<PAGE>

                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-Q

[ X ] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
      Exchange Act of 1934


                  FOR THE QUARTERLY PERIOD ENDED JUNE 30, 1999

Commission File Number 0-22334

                       LODGENET ENTERTAINMENT CORPORATION
           -----------------------------------------------------------
             (Exact name of registrant as specified in its charter)

    DELAWARE                                                 46-0371161
-------------------------                           ---------------------------
 (State or other jurisdiction of                          (I.R.S. Employer
 incorporation or organization)                        Identification Number)

          3900 WEST INNOVATION STREET, SIOUX FALLS, SOUTH DAKOTA 57107
   --------------------------------------------------------------------------
               (Address of Principal Executive Offices) (ZIP code)

                                 (605) 988-1000
                    -----------------------------------------
                         (Registrant's telephone number,
                              including area code)

   -------------------------------------------------------------------------
  (Former name, former address and former fiscal year, if changed since last
                                    report)

     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    .
                                              ---     ---

     At August 2, 1999, there were 11,942,387 shares outstanding of the
Registrant's common stock, $0.01 par value.


<PAGE>

                       LODGENET ENTERTAINMENT CORPORATION

                                      INDEX
<TABLE>
<CAPTION>
                                                                                                           Page
                                                                                                            No.
<S>                                                                                                        <C>
                          PART I. FINANCIAL INFORMATION

Item 1 -- Financial Statements:

     Consolidated Balance Sheets as of December 31, 1998 and June 30, 1999 (Unaudited)..................    3
     Consolidated Statements of Operations (Unaudited) for
         the Three and Six Months Ended June 30, 1998 and 1999..........................................    4
     Consolidated Statements of Cash Flows (Unaudited) for
         the Six Months Ended June 30, 1998 and 1999....................................................    5
     Notes to Consolidated Financial Statements.........................................................    6
Item 2 -- Management's Discussion and Analysis of  Financial Condition and Results of Operations........    9
Item 3-- Quantitative and Qualitative Disclosures About Market Risk.....................................   19

                                              PART II. OTHER INFORMATION

Item 1-- Legal Proceedings..............................................................................   20
Item 2-- Changes in Securities and Use of Proceeds......................................................   20
Item 3-- Defaults Upon Senior Securities................................................................   20
Item 4-- Submission of Matters to a Vote of Security Holders............................................   20
Item 5-- Other Information..............................................................................   20
Item 6-- Exhibits and Reports on Form 8-K...............................................................   21

SIGNATURES..............................................................................................   22

</TABLE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS -- CERTAIN STATEMENTS IN THIS
QUARTERLY REPORT ON FORM 10-Q CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. WHEN USED IN THIS QUARTERLY REPORT, THE WORDS
"EXPECTS," "ANTICIPATES," "ESTIMATES," "BELIEVES," "NO ASSURANCE," AND SIMILAR
EXPRESSIONS, AND STATEMENTS WHICH ARE MADE IN THE FUTURE TENSE, ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY
CAUSE THE COMPANY'S ACTUAL PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION TO THE RISKS AND
UNCERTAINTIES DISCUSSED IN THIS QUARTERLY REPORT, SUCH FACTORS INCLUDE, AMONG
OTHERS, THE FOLLOWING: THE IMPACT OF COMPETITION AND CHANGES TO THE COMPETITIVE
ENVIRONMENT FOR THE COMPANY'S PRODUCTS AND SERVICES, CHANGES IN TECHNOLOGY,
RELIANCE ON STRATEGIC PARTNERS, UNCERTAINTY OF LITIGATION, CHANGES IN GOVERNMENT
REGULATION AND OTHER FACTORS DETAILED, FROM TIME TO TIME, IN THE COMPANY'S
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE FORWARD-LOOKING
STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS QUARTERLY REPORT. THE COMPANY
EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY
UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO
REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS
BASED.

     As used herein (unless the context otherwise requires) "LodgeNet", "the
Company" and/or "the Registrant" means LodgeNet Entertainment Corporation and
its majority-owned subsidiaries.


                                                                         Page 2

<PAGE>



                          PART I -- FINANCIAL INFORMATIOn

ITEM 1 -- FINANCIAL STATEMENTS

                         LODGENET ENTERTAINMENT CORPORATION
                             CONSOLIDATED BALANCE SHEETS
                            (Dollar amounts in thousands)
<TABLE>
<CAPTION>
                                                                          December 31,          June 30,
                                                                              1998                1999
                                                                          ------------        ------------
                                                                                               (Unaudited)
<S>                                                                       <C>                 <C>
                       Assets
Current assets:
   Cash and cash equivalents                                                 $ 5,240             $ 3,969
   Accounts receivable, net of allowance for doubtful accounts                27,586              26,843
   Prepaid expenses and other                                                  6,086               4,930
                                                                          ------------        ------------
      Total current assets                                                    38,912              35,742

Property and equipment, net of accumulated depreciation                      209,437             207,967
Investments in and advances to unconsolidated affiliates                      32,701              11,739
Debt issuance costs, net of accumulated amortization                           6,637               9,445
Other assets, net                                                             18,343              15,658
                                                                          ------------        ------------
                                                                           $ 306,030           $ 280,551
                                                                          ============        ============

                 Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
   Accounts payable                                                         $ 13,705            $ 12,558
   Accrued expenses and other                                                  9,410              12,148
   Current maturities of long-term debt                                        5,718               5,597
   Deferred revenue                                                            2,318               2,331
                                                                          ------------        ------------
      Total current liabilities                                               31,151              32,634

Long-term debt                                                               262,375             270,741
Minority interest in consolidated subsidiary                                     730                 730
                                                                          ------------        ------------
   Total liabilities                                                         294,256             304,105
                                                                          ------------        ------------
Commitments and contingencies

Stockholders' equity (deficit):
   Common stock, $.01 par value, 20,000,000 shares authorized; 11,942,387 shares
      outstanding at December 31, 1998 and
      June 30, 1999                                                              119                 119
   Additional paid-in capital                                                123,706             123,724
   Accumulated other comprehensive loss                                       (1,512)             (1,005)
   Accumulated deficit                                                      (110,539)           (146,392)
                                                                          ------------        ------------
      Total stockholders' equity (deficit)                                    11,774             (23,554)
                                                                          ------------        ------------
                                                                           $ 306,030           $ 280,551
                                                                          ============        ============
</TABLE>


       The accompanying notes are an integral part of these consolidated
                               financial statements.

                                                                         Page 3

<PAGE>


                       LODGENET ENTERTAINMENT CORPORATION
                 CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                          (Dollar amounts in thousands)
<TABLE>
<CAPTION>
                                                        Three Months Ended                   Six Months Ended
                                                             June 30,                            June 30,
                                                 ---------------------------------    --------------------------------
                                                      1998              1999              1998              1999
                                                 ---------------    --------------    --------------    --------------
<S>                                              <C>                <C>               <C>               <C>
Revenues:
   Guest Pay                                            $35,901          $ 41,479           $67,750          $ 80,448
   Other                                                  4,997             2,790             9,495             5,786
                                                 ---------------    --------------    --------------    --------------
      Total revenues                                     40,898            44,269            77,245            86,234
                                                 ---------------    --------------    --------------    --------------

Direct costs:
   Guest Pay                                             14,679            16,840            27,750            32,691
   Other                                                  3,508             2,165             6,517             4,562
                                                 ---------------    --------------    --------------    --------------
      Total direct costs                                 18,187            19,005            34,267            37,253
                                                 ---------------    --------------    --------------    --------------
Gross profit                                             22,711            25,264            42,978            48,981
                                                 ---------------    --------------    --------------    --------------

Operating expenses:
   Guest Pay operations                                   6,245             6,032            12,382            11,899
   Selling, general and administrative                    4,961             4,218             9,787             8,559
   Depreciation and amortization                         13,407            14,880            25,986            29,305
                                                 ---------------    --------------    --------------    --------------
      Total operating expenses                           24,613            25,130            48,155            49,763
                                                 ---------------    --------------    --------------    --------------
Operating income (loss)                                  (1,902)              134            (5,177)             (782)
Equity in losses of unconsolidated affiliates                --           (18,373)               --           (22,217)
Interest expense                                         (5,571)           (6,874)          (10,872)          (13,477)
Interest income                                              --               387                92               780
Provision for income taxes                                  (75)             (100)             (226)             (157)
                                                 ===============    ==============    ==============    ==============
Net loss                                               $ (7,548)        $ (24,826)        $ (16,183)        $ (35,853)
                                                 ===============    ==============    ==============    ==============
Per common share (basic and diluted):
   Net loss                                              $(0.65)          $ (2.08)           $(1.41)          $ (3.00)
                                                 ===============    ==============    ==============    ==============
Weighted average shares outstanding                  11,545,121        11,942,387        11,451,473        11,942,387
                                                 ===============    ==============    ==============    ==============

</TABLE>



       The accompanying notes are an integral part of these consolidated
                               financial statements.

                                                                         Page 4

<PAGE>


                       LODGENET ENTERTAINMENT CORPORATION
                 CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                          (Dollar amounts in thousands)
<TABLE>
<CAPTION>
                                                                  Six Months Ended June 30,
                                                              ----------------------------------
                                                                   1998               1999
                                                              ---------------     --------------
<S>                                                           <C>                 <C>
Operating activities:
   Net loss                                                      $  (16,183)         $  (35,853)
   Adjustments to reconcile net loss to net cash provided
   by operating activities:
      Depreciation and amortization                                  25,986              29,305
      Gain on sale of property and equipment                           (309)                  --
      Equity in losses of unconsolidated affiliates                       --             22,217
      Change in operating assets and liabilities:
         Accounts receivable                                         (1,911)                394
         Prepaid expenses and other                                     688               1,158
         Accounts payable                                            (3,638)             (1,159)
         Accrued expenses and other                                   1,037               2,746
         Other                                                          (92)              1,726
                                                              ---------------     --------------
Net cash provided by operating activities                             5,578              20,534
                                                              ---------------     --------------
Investing activities:
   Property and equipment additions                                 (36,393)            (25,680)
   Proceeds from sale of property and equipment                         412                  --
   Investment in unconsolidated affiliates                           (5,590)               (846)
                                                              ---------------     --------------
Net cash used for investing activities                              (41,571)            (26,526)
                                                              ---------------     --------------
Financing activities:
   Proceeds from long-term debt                                       1,000              75,000
   Repayment of long-term debt                                           (9)                (19)
   Repayment of capital lease obligations                              (301)               (303)
   Borrowings under revolving credit facility                        36,500              15,500
   Repayments of revolving credit facility                               --             (82,000)
   Debt issuance costs                                                   --              (3,501)
   Stock option activity                                                188                  --
                                                              ---------------     --------------
Net cash provided by financing activities                            37,378               4,677
                                                              ---------------     --------------
Effect of exchange rates on cash                                        (13)                 44
                                                              ---------------     --------------
Increase (decrease) in cash and cash equivalents                      1,372              (1,271)
Cash and cash equivalents at beginning of period                      1,021               5,240
                                                              ---------------     --------------
Cash and cash equivalents at end of period                          $ 2,393             $ 3,969
                                                              ===============     ==============
Supplemental cash flow information:
   Cash paid for interest                                          $ 10,362            $ 12,668
                                                              ===============     ==============
</TABLE>


       The accompanying notes are an integral part of these consolidated
                               financial statements.

                                                                         Page 5

<PAGE>


                        LODGENET ENTERTAINMENT CORPORATION
                     NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1 -- Basis of Presentation

         The accompanying consolidated financial statements as of June 30, 1999,
and for the three and six month periods ended June 30, 1998 and 1999, have been
prepared by LodgeNet Entertainment Corporation (the "Company"), without audit,
pursuant to the rules and regulations of the Securities and Exchange Commission
(the "Commission"). The information furnished in the accompanying consolidated
financial statements reflects all adjustments, consisting only of normal
recurring adjustments, which, in the opinion of management, are necessary for a
fair presentation of such financial statements.

         Certain information and footnote disclosures, normally included in
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to the rules and regulations
of the Commission. Although the Company believes that the disclosures are
adequate to make the information presented herein not misleading, it is
recommended that these unaudited consolidated financial statements be read in
conjunction with the more detailed information contained in the Company's Annual
Report on Form 10-K for 1998, as filed with the Commission. The results of
operations for the three and six month periods ended June 30, 1999 are not
necessarily indicative of the results of operations for the full year.

         The consolidated financial statements include the accounts of LodgeNet
Entertainment Corporation and its majority-owned subsidiaries. All significant
inter-company accounts and transactions have been eliminated in consolidation.

Note 2 -- Property and Equipment, Net

Property and equipment was comprised as follows at (in thousands of dollars):

<TABLE>
<CAPTION>
                                            December 31,          June 30,
                                                1998                1999
                                           ---------------     ----------------
    <S>                                    <C>                 <C>
    Land, building and equipment                $  48,105           $  52,193
    Free-to-guest equipment                        16,237              17,355
    Guest pay systems:
       Installed                                  257,980             274,697
       System components                           24,933              26,459
       Software costs                               8,640               9,203
                                           ---------------     ----------------
          Total                                   355,895             379,907
    Less - depreciation and amortization         (146,458)           (171,940)
                                           ---------------     ----------------
    Property and equipment, net                 $ 209,437           $ 207,967
                                           ===============     ================
</TABLE>

                                                                         Page 6

<PAGE>


Note 3 -- Investment in Affiliate

         The Company obtained a 30% interest in Global Interactive
Communications Corporation ("GICC") resulting from the November 30, 1998 merger
transaction of the Company's majority owned subsidiary, ResNet Communications,
LLC with two other entities. GICC's business consists of providing cable
television programming and telecommunications services to the multi-family
dwelling unit market. The Company recorded losses totaling $3.2 million for the
first six months of 1999 to reflect its 30% interest in GICC's losses.
Additionally, during the second quarter of 1999, the Company recorded a charge
of $16.8 million to write-down its investment in GICC to estimated fair value.
Based on information from independent sources and GICC management, the Company
has reduced the carrying amount of its investment in GICC to approximately $12
million as of June 30, 1999, reflecting estimated amounts available to the
Company upon the sale of GICC's assets to third parties.

Note 4 -- Financing Transaction

         On February 25, 1999, the Company amended and restated its bank credit
facility (the "Bank Facility"), increasing the capacity of the Bank Facility to
$150 million, comprised of a $75 million term loan and a $75 million revolving
credit facility. The $76.5 million outstanding at December 31, 1998 under the
previous revolving credit facility was repaid with proceeds from the term loan.
In addition to the $75 million term loan, the Bank Facility provides a $75
million revolving credit facility, which may be increased at the Company's
request to $100 million, subject to certain limitations. Quarterly repayments on
the term loan begin in February 2001 and are as follows for the respective
fiscal years (in thousands of dollars): 2001 -- $15,000; 2002 -- $18,750; 2003
-- $18,750; 2004 -- $22,500. The revolving credit facility matures in February
2005. Loans under the Bank Facility bear interest at the Company's option of (1)
the bank's prime rate plus a margin of from 1.00% to 1.75%, or (2) the
eurodollar rate plus a margin of from 2.00% to 2.75%; both depending on leverage
as defined. The margins applicable to the bank's prime rate and/or the
eurodollar rate loans are subject to quarterly adjustment as defined in the
agreement.

         The Bank Facility includes terms and conditions which require the
maintenance of certain financial ratios and place certain limitations on capital
expenditures, investments, additional indebtedness, liens, guarantees, and
certain payments or distributions in respect of common stock of the Company.
Loans under the Bank Facility are secured by a first priority security interest
in all of the Company's assets. As of June 30, 1999, $10 million was outstanding
under the revolving credit facility, and the Company was in compliance with all
covenants, terms and conditions of the Bank Facility.

Note 5 -- Comprehensive Income

         Effective January 1, 1998, the Company adopted SFAS No. 130, "Reporting
Comprehensive Income". This statement established standards for reporting and
disclosure of comprehensive income and its components. Comprehensive income
reflects the change in equity of a business enterprise during a period from
transactions and other events and circumstances from non-owner sources. For the
Company, comprehensive income primarily represents net income adjusted for
foreign currency translation adjustments. Comprehensive loss was $24,514 and
$7,953 for the quarters ended June 30, 1999 and 1998, respectively, and $35,346
and $16,511 for the six months ended June 30, 1999 and 1998, respectively.

Note 6 -- Reclassification

         Beginning in 1999, the Company has chosen to reflect the results of its
free-to-guest business within the "other" components of revenues and direct
costs in the statements of operations. Accordingly, the statement of operations
for the three and six months ended June 30, 1998 includes these
reclassifications to conform to the 1999 presentation. These changes had no
impact on total revenues, direct costs or net loss for the period.


                                                                         Page 7

<PAGE>


Note 7 -- Effect of Recently Issued Accounting Standards

         In June 1998, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for
Derivative Instruments and Hedging Activities". SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument
(including certain derivative instruments embedded in other contracts) be
recorded in the balance sheet as either an asset or liability measured at its
fair value. The statement requires that changes in the derivative's fair value
be recognized currently in earnings unless specific hedge accounting criteria
are met. Special accounting for qualifying hedges allows a derivative's gains
and losses to offset related results on the hedged item in the income statement
and requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting. In June 1999, the
FASB issued SFAS No. 137 which amended SFAS No. 133 to delay its effective date
to fiscal quarters beginning after June 15, 2000. Accordingly, the Company plans
to adopt the requirements of SFAS No. 133 in the third quarter of 2000. SFAS No.
133 could increase volatility in earnings and other comprehensive income.


                                                                         Page 8

<PAGE>


ITEM 2 -- MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS

         THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE CONSOLIDATED FINANCIAL STATEMENTS
OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE HEREIN.

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS -- CERTAIN STATEMENTS IN THIS
QUARTERLY REPORT ON FORM 10-Q CONSTITUTE "FORWARD-LOOKING STATEMENTS" WITHIN THE
MEANING OF THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE
ACT OF 1934, AS AMENDED. WHEN USED IN THIS QUARTERLY REPORT, THE WORDS
"EXPECTS," "ANTICIPATES," "ESTIMATES," "BELIEVES," "NO ASSURANCE," AND SIMILAR
EXPRESSIONS, AND STATEMENTS WHICH ARE MADE IN THE FUTURE TENSE, ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY
CAUSE THE COMPANY'S ACTUAL PERFORMANCE OR ACHIEVEMENTS TO BE MATERIALLY
DIFFERENT FROM ANY FUTURE RESULTS, PERFORMANCE OR ACHIEVEMENTS EXPRESSED OR
IMPLIED BY SUCH FORWARD-LOOKING STATEMENTS. IN ADDITION TO THE RISKS AND
UNCERTAINTIES DISCUSSED IN THIS QUARTERLY REPORT, SUCH FACTORS INCLUDE, AMONG
OTHERS, THE FOLLOWING: THE IMPACT OF COMPETITION AND CHANGES TO THE COMPETITIVE
ENVIRONMENT FOR THE COMPANY'S PRODUCTS AND SERVICES, CHANGES IN TECHNOLOGY,
RELIANCE ON STRATEGIC PARTNERS, UNCERTAINTY OF LITIGATION, CHANGES IN GOVERNMENT
REGULATION AND OTHER FACTORS DETAILED, FROM TIME TO TIME, IN THE COMPANY'S
FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE FORWARD-LOOKING
STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS QUARTERLY REPORT. THE COMPANY
EXPRESSLY DISCLAIMS ANY OBLIGATION OR UNDERTAKING TO RELEASE PUBLICLY ANY
UPDATES OR REVISIONS TO ANY FORWARD-LOOKING STATEMENTS CONTAINED HEREIN TO
REFLECT ANY CHANGE IN THE COMPANY'S EXPECTATIONS WITH REGARD THERETO OR ANY
CHANGE IN EVENTS, CONDITIONS OR CIRCUMSTANCES ON WHICH ANY SUCH STATEMENT IS
BASED.

OVERVIEW

         LodgeNet is a specialized communications company which provides
video on-demand, network-based video games, high-speed internet access, cable
television programming and other interactive entertainment and information
services to the lodging industry utilizing its B-LAN-Registered Trademark-
open system architecture.

         GUEST PAY SERVICES. Guest Pay services are purchased by guests on a
per-view or hourly basis and include Guest Scheduled-SM- on-demand movies and
network-based Nintendo-Registered Trademark- video games. Guest Pay packages
may also include additional services such as satellite-delivered basic and
premium cable television programming , and other interactive entertainment
and information services that are paid for by the hotel and provided to
guests at no charge. The growth that the Company has experienced has
principally resulted from its rapid expansion of Guest Pay services, which
the Company began installing in 1986. In May 1992, the Company introduced and
began installing its on-demand Guest Pay service. It has been the Company's
experience that rooms featuring the on-demand Guest Pay service generate
significantly more revenue and gross profit per room than comparable rooms
having only the scheduled format.

         The Company's Guest Pay revenues depend on a number of factors,
including the number of rooms equipped with the Company's systems, Guest Pay buy
rates, hotel occupancy rates, hotel guest demographics, the popularity,
selection and pricing of the Company's program offerings and the length of time
programming is available to the Company prior to its release to the home video
and cable television markets. The primary direct costs of providing Guest Pay
services are (i) license fees paid to studios for non-exclusive distribution
rights to recently-released major motion pictures, (ii) nominal one-time license
fees paid for independent films, (iii) license fees for video games and other
services, and (iv) the commission retained by the hotel. Guest Pay operating
expenses include costs of system maintenance and support, in-room marketing,
programming delivery and distribution, data retrieval, insurance and personal
property taxes.

         The Company provides video games and interactive multimedia
entertainment and information services including folio review, video
checkout, guest satisfaction survey, advertising and merchandising services
through its Guest Pay systems. In 1993, the Company entered into a seven-year
non-exclusive license agreement with Nintendo of America, Inc. ("Nintendo")
to provide hotels with a network-based Super Nintendo-Registered Trademark-
video game playing system. During 1998, the Company entered into a new,
ten-year non-exclusive license agreement with Nintendo to become the first
provider of Nintendo 64 ("N64-Registered Trademark-") video games to the
lodging industry. The Company began the rollout of the N64 game technology to
its Guest Pay rooms during the second quarter of 1999.

                                                                         Page 9

<PAGE>


         During the three months and twelve months ended June 30, 1999, the
Company installed its systems in the following number of rooms, net of
de-installations:

<TABLE>
<CAPTION>
                                         Three Months           Twelve Months
                                             Ended                  Ended
                                         June 30, 1999          June 30, 1999
                                       ------------------     ------------------
<S>                                    <C>                    <C>
Guest Pay rooms                                   17,610                 77,018
                                       ==================     ==================
Nintendo game system rooms                        26,134                 73,292
                                       ==================     ==================
</TABLE>

     The room installations for the twelve months ended June 30, 1999 represent
increases of 13.8% for Guest Pay and 14.6% for Nintendo, over the room bases at
June 30, 1998.

The Company's base of installed rooms was comprised as follows at June 30:

<TABLE>
<CAPTION>
                                    1998                        1999
                           ------------------------    ------------------------
<S>                        <C>                         <C>
                              Rooms           %           Rooms           %
                           ------------    --------    ------------    --------
Guest Pay rooms:
     Scheduled                  21,034         3.8           9,997         1.6
     On-demand                 535,234        96.2         623,289        98.4
                           ------------    --------    ------------    --------
                               556,268       100.0         633,286       100.0
                           ------------    --------    ------------    --------
Nintendo game system rooms     503,041                     576,333
                           ============                ============
</TABLE>

         Total rooms served, representing rooms receiving one or more of the
Company's services, including rooms served by international licensees, were as
follows at June 30:

<TABLE>
<CAPTION>
                                            1998             1999
                                       ------------     ------------
<S>                                    <C>              <C>
Total rooms served                         659,866          735,726
                                       ============     ============
</TABLE>

         FREE-TO-GUEST SERVICES. In addition to Guest Pay services, the Company
provides cable television programming for which the hotel, rather than its
guests, pays the charges. Free-to-guest services include the satellite delivery
of various programming channels through a satellite earth station, which
generally is owned or leased by the hotel. The hotel pays the Company a fixed
monthly charge per room for each programming channel provided. The Company
obtains its free-to-guest programming pursuant to multi-year agreements with the
programmers and pays a fixed monthly fee per room which varies depending on
incentive programs in effect from time to time from the programming networks.
Results from free-to-guest services delivered to rooms not receiving Guest Pay
services are included in the "other" components of revenues and direct costs in
the statements of operations.

         RESIDENTIAL SERVICES. Effective November 30, 1998, the operations of
the Company's majority-owned subsidiary, ResNet Communications, LLC ("ResNet")
were merged with two non-affiliated entities to form a new entity, Global
Interactive Communications Corporation ("GICC"). The Company has a 30% equity
interest in GICC. GICC's business consists of providing cable television
programming and telecommunications services to the multi-family dwelling unit
market. The Company has accounted for its investment in GICC using the equity
method of accounting for an investment, recording losses totaling $3.2 million
for its share of GICC's losses for the six months ending June 30, 1999.
Additionally, during the second quarter of 1999, the Company recorded a charge
of $16.8 million to write-down its investment in GICC to estimated fair value.
Based on information from independent sources and GICC management, the Company
has reduced the carrying amount of its investment in GICC to

                                                                       Page 10

<PAGE>

approximately $12 million as of June 30, 1999, reflecting estimated amounts
available to the Company upon the sale of GICC's assets to third parties.

                DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS
                    THREE MONTHS ENDED JUNE 30, 1998 AND 1999

REVENUE ANALYSIS

         The Company's total revenue for the second quarter of 1999 increased
8.2%, or $3.4 million, in comparison to the second quarter of 1998. The
following table sets forth the components of the Company's revenue (in
thousands) for the quarter ending June 30:

<TABLE>
<CAPTION>
                            1998                             1999
                 ---------------------------     -----------------------------
                                  Percent                           Percent
                                  of Total                          of Total
                   Amount         Revenue           Amount          Revenue
                 ------------    -----------     -------------     -----------
<S>              <C>             <C>             <C>               <C>
Guest Pay           $ 35,901           87.8          $ 41,479            93.7
Other                  4,997           12.2             2,790             6.3
                 ------------    -----------     -------------     -----------
   Total            $ 40,898          100.0          $ 44,269           100.0
                 ============    ===========     =============     ===========
</TABLE>

         GUEST PAY SERVICES. Guest Pay revenue increased 15.5%, or $5.6 million,
in the second quarter of 1999 in comparison to the same quarter of 1998. This
increase was attributable to a 14.7% increase in the average number of installed
Guest Pay rooms and a .7% increase in average monthly revenue per room. The
following table sets forth information in regard to average monthly revenue per
installed Guest Pay room for the quarter ending June 30:

<TABLE>
<CAPTION>
                                                    1998           1999
                                                 -----------    ------------
<S>                                              <C>            <C>
Average monthly revenue per room:
   Movie revenue                                    $ 18.54         $ 18.51
   Video game and other service revenue                3.54            3.73
                                                 -----------    ------------
      Total per Guest Pay room                      $ 22.08         $ 22.24
                                                 ===========    ============
</TABLE>

         Average movie revenue per Guest Pay room decreased .2% in the second
quarter of 1999 compared to the same quarter of 1998. This decrease was due to
lower average buy rates and hotel occupancy levels, partially offset by higher
average movie prices.

         Average video game and other service revenue per Guest Pay room
increased 5.4% primarily as a result of increased revenue per Guest Pay room
from cable television programming services, partially offset by a decrease in
average monthly video game revenue per room.

         OTHER. Revenue from other sources includes revenue from free-to-guest
services provided to hotels not receiving Guest Pay services and sales of
televisions, system equipment, and service parts and labor. Additionally, in
1998, other revenue includes revenue generated by ResNet. The decrease in the
second quarter of 1999 from the second quarter of 1998 of $2.2 million or 44.2%,
is primarily due to $1.4 million of revenue generated by ResNet in the second
quarter of 1998. In addition, sales of televisions and system equipment were
lower in the second quarter of 1999 from the year earlier quarter.

                                                                       Page 11

<PAGE>

EXPENSE ANALYSIS

         DIRECT COSTS. The following table sets forth information in regard to
the Company's direct costs (in thousands) and gross profit margin for the
quarter ending June 30:

<TABLE>
<CAPTION>
                                   1998            1999
                                ------------    -----------
<S>                             <C>             <C>
Direct costs:
   Guest Pay                       $ 14,679       $ 16,840
   Other                              3,508          2,165
                                ------------    -----------
                                   $ 18,187       $ 19,005
                                ============    ===========
Gross profit margin:
   Guest Pay                          59.1%          59.4%
   Other                              29.8%          22.4%
   Composite                          55.5%          57.1%

</TABLE>

         Guest Pay direct costs increased 14.7%, or $2.2 million, in the second
quarter of 1999 as compared to the year earlier quarter. Since Guest Pay direct
costs (primarily studio license fees, video game license fees and the commission
retained by the hotel) are primarily based on related revenue, such costs tend
to vary directly with revenue. As a percentage of revenue, such costs decreased
from 40.9% in the second quarter of 1998 to 40.6% in the current quarter,
primarily due to a slight decrease in commissions earned by the hotels and
increased margins earned on cable television programming services provided to
Guest Pay rooms.

         Direct costs associated with other revenue decreased $1.3 million or
38.3% in the second quarter of 1999 from the year earlier quarter. This decrease
is primarily due to $642,000 of direct costs incurred by ResNet in the second
quarter of 1998 and the lower volume of television and equipment sales
previously described. As a percentage of related revenues, direct costs
increased to 77.6% of other revenue in the current quarter versus 70.2% in the
second quarter of 1998. The resulting decrease in gross profit margin from 29.8%
in the second quarter of 1998 to 22.4% in the current quarter is due to the fact
that the ResNet business, which generally earned a higher margin than the other
sources of other revenue, is not included in the 1999 results due to the merger
transaction previously described.

         The Company's overall gross profit increased 11.2%, or $2.6 million, to
$25.3 million in the second quarter of 1999 on a 8.2% increase in revenues in
comparison to the same period of the prior year. The Company's overall gross
profit margin increased to 57.1% in the current quarter from 55.5% in the year
earlier quarter.

         OPERATING EXPENSES. The following table sets forth information in
regard to the Company's operating expenses for the quarter ending June 30
(dollar amounts in thousands):

<TABLE>
<CAPTION>
                                                      1998                            1999
                                           ---------------------------     ---------------------------
                                                            Percent                         Percent
                                                            of Total                        of Total
                                             Amount         Revenues         Amount         Revenues
                                           ------------    -----------     -----------     -----------
<S>                                        <C>             <C>             <C>             <C>
Operating expenses:
   Guest Pay operations                        $ 6,245           15.3         $ 6,032            13.7
   Selling, general and administrative           4,961           12.1           4,218             9.5
   Depreciation and amortization                13,407           32.8          14,880            33.6
                                           ------------    -----------     -----------     -----------
      Total operating expenses                $ 24,613           60.2        $ 25,130            56.8
                                           ============    ===========     ===========     ===========
</TABLE>

         Guest Pay operations expenses consist of costs directly related to the
operation of systems at the hotel sites. Additionally, prior to the ResNet
merger, costs incurred to operate the ResNet systems were included in Guest Pay
operations. Such costs totaled $710,000 in the second quarter of 1998. Excluding
the expenses incurred to operate the

                                                                        Page 12

<PAGE>

systems at residential sites, expenses related to Guest Pay operations
increased 9.0%, or $497,000 in the second quarter of 1999 compared to the
year earlier quarter. This increase is primarily attributable to the 14.7%
increase in average installed Guest Pay rooms in the second quarter of 1999
as compared to the year earlier quarter, partially offset by lower average
operating and service expenses incurred on a per room basis. Per average
installed Guest Pay room, such expenses were $3.23 per month in the second
quarter of 1999 as compared to $3.40 per month in the second quarter of 1998.

         Selling, general and administrative expenses decreased 15.0%, or
$743,000 in the second quarter of 1999 compared to the year earlier quarter. The
decrease is due in part to the ResNet merger as $424,000 of selling, general and
administrative expenses were incurred by ResNet in the second quarter of 1998.
As a percentage of revenue, such expenses were 9.5% in the current quarter as
compared to 12.1% in the year earlier quarter.

         Depreciation and amortization expenses increased 11.0% to $14.9 million
in the second quarter of 1999 from $13.4 million in the year earlier quarter.
This increase is attributable to the increases in the number of installed Guest
Pay rooms, associated software and other capitalized costs such as service vans,
equipment and computers that are related to the increased number of rooms in
service since the year-earlier quarter. This increase was partially offset by
the ResNet merger as ResNet depreciation and amortization during the second
quarter of 1998 was $969,000.

         OPERATING INCOME. As a result of the factors previously described, the
Company generated operating income of $134,000 in the second quarter of 1999
compared to an operating loss of $1.9 million in the same quarter of 1998.

         EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. As previously described
in Note 3 to the financial statements and the Overview section of Management's
Discussion and Analysis of Financial Condition and Results of Operations, the
merger of ResNet with two other entities effective November 30, 1998 to form
GICC resulted in the Company obtaining a 30% equity interest in GICC. The
Company's portion of GICC's 1999 second quarter loss was $1.6 million. In
addition, the Company recorded a $16.8 million charge in the second quarter of
1999 to write-down its investment in GICC to estimated fair value.

         INTEREST EXPENSE. Interest expense increased to $6.9 million in the
current quarter from $5.6 million in the year earlier quarter due to increases
in long-term debt to fund the Company's continuing expansion of its business.
Total debt increased from $221.2 million at June 30, 1998 to $276.3 million at
June 30, 1999. Average principal amount of long-term debt outstanding during the
quarter ended June 30, 1999 was approximately $269 million (at an average
interest rate of approximately 10.2%) as compared to an average principal amount
outstanding of approximately $213 million (at an average interest rate of
approximately 10.5%) during the second quarter of 1998.

         INTEREST INCOME. Interest income, earned on loans to unconsolidated
affiliates, was $387,000 in the second quarter of 1999. No such interest was
earned during the same period of 1998.

         NET LOSS. For the reasons previously described, the Company's net loss
increased to $24.8 million in the second quarter of 1999 from a net loss of $7.5
million in the same quarter a year earlier.

         EBITDA. As a result of increasing revenues from Guest Pay services, and
the other factors previously described, EBITDA (defined as "earnings before
interest, income taxes, depreciation and amortization") excluding equity in
losses of unconsolidated affiliates increased 30.5% to $15.0 million in the
second quarter of 1999 as compared to $11.5 million in the second quarter of
1998. EBITDA as a percentage of total revenues was 33.9% in the current quarter
as compared to 28.1% in the same quarter of 1998. EBITDA is included herein
because it is a widely accepted financial indicator used by certain investors
and financial analysts to assess and compare companies on the basis of operating
performance. EBITDA is not intended to represent an alternative to net income
(as determined in accordance with generally accepted accounting principles) as a
measure of performance, but management believes that it does provide an
important additional perspective on the Company's operating results and the
Company's ability to service its long-term debt and to fund the Company's
continuing growth.

                                                                       Page 13

<PAGE>


                              RESULTS OF OPERATIONS
                     SIX MONTHS ENDED JUNE 30, 1998 AND 1999

REVENUE ANALYSIS

         The Company's total revenue for the six months ended June 30, 1999
increased 11.6%, or $9.0 million, in comparison to the six months ended June 30,
1998. The following table sets forth the components of the Company's revenue for
the six months ended June 30 (dollar amounts in thousands):

<TABLE>
<CAPTION>
                         1998                             1999
              ---------------------------     -----------------------------
                               Percent                           Percent
                               of Total                          of Total
                Amount         Revenue           Amount          Revenue
              ------------    -----------     -------------     -----------
<S>           <C>             <C>             <C>               <C>
Guest Pay        $ 67,750           87.7          $ 80,448            93.3
Other               9,495           12.3             5,786             6.7
              ------------    -----------     -------------     -----------
   Total         $ 77,245          100.0          $ 86,234           100.0
              ============    ===========     =============     ===========
</TABLE>

         GUEST PAY REVENUE. Guest Pay revenue increased 18.7%, or $12.7 million,
in the first half of 1999 in comparison to the same period of 1998. This
increase was the result of a 15.3% increase in the average number of installed
Guest Pay rooms and a 3.1% increase in average monthly revenue per room. The
following table sets forth information in regard to average monthly revenue per
installed Guest Pay room for the six months ending June 30:

<TABLE>
<CAPTION>
                                                  1998           1999
                                               -----------    ------------
<S>                                            <C>            <C>
Average monthly revenue per room:
   Movie revenue                                  $ 17.93         $ 18.28
   Video game and other service revenue              3.31            3.61
                                               -----------    ------------
      Total per Guest Pay room                    $ 21.24         $ 21.89
                                               ===========    ============
</TABLE>

         Average movie revenue per room increased 2.0% in the first six months
of 1999 compared to the same period of 1998. This increase was due to higher
average movie prices, partially offset by lower average buy rates and hotel
occupancy levels.

         Average video game and other service revenue per room increased 9.1%
primarily as a result of increased revenue per Guest Pay room from cable
television programming services, partially offset by a decrease in average
monthly video game revenue per room.

         OTHER REVENUE. Revenue from other sources includes revenue from
free-to-guest services provided to hotels not receiving Guest Pay services and
sales of televisions, system equipment, and service parts and labor.
Additionally, in 1998, other revenue includes revenue generated by ResNet. The
decrease in the first six months of 1999 from the same period of 1998 of $3.7
million or 39.1%, is primarily due to $2.6 million of revenue generated by
ResNet in the first six months of 1998. In addition, sales of televisions and
system equipment were lower in the first half of 1999 from the year earlier
period.


                                                                       Page 14

<PAGE>


EXPENSE ANALYSIS

         DIRECT COSTS. The following table sets forth information in regard to
the Company's direct costs and gross profit margin for the six months ending
June 30 (dollar amounts in thousands):

<TABLE>
<CAPTION>
                                   1998            1999
                                ------------    -----------
<S>                             <C>             <C>
Direct costs:
   Guest Pay                       $ 27,750       $ 32,691
   Other                              6,517          4,562
                                ------------    -----------
                                   $ 34,267       $ 37,253
                                ============    ===========

Gross profit margin:
   Guest Pay                          59.0%          59.4%
   Other                              31.4%          21.2%
   Composite                          55.6%          56.8%

</TABLE>

         Guest Pay direct costs increased 17.8%, or $4.9 million, in the first
half of 1999 as compared to the first half of 1998. Since Guest Pay direct costs
(primarily studio license fees, video game license fees and the commission
retained by the hotel) are primarily based on related revenue, such costs tend
to vary directly with revenue. As a percentage of revenue, such costs decreased
from 41.0% during the first six months of 1998 to 40.6% during the same period
of 1999. This decrease is primarily due to a slight decrease in commissions
earned by the hotels and increased margins earned on cable television
programming services provided to Guest Pay rooms.

         Direct costs associated with other revenue decreased $2.0 million or
30.0% in the first half of 1999 from the year earlier period. This decrease is
primarily due to $1.2 million of direct costs incurred by ResNet in the first
six months of 1998 and the lower volume of television and equipment sales
previously described. As a percentage of related revenues, direct costs
increased to 78.8% of other revenue in the current six month period versus 68.6%
in the same period of 1998. The resulting decrease in gross profit margin from
31.4% in the first half of 1998 to 21.2% in the first half of 1999 is due to the
fact that the ResNet business, which generally earned a higher margin than the
other sources of other revenue, is not included in the 1999 results due to the
merger transaction previously described.

         The Company's overall gross profit increased 14.0%, or $6.0 million, to
$49.0 million in the first six months of 1999 on an 11.6% increase in revenues
in comparison to the same period of the prior year. The Company's overall gross
profit margin was 56.8% in the current six month period, as compared to the year
earlier 55.6%.

         OPERATING EXPENSES. The following table sets forth information in
regard to the Company's operating expenses for the six months ending June 30
(dollar amounts in thousands):

<TABLE>
<CAPTION>
                                                    1998                            1999
                                         ---------------------------     ---------------------------
                                                          Percent                         Percent
                                                          of Total                        of Total
                                           Amount         Revenues         Amount         Revenues
                                         ------------    -----------     -----------     -----------
<S>                                      <C>             <C>             <C>             <C>
Operating expenses:
   Guest Pay operations                     $ 12,382          16.0%        $ 11,899           13.8%
   Selling, general and administrative         9,787          12.7%           8,559            9.9%
   Depreciation and amortization              25,986          33.6%          29,305           34.0%
                                         ------------    -----------     -----------     -----------
      Total operating expenses              $ 48,155          62.3%        $ 49,763           57.7%
                                         ============    ===========     ===========     ===========
</TABLE>

          Guest Pay operations expenses consist of costs directly related to the
operation of systems at the hotel sites. Additionally, prior to the ResNet
merger, costs incurred to operate the ResNet systems were included in Guest Pay


                                                                        Page 15

<PAGE>


operations. Such costs totaled $1.5 million in the first six months of 1998.
Excluding the expenses incurred to operate the systems at residential sites,
expenses related to Guest Pay operations increased 8.9%, or $973,000 in the
first six months of 1999 compared to the year earlier period. This increase is
primarily attributable to the 15.3% increase in average installed Guest Pay
rooms in the current period as compared to the year earlier period, partially
offset by lower average operating and service expenses incurred on a per room
basis. Per average installed Guest Pay room, such expenses were $3.24 per month
in the current period as compared to $3.43 per month in the prior year period.

         Selling, general and administrative expenses decreased 12.5%, or $1.2
million in the first six months of 1999 compared to the year earlier period.
This decrease is primarily due to the ResNet merger as $1.0 million of selling,
general and administrative expenses were incurred by ResNet in the first six
months of 1998. As a percentage of revenue, such expenses were 9.9% in the
current period as compared to 12.7% in the year earlier period.

         Depreciation and amortization expenses increased 12.8% to $29.3 million
in the first six months of 1999 from $26.0 million in the year earlier period.
This increase is attributable to the increases in the number of installed Guest
Pay rooms, associated software and other capitalized costs such as service vans,
equipment and computers that are related to the increased number of rooms in
service since the year-earlier period. This increase was partially offset by the
ResNet merger as ResNet depreciation and amortization during the first six
months of 1998 was $1.8 million.

         OPERATING LOSS. The Company's operating loss, as a result of the
factors previously described, decreased to $782,000 for the six months ending
June 30, 1999 as compared to $5.2 million in the same period of 1998.

         EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES. During 1998, the Company
acquired a 10% interest in Across Media Networks, LLC ("AMN"), a company engaged
in the creation and distribution of digitally produced on-screen content for
television and the internet. Prior to the second quarter of 1999, the Company
had applied the equity method of accounting for this investment to reflect the
fact that the Company had certain financing obligations to AMN. Losses of $2.2
million related to this investment were recorded in the first quarter of 1999.
During the second quarter of 1999, AMN was able to secure other financing
resources eliminating the Company's obligation to provide future financing.
Accordingly, the Company discontinued the use of the equity method of accounting
for this investment and, as such, no further equity losses have been recorded.
Additionally, as previously described, the merger of ResNet with two other
entities effective November 30, 1998 to form GICC resulted in the Company
obtaining a 30% equity interest in GICC. The Company's portion of GICC's net
losses for the first six months of 1999 totaled $3.2 million. In addition, the
Company recorded a $16.8 million charge in the second quarter of 1999 to
write-down its investment in GICC to estimated fair value.

         INTEREST EXPENSE. Interest expense increased to $13.5 million in the
current six month period from $10.9 million in the year earlier period due to
increases in long-term debt to fund the Company's continuing expansion of its
business. Total debt increased from $221.2 million at June 30, 1998 to $276.3
million at June 30, 1999. Average principal amount of long-term debt outstanding
during the six months ended June 30, 1999 was approximately $266 million (at an
average interest rate of approximately 10.2%) as compared to an average
principal amount outstanding of approximately $204 million (at an average
interest rate of approximately 10.6%) during the first six months of 1998.

         INTEREST INCOME. Interest income increased to $780,000 in the first
half of 1999 from $92,000 during the same period of 1998. This increase is
primarily due to increased loans to unconsolidated affiliates.

         NET LOSS. For the reasons previously described, the Company's net loss
increased to $35.9 million in the first half of 1998 from a net loss of $16.2
million in the same period of the prior year.

         EBITDA. As a result of increasing revenues from Guest Pay services, and
the other factors previously described, EBITDA increased 37.1% to $28.5 million
in the first six months of 1999 as compared to $20.8 million in the first six
months of 1998. EBITDA as a percentage of total revenue was 33.1% in the current
six month period as compared to 26.9% in the same period of 1998. EBITDA is
included herein because it is a widely accepted


                                                                       Page 16

<PAGE>


financial indicator used by certain investors and financial analysts to
assess and compare companies on the basis of operating performance. EBITDA is
not intended to represent an alternative to net income (as determined in
accordance with generally accepted accounting principles) as a measure of
performance, but management believes that it does provide an important
additional perspective on the Company's operating results and the Company's
ability to service its long-term debt and to fund the Company's continuing
growth.

SEASONALITY

         The Company's quarterly operating results are subject to fluctuation
depending upon hotel occupancy rates and other factors. Typically, occupancy
rates are higher during the second and third calendar quarters due to seasonal
travel patterns.

LIQUIDITY AND CAPITAL RESOURCES

         Historically, the growth of the Company's business has required
substantial amounts of capital. The Company has incurred operating and net
losses due in large part to the depreciation, amortization and interest expenses
related to the capital required to expand its lodging and residential
businesses. Historically, cash flow from operations has not been sufficient to
fund the cost of expanding the Company's business and to service existing
indebtedness. During 1998, capital expenditures were $69.7 million (of which
$14.2 million was incurred by ResNet) and net cash provided by operating
activities was $13.2 (after the reduction of net cash used in operating
activities of $5.0 million by ResNet). During the first six months of 1999,
capital expenditures were approximately $25.7 million as compared to $36.4
million in the first six months of 1998, and net cash provided by operating
activities was $20.5 million as compared to $5.6 million in the same period of
1998.

         Depending on the rate of growth of its lodging business and other
factors, the Company expects to incur capital expenditures of between
approximately $25 to $30 million during the remainder of 1999. In addition, the
Company's cash requirements during 1999 and 2000 are expected to include (i)
payments to OCC of $5.85 million on each of July 15, 1999 and July 15, 2000
pursuant to the terms of the multiple cross licenses and (ii) deferred purchase
payments of up to $1 million in each of 1999 and 2000 in connection with the
Company's acquisition of Connect Group Corporation in 1998. The foregoing
statements regarding capital expenditures and cash requirements are
forward-looking statements and there can be no assurance in this regard. The
actual amount and timing of the Company's capital expenditures will vary (and
such variations could be material) depending upon the number of new contracts
for services entered into by the Company, the costs of installations and other
factors.

         On February 25, 1999, the Company amended and restated its existing
bank credit facility. This amended facility (the "Bank Facility") consists of a
$150 million secured credit facility which combines a $75 million term loan (the
"Term Loan") and a $75 million revolving loan facility (the "Revolving Loan").
Proceeds under the Term Loan were used to repay amounts outstanding under the
revolving loan facility that existed prior to the amendment and restatement.
Minimum required prepayments of borrowings under the Term Loan for the
respective years are (in thousands of dollars): 2001 -- $15,000; 2002 --
$18,750; 2003 -- $18,750; 2004 -- $22,500. The Bank Facility includes covenants
which require the maintenance of certain financial ratios and which impose
certain limitations on such matters as the incurrence of additional indebtedness
and payments in respect of common stock of the Company, among others. As of June
30, 1999, the Company was in compliance with all such covenants.

         As previously described, effective November 30, 1998 the Company
contributed its interest in the ResNet business to GICC. The Company has no
continuing obligation to fund any of GICC's operating and/or investing
activities. During 1998, the Company provided $19.3 million to fund ResNet's
operating and investing activities, all of which funding occurred prior to
November 30, 1998.

         The Company believes that its operating cash flows and borrowings
available under its revolving credit facility will be sufficient to fund the
Company's future growth as contemplated under its current business plan,
depending on the rate of the Company's growth and other factors. However, if the
Company's plans or assumptions change, if its assumptions prove to be inaccurate
or if the Company experiences unanticipated costs or competitive pressures, the
Company may be required to seek additional capital. There can be no assurance
that the Company will


                                                                       Page 17

<PAGE>


be able to obtain financing, if additional long-term financing should be
required, or, if such financing is available, that the Company will be able
to obtain it on acceptable terms. Failure to obtain additional financing, if
needed, could result in the delay or abandonment of some or all of the
Company's expansion plans.

YEAR 2000 INFORMATION

         The Company has engaged in a comprehensive review of its internal
computer systems and software and external business relationships in regard to
Year 2000 issues.

         STATE OF READINESS. The Company has a project team comprised of key
members from cross-organization departments. The team's objectives are to gather
information and facilitate research on Year 2000 issues that could affect the
Company, and to take necessary actions to eliminate or minimize the impact of
such issues. Internally the Company has completed its efforts to identify the
computer hardware and software that is used both at its in-house facilities as
well as at its hotel properties. Research and testing of these systems for Year
2000 compliance is near completion. The Company expects to substantially
complete its research and testing of internal computer hardware and software by
the end of the third quarter of 1999. Correction or replacement of hardware and
software containing Year 2000 issues is in progress and is estimated for
completion during the fourth quarter of 1999.

         Externally, the Company is working to identify third party business
relationships that are impacted by the Year 2000 issue. Research and review of
these relationships, including contacting the third parties to solicit
information and assurances relating to potential Year 2000 issues and reviewing
responses, is nearly complete The Company expects to substantially complete its
review of third party relationships by the end of the third quarter of 1999,
although no assurance can be given as to the Year 2000 remediation of third
parties.

         COSTS ASSOCIATED WITH YEAR 2000. Incremental costs are expected to be
comprised primarily of costs to purchase software upgrades and hardware.
Additionally, external consulting, programming and training costs may be
incurred. Estimated costs of Year 2000 compliance are not fully determined at
this time, however, the Company expects to incur less than $500,000 in aggregate
out-of-pocket costs in 1998 and 1999 to complete its Year 2000 compliance
program, excluding the costs of internal staffing. As of June 30, 1999 the
Company has incurred out-of-pocket costs totaling approximately $275,000 toward
Year 2000 compliance efforts. Such funds have been provided from the Company's
bank credit facility. Although the Company intends to develop and implement, if
necessary, appropriate contingency plans to mitigate to the extent possible the
effects of any Year 2000 noncompliance, such plans may not be adequate and the
cost of Year 2000 compliance may be greater than $500,000.

         RISKS ASSOCIATED WITH YEAR 2000 ISSUES. The Company is highly dependent
upon its own information technology systems and those of its suppliers and
customers. The Company's or a third party's failure to correct a material Year
2000 problem could result in a failure of or interruption in the Company's
business activities and operations. Such interruptions and failures could
materially and adversely affect the Company's results of operation, liquidity
and financial condition. The Company's Year 2000 project is expected to reduce
significantly the Company's level of uncertainty and the possibility of
significant or long-lasting interruptions of the Company's business operations;
however, the Company believes that it is impossible to predict all of the areas
in which material problems may arise.

         CONTINGENCY PLANS. The Company has not yet completed specific
contingency plans for Year 2000 issues. The Company is in the process of
identifying the most reasonably likely worst-case scenarios, so that it may
attempt to secure alternate vendors and service providers for these functions as
well as to develop alternative systems which could be used to process data.

         While the Company anticipates achieving Year 2000 compliance in a
timely manner, there can be no assurance that all processes will be compliant,
that there will be no significant delay or loss of revenues, or that no material
supply sources will be interrupted. However, the Company believes that its
planning and action efforts will help reduce any loss or disruption.

                                                                       Page 18

<PAGE>


ITEM 3 -- QUANTITATIVE  AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

         The Company is exposed to various market risks, including potential
losses resulting from adverse changes in interest rates and foreign currency
exchange rates. The Company does not enter into derivatives or other financial
instruments for trading or speculative purposes.

         INTEREST. At June 30, 1999, the Company had debt totaling $276.3
million. During the second quarter of 1999, the Company entered into interest
rate swap arrangements covering debt with a notional amount of $75 million to
effectively change the underlying debt from a variable interest rate to a fixed
interest rate for the term of the swap agreements. After giving effect to the
interest rate swap arrangements the Company had fixed rate debt of $266.3
million and variable rate debt of $10 million at June 30, 1999. For fixed rate
debt, interest rate changes affect the fair market value but do not impact
earnings or cash flows. Conversely, for variable rate debt, interest rate
changes generally do not affect the fair market value but do impact future
earnings and cash flows, assuming other factors are held constant. Assuming
other variables remain constant (such as debt levels), a one percentage point
increase in interest rates would decrease the unrealized fair market value of
the fixed rate debt by an estimated $24.7 million. The impact on earnings and
cash flow for the next year resulting from a one percentage point increase in
interest rates would be approximately $100,000, assuming other variables remain
constant.

         FOREIGN CURRENCY TRANSACTIONS. A minor portion of the Company's
revenues are derived from the sale of Guest Pay services in Canada. The results
of operations and financial position of the Company's operations in Canada are
measured in Canadian dollars and translated into U.S. dollars. The effects of
foreign currency fluctuations in Canada are somewhat mitigated by the fact that
expenses are generally incurred in Canadian dollars. The reported income of the
Company's Canadian subsidiary will be higher or lower depending on a weakening
or strengthening of the U.S. dollar against the Canadian dollar. In addition, a
minor portion of the Company's assets are based in Canada and are translated
into U.S. dollars at foreign currency exchange rates in effect as of the end of
each period, with the impact of such translation reflected within the Company's
consolidated stockholders' equity. Accordingly, the Company's consolidated
stockholders' equity will fluctuate depending on the weakening or strengthening
of the U.S. dollar against the Canadian dollar. The Company manages its
potential adverse currency fluctuation risk by conducting the majority of its
Canadian operations in Canadian dollars.


                                                                       Page 19

<PAGE>


                           PART II -- OTHER INFORMATIOn

ITEM 1 -- LEGAL PROCEEDINGS

     The Company is subject to litigation arising in the ordinary course of
business. As of the date hereof, the Company believes the resolution of such
litigation will not have a material adverse effect upon the Company's financial
condition or results of operations.

ITEM 2 -- CHANGES IN SECURITIES AND USE OF PROCEEDS

         Not applicable.

ITEM 3 -- DEFAULTS UPON SENIOR SECURITIES

         Not applicable.

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

     a.   The Annual Meeting of Stockholders of the company ("Meeting") was
          held on May 12, 1999 for the following purposes:

          1.   Election of two directors to serve for a three-year term
               expiring in 2002;

          2.   Ratification of the appointment of independent public
               accountants; and

          3.   Action on such matters as may properly come before the Meeting.

     b. The directors who were elected at the Meeting are as follows:

               Tim C. Flynn
               R. F. Leyendecker

     c.   The results of voting at the Meeting were as follows:

               Election of Directors -

<TABLE>
<CAPTION>
                                         For           Against         Withheld      Abstentions
           <S>                        <C>              <C>             <C>           <C>
           Tim C. Flynn               9,870,213          - -           510,213           - -
           R. F. Leyendecker          9,870,213          - -           510,213           - -
</TABLE>

          Ratification of Public Accountants -
<TABLE>
<CAPTION>
                                For            Against                  Abstain
                            <C>                <C>                      <C>
                            10,377,263          1,363                    1,800
</TABLE>

ITEM 5 -- OTHER INFORMATION

          Not applicable.


                                                                       Page 20

<PAGE>


ITEM 6 -- EXHIBITS AND REPORTS ON FORM 8-K

A.  EXHIBITS:

         EXHIBIT
         NO.

         10.30    Form of Employment Agreement between the Company and
                  Scott C. Petersen.

         10.31    Form of Employment Agreement between the Company and each of
                  David M. Bankers, John M. O'Haugherty and Jeffrey T. Weisner.

B.  REPORTS ON FORM 8-K:

         The Company filed no Reports on Form 8-K during the quarter ended June
30, 1999.


                                                                       Page 21

<PAGE>


                       LODGENET ENTERTAINMENT CORPORATION

                                   SIGNATURES

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

                           LODGENET ENTERTAINMENT CORPORATION
                           ---------------------------------------------------
                                             (Registrant)

Date:  August 12, 1999     / s/  Scott C. Petersen
                           ----------------------------------------------------
                           Scott C. Petersen
                           President and Chief Executive Officer
                           (Principal  Executive Officer)

Date:  August 12, 1999     / s /  Jeffrey T. Weisner
                           ----------------------------------------------------
                           Jeffrey T. Weisner
                           Senior Vice President, Chief Financial Officer
                           (Principal Financial Officer)

Date:  August 12, 1999     / s /  Ronald W. Pierce
                           ----------------------------------------------------
                           Ronald W. Pierce
                           Vice President, Corporate Controller
                           (Principal Accounting Officer)


                                                                       Page 22