.
The offering consisted of 2,325,000 primary shares offered by the company and 775,000 secondary shares
offered by the selling stockholders. The selling stockholders are the founders
of the company and its principal stockholders, Edward G. Atsinger III and Stuart
W. Epperson. In addition, the company and the selling stockholders granted
the underwriters an over-allotment option to purchase up to an additional 175,000
shares from the company and 225,000 shares from the selling stockholders.
Salem intends to use the net proceeds of approximately $65.5 million from this offering for
working capital and general corporate purposes, which may include the redemption
of up to approximately $52.5 million principal amount of the outstanding 9% Notes.

On May 5, 2004, the company
entered into an agreement to acquire the assets of radio stations KPOI-FM
and KHUI-FM in Honolulu, Hawaii for approximately $3.7 million. We anticipate this
transaction to close in the third quarter of 2004.

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 consolidated financial statements and related notes
included elsewhere in this report. Our consolidated financial statements are not
directly comparable from period to period because of our acquisition and
disposition of radio stations and certain assets of other media
businesses.

We believe that we are the
largest U.S. radio broadcasting company, measured by number of stations and
audience coverage, providing programming targeted at audiences interested in
religious and family themes. Our core business is the ownership and operation of
radio stations in large metropolitan markets. Upon completion of all pending
transactions, we will own a national portfolio of 97 radio stations in 37 markets, including 60 stations
in 23 of the top 25 markets, which consists of 30 FM stations and 67 AM stations. Upon
completion of all pending transactions, we will be one of only four commercial
radio broadcasters with radio stations in all of the top 10 markets. We are the sixth largest operator measured by
number of stations overall and the third largest operator measured by number of
stations in the top 25 markets. Management believes that we are the fourteenth
largest radio broadcaster measured by net broadcasting revenue for the year
ended December 31, 2003.

We also own Salem Radio Network®, which
is a developer, producer and syndicator of religious and family issues
oriented talk, news and music programming with approximately 1,600 affiliated radio stations. In addition, we
own complementary Internet and publishing businesses which target our radio audiences.

We maintain a website at
http://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 or furnished to the SEC.

Our business strategy is to
expand and improve our national radio platform in order to deliver compelling
content to audiences interested in religious and family issues. We primarily
program our stations with our Christian teaching and talk format, which is talk
programming with religious and family themes. We also feature
news/talk and contemporary Christian music formats. Salem Radio Network®
supports our strategy by allowing us to reach listeners in markets where we do not own
or operate radio stations.

Historically, our principal
sources of revenue have been:

           the
sale of block program time, both to national and local program
producers,
           the
sale of advertising time on our radio stations, both to national and local
advertisers,
and
           the
sale of advertising time on our national radio network.

Our broadcasting revenue is
affected primarily by the program rates our radio stations charge and by the
advertising rates our radio stations and networks charge. The rates for block
programming time are based upon our stations ability to attract audiences that will
support the program producers through contributions and purchases of their
products. Advertising rates are based upon the demand for advertising time,
which in turn is based on our stations and networks ability to produce results
for their advertisers. Historically, we have not subscribed to traditional
audience measuring services. Instead, we have marketed ourselves to advertisers
based upon the responsiveness of our audience. In selected markets we subscribe
to a raitings report service offered by Arbitron ®, which provides quarterly reports to measure a radio stations
audience share in the demographic groups targeted by advertisers. Each of our
radio stations and our network have a general pre-determined level of time that
they make available for block programming and/or advertising, which may vary at
different times of the day.

19



---

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 generally with quarterly fluctuations
in the retail advertising industry. Quarterly
revenue from the sale of block program time does not tend to vary, however,
since program rates are generally set annually.

Our cash flow is affected by
the transition period experienced by radio stations when, due to the nature of
the radio station, our plans for the market and other circumstances, we find it
beneficial to change its format. This transition period is when we
develop a radio stations customer and listener base. During this period, a
station will typically 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 (such as other media advertising, travel
or lodging) in lieu of cash. In order to preserve the sale of our advertising
time for cash, we generally enter into trade agreements only if the goods or
services bartered to us will be used in our business. We have minimized our use
of trade agreements and have generally sold most of our advertising time for
cash. In 2003, we sold 94% of our advertising time for cash. In addition, it is
our general policy not to preempt advertising paid for in cash with advertising
paid for in trade.

The primary operating
expenses incurred in the ownership and operation of our radio stations include: (i)
employee salaries, commissions and related employee benefits and taxes, (ii) facility expenses,
such as rent, insurance and utilities, (iii) promotional expenses and (iv) music
license fees. In addition to these expenses, our
networks incur programming costs and lease expenses for satellite communication
facilities. We also incur and will continue to incur significant
depreciation, amortization and interest expense as a result of completed and
future acquisitions of radio stations and existing and future borrowings.

Salem Web Network, our
Internet division, earns its revenue from sales of streaming services, sales of
banner advertising and sponsorships on the Internet, and, to a lesser extent,
sales of software and software support contracts. Salem Publishing, our publishing business,
earns its revenue by selling advertising in and subscriptions to its
publications. The revenue and related operating expenses of these businesses are
reported as other media on our consolidated statements of operations.

SAME STATION DEFINITION

In the following discussion
of our results of operations, 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 and networks
that we own or operate in the same format during that 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

|                                     |                                                |   |                        |        |      |   |          |        |   |  |         |        |   |  
|------------------------------------ | ---------------------------------------------- | - | ---------------------- | ------ | ---- | - | -------- | ------ | - |  | ------- | ------ | - | -
|                                     |                                                |   | Three Months Ended    
|                                     |                                                |   | March 31,             
|                                     |                                                |   |                       
|                                     |                                                |   | 2003                   |        | 2004 |   | % Change
|                                     |                                                |   |                        |        |      |   |         
|                                     |                                                |   | (Dollars in thousands) |       
|                                     |                                                |   |                        |       
|Net broadcasting revenue             |                                                | $ | 38,706                 |        |      | $ | 43,157   |        |   |  | 11.5    |        | %
|Other media revenue                  |                                                |   | 1,921                  |        |      |   | 1,946    |        |   |  | 1.3     |        | %
|                                     |                                                |   |                        |        |      |   |         
|Total revenue                        |                                                |   | 40,627                 |        |      |   | 45,103   |        |   |  | 11.0    |        | %
|Operating expenses:                 
|                                     | Broadcasting operating expenses                |   |                        | 26,338 |      |   |          | 27,544 |   |  |         | 4.6    |   | %
|                                     | Costs of denied tower site and license upgrade |   |                        | 2,202  |      |   |          |       |   |  |         | (100.0 | ) | %
|                                     | Other media operating expenses                 |   |                        | 1,860  |      |   |          | 2,162  |   |  |         | 16.2   |   | %
|                                     | Corporate expenses                             |   |                        | 4,044  |      |   |          | 4,304  |   |  |         | 6.4    |   | %
|                                     | Depreciation & amortization                    |   |                        | 3,025  |      |   |          | 3,097  |   |  |         | 2.4    |   | %
|                                     |                                                |   |                        |        |      |   |         
|                                     | Operating expenses                             |   |                        | 37,469 |      |   |          | 37,107 |   |  |         | (1.0   | ) | %
|                                     |                                                |   |                        |        |      |   |         
|Operating income                     |                                                |   | 3,158                  |        |      |   | 7,996    |        |   |  | 153.2   |        | %
|Other expense:                      
|                                     | Interest income                                |   |                        | 154    |      |   |          | 29     |   |  |         | (81.2  | ) | %
|                                     | Interest expense                               |   |                        | (6,636 | )    |   |          | (5,670 | ) |  |         | (14.6  | ) | %
|                                     | Loss on early redemption of long-term debt     |   |                        | (6,440 | )    |   |          |       |   |  |         | (100.0 | ) | %
|                                     | Loss on sale of assets                         |   |                        |       |      |   |          | (224   | ) |  |         | N/A    |   |  
|                                     | Other expense, net                             |   |                        | (69    | )    |   |          | (111   | ) |  |         | 60.9   |   | %
|                                     |                                                |   |                        |        |      |   |         
|Income (loss) before income taxes    |                                                |   | (9,833                 | )      |      |   | 2,020    |        |   |  | (120.5  | )      | %
|Provision (benefit) for income taxes |                                                |   | (3,745                 | )      |      |   | 777      |        |   |  | (120.7  | )      | %
|                                     |                                                |   |                        |        |      |   |         
|Net income (loss)                    |                                                | $ | (6,088                 | )      |      | $ | 1,243    |        |   |  | (120.4) |        | %
|                                     |                                                |   |                        |        |      |   |         

21



---

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

|                                     |                                               |  |                    |     |      |   |  |     |     |   |  
|------------------------------------ | --------------------------------------------- |  | ------------------ | --- | ---- | - |  | --- | --- | - | -
|                                     |                                               |  | Three Months Ended
|                                     |                                               |  | March 31,         
|                                     |                                               |  |                   
|                                     |                                               |  | 2003               |     | 2004 |  
|                                     |                                               |  |                    |     |     
|                                    
|Net broadcasting revenue             |                                               |  | 95                 |     | %    |   |  | 96  |     | %
|Other media revenue                  |                                               |  | 5                  |     | %    |   |  | 4   |     | %
|                                     |                                               |  |                    |     |      |  
|Total revenue                        |                                               |  | 100                |     | %    |   |  | 100 |     | %
|Operating expenses:                 
|                                     | Broadcasting operating expenses               |  |                    | 65  |      | % |  |     | 61  |   | %
|                                     | Cost of denied tower site and license upgrade |  |                    | 5   |      | % |  |     |    |   | %
|                                     | Other media operating expenses                |  |                    | 5   |      | % |  |     | 5   |   | %
|                                     | Corporate expenses                            |  |                    | 10  |      | % |  |     | 10  |   | %
|                                     | Depreciation & amortization                   |  |                    | 7   |      | % |  |     | 7   |   | %
|                                     |                                               |  |                    |     |      |  
|                                     | Operating expenses                            |  |                    | 92  |      | % |  |     | 82  |   | %
|                                     |                                               |  |                    |     |      |  
|Operating income                     |                                               |  | 8                  |     | %    |   |  | 18  |     | %
|Other expense:                      
|                                     | Interest income                               |  |                    |    |      | % |  |     |    |   | %
|                                     | Interest expense                              |  |                    | (16 | )    | % |  |     | (13 | ) | %
|                                     | Loss on early redemption of long-term debt    |  |                    | (16 | )    | % |  |     |    |   | %
|                                     | Loss on sale of assets                        |  |                    |    |      | % |  |     |    |   | %
|                                     | Other expense, net                            |  |                    |    |      | % |  |     |    |   | %
|                                     |                                               |  |                    |     |      |  
|Income (loss) before income taxes    |                                               |  | (24                | )   | %    |   |  | 4   |     | %
|Provision (benefit) for income taxes |                                               |  | (9                 | )   | %    |   |  | 2   |     | %
|                                     |                                               |  |                    |     |      |  
|Net income (loss)                    |                                               |  | (15                | )   | %    |   |  | 3   |     | %
|                                     |                                               |  |                    |     |      |  

Three months ended March 31, 2004 compared to three months ended March 31, 2003

NET BROADCASTING
REVENUE.      Net broadcasting revenue
increased $4.5 million or 11.5% to $43.2 million for the quarter ended March
31, 2004 from $38.7 million for the same quarter of the prior year. On a
same station basis, net broadcasting revenue improved $3.9 million or 10.0% to $42.6 million
for the quarter ended March 31, 2004 from $38.7 million for the same quarter
of the prior year. The growth is primarily attributable to an increase in net
broadcasting revenue from our music stations acquired since the middle of 2000,
an increase in programming revenue, the acquisitions of radio stations during 2003
and an increase in advertising rates. Revenue from advertising as a percentage
of our gross broadcasting revenue increased to 50.9% for the quarter ended March 31, 2004 from 49.3%
for the same quarter of the prior year. Revenue from block program time as a
percentage of our gross broadcasting revenue decreased to 36.0% for the quarter
ended March 31, 2004 from 38.1% for the same quarter of the prior year. This
change in our revenue mix is primarily due to the growth of our contemporary
Christian music format as well as our continued efforts to develop more
advertising revenue in all of our markets.

OTHER MEDIA REVENUE.      Other media revenue remained unchanged at
$1.9 million for the quarters ended March 31, 2004 and 2003.

BROADCASTING OPERATING
EXPENSES.       Broadcasting operating
expenses increased $1.2 million or 4.6% to $27.5 million for the quarter ended
March 31, 2004 from $26.3 million for the same quarter of the prior year. On
a same station basis, broadcasting operating expenses increased $0.5 million or
1.9% to $26.8 million for the quarter ended March 31, 2004 from $26.3
million for the same quarter of the prior year. The increase is primarily due to
incremental selling expenses incurred to produce the increased revenue in the
period. Additionally, we have incurred expenses related to the launch of stations
acquired in 2003.

OTHER MEDIA OPERATING
EXPENSES.      Other media operating expenses
increased $0.3 million or 16.2% to $2.2 million for the quarter ended March 31, 2004
from $1.9 million for the same quarter in the prior year. The increase
is attributable primarily to costs associated with the closing of one of our Salem
Web Network offices and increased promotional expenses related to Salem Publishing.

22



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CORPORATE EXPENSES.      Corporate expenses increased $0.3
million or 6.4% to $4.3 million in the quarter ended March 31, 2004 from
$4.0 million in the same quarter of the prior year, primarily due to increased
overhead costs associated with recent acquisitions and inflation in salaries.

DEPRECIATION AND
AMORTIZATION.      Depreciation and
amortization expense increased $0.1 million or 2.4% to $3.1 million for the
quarter ended March 31, 2004 from $3.0 million for the same quarter of the
prior year. The increase is due principally to the depreciation
associated with the acquisitions of radio stations during 2003.

OTHER INCOME (EXPENSE).      Interest income of approximately $29,000
for the quarter ended March 31, 2004 is primarily from interest earned on
excess cash. Interest income of $0.2 million for the quarter ended March 31, 2003
is primarily from interest earned on the cash which was held in a trust account
that was used to redeem all of our 91⁄2% Notes and from interest earned on
excess cash. Interest expense decreased $0.9 million or 14.6% to $5.7 million
for the quarter ended March 31, 2004 from $6.6 million for the same quarter
of the prior year. The decrease is primarily due to savings of $0.9 million in
interest related to our interest rate swap agreements entered into in April 2002
and July 2003 compared to savings of $0.7 million in the same period of the
prior year and savings due to the refinancing of our 91⁄2% Notes. Additionally,
as part of the refinancing of our 91⁄2% Notes, both the 91⁄2% Notes and
the 73⁄4% Notes were outstanding until January 22, 2003, resulting in an
additional $0.6 million of interest expense in the prior year. Loss on sale of
assets of $0.2 million for the quarter ended March 31, 2004 is primarily due to
certain studio and production equipment being sold in connection with the early
termination of a lease with a related party. Other expense, net was $0.1 million
for the quarters ended March 31, 2004 and 2003, and was related primarily to
bank commitment fees associated with our credit facility.

PROVISION (BENEFIT) FOR INCOME
TAXES.      Provision for income taxes as a
percentage of income before income taxes (that is, the effective tax rate) was
38.5% for the quarter ended March 31, 2004 as compared to a benefit of 38.1% for the same quarter of
the prior year. For the quarters ended March 31, 2004 and 2003 the effective
tax rates differ from the federal statutory income rate of 35.0% primarily due
to the effect of state income taxes and certain expenses that are not deductible
for tax purposes.

NET INCOME (LOSS).
      We recognized net income of $1.2 million
for the quarter ended March 31, 2004 as compared to net a loss of $6.1
million for the same quarter of the prior year.

23



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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 as net
broadcasting revenue less broadcasting operating expenses.

Station operating income is
not a measure of performance calculated in accordance with GAAP; as a result it
should be viewed as a supplement to and not a substitute for our results of
operations presented on the basis of GAAP. Management believes that station
operating income is useful, 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, we use
station operating income as one of our key measures of operating efficiency and
profitability. Station operating income 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. Our station operating income is not
necessarily comparable to similarly titled measures employed by other
companies.

Three months ended March 31, 2004 compared to the three months ended March 31, 2003

STATION OPERATING
INCOME.       Station operating income increased
$3.2 million or 26.2% to $15.6 million for the quarter ended March 31, 2004
from $12.4 million for the same quarter of the prior year. As a percentage of
net broadcasting revenue, station operating income increased to 36.2% for the
quarter ended March 31, 2004 from 32.0% for the same quarter of the prior
year. The percentage increase is primarily attributable to the effect of radio
stations acquired during 2002 and 2003 that previously operated with formats
other than their current format and the effect of the growth of our contemporary
Christian music format. Acquired and reformatted radio stations typically
produce low margins during the first several years following acquisition or
conversion. Station operating income margins improve as we implement scheduled
program rate increases and increase advertising revenue on our stations. On a
same station basis, station operating income improved $3.4 million or 27.3% to
$15.8 million for the quarter ended March 31, 2004 from $12.4 million for
the same quarter of the prior year. As a percentage of same station net
broadcast revenue, same station operating income increased to 37.0% for the
quarter ended March 31, 2004 from 32.0% for the same quarter of the prior
year.

The following table provides
a reconciliation of station operating income (a non-GAAP financial measure) to
operating income (as presented in our financial statements) for the three months
ended March 31, 2003 and 2004:

|                         |                                                          |   |                              |        |   |      |        |        |  
|------------------------ | -------------------------------------------------------- | - | ---------------------------- | ------ | - | ---- | ------ | ------ | -
|                         |                                                          |   |                             
|                         |                                                          |   | Three Months Ended March 31, |       
|                         |                                                          |   |                              |       
|                         |                                                          |   |                              |       
|                         |                                                          |   | 2003                         |        |   | 2004 |        |       
|                         |                                                          |   |                              |        |   |      |       
|                         |                                                          |   | (Dollars in thousands)      
|                         |                                                          |   |                             
|Station operating income |                                                          | $ | 12,368                       |        |   | $    | 15,613 |       
|                         | Plus other media revenue                                 |   |                              | 1,921  |   |      |        | 1,946  |  
|                         | Less cost
      of denied tower site and license upgrade |   |                              | (2,202 | ) |      |        |       |  
|                         | Less other
      media operating expenses                |   |                              | (1,860 | ) |      |        | (2,162 | )
|                         | Less
      depreciation and amortization                 |   |                              | (3,025 | ) |      |        | (3,097 | )
|                         | Less
      corporate expenses                            |   |                              | (4,044 | ) |      |        | (4,304 | )
|                         |                                                          |   |                              |        |   |      |        |       
|Operating income         |                                                          | $ | 3,158                        |        |   | $    | 7,996  |       
|                         |                                                          |   |                              |        |   |      |        |       

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CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

The discussion and analysis
of our financial condition and results of operations are based upon our
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 allowance for doubtful accounts, acquisitions and upgrades of radio
station and network assets, goodwill and other intangible assets, income taxes,
and long-term debt and debt covenant compliance. 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, which affect the preparation of our consolidated financial
statements.

Accounting for acquisitions and upgrades of radio station
and network assets

Most 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 FCC license. It is generally our policy to retain third-party appraisers to
value radio stations, networks or other media properties under consideration for
acquisition. The allocations assigned to acquired FCC 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 which 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 other media properties at the
close of the transaction.

From time to time we
undertake projects to upgrade our radio station technical facilities and/or FCC
licenses. Our policy is to capitalize costs up to the point where the project is
complete, at which point we transfer the costs to the appropriate fixed asset
and/or intangible asset categories. In certain cases where a projects
completion 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 unlikely event
the required approval is considered not probable, we write-off the capitalized
costs of the project. As of March 31, 2004, there are two significant upgrade
projects with an aggregate amount of $2.1 million which is included in other
assets, in addition to several other projects aggregating an insignificant
amount.

Allowance for bad debt

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 performing 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.

26



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Intangible assets

Under the Financial
Accounting Standards Boards rules, SFAS No. 141, Business Combinations, and
SFAS No. 142, Goodwill and Other Intangible Assets, we no longer amortize
goodwill and intangible assets deemed to have indefinite lives, but perform
annual impairment tests in accordance with these statements. We believe our FCC
licenses have indefinite lives under the new standard and accordingly
amortization expense will no longer be recorded for our FCC licenses as well as
our goodwill effective July 1, 2001, for assets acquired subsequent to June 30,
2001, and effective January 1, 2002, for all other assets. Other intangible
assets will continue to be amortized over their useful lives.

We perform an annual test of
impairment on our FCC licenses and our goodwill. These tests include comparing
the recorded values to the appraised values, calculations of discounted cash
flows, operating income and other analyses. As of March 31, 2004, based on
our application of the impairment rules, no impairment was recorded. The
assessment of the fair values of these assets and the underlying businesses are
estimates which require careful consideration and judgments by our management.
If conditions in the markets in which that our stations and other media
businesses operate or if the operating results of our stations and other media
businesses change or fail to develop as anticipated, our estimates of the fair
values may change in the future and result in impairment charges.

Valuation allowance (deferred taxes)

For financial reporting
purposes, the company has recorded a valuation allowance of $3.9 million as of
March 31, 2004, 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 the realizability of 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.

Long-term debt and debt covenant compliance

Our classification of our
borrowings under our credit facility as long-term debt in our balance sheet is
based on our assessment that, under the borrowing restrictions and covenants in
our credit facility and after considering our projected operating results and
cash flows for the coming year, no principal payments will be required pursuant
to the credit agreement. These projections are estimates which are inherently
uncertain and 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; our actual results could differ from these estimates. Should our
actual results differ materially from these estimates, payments may become due
under our credit facility or it may become necessary to seek an amendment to our
credit facility. Based on our managements current assessment, we do not
anticipate principal payments becoming due under our credit facility or a
further amendment of our credit facility becoming necessary.

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 our debt and equity offerings, borrowings under the credit
facility and operating cash flow. We have
historically funded, and will continue to fund, expenditures for operations,
administrative expenses, capital expenditures and debt service required by our
credit facility and our senior subordinated notes from operating cash flow and
borrowings under our credit facility. We believe that cash on hand, cash flow
from operations, proceeds from our secondary equity offering and
borrowings under the credit facility will be sufficient to
permit us to meet our financial obligations, fund pending acquisitions and fund
operations for at least the next twelve months.

On May 5, 2004, we completed
a public offering of our Class A common stock. We intend to use the net proceeds
of approximately $65.5 million from this offering for working capital and general
corporate purposes, which may include the redemption of up to approximately $52.5
million principal amount of the outstanding 9% Notes.

Cash. Cash and cash
equivalents was $4.2 million at March 31, 2004 and $5.6 million at
December 31, 2003. Working capital was $23.5 million at March 31, 2004.
The decrease in cash and cash equivalents is due primarily to
the use of $12.5 million to repay borrowings under our credit facility, partially offset by $7.5
million of additional borrowings under our credit facility and cash provided by
operating activities.

27



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Net cash provided by
operating activities increased to $8.2 million for the three months ended
March 31, 2004 compared to $4.6 million in the same period of the prior
year, primarily due to a loss in the prior year of $6.4 million related to the early retirement of
debt, a $2.2 million in write-off in the prior year of costs related to a denied
tower site and license upgrade, an increase in operating income, lower interest expense
and improved accounts receivable collections, partially offset by a decrease
in accounts payable and the recognition of deferred revenue.

Net cash used in investing
activities was $5.2 million for the three months ended March 31, 2004
compared to $2.2 million for the same period of the prior year. The increase is
due primarily to an increase in capital expenditures of $1.8 million and an increase
in deposits on radio stations of $1.1 million for the three months ended March 31, 2004 as compared to
the same three month period of 2003.

We have announced that we are
currently in the process of acquiring the assets of the following radio stations: (i)
WQBH-AM, Detroit, Michigan for $4.8 million, (ii) WAFS-AM, Atlanta, Georgia
for $16.4 million, (iii) KJPN-AM, Honolulu, Hawaii for $0.5 million and (iv)
KPOI-FM and KHUI-FM, Honolulu, Hawaii for $3.7 million. Although we
have not yet determined how we will be financing these acquisitions, we anticipate
that we will use borrowings under our credit facility or cash on hand.

Net cash used in financing
activities was $4.5 million for the three months ended March 31, 2004
compared to $27.2 million for the
same period of the prior year. The difference is primarily due to decreased
repayments, net of borrowings, under our credit facility of $5.0 million for the three months ended
March 31, 2004 as compared to $27.0 million for the same period in the prior
year.

Credit Facility. Our
wholly-owned subsidiary, Salem Holding, is the borrower under our credit facilities. The
credit facilities were amended and restated as of September 25, 2003 and include a
$75.0 million senior secured reducing revolving credit facility (revolving
credit facility) as well as a $75.0 million term loan facility (term
loan facility). The description of the credit facilities as set forth below
reflects the terms of the amendment and restatement. As of March 31, 2004, the
borrowing capacity and aggregate commitments under the credit facility was $75.0
million under each of the revolving credit facility and the term loan facility.
The amount we can borrow, however, is subject to certain restrictions as described
below. At March 31, 2004, $75.0 million was outstanding under the term loan facility
and there was no outstanding balance under the revolving credit facility. The
borrowing capacity under the revolving credit facility steps down in three 10%
increments commencing June 30, 2007, and matures on March 25, 2009. The term loan facility
matures on the earlier of March 25, 2010, or the date that is six months prior to
the maturity of any subordinated indebtedness of Salem or Salem Holding. The credit facilities
require us, under certain circumstances, to prepay borrowings under the credit facilities with excess cash flow and
the net proceeds from the sale of assets, the issuance of equity interests and
the issuance of subordinated notes. If we are required to make these
prepayments, our borrowing capacity and the aggregate commitments under the
facilities will be reduced, but such reduction shall not, in any event, reduce
the borrowing capacity and aggregate commitments under the facilitates below
$50.0 million.

Amounts outstanding under
the credit facilities bear interest at a rate based on, at Salem Holdings option, the banks
prime rate or LIBOR, in each case plus a spread. For purposes of determining the
interest rate under the revolving credit facility, the prime rate spread ranges
from 0.25% to 1.75%, and the LIBOR spread ranges from 1.5% to 3.0%. For the term
loan facility, the prime rate spread ranges from 1.25% to
1.75%, and the LIBOR spread ranges from 2.5% to 3.0%. In each case, the spread
is based on the total leverage ratio on the date of determination. At March 31, 2004,
the blended interest rate on amounts outstanding under the credit
facility was 3.94%. If an event of default occurs, the rate may increase by 2.0%.

The maximum amount that
Salem Holding may borrow under our credit facilities is limited by a ratio of our
consolidated existing total adjusted funded debt to pro forma twelve-month cash
flow (the Total Leverage Ratio). Our credit facilities will allow us to adjust
our total debt as used in such calculation by the lesser of (i) 50% of the
aggregate purchase price of acquisitions of newly acquired non-religious
formatted radio stations that we reformat to a religious talk, news talk
or religious music format or (ii) $45.0 million, and the cash flow from such
stations will not be considered in the calculation of the ratio during the
period in which such acquisition gives rise to an adjustment to total debt. The
Total Leverage Ratio allowed under the credit facility was 7.25 to 1 as of
March 31, 2004. Beginning December 31, 2004, the maximum ratio will decline periodically
until December 31, 2006, at which point it will remain at 5.5 to 1 through March
2009. The Total Leverage Ratio under the credit facility at March 31, 2004,
on a pro forma basis, was 6.28 to 1, resulting in a borrowing availability of
approximately $47.9 million.

Our credit facilities contain
additional restrictive covenants customary for facilities of their size,
type and purpose which, with specified exceptions, limits our
ability to incur debt, have liens, enter into affiliate transactions, pay
dividends, consolidate, merge or effect certain asset sales, make specified
investments, acquisitions and loans and change the nature of our business. Our
credit facilities also require us to satisfy specified financial covenants, which
covenants require us on a consolidated basis to maintain specified financial
ratios and comply with certain financial tests, including ratios for maximum
leverage as described above, minimum interest coverage (not less than 1.5 to 1
through June 29, 2005 increasing in increments to 2.5 to 1 after June 30, 2008),
minimum debt service coverage (a static ratio of not less than 1.25 to 1), a
maximum consolidated senior leverage ratio (a static ratio of 3.0 to 1 prior to
the issuance of $50.0 million in New Subordinated Notes, after any such issuance
the ratio shall not exceed 2.5 to 1), and minimum fixed charge coverage (a
static ratio of not less than 1.1 to 1). Salem and all of its subsidiaries, except
for Salem Holding, are guarantors of borrowings under the credit facilities. The credit
facilities are secured by liens on all of our and our subsidiaries assets and
pledges of all of the capital stock of our subsidiaries.

28



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As of March 31, 2004, and currently,
management believes we were and remain in compliance with all of the covenants under the
terms of the credit facility.

9% Senior Subordinated
Notes Due 2011.In September 2001, Salem Holding issued $150.0 million principal
amount of 9% Notes. Salem Holding used the net proceeds to repay approximately $145.5
million in borrowings under the credit facility. The indenture for the 9% Notes
contains restrictive coventants that, among others, limit the incurrence of debt
by Salem Holding and its subsidiaries, the payment of dividends, the use of proceeds of
specified asset sales and transactions with affiliates. Salem Holding is required to
pay $13.5 million per year in interest on the 9% Notes. We and all of our
subsidiaries (other than Salem Holding) are guarantors of the 9% Notes.

As of March 31, 2004, and currently,
management believes we were and remain in compliance with all of the covenants under the
indenture for the 9% Notes.

73⁄4% Senior Subordinated
Notes due 2010. In December 2002, Salem Holding issued $100.0 million principal
amount of 73⁄4% Notes. Salem Holding used the net proceeds to redeem the $100.0 million
91⁄2% Notes on January 22, 2003. The indenture for the 73⁄4% Notes contains
restrictive covenants that, among others, limit the incurrence of debt by Salem Holding
and its subsidiaries, the payment of dividends, the use of proceeds of specified
asset sales and transactions with affiliates. Salem Holding is required to pay $7.8
million per year in interest on the 73⁄4% Notes. We and all of our subsidiaries
(other than Salem Holding) are guarantors of the 73⁄4% Notes.

As of March 31, 2004, and currently,
management believes we were and remain in compliance with all of the covenants under the
indenture for the 73⁄4% Notes.

Summary of Long-Term Debt Obligations

Long-term debt consisted of
the following at the balance sheet dates indicated:

|                                                                                    |                        |         |           |   |         |  
|----------------------------------------------------------------------------------- | ---------------------- | ------- | --------- | - | ------- | -
|                                                                                    | December 31,           |         | March 31,
|                                                                                    |                        |         |          
|                                                                                    | 2003                   |         | 2004     
|                                                                                    |                        |         |          
|                                                                                    | (Dollars in thousands) |         |          
|                                                                                    |                        |         |          
|Revolving
      line of credit under credit facility                                | $                      | 5,000   |           | $ |        |  
|Term loan
      under credit facility                                               |                        | 75,000  |           |   | 75,000  |  
|73⁄4% senior
      subordinated notes due 2010                                        |                        | 100,000 |           |   | 100,000 |  
|9% senior
      subordinated notes due 2011                                         |                        | 150,000 |           |   | 150,000 |  
|Fair value
      in excess of book value of debt hedged with interest rate
    swap |                        | 6,045   |           |   | 6,806   |  
|Capital
      leases and other loans                                                |                        | 61      |           |   | 57      |  
|                                                                                    |                        |         |           |  
|                                                                                    |                        | 336,106 |           |   | 331,863 |  
|Less
      current portion                                                          |                        | (15     | )         |   | (16     | )
|                                                                                    |                        |         |           |  
|                                                                                    | $                      | 336,091 |           | $ | 331,847 |  
|                                                                                    |                        |         |           |   |         |  

29



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Off Balance Sheet Arrangements

At March 31, 2004 and 2003,
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.

30



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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 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 and may increase volatility in our earnings.

At March 31, 2004, an
interest rate swap agreement with a notional principal amount of $66.0 million
was outstanding. This agreement relates to our $150.0 million 9% Notes. This agreement expires in 2011 when
the 9% Notes mature, and effectively swaps the 9.0% fixed interest rate on $66.0
million of the 9% Notes for a floating rate equal to the LIBOR rate plus 3.09%.
The estimated fair value of this swap agreement and the excess of fair value
over the book value of the debt hedged by the swap, based on current market
rates, were each $6.7 million at March 31, 2004. Changes in the fair value
of the swap and the changes in the fair value of debt being hedged are recorded
as part of interest expense. The fair value of the swap agreement is included
with long-term assets, and the fair value of the debt hedged by the swap is
recorded in long-term debt consistent with the maturity date of the swap and related debt.
Because this fair value hedge is effective (that is, the change in the fair
value of the hedge instrument is designed to be equal to the change in the fair
value of the item being hedged), there was no income statement effect relative
to the change in the fair value of the swap agreement. Interest expense for the
three months ended March 31, 2004 was reduced by $0.8 million as a result of
the difference between the 9.0% fixed interest rate on our debt and the floating
interest rate under the swap agreement, which was 4.31% for the three months
ended March 31, 2004.

We have
a second interest rate swap agreement with a notional principal amount of
$24.0 million. This agreement also relates to our 9% Notes. This agreement
expires in 2011 when the 9% Notes mature, and effectively swaps the 9.0% fixed
interest rate on $24.0 million of the 9% Notes for a floating rate equal to the
LIBOR rate plus 4.86%. The estimated fair value of this swap agreement
and the excess of fair value over the book value of the debt hedged by
the swap, based on current market rates, were each $0.1 million at March 31,
2004. Changes in the fair value of the swap and the changes in the fair value of
debt being hedged are recorded as part of interest expense. The fair value of
the swap agreement is included with long-term liabilities, and the fair value of
the debt hedged by the swap is recorded in long-term debt consistent with the
maturity date of the swap and related debt. Because this fair value hedge is effective (that is,
the change in the fair value of the hedge instrument is designed to be equal to
the change in the fair value of the item being hedged), there was no income
statement effect relative to the change in the fair value of the swap agreement.
Interest expense for the three months ended March 31, 2004 was reduced by
$0.2 million as a result of the difference between the 9.0% fixed interest rate
on our debt and the floating interest rate under the swap agreement, which was
6.08% for the three months ended March 31, 2004.

30



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MARKET RISK

In addition to the interest
rate swap agreements discussed above under Derivative Instruments, borrowings
under the credit facility are subject to market risk exposure, specifically to
changes in LIBOR and in the prime rate in the United States. At March 31,
2004, we had borrowed $75.0 million under the credit facility. As of March 31, 2004,
we could borrow up to an additional $47.9 million under the credit
facility. Amounts outstanding under the credit facility bear interest at a base
rate, at our option, of the banks prime rate or LIBOR, plus a spread. For
purposes of determining the interest rate under the revolving credit facility,
the prime rate spread ranges from 0.25% to 1.75%, and the LIBOR spread ranges
from 1.5% to 3.0%. At March 31, 2004, the blended interest rate on amounts
outstanding under the credit facility was 3.94%. At March 31, 2004, a
hypothetical 100 basis point increase in the prime rate would result in
additional interest expense of $0.8 million on an annualized basis.

In addition to the variable
rate debt disclosed above, we have fixed rate debt with a carrying value of
$250.0 million (relating to the 9% Notes and the 73⁄4% Notes) as of March 31,
2004, with an aggregate fair value of $269.3 million. We are exposed to changes
in the fair value of these financial instruments based on changes in the market
rate of interest on our debt. The ultimate value of these notes will be
determined by actual market prices, as all of these notes are tradable. We
estimate that a hypothetical 100 basis point increase in market interest rates
would result in a decrease in the aggregate fair value of the 9% Notes and 73⁄4%
Notes to approximately $255.6 million and a hypothetical 100 basis point
decrease in market interest rates would result in the increase of the fair value
of the 9% Notes and 73⁄4% Notes to approximately $284.0 million.



ITEM 4. CONTROLS AND PROCEDURES

As of the end of the period
covered by this report, the company carried out an evaluation, under the
supervision and with the participation of the companys management, including
the companys Chief Executive Officer and Chief Financial Officer, of the
effectiveness of the design and operation of the companys disclosure controls
and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Exchange Act).
Based upon that evaluation, the Chief Executive Officer and Chief Financial
Officer concluded that the companys disclosure controls and procedures are
effective in timely alerting them to material information required to be
included in the companys periodic filings with the SEC.

There were no significant
changes in the companys internal controls over financial reporting or in other
factors that could significantly affect these internal controls subsequent to
the date of the most recent evaluation. Since there were no significant
deficiencies or material weaknesses in the companys internal controls over
financial reporting, the company did not take any corrective actions.

32



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PART II - OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

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

ITEM 2. CHANGES IN SECURITIES, USE OF PROCEEDS
AND ISSUER PURCHASES OF EQUITY SECURITIES

Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

Not applicable.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

No matters have been
submitted to a vote of security holders, through the solicitation of proxies or
otherwise, during the period covered by this report.

ITEM 5. OTHER INFORMATION

Not applicable.

33



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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) EXHIBITS

Set forth below is a list of
exhibits included as part of this Quarterly Report:

|        |  |                                                                                                                
|------- |  | ---------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description of Exhibits                                                                                        
|        |  |                                                                                                                
|31.1    |  | Certification of Edward G. Atsinger
      III Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.
|31.2    |  | Certification of David A.R. Evans
      Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange Act.      
|32.1    |  | Certification of Edward G. Atsinger
      III Pursuant to 18 U.S.C. Section 1350.                              
|32.2    |  | Certification of David A.R. Evans
      Pursuant to 18 U.S.C. Section 1350.                                    

33



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(b) REPORTS ON FORM 8-K

Form 8-K dated February 12, 2004,
reporting the companys issuance of a press release announcing national block programming renewals.

Form 8-K dated February 26, 2004,
reporting the companys issuance of a press release on the financial results of the fourth
quarter and year ended December 31, 2003.

35



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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                           | 
| | ------------ | ---------------------------------------------------------- | 
| | May 10, 2004 |                                                            | 
| |              | By: /s/ EDWARD G. ATSINGER III                             | 
| |              |                                                            | 
| |              | Edward G. Atsinger III                                     | 
| |              | President and Chief Executive Officer                      | 
| |              | (Principal Executive Officer)                              | 
| | May 10, 2004 |                                                            | 
| |              | By: /s/ DAVID A.R. EVANS                                   | 
| |              |                                                            | 
| |              | David A.R. Evans                                           | 
| |              | Executive Vice President and Chief
      Financial Officer | 
| |              | (Principal Financial Officer)                              | 

36



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EXHIBIT INDEX

|        |  |                                                                                                                      
|------- |  | ---------------------------------------------------------------------------------------------------------------------
|Exhibit
|Number  |  | Description of Exhibits                                                                                              
|        |  |                                                                                                                      
|        |  |                                                                                                                      
|31.1    |  | Certification of Edward G. Atsinger
      III Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange
      Act.
|        |  |                                                                                                                      
|31.2    |  | Certification of David A.R. Evans
      Pursuant to Rules 13a-14(a) and 15d-14(a) under the Exchange
  Act.          
|32.1    |  | Certification of Edward G. Atsinger
      III Pursuant to 18 U.S.C. Section 1350.                                    
|        |  |                                                                                                                      
|32.2    |  | Certification of David A.R. Evans
      Pursuant to 18 U.S.C. Section 1350.                                          

37



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EXHIBIT 31.1

Certification of Chief Executive Officer

I, Edward G. Atsinger III, certify that:

|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|-- | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|1. |     | I have reviewed this 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 officer(s)
      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))
      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) | 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                                                                                                            | 
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|   | (c) | 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 officer(s)
      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 the 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.                                                                                                                                                                                                                                | 
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|   |     | Dated: May 10, 2004                                                                                                                                                                                                                                                                                                                                                                                                   | 
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|   |     | By: /s/ EDWARD G. ATSINGER III                                                                                                                                                                                                                                                                                                                                                                                        | 

| |  |                         | 
| |  | ----------------------- | 
| |  | Edward G. Atsinger III  | 
| |  | Chief Executive Officer | 
| |  |                         | 
| |  |                         | 

A signed original of this written statement required by Section
302 of the Sarbanes-Oxley Act of 2002 or other document authenticating,
acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section 302
has been provided to Salem Communications Corporation and will be retained by
Salem Communications Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.

38



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EXHIBIT 31.2

Certification of Chief Financial Officer

I, David A.R. Evans, certify that:

|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|-- | --- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | 
|1. |     | I have reviewed this 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 officer(s)
      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))
      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) | 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                                                                                                            | 
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|   | (c) | 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 officer(s)
      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 the 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.                                                                                                                                                                                                                                | 
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|   |     | Dated: May 10, 2004                                                                                                                                                                                                                                                                                                                                                                                                   | 
|   |     |                                                                                                                                                                                                                                                                                                                                                                                                                       | 
|   |     | By: /s/ DAVID A.R. EVANS                                                                                                                                                                                                                                                                                                                                                                                              | 

| |  |                         | 
| |  | ----------------------- | 
| |  | David A.R. Evans        | 
| |  | Chief Financial Officer | 
| |  |                         | 
| |  |                         | 

A signed original of this written statement required by Section
302 of the Sarbanes-Oxley Act of 2002 or other document authenticating,
acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section 302
has been provided to Salem Communications Corporation and will be retained by
Salem Communications Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.

39



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EXHIBIT 32.1

CERTIFICATION PURSUANT TO18 U.S.C. SECTION
1350,AS ADOPTED PURSUANT TOSECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

The undersigned hereby certifies, in his capacity as President
and 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 March 31, 2004 (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: May 10, 2004 |                                       | 
| | ------------------- | ------------------------------------- | 
| |                     | By: /s/ EDWARD G. ATSINGER
      III  | 
| |                     |                                       | 
| |                     | Edward G. Atsinger III                | 
| |                     | President and Chief Executive Officer | 

A signed original of this written statement required by Section
906 of the Sarbanes-Oxley Act of 2002 or other document authenticating,
acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section 906
has been provided to Salem Communications Corporation and will be retained by
Salem Communications Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.

40



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EXHIBIT 32.2

CERTIFICATION PURSUANT TO18 U.S.C. SECTION
1350,AS ADOPTED PURSUANT TOSECTION 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 March 31, 2004 (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: May 10, 2004 |                                                            | 
| | ------------------- | ---------------------------------------------------------- | 
| |                     | By: /s/ DAVID A.R. EVANS                                   | 
| |                     |                                                            | 
| |                     | David A.R. Evans                                           | 
| |                     | Executive Vice President and Chief
      Financial Officer | 
| |                     |                                                            | 

A signed original of this written statement required by Section
906 of the Sarbanes-Oxley Act of 2002 or other document authenticating,
acknowledging, or otherwise adopting the signature that appears in typed form
within the electronic version of this written statement required by Section 906
has been provided to Salem Communications Corporation and will be retained by
Salem Communications Corporation and furnished to the Securities and Exchange
Commission or its staff upon request.

41



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