##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the quarterly period ended September 30, 2006
 or
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from  to
 Commission File Number 0-22334
 LodgeNet Entertainment Corporation
  Delaware
    
    46-0371161(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 3900 West Innovation Street, Sioux Falls, South Dakota
    
    57107(Address of Principal Executive Offices)
    
    (ZIP code)
 (605) 988-1000
 
 
 Former name, former address and former fiscal year, if changed since last report
 þ o
  o þ o
 o þ




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##### 



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiary
 Index
 PageNo.Part I. Financial InformationItem 1  Financial Statements:Consolidated Balance Sheets (Unaudited) as of September 30, 2006 and December 31, 2005
    
    
    3Consolidated Statements of Operations (Unaudited) for
the Three Months and Nine Months Ended September 30, 2006 and 2005
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months Ended September 30, 2006 and 2005
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    
    17Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    38Item 4  Controls and Procedures
    
    
    38Part II. Other InformationItem 1  Legal Proceedings
    
    
    39Item 1A  Risk Factors
    
    
    39Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    39Item 3  Defaults Upon Senior Securities
    
    
    39Item 4  Submission of Matters to a Vote of Security Holders
    
    
    39Item 5  Other Information
    
    
    39Item 6  Exhibits
    
    
    39Signatures
    
    
    40Certification of Chief Financial OfficerCertification of Chief Executive OfficerSection 1350 Certifications
  
 As used herein (unless the context otherwise requires) LodgeNet and/or the Registrant, as well
as the terms we, us and our refer to LodgeNet Entertainment Corporation and its consolidated
subsidiary.LodgeNet , the LodgeNet logo, SigNETure TV, SigNETure PC, SigNETure HDTV, and Hotel
SportsNET are service marks or registered trademarks of LodgeNet Entertainment Corporation; all
other trademarks or service marks used herein are the property of their respective owners. Page 2




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Part I  Financial Information
 
 Item 1  Financial Statements
 LodgeNet Entertainment Corporation and Subsidiary
 
 Consolidated Balance Sheets (Unaudited)
 September 30,
    
    
    December 31,2006
    
    
    2005AssetsCurrent assets:Cash and cash equivalents
    
    $
    31,107
    
    
    $
    20,742Accounts receivable, net
    
    
    32,897
    
    
    
    29,617Other current assets
    
    
    4,507
    
    
    
    2,629Total current assets
    
    
    68,511
    
    
    
    52,988Property and equipment, net
    
    
    190,210
    
    
    
    199,882Debt issuance costs, net
    
    
    6,113
    
    
    
    7,423Intangible assets, net
    
    
    982
    
    
    
    2,007Other assets
    
    
    3,119
    
    
    
    772Total assets
    
    $
    268,935
    
    
    $
    263,072Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    21,307
    
    
    $
    16,036Current maturities of long-term debt
    
    
    2,587
    
    
    
    2,749Accrued expenses
    
    
    20,134
    
    
    
    15,322Deferred revenue
    
    
    6,838
    
    
    
    5,143Total current liabilities
    
    
    50,866
    
    
    
    39,250Long-term debt
    
    
    273,054
    
    
    
    289,251Other long-term liabilities
    
    
    7,387
    
    
    
    4,804Total liabilities
    
    
    331,307
    
    
    
    333,305Commitments and contingenciesStockholders deficiency:Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued or outstandingCommon stock, $.01 par value, 50,000,000 shares authorized;
18,593,443 and 18,165,643 shares outstanding at September 30,
2006 and December 31, 2005, respectively
    
    
    186
    
    
    
    182Additional paid-in capital
    
    
    237,565
    
    
    
    232,327Accumulated deficit
    
    
    (302,344
    )
    
    
    (304,307
    )Accumulated other comprehensive income
    
    
    2,221
    
    
    
    1,565Total stockholders deficiency
    
    
    (62,372
    )
    
    
    (70,233
    )Total liabilities and stockholders deficiency
    
    $
    268,935
    
    
    $
    263,072
   September 30, 2006
    
    Page 3




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiary
 
 Consolidated Statements of Operations (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Revenues:Guest Pay
    
    $
    73,861
    
    
    $
    71,579
    
    
    $
    211,218
    
    
    $
    202,013Other
    
    
    2,649
    
    
    
    2,566
    
    
    
    7,356
    
    
    
    6,236Total revenues
    
    
    76,510
    
    
    
    74,145
    
    
    
    218,574
    
    
    
    208,249Costs and Expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately
below):Guest Pay
    
    
    34,743
    
    
    
    32,741
    
    
    
    96,439
    
    
    
    89,437Other
    
    
    1,293
    
    
    
    1,629
    
    
    
    3,472
    
    
    
    3,276Operating expenses:Guest Pay operations
    
    
    8,902
    
    
    
    8,862
    
    
    
    26,752
    
    
    
    26,311Selling, general and administrative
    
    
    7,069
    
    
    
    6,249
    
    
    
    21,089
    
    
    
    18,560Depreciation and amortization
    
    
    16,099
    
    
    
    16,729
    
    
    
    49,882
    
    
    
    52,609Other operating expense (income), net
    
    
    
    
    
    
    250
    
    
    
    (198
    )
    
    
    250Total costs and operating expenses
    
    
    68,106
    
    
    
    66,460
    
    
    
    197,436
    
    
    
    190,443Income from operations
    
    
    8,404
    
    
    
    7,685
    
    
    
    21,138
    
    
    
    17,806Other Income and Expenses:Interest expense
    
    
    (6,402
    )
    
    
    (7,254
    )
    
    
    (19,483
    )
    
    
    (22,133
    )Write-off of debt issuance costs
    
    
    (52
    )
    
    
    
    
    
    
    (181
    )
    
    
    (143
    )Other income
    
    
    234
    
    
    
    254
    
    
    
    794
    
    
    
    128Income (loss) before income taxes
    
    
    2,184
    
    
    
    685
    
    
    
    2,268
    
    
    
    (4,342
    )Provision for income taxes
    
    
    
    
    
    
    (100
    )
    
    
    (305
    )
    
    
    (332
    )Net income (loss)
    
    $
    2,184
    
    
    $
    585
    
    
    $
    1,963
    
    
    $
    (4,674
    )Net income (loss) per common share (basic)
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.11
    
    
    $
    (0.26
    )Net income (loss) per common share (diluted)
    
    $
    0.12
    
    
    $
    0.03
    
    
    $
    0.11
    
    
    $
    (0.26
    )Weighted average shares outstanding (basic)
    
    
    18,377,629
    
    
    
    18,010,017
    
    
    
    18,250,620
    
    
    
    17,863,076Weighted average shares outstanding (diluted)
    
    
    18,743,251
    
    
    
    18,238,914
    
    
    
    18,611,981
    
    
    
    17,863,076
   September 30, 2006
    
    Page 4




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiary
 
 Consolidated Statements of Cash Flows (Unaudited)
 Nine Months EndedSeptember 30,2006
    
    
    2005Operating activities:Net income (loss)
    
    $
    1,963
    
    
    $
    (4,674
    )Adjustments to reconcile net income (loss) to net cash provided
by operating activities:Depreciation and amortization
    
    
    49,882
    
    
    
    52,609Investment (gains) losses
    
    
    (238
    )
    
    
    Write-off of debt issuance costs
    
    
    181
    
    
    
    143Share-based compensation
    
    
    1,297
    
    
    
    223Gain due to insurance proceeds
    
    
    (200
    )
    
    
    Non-cash other operating expense
    
    
    
    
    
    
    250Insurance proceeds related to business interruption
    
    
    200
    
    
    
    Change in operating assets and liabilities:Accounts receivable
    
    
    (3,193
    )
    
    
    (4,866
    )Other current assets
    
    
    (1,919
    )
    
    
    (840
    )Accounts payable
    
    
    5,239
    
    
    
    2,774Accrued expenses and deferred revenue
    
    
    9,152
    
    
    
    5,797Other
    
    
    (2,297
    )
    
    
    781Net cash provided by operating activities
    
    
    60,067
    
    
    
    52,197Investing activities:Property and equipment additions
    
    
    (36,825
    )
    
    
    (39,232
    )Note receivable repayment
    
    
    238
    
    
    
    Net cash used for investing activities
    
    
    (36,587
    )
    
    
    (39,232
    )Financing activities:Repayment of long-term debt
    
    
    (16,125
    )
    
    
    (10,125
    )Proceeds from lease transaction
    
    
    
    
    
    
    1,022Payment of capital lease obligations
    
    
    (1,049
    )
    
    
    (1,057
    )Exercise of stock options
    
    
    3,945
    
    
    
    4,184Net cash used for financing activities
    
    
    (13,229
    )
    
    
    (5,976
    )Effect of exchange rates on cash
    
    
    114
    
    
    
    44Increase in cash and cash equivalents
    
    
    10,365
    
    
    
    7,033Cash and cash equivalents at beginning of period
    
    
    20,742
    
    
    
    24,995Cash and cash equivalents at end of period
    
    $
    31,107
    
    
    $
    32,028
   September 30, 2006
    
    Page 5




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiary
 
 Notes to Consolidated Financial Statements (Unaudited)
        Accounting for Stock Issued to
Employees Accounting for
Stock-Based Compensation Share-Based Payment
  September 30, 2006
    
    Page 6




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Compensation Cost:Stock options
    
    $
    141
    
    
    $
    50
    
    
    $
    556
    
    
    $
    50Non-vested (restricted) shares
    
    
    229
    
    
    
    58
    
    
    
    741
    
    
    
    173Total share-based compensation expense
    
    $
    370
    
    
    $
    108
    
    
    $
    1,297
    
    
    $
    223Compensation expense per common share:
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.07
    
    
    $
    0.01
  Pro Forma Information under Statement 123
  Three
    
    
    NineMonths Ended
    
    
    Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net income (loss), as reported
    
    $
    585
    
    
    $
    (4,674
    )Add: stock based employee compensation expense
included in reported net income (loss)
    
    
    108
    
    
    
    223Less: stock based employee compensation expense
determined under fair value method, net of
related tax effects
    
    
    (206
    )
    
    
    (1,573
    )Net income (loss), pro forma
    
    $
    487
    
    
    $
    (6,024
    )Net income (loss) per common share (basic and diluted)As reported
    
    $
    0.03
    
    
    $
    (0.26
    )Pro forma
    
    $
    0.03
    
    
    $
    (0.34
    )
  September 30, 2006
    
    Page 7




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Stock Option Valuation and Expense Information under Statement 123(R)
       September 30,
    
    
    September 30,2006
    
    
    2005Weighted average fair value of options granted
    
    Not applicable
        
    $
    8.70Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Weighted average risk-free interest
    
    
    4.8
    %
    
    
    3.7
    %Weighted average expected volatility
    
    
    52.7
    %
    
    
    54.8
    %Weighted
average expected life  employee
    
    6.25 years
    
    5.0 yearsWeighted
average expected life  non-employee director
    
    8.47 years
    
    5.0 years
  September 30, 2006
    
    Page 8




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
  Nine Months EndedSeptember 30, 2006
    
    
    WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Term
    
    
    IntrinsicOptions
    
    
    Price
    
    
    in Years
    
    
    ValueOutstanding, beginning of period
    
    
    2,492,075
    
    
    $
    16.33Granted
    
    
    25,000
    
    
    
    19.09Exercised
    
    
    (285,500
    )
    
    
    13.81Forfeited/canceled
    
    
    (55,800
    )
    
    
    21.77Outstanding, end of period
    
    
    2,175,775
    
    
    $
    16.56
    
    
    
    5.2
    
    
    $
    6,166,104Outstanding, net of expected forfeiture
    
    
    2,172,105
    
    
    $
    16.57
    
    
    
    5.5
    
    
    $
    6,138,592Options exercisable, end of period
    
    
    2,074,985
    
    
    $
    16.76
    
    
    
    5.1
    
    
    $
    5,534,427
   Non-Vested Shares (Restricted Stock)
     September 30, 2006
    
    Page 9




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Compensation cost  non-vested shares:Time-based vesting
    
    $
    88
    
    
    $
    58
    
    
    $
    247
    
    
    $
    173Performance-based vesting
    
    
    141
    
    
    
    
    
    
    
    494
    
    
    
    Total share based compensation
expense   non-vested shares
    
    $
    229
    
    
    $
    58
    
    
    $
    741
    
    
    $
    173
  Nine Months EndedSeptember 30, 2006Time Based
    
    
    Performance BasedWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageNon-vested
    
    
    Grant-date
    
    
    Non-vested
    
    
    Grant-dateShares
    
    
    Fair Value
    
    
    Shares
    
    
    Fair ValueOutstanding, beginning of period
    
    
    44,000
    
    
    $
    18.01
    
    
    
    
    
    
    $
    Granted
    
    
    40,750
    
    
    
    16.02
    
    
    
    101,550
    
    
    
    14.47Vested
    
    
    (6,250
    )
    
    
    18.65
    
    
    
    
    
    
    
    Forfeited/canceled
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Outstanding, end of period
    
    
    78,500
    
    
    $
    16.93
    
    
    
    101,550
    
    
    $
    14.47
 Unrecognized Compensation Expense
  Weighted averageSeptember 30,
    
    
    recognition period2006
    
    
    (months)Unrecognized compensation cost:Stock options, net of expected forfeitures
    
    $
    308
    
    
    
    8.9Non-vested shares  time based vesting
    
    
    672
    
    
    
    27.0Non-vested shares  performance based vesting
    
    
    1,150
    
    
    
    27.0Total unrecognized compensation cost
    
    $
    2,130
  September 30, 2006
    
    Page 10




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   September 30,
    
    
    December 31,2006
    
    
    2005Land, building and equipment
    
    $
    85,138
    
    
    $
    83,267Free-to-guest equipment
    
    
    34,663
    
    
    
    33,989Guest Pay systems:Installed system costs
    
    
    444,960
    
    
    
    450,754Customer acquisition costs
    
    
    52,863
    
    
    
    52,264System components
    
    
    26,318
    
    
    
    25,336Software costs
    
    
    22,195
    
    
    
    21,889Total
    
    
    666,137
    
    
    
    667,499Less  depreciation and amortization
    
    
    (475,927
    )
    
    
    (467,617
    )Property and equipment, net
    
    $
    190,210
    
    
    $
    199,882
    September 30, 2006
    
    
    December 31, 2005Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired technology
    
    $
    10,280
    
    
    $
    10,280
    
    
    $
    14,291
    
    
    $
    14,150Acquired intangibles
    
    
    5,774
    
    
    
    4,812
    
    
    
    5,774
    
    
    
    3,945Other
    
    
    449
    
    
    
    429
    
    
    
    497
    
    
    
    460$
    16,503
    
    
    $
    15,521
    
    
    $
    20,562
    
    
    $
    18,555
    September 30, 2006
    
    Page 11




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   Three Months Ended
    
    
    Nine Months EndedSeptember 30
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Average
shares outstanding  basic
    
    
    18,377,629
    
    
    
    18,010,017
    
    
    
    18,250,620
    
    
    
    17,863,076Dilutive effect of stock options, non-
vested shares and warrants
    
    
    365,622
    
    
    
    228,897
    
    
    
    361,361
    
    
    
    Average
shares outstanding  diluted
    
    
    18,743,251
    
    
    
    18,238,914
    
    
    
    18,611,981
    
    
    
    17,863,076Antidilutive securities excluded
from calculation
    
    
    2,225,255
    
    
    
    3,525,912
    
    
    
    2,225,255
    
    
    
    3,525,912
  September 30,
    
    
    September 30,2006
    
    
    2005Potential dilutive common shares
    
    
    4,117,380
    
    
    
    4,340,087
   September 30,
    
    
    December 31,2006
    
    
    2005Accrued taxes
    
    $
    4,203
    
    
    $
    3,679Accrued compensation
    
    
    4,890
    
    
    
    5,803Accrued interest
    
    
    5,931
    
    
    
    1,100Accrued programming related
    
    
    1,533
    
    
    
    1,637Other
    
    
    3,577
    
    
    
    3,103$
    20,134
    
    
    $
    15,322
 September 30, 2006
    
    Page 12




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   September 30,
    
    
    December 31,2006
    
    
    2005Bank Credit Facility:Bank term loan
    
    $
    73,500
    
    
    $
    89,625Revolving credit facility
    
    
    
    
    
    
    9.50% senior notes
    
    
    200,000
    
    
    
    200,000Capital leases
    
    
    2,141
    
    
    
    2,375275,641
    
    
    
    292,000Less current maturities
    
    
    (2,587
    )
    
    
    (2,749
    )$
    273,054
    
    
    $
    289,251
 Bank Credit Facility 3⁄4
    9.50% Senior Notes 3⁄4 pari
passu
 September 30, 2006
    
    Page 13




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
  Capital Leases
  2006
    
    
    2007
    
    
    2008
    
    
    2009
    
    
    2010
    
    
    ThereafterLong-term debt
    
    $
    375
    
    
    $
    1,500
    
    
    $
    71,625
    
    
    $
    
    
    
    $
    
    
    
    $
    200,000Capital leases
    
    
    369
    
    
    
    1,082
    
    
    
    526
    
    
    
    289
    
    
    
    106
    
    
    
    744
    
    
    
    2,582
    
    
    
    72,151
    
    
    
    289
    
    
    
    106
    
    
    
    200,000Less amount representing
interest on capital leases
    
    
    (39
    )
    
    
    (106
    )
    
    
    (53
    )
    
    
    (24
    )
    
    
    (9
    )
    
    
    $
    705
    
    
    $
    2,476
    
    
    $
    72,098
    
    
    $
    265
    
    
    $
    97
    
    
    $
    200,000
   3⁄4
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    2,184
    
    
    $
    585
    
    
    $
    1,963
    
    
    $
    (4,674
    )Foreign currency translation adjustment
    
    
    74
    
    
    
    436
    
    
    
    500
    
    
    
    234Unrealized gain on derivative
instruments
    
    
    
    
    
    
    773
    
    
    
    156
    
    
    
    2,699Comprehensive income (loss)
    
    $
    2,258
    
    
    $
    1,794
    
    
    $
    2,619
    
    
    $
    (1,741
    )
  September 30,
    
    
    December 31,2006
    
    
    2005Unrealized loss on derivative instruments
    
    $
    
    
    
    $
    (156
    )Foreign currency translation adjustment
    
    
    2,221
    
    
    
    1,721Accumulated other comprehensive income
    
    $
    2,221
    
    
    $
    1,565
 September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 3⁄4
  3⁄4
 Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
with Modifications or Exchanges of Insurance Contract
 How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation)
 Accounting
for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109
 Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
 Fair Value Measurements
 September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
  Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R)
     September 30,
2006
    
    Page 16




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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion and analysis provides information concerning our results of operations and
financial condition. This discussion should be read in conjunction with the accompanying
consolidated financial statements and the notes thereto.
 Special Note Regarding Forward-Looking Statements
 Certain statements in this Quarterly Report on Form 10-Q constitute forward-looking statements.
When used in this Quarterly Report, the words expects, intends, 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
within the meaning of the Securities Act of 1933, as amended, and the Securities Exchange Act of
1934, as amended, are subject to risks, uncertainties, and other factors that could cause our
actual results, 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 elsewhere in this Report, such factors include, among
others, the following: the effects of economic conditions, including in particular the economic
condition of the lodging industry, competition, demand for our products and services, programming
availability and quality, technological developments, developmental difficulties and delays,
relationships with clients and property owners, the availability of capital to finance growth, the
impact of government regulations, international crises, acts of terrorism, public health issues,
risks related to the security of our data systems, and other factors detailed, from time to time,
in our filings with the Securities and Exchange Commission. These forward-looking statements speak
only as of the date of this Quarterly Report. We expressly disclaim any obligation or undertaking
to release publicly any updates or revisions to any forward-looking statements contained herein to
reflect any change our expectations with regard thereto or any change in events, conditions or
circumstances on which any such statement is based.
 Executive Overview
    September 30, 2006
    
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LodgeNet Entertainment Corporation
    
    Form 10-Q
   SM () SM SM
 SM SM SM
 September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
     Guest Pay Interactive Services.
  
    
    The number of rooms on our network.We can increase revenue over
time by increasing the number of rooms served by our interactive
systems. Our ability to expand our room base is dependent on a
number of factors, including the attractiveness of our technology,
service and support to hotels currently operating without an
interactive television system, newly constructed hotel properties,
and hotels with expiring contracts currently served by our
competitors.
 
    
    The variety of services offered at the hotel.Rooms equipped with
our digital system generate higher revenue than rooms equipped
with our tape-based system primarily because they offer a greater
variety of services and content choices. We plan to continue to
grow the revenue we generate per average room by the installation
of our digital system in all newly contracted rooms and by
converting selected tape-based rooms to our digital system in
exchange for long-term contract extensions.
 
    
    The popularity, timeliness and amount of content offered at the
hotel.Our revenues vary to a certain degree with the number,
timeliness and popularity of movie content available for viewing.
Historically, a decrease in the availability of popular movie
content has adversely impacted revenue. Although not completely
within our control, we seek to program and promote the most
popular available movie content and other content to maximize
revenue and gross profit.
 
    
    The price of the service purchased by the hotel guest.Generally,
we control the prices charged for our products and services and
manage pricing in an effort to maximize revenue and overall gross
profit. We establish pricing based on such things as the
demographics of the property served, the popularity of the content
and overall economic conditions. Our technology enables us to measure popularity of our content
and make decisions to best position such content and optimize revenue from such content.
 September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 
    
    The occupancy rate at the property.Our revenue also varies depending on hotel occupancy
rates, which are subject to a number of factors, including seasonality, general economic
conditions and world events, such as terrorist threats or public health issues. Occupancy
rates are typically higher during the second and third quarters due to seasonal travel
patterns. We target higher occupancy properties in diverse demographic and geographic
locations in an effort to mitigate occupancy-related risks.
  
    
    license fees paid to major motion picture studios, which are based on a percent of
guest-generated revenue, for non-exclusive distribution rights of recently released major
motion pictures;
    
    commissions paid to our hotel customers, which are also based on a percent of
guest-generated revenue;
    
    fixed monthly programming charges paid primarily to DIRECTV for satellite-delivered
basic and premium television programming;
    
    license fees, which are based on a percent of guest-generated revenue, for television on
demand, music, music video, video games and sports programming;
    
    one-time license fees paid for independent films, most of which are non-rated and
intended for mature audiences; and
    
    Internet connectivity costs.
 Other Services. .
   September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Key Metrics:
 Rooms Served
  September 30,2006
    
    
    2005Total rooms served (1) (2)
    
    
    1,051,046
    
    
    
    1,038,529Total Guest Pay interactive rooms (2) (3)
    
    
    1,003,602
    
    
    
    985,378Net new Guest Pay interactive rooms for the three months ended (4)
    
    
    (3,011
    )
    
    
    10,564Net new Guest Pay interactive rooms for the nine months ended (4)
    
    
    1,673
    
    
    
    31,273
 
 (1)
    
    Total rooms served include guest pay interactive rooms, rooms served by international
licensees, and properties receiving only basic and premium television services.(2)
    
    As a result of Hurricane Katrina, room count as of September 30 was reduced by 4,902 rooms in
2006 and 20,693 rooms in 2005.(3)
    
    Guest Pay interactive rooms are equipped with our interactive television system, which
includes high-definition (HD), digital and tape-based systems.(4)
    
    Amounts shown are net of de-installations during the period. The gross number of new rooms
installed was 18,295 and 19,566 for the three months ended September 30, 2006 and 2005,
respectively, and 48,164 and 58,312 for the nine months ended September 30, 2006 and 2005,
respectively. Digital Room Growth
  September 30,2006
    
    2005Digital room installations for the three months ended
    
    
    24,240
    
    
    
    32,165Digital room installations for the nine months ended
    
    
    81,708
    
    
    
    96,001Total digital rooms installed
    
    
    710,793
    
    
    
    592,380Digital rooms as a percent of total Guest Pay interactive rooms
    
    
    70.8
    %
    
    
    60.1
    %
 September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Capital Investment Per Room
  Three Months Ended
    
    Years EndedSeptember 30,
    
    September 30,
    
    December 31,
    
    December 31,
    
    December 31,2006
    
    2005
    
    2005
    
    2004
    
    2003Average cost
per room 
new installation
    
    $
    356
    
    
    $
    321
    
    
    $
    340
    
    
    $
    364
    
    
    $
    405Average cost
per room 
conversion
    
    $
    235
    
    
    $
    276
    
    
    $
    262
    
    
    $
    284
    
    
    $
    337
  Direct Costs
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2006
    
    2005
    
    2006
    
    2005Guest Pay direct costs per room
    
    $
    11.55
    
    
    $
    10.92
    
    
    $
    10.67
    
    
    $
    10.06Guest Pay direct costs as a percent of total revenue
    
    
    47.0
    %
    
    
    45.7
    %
    
    
    45.7
    %
    
    
    44.3
    %
  Operating Expense Per Room
  September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Guest Pay operating expenses
    
    $
    2.96
    
    
    $
    2.96
    
    
    $
    2.96
    
    
    $
    2.96SG&A expense
    
    
    2.35
    
    
    
    2.09
    
    
    
    2.33
    
    
    
    2.09Depreciation and amortization (D&A)
    
    
    5.35
    
    
    
    5.58
    
    
    
    5.52
    
    
    
    5.91Other operating expense (income), net (1)
    
    
    
    
    
    
    0.08
    
    
    
    (0.02
    )
    
    
    0.03$
    10.66
    
    
    $
    10.71
    
    
    $
    10.79
    
    
    $
    10.99Guest Pay operations as a percent of total revenue
    
    
    11.6
    %
    
    
    12.0
    %
    
    
    12.2
    %
    
    
    12.6
    %SG&A as a percent of total revenue
    
    
    9.2
    %
    
    
    8.4
    %
    
    
    9.6
    %
    
    
    8.9
    %D&A as a percent of total revenue
    
    
    21.0
    %
    
    
    22.6
    %
    
    
    22.8
    %
    
    
    25.3
    %
 
 (1)
    
    Insurance proceeds received for business interruption losses due to Hurricane Katrina in
2006 and equipment impairment charge related to the impact of hurricane Katrina in 2005.  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Share-based compensation
    
    $
    370,000
    
    
    $
    108,000
    
    
    $
    1,297,000
    
    
    $
    223,000Share-based
compensation as a
percent of total revenue
    
    
    0.5
    %
    
    
    0.1
    %
    
    
    0.6
    %
    
    
    0.1
    %Share-based
compensation per room
    
    $
    0.12
    
    
    $
    0.04
    
    
    $
    0.14
    
    
    $
    0.03
 Net Income/(Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net income (loss)
    
    $
    2,184
    
    
    $
    585
    
    
    $
    1,963
    
    
    $
    (4,674
    )
 Free Cash Flow
  September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Cash provided by operating activities
    
    $
    23,776
    
    
    $
    18,957
    
    
    $
    60,067
    
    
    $
    52,197Cash used for investing activities
    
    
    (11,668
    )
    
    
    (11,128
    )
    
    
    (36,587
    )
    
    
    (39,232
    )Difference
    
    $
    12,108
    
    
    $
    7,829
    
    
    $
    23,480
    
    
    $
    12,965Expansion capital investment
    
    $
    6,315
    
    
    $
    6,272
    
    
    $
    15,999
    
    
    $
    19,455
 New Revenue Sources
     September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Liquidity and Capital Resources
      2006
    
    2005Actual consolidated total leverage ratio (1) (4)
    
    
    2.93
    
    
    
    3.30Maximum per covenant
    
    
    3.75
    
    
    
    4.25Actual senior secured leverage ratio (2) (4)
    
    
    0.80
    
    
    
    1.12Maximum per covenant
    
    
    2.25
    
    
    
    2.25Actual consolidated interest coverage ratio (3) (4)
    
    
    3.67
    
    
    
    3.03Minimum per covenant
    
    
    2.75
    
    
    
    2.50
 
 (1)
    
    Our maximum consolidated leverage ratio is a function of total indebtedness divided by
operating income exclusive of depreciation and amortization and other miscellaneous
non-recurring items as defined by the covenant.(2)
    
    Our maximum consolidated senior secured leverage ratio is a function of total indebtedness
less total September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 unsecured indebtedness, divided by operating income exclusive of depreciation and
amortization and other miscellaneous non-recurring items as defined by the covenant. (3)
    
    Our minimum consolidated interest coverage ratio is a function of operating income exclusive
of depreciation and amortization and other miscellaneous non-recurring items divided by
interest expense as defined by the covenant.
 (4)
    
    Maximum consolidated total leverage ratio, maximum consolidated senior secured leverage
ratio, and minimum consolidated interest coverage ratios are not based on generally accepted
accounting principles and are not presented as alternative measures of operating performance
or liquidity. They are presented here to demonstrate compliance with the covenants in our
Credit Facility, as noncompliance with such covenants could have a material adverse effect on
us.
   Q4 2006Maximum consolidated total leverage ratio
    
    
    3.50Maximum senior secured leverage ratio
    
    
    2.25Minimum consolidated interest coverage ratio
    
    
    2.75
     pari passu
 September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
    Payments due by periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsContractual obligations:Long-term debt(s)
    
    $
    275,641
    
    
    $
    2,587
    
    
    $
    72,907
    
    
    $
    147
    
    
    $
    200,000Interest on fixed rate debt
    
    
    133,000
    
    
    
    19,000
    
    
    
    38,000
    
    
    
    38,000
    
    
    
    38,000Interest on bank term loan (1)
    
    
    10,084
    
    
    
    5,317
    
    
    
    4,767
    
    
    
    
    
    
    
    Other
long-term obligations
Acquired intangible asset (2)
    
    
    3,750
    
    
    
    1,250
    
    
    
    2,500
    
    
    
    
    
    
    
    Operating lease payments
    
    
    1,511
    
    
    
    578
    
    
    
    800
    
    
    
    133
    
    
    
    Purchase obligations
    
    
    2,967
    
    
    
    2,967
    
    
    
    
    
    
    
    
    
    
    
    Nintendo minimum royalty (3)
    
    
    28,000
    
    
    
    4,200
    
    
    
    8,400
    
    
    
    8,400
    
    
    
    7,000Programming related minimum
royalties and commissions (4)
    
    
    9,559
    
    
    
    2,302
    
    
    
    4,864
    
    
    
    2,358
    
    
    
    35Total contractual obligations
    
    $
    464,512
    
    
    $
    38,201
    
    
    $
    132,238
    
    
    $
    49,038
    
    
    $
    245,035Amount of commitment expiration per periodLess than
    
    2  3
    
    4  5
    
    OverTotal
    
    
    1 year
    
    years
    
    years
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    1,795
    
    
    $
    1,795
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Interest payments are estimates based on current LIBOR and scheduled amortization.(2)
    
    In July 2002, we acquired from Hilton Hotels Corporation the right to provide Internet on
television access and television on-demand programming services to participating hotels and
the right to independently pursue and further develop interactive television content
throughout our entire room base.(3)
    
    Nintendo video games pursuant to a non-exclusive license agreement with Nintendo, which
expires in May 2013. Under the terms of the agreement, we pay a monthly royalty equal to a
percent of revenue generated from the sale of Nintendo video game services, subject to a
monthly minimum.(4)
    
    In connection with our programming related agreements, we may guarantee minimum royalties for
specific periods or by individual programming content. Seasonality
  September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Discussion and Analysis of Results of Operations
Three Months Ended September 30, 2006 and 2005
 Metrics are calculated based on reduced room counts due to the impact of Hurricane Katrina. As of
September 30, 2006, 4,902 rooms remained out of service compared to 20,693 rooms as of September
30, 2005.
 Revenue Analysis.
 2006
    
    
    2005Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Guest Pay
    
    $
    73,861
    
    
    
    96.5
    %
    
    $
    71,579
    
    
    
    96.5
    %Other
    
    
    2,649
    
    
    
    3.5
    %
    
    
    2,566
    
    
    
    3.5
    %$
    76,510
    
    
    
    100.0
    %
    
    $
    74,145
    
    
    
    100.0
    %
  2006
    
    
    2005Average monthly revenue per room:Movie revenue
    
    $
    18.56
    
    
    $
    18.01Other interactive service revenue
    
    
    5.99
    
    
    
    5.87Total per Guest Pay room
    
    $
    24.55
    
    
    $
    23.88
   September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
    2006
    
    2005
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    47.1
    %
    
    
    46.4
    %
    
    
    0.7
    %Change drivers:Internet related
    
    
    
    
    
    
    
    
    
    
    -0.2
    %Programming costs (product mix)
    
    
    
    
    
    
    
    
    
    
    0.6
    %Hotel incentive commissions
    
    
    
    
    
    
    
    
    
    
    0.3
    %0.7
    %
 Operating Expenses.
 2006
    
    
    2005Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    8,902
    
    
    
    11.6
    %
    
    $
    8,862
    
    
    
    12.0
    %Selling, general and administrative
    
    
    7,069
    
    
    
    9.2
    %
    
    
    6,249
    
    
    
    8.4
    %Depreciation and amortization
    
    
    16,099
    
    
    
    21.0
    %
    
    
    16,729
    
    
    
    22.6
    %Other operating expense (income), net
    
    
    
    
    
    
    
    
    
    
    250
    
    
    
    0.3
    %Total operating expenses
    
    $
    32,070
    
    
    
    41.9
    %
    
    $
    32,090
    
    
    
    43.3
    %
  September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
   Operating Income.
 Interest Expense.
 Other (Expense) Income.
 Taxes.
 Net Income (Loss).
 September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Discussion and Analysis of Results of Operations
Nine Months Ended September 30, 2006 and 2005
 Metrics are calculated based on reduced room counts due to the impact of Hurricane Katrina. As of
September 30, 2006, 4,902 rooms remained out of service compared to 20,693 rooms as of September
30, 2005.
 Revenue Analysis
 2006
    
    
    2005Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Guest Pay
    
    $
    211,218
    
    
    
    96.6
    %
    
    $
    202,013
    
    
    
    97.0
    %Other
    
    
    7,356
    
    
    
    3.4
    %
    
    
    6,236
    
    
    
    3.0
    %$
    218,574
    
    
    
    100.0
    %
    
    $
    208,249
    
    
    
    100.0
    %
  2006
    
    
    2005Average monthly revenue per room:Movie revenue
    
    $
    17.56
    
    
    $
    17.11Other interactive service revenue
    
    
    5.80
    
    
    
    5.60Total per Guest Pay room
    
    $
    23.36
    
    
    $
    22.71
   Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
 September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
    2006
    
    2005
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    45.7
    %
    
    
    44.5
    %
    
    
    1.2
    %Change drivers:Internet related
    
    
    
    
    
    
    
    
    
    
    -0.3
    %Programming costs (product mix)
    
    
    
    
    
    
    
    
    
    
    1.0
    %Hotel incentive commissions
    
    
    
    
    
    
    
    
    
    
    0.5
    %1.2
    %
 Operating Expenses.
 2006
    
    
    2005Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:Guest Pay operations
    
    $
    26,752
    
    
    
    12.2
    %
    
    $
    26,311
    
    
    
    12.6
    %Selling, general and administrative
    
    
    21,089
    
    
    
    9.6
    %
    
    
    18,560
    
    
    
    8.9
    %Depreciation and amortization
    
    
    49,882
    
    
    
    22.8
    %
    
    
    52,609
    
    
    
    25.3
    %Other operating expense (income), net
    
    
    (198
    )
    
    
    (0.1
    )%
    
    
    250
    
    
    
    0.1
    %Total operating expenses
    
    $
    97,525
    
    
    
    44.6
    %
    
    $
    97,730
    
    
    
    46.9
    %
   September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
    Operating Income.
 Interest Expense.
 Other (Expense) Income.
 Taxes.
 Net Income (Loss).
 September 30, 2006
    
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##### Table of Contents



LodgeNet Entertainment Corporation
    
    Form 10-Q
 Critical Accounting Policies
  Revenue Recognition 
 
    
    Guest Pay Services.Our primary source of revenue is from
providing in-room, interactive television services to the lodging
industry, which the hotel guest typically purchases on a per-view,
hourly or daily basis. These services include on-demand movies,
on-demand games, music and music video, Internet on television and
television on-demand. We recognize revenue from the sale of these
Guest Pay services in the period in which such services are sold
to the hotel guest and when collection is reasonably assured.
Persuasive evidence of a purchase exists through a guest buy
transaction recorded on our system. No future performance
obligations exist with respect to these types of services once
they have been provided to the hotel guest. The prices related to
our products or services are fixed or determinable prior to
delivery of the products or services.
 
    
    Free-to-Guest Services.We generate revenue from the sale of
basic and premium television programming to individual hotels. In
contrast to Guest Pay Services, where the hotel guest is charged
directly for the service, we charge the hotel for our
Free-to-Guest Services. We recognize revenue from the sale of
Free-to-Guest Services in the period in which such services are
sold and when collection is reasonably assured. We establish the
prices charged to each hotel and no future performance obligations
exist on programming that has been provided to the hotel.
Persuasive evidence of an arrangement exists through our long-term
contract with each hotel. We also have advance billings from one
month to three months for certain free-to-guest programming
services where the revenue is deferred and recognized in the
periods that services are provided.
 
    
    High Speed Internet Access System Sales.We provide high-speed
Internet access through the sale and installation of equipment.
Revenue from the sale and installation of this equipment is
recognized when the equipment is installed. The delivery and
installation of the equipment are concurrent. In addition, this
equipment has stand-alone value to the customer. The software
used within these systems is not proprietary and can be supplied
by other vendors unrelated to us. Equipment prices are fixed and
determinable prior to delivery and are based on objective and
reliable sales evidence from a stand-alone basis.
 
    
    High Speed Internet Access Service and Support.We provide
ongoing maintenance, service and call center support services to
hotel properties that have been installed by us and also to hotel
properties that have been installed by other providers. In
addition, we provide, in some cases, the hotel property with the
portal to access the Internet. We receive monthly service fees
from such hotel properties for our maintenance services and
Internet access. We recognize the service fee ratably over the
term of the contract. The prices for these services are fixed and
determinable prior to delivery of the service. The fair value of
these services are known due to objective and reliable evidence
from contracts and stand-alone sales. Under the service
agreement, which includes maintenance and Internet access, we
recognize revenue ratably over the term of the maintenance and
service contract, typically three years.
 
    
    Healthcare System Sales and Support.We provide our interactive
television infrastructure and content to the healthcare industry.
We generate revenue from two sources: 1) the sale and installation
of system equipment and 2) long-term agreements with the facility
to provide software maintenance, programming and system
maintenance. Typically, revenue from the sale and installation of
our interactive system is recognized ratably
over a one-year period after the equipment is installed. The contracted system hardware,
installation and maintenance elements are not separable during this start-up phase due to
insufficient vendor specific objective evidence (VSOE). The package price of
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 the interactive
system and related maintenance is fixed and determinable prior to delivery. Upon completion of
the initial year, the support arrangement, which includes interactive content, software
maintenance, and system services, is renewable and is recognized ratably over the term of the
related contract. The hospital is under no obligation to contract with us for the support
arrangement. They may contract with other providers and utilize the equipment and software
installed by us. As more systems are sold and services renewed, VSOE will be established and
management expects to recognize the sale of the interactive system upon installation.
 
    
    System Sales and Support to Travel Centers.We also market and
sell our interactive systems to travel centers. We generate
revenue from three sources: 1) the sale of the interactive system,
which includes equipment, operating software and a one-year parts
and labor warranty 2) optional extended service and maintenance
agreements, which include future software upgrades as they become
available and 3) programming. The interactive system price
includes a non-exclusive, non-transferable right to use the
initial software package. Currently, revenue from the sale of our
interactive system and the extended service and maintenance
agreement is recognized ratably over a three-year period after the
equipment is delivered. The contracted interactive system and
extended service and maintenance elements are not separable during
this start-up phase due to insufficient vendor specific objective
evidence (VSOE). The prices of the interactive system and
extended service and maintenance agreement are fixed and
determinable prior to delivery. As more systems are sold and
services renewed, VSOE will be established and management expects
to recognize the sale of the interactive system upon delivery.
Programming revenue from this arrangement is recognized on a
recurring basis over the term of the related contract.
 
    
    Hotel System Sales and Support.We also market and sell our Guest
Pay interactive systems to hotels, along with recurring support
for interactive content, software maintenance and technical field
service for a fixed fee. Revenue from the sale and installation
of the interactive system, including the operating software, is
deferred and recognized over the term of the contract, generally
five years, due to inseparable proprietary software elements. The
multiple elements are not separable because the proprietary
software is required to operate the system and we do not license
or sell the software separately under this business model. The
interactive system prices are fixed and determinable prior to
delivery. Revenue from this arrangement, which includes
equipment, operating software, interactive content, and
maintenance services, is recognized ratably over the term of the
related contract.
 
    
    Other.We also generate revenue from the sale of miscellaneous
system equipment such as television remotes and service parts and
labor. These sales are not made under multiple element
arrangements and we recognize the revenue when the equipment is
delivered or service (repair or installation) has been performed.
No future performance obligation exists on an equipment sale or on
a repair service that has been provided.
 Allowance for doubtful accounts.
 Allowance for excess or obsolete system components.
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 Property and equipment.
 YearsBuildings
    
    
    30Guest Pay systems:Installed system costs
    
    
    2  7Customer acquisition costs
    
    
    5  7System components
    
    
    5  7Software costs
    
    
    3  5Other equipment
    
    
    3  10
 Allowance for system removal.
 Recent Accounting Developments
 Accounting by Insurance Enterprises for Deferred Acquisition Costs in Connection
with Modifications or Exchanges of Insurance Contract
 How Taxes Collected from Customers and Remitted to Governmental Authorities Should Be
Presented in the Income Statement (That Is, Gross versus Net Presentation)
 Accounting
for Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109
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LodgeNet Entertainment Corporation
    
    Form 10-Q
  Considering the Effects of Prior Year Misstatements when Quantifying
Misstatements in Current Year Financial Statements
 Fair Value Measurements
 Employers
Accounting for Defined Benefit Pension and Other Postretirement Plans an amendment of FASB
Statements No. 87, 88, 106, and 132(R)
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Item 3  Quantitative and Qualitative Disclosures About Market Risk
  Interest.
 Foreign Currency Transactions.
 
 Item 4  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Changes in Internal Control over Financial Reporting.
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 
 Part II  Other Information
 
 Item 1  Legal Proceedings
  
 Item 1ARisk Factors
  
 Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3  Defaults Upon Senior Securities
  
 Item 4  Submission of Matters to a Vote of Security Holders
  
 Item 5  Other Information
  
 Item 6  Exhibits
 31.1
    
    Rule 13a-14(a)/15(d)-14(a) Certification of Chief Financial Officer31.2
    
    Rule 13a-14(a)/15(d)-14(a) Certification of Chief Executive Officer32
    
    Section 1350 Certifications
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LodgeNet Entertainment Corporation
    
    Form 10-Q
 LodgeNet Entertainment Corporation and Subsidiary
 
 Signatures
  LodgeNet Entertainment Corporation(Registrant)Date:  November 6, 2006
    /s/  Scott C. PetersenScott C. PetersenPresident, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)Date:  November 6, 2006

/s/ Gary H. RitondaroGary H. Ritondaro
Senior Vice President, Chief Financial Officer
(Principal Financial & Accounting Officer) September 30, 2006
    
    Page 40