##### 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 June 30, 2008
 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 Interactive Corporation
  Delaware
    
    46-0371161(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
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
  Large accelerated filer
o

    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



LodgeNet Interactive Corporation
    
    Form 10-Q
 LodgeNet Interactive Corporation and Subsidiaries
 Index
 PageNo.Part I. Financial InformationItem 1  Financial Statements:Consolidated Balance Sheets (Unaudited) as of June 30, 2008 and December 31, 2007
    
    3Consolidated Statements of Operations (Unaudited) for
the Three Months and Six Months Ended June 30, 2008 and 2007
    
    4Consolidated Statements of Cash Flows (Unaudited) for
the Six Months Ended June 30, 2008 and 2007
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    6Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations
    
    15Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    38Item 4  Controls and Procedures
    
    39Part II. Other InformationItem 1  Legal Proceedings
    
    40Item 1A  Risk Factors
    
    40Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    40Item 3  Defaults Upon Senior Securities
    
    40Item 4  Submission of Matters to a Vote of Security Holders
    
    40Item 5  Other Information
    
    41Item 6  Exhibits
    
    41Signatures
    
    42Certification of Chief Financial OfficerCertification of Chief Executive OfficerSection 1350 Certifications
     Page 2




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 
 Part I  Financial Information
 
 Item 1  Financial Statements
 LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Balance Sheets (Unaudited)
  June 30,
    
    
    December 31,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    15,710
    
    
    $
    25,569Accounts receivable, net
    
    
    73,357
    
    
    
    73,580Other current assets
    
    
    10,514
    
    
    
    11,359Total current assets
    
    
    99,581
    
    
    
    110,508Property and equipment, net
    
    
    304,653
    
    
    
    323,963Debt issuance costs, net
    
    
    10,386
    
    
    
    11,374Intangible assets, net
    
    
    120,833
    
    
    
    126,530Goodwill
    
    
    111,293
    
    
    
    111,293Other assets
    
    
    9,762
    
    
    
    10,155Total assets
    
    $
    656,508
    
    
    $
    693,823Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    49,430
    
    
    $
    50,559Current maturities of long-term debt
    
    
    7,328
    
    
    
    7,398Accrued expenses
    
    
    28,311
    
    
    
    30,118Deferred revenue
    
    
    14,104
    
    
    
    14,354Total current liabilities
    
    
    99,173
    
    
    
    102,429Long-term debt
    
    
    608,981
    
    
    
    617,196Other long-term liabilities
    
    
    20,605
    
    
    
    22,440Total liabilities
    
    
    728,759
    
    
    
    742,065Commitments 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;
23,009,515 and 22,969,775 shares outstanding at June 30,
2008 and December 31, 2007, respectively
    
    
    230
    
    
    
    230Treasury stock, at cost: 530,000 and 60,000 shares at June 30,
2008 and December 31, 2007, respectively
    
    
    (5,737
    )
    
    
    (1,075
    )Additional paid-in capital
    
    
    331,577
    
    
    
    330,405Accumulated deficit
    
    
    (388,110
    )
    
    
    (367,638
    )Accumulated other comprehensive loss
    
    
    (10,211
    )
    
    
    (10,164
    )Total stockholders deficiency
    
    
    (72,251
    )
    
    
    (48,242
    )Total liabilities and stockholders deficiency
    
    $
    656,508
    
    
    $
    693,823
   Page 3




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Operations (Unaudited)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Guest entertainment and hotel services
    
    $
    125,291
    
    
    $
    124,928
    
    
    $
    253,903
    
    
    $
    195,623System sales, advertising and other
    
    
    12,056
    
    
    
    9,986
    
    
    
    23,231
    
    
    
    14,576Total revenues
    
    
    137,347
    
    
    
    134,914
    
    
    
    277,134
    
    
    
    210,199Direct Costs and Operating Expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately
below):Guest entertainment and hotel services
    
    
    63,776
    
    
    
    61,894
    
    
    
    131,146
    
    
    
    94,984System sales, advertising and other
    
    
    9,423
    
    
    
    7,042
    
    
    
    17,964
    
    
    
    10,412Operating expenses:System operations
    
    
    14,839
    
    
    
    15,197
    
    
    
    30,226
    
    
    
    23,731Selling, general and administrative
    
    
    13,575
    
    
    
    16,218
    
    
    
    28,800
    
    
    
    24,063Depreciation and amortization
    
    
    32,502
    
    
    
    33,591
    
    
    
    65,602
    
    
    
    49,680Restructuring
    
    
    817
    
    
    
    2,515
    
    
    
    2,818
    
    
    
    2,756Other operating income
    
    
    (877
    )
    
    
    (816
    )
    
    
    (867
    )
    
    
    (816
    )Total direct costs and operating expenses
    
    
    134,055
    
    
    
    135,641
    
    
    
    275,689
    
    
    
    204,810Income (loss) from operations
    
    
    3,292
    
    
    
    (727
    )
    
    
    1,445
    
    
    
    5,389Other Income and (Expenses):Interest expense
    
    
    (10,482
    )
    
    
    (11,582
    )
    
    
    (21,456
    )
    
    
    (17,786
    )Loss on early retirement of debt
    
    
    (79
    )
    
    
    (22,170
    )
    
    
    (79
    )
    
    
    (22,170
    )Minority interest in income of subsidiary
    
    
    
    
    
    
    165
    
    
    
    
    
    
    
    165Other (expense) income
    
    
    (25
    )
    
    
    403
    
    
    
    (14
    )
    
    
    564Loss before income taxes
    
    
    (7,294
    )
    
    
    (33,911
    )
    
    
    (20,104
    )
    
    
    (33,838
    )Provision for income taxes
    
    
    (167
    )
    
    
    (121
    )
    
    
    (368
    )
    
    
    (222
    )Net loss
    
    $
    (7,461
    )
    
    $
    (34,032
    )
    
    $
    (20,472
    )
    
    $
    (34,060
    )Net loss per common share (basic and diluted)
    
    $
    (0.33
    )
    
    $
    (1.52
    )
    
    $
    (0.91
    )
    
    $
    (1.64
    )Weighted average shares outstanding (basic and diluted)
    
    
    22,289,919
    
    
    
    22,428,960
    
    
    
    22,448,309
    
    
    
    20,743,919
   Page 4




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LodgeNet Interactive Corporation
    
    Form 10-Q
 LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows (Unaudited)
  Six Months Ended June 30,2008
    
    
    2007Operating activities:Net loss
    
    $
    (20,472
    )
    
    $
    (34,060
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    65,602
    
    
    
    49,680Loss on early retirement of debt
    
    
    79
    
    
    
    3,583Share-based compensation
    
    
    1,194
    
    
    
    853Gain due to insurance proceeds
    
    
    (815
    )
    
    
    Insurance proceeds related to business interruption
    
    
    815
    
    
    
    Other, net
    
    
    (15
    )
    
    
    (215
    )Change in operating assets and liabilities:Accounts receivable, net
    
    
    132
    
    
    
    1,152Other current assets
    
    
    751
    
    
    
    (2,439
    )Accounts payable
    
    
    (1,786
    )
    
    
    (5,777
    )Accrued expenses and deferred revenue
    
    
    (3,347
    )
    
    
    1,915Other
    
    
    306
    
    
    
    (577
    )Net cash provided by operating activities
    
    
    42,444
    
    
    
    14,115Investing activities:Property and equipment additions
    
    
    (38,723
    )
    
    
    (38,842
    )Acquisition of StayOnline, Inc.
    
    
    
    
    
    
    (14,388
    )Acquisition of On Command Corporation, net of cash acquired
    
    
    
    
    
    
    (335,216
    )Other investing activities
    
    
    
    
    
    
    637Net cash used for investing activities
    
    
    (38,723
    )
    
    
    (387,809
    )Financing activities:Proceeds from long-term debt
    
    
    
    
    
    
    625,000Repayment of long-term debt
    
    
    (8,136
    )
    
    
    (268,115
    )Payment of capital lease obligations
    
    
    (709
    )
    
    
    (1,018
    )Borrowings on revolving credit facility
    
    
    30,000
    
    
    
    Repayments of revolving credit facility
    
    
    (30,000
    )
    
    
    Debt issuance costs
    
    
    
    
    
    
    (12,738
    )Contribution from minority interest holder to subsidiary
    
    
    
    
    
    
    300Purchase of treasury stock
    
    
    (4,662
    )
    
    
    Proceeds from issuance of common stock, net of offering costs
    
    
    
    
    
    
    23,350Exercise of stock options
    
    
    
    
    
    
    16,036Net cash (used for) provided by financing activities
    
    
    (13,507
    )
    
    
    382,815Effect of exchange rates on cash
    
    
    (73
    )
    
    
    311(Decrease) increase in cash and cash equivalents
    
    
    (9,859
    )
    
    
    9,432Cash and cash equivalents at beginning of period
    
    
    25,569
    
    
    
    22,795Cash and cash equivalents at end of period
    
    $
    15,710
    
    
    $
    32,227
   Page 5




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LodgeNet Interactive Corporation
    
    Form 10-Q
 LodgeNet Interactive Corporation and Subsidiaries
 
 Notes to Consolidated Financial Statements (Unaudited)
           Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,Pro Forma
    
    
    
    
    
    Pro Forma2008
    
    2007
    
    2008
    
    2007Total revenue
    
    $
    137,347
    
    
    $
    136,808
    
    
    $
    277,134
    
    
    $
    272,342Net loss
    
    $
    (7,461
    )
    
    $
    (34,613
    )
    
    $
    (20,472
    )
    
    $
    (47,660
    )Net loss per share
    
    $
    (0.33
    )
    
    $
    (1.54
    )
    
    $
    (0.91
    )
    
    $
    (2.14
    )
  Page 6




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
    June 30,
    
    
    December 31,2008
    
    
    2007Land, building and equipment
    
    $
    112,675
    
    
    $
    105,247Hotel systems:Installed system costs
    
    
    650,662
    
    
    
    646,095Customer acquisition costs
    
    
    56,876
    
    
    
    55,080System components
    
    
    29,902
    
    
    
    24,966Software costs
    
    
    35,155
    
    
    
    33,783Total
    
    
    885,270
    
    
    
    865,171Less  depreciation and amortization
    
    
    (580,617
    )
    
    
    (541,208
    )Property and equipment, net
    
    $
    304,653
    
    
    $
    323,963
       Page 7




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  June 30, 2008
    
    
    December 31, 2007Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired contracts and relationships
    
    $
    120,315
    
    
    $
    (8,082
    )
    
    $
    120,315
    
    
    $
    (4,884
    )Other acquired intangibles
    
    
    12,984
    
    
    
    (9,480
    )
    
    
    12,984
    
    
    
    (8,263
    )Tradenames
    
    
    3,012
    
    
    
    (797
    )
    
    
    2,955
    
    
    
    (225
    )Acquired patents
    
    
    5,052
    
    
    
    (2,171
    )
    
    
    5,032
    
    
    
    (1,384
    )$
    141,363
    
    
    $
    (20,530
    )
    
    $
    141,286
    
    
    $
    (14,756
    )
       June 30,
    
    
    December 31,2008
    
    
    2007Taxes
    
    $
    8,811
    
    
    $
    8,405Compensation
    
    
    9,805
    
    
    
    11,485Interest
    
    
    2,981
    
    
    
    Programming related
    
    
    1,465
    
    
    
    1,785Restructuring
    
    
    1,964
    
    
    
    5,774Other
    
    
    3,285
    
    
    
    2,669$
    28,311
    
    
    $
    30,118
  Page 8




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
   June 30,
    
    
    December 31,2008
    
    
    2007Bank Credit Facility:Bank term loan
    
    $
    613,750
    
    
    $
    621,875Revolving credit facility
    
    
    
    
    
    
    9.50% senior notes
    
    
    
    
    
    
    10Capital leases
    
    
    2,559
    
    
    
    2,709616,309
    
    
    
    624,594Less current maturities
    
    
    (7,328
    )
    
    
    (7,398
    )$
    608,981
    
    
    $
    617,196
 Bank Credit Facility 3⁄4
    9.50% Senior Notes 3⁄4 pari passu
  Page 9




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LodgeNet Interactive Corporation
    
    Form 10-Q
  Capital Leases
  2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    ThereafterLong-term debt
    
    $
    3,125
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    585,625Capital leases
    
    
    657
    
    
    
    1,095
    
    
    
    756
    
    
    
    334
    
    
    
    19
    
    
    
    3,782
    
    
    
    7,345
    
    
    
    7,006
    
    
    
    6,584
    
    
    
    6,269
    
    
    
    585,625Less amount representing
interest on capital leases
    
    
    (92
    )
    
    
    (126
    )
    
    
    (62
    )
    
    
    (21
    )
    
    
    (1
    )
    
    
    $
    3,690
    
    
    $
    7,219
    
    
    $
    6,944
    
    
    $
    6,563
    
    
    $
    6,268
    
    
    $
    585,625
  3⁄4
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (7,461
    )
    
    $
    (34,032
    )
    
    $
    (20,472
    )
    
    $
    (34,060
    )Foreign currency translation adjustment
    
    
    530
    
    
    
    2,482
    
    
    
    (467
    )
    
    
    2,495Unrealized gain on interest rate swap
agreements
    
    
    17,567
    
    
    
    4,415
    
    
    
    420
    
    
    
    4,415Comprehensive income (loss)
    
    $
    10,636
    
    
    $
    (27,135
    )
    
    $
    (20,519
    )
    
    $
    (27,150
    )
  June 30,
    
    
    December 31,2008
    
    
    2007Unrealized loss on interest rate swap agreements
    
    $
    (16,477
    )
    
    $
    (16,897
    )Foreign currency translation adjustment
    
    
    6,266
    
    
    
    6,733Accumulated other comprehensive loss
    
    $
    (10,211
    )
    
    $
    (10,164
    )
 3⁄4
   Page 10




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LodgeNet Interactive Corporation
    
    Form 10-Q
 3⁄4
   
    Page 11




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LodgeNet Interactive Corporation
    
    Form 10-Q
   Present Fairly in Conformity With
Generally Accepted Accounting Principles
    Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Compensation cost (benefit):Stock options
    
    $
    356
    
    
    $
    160
    
    
    $
    601
    
    
    $
    207Non-vested shares
    
    
    329
    
    
    
    428
    
    
    
    593
    
    
    
    646Total share based compensation expense
    
    $
    685
    
    
    $
    588
    
    
    $
    1,194
    
    
    $
    853Compensation expense per common share
(basic and diluted):
    
    $
    0.03
    
    
    $
    0.03
    
    
    $
    0.05
    
    
    $
    0.04
   Page 12




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LodgeNet Interactive Corporation
    
    Form 10-Q
  Stock Option Valuation and Expense Information under SFAS No. 123R
  Non-Vested Shares (Restricted Stock)
      12/31/07
    
    
    Charges to
    
    
    Cash
    
    
    6/30/08Balance
    
    
    Expense
    
    
    Payment
    
    
    BalanceSeverance and other benefit related costs
    
    $
    5,289
    
    
    $
    1,349
    
    
    $
    (5,916
    )
    
    $
    722Cost of closing redundant acquired facilities
    
    
    485
    
    
    
    1,279
    
    
    
    (523
    )
    
    
    1,242Other
    
    
    
    
    
    
    190
    
    
    
    (190
    )
    
    
    Total
    
    $
    5,774
    
    
    $
    2,818
    
    
    $
    (6,628
    )
    
    $
    1,964
    Page 13




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
    June 30, 2008
    
    December 31, 2007Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueInterest rate swaps  liability position
    
    $
    16,477
    
    
    $
    16,477
    
    
    $
    16,897
    
    
    $
    16,897Long-term debt
    
    $
    616,309
    
    
    $
    567,209
    
    
    $
    624,594
    
    
    $
    599,718
        Total
    
    Quoted Prices inFair Value
    
    Active Markets for
    
    Significant Other
    
    SignificantMeasurement
    
    Identical Asset
    
    Observable Inputs
    
    Unobservable InputsJune 30, 2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Interest rate swaps -
liability position
    
    $
    16,477
    
    
    $
    
    
    
    $
    16,477
    
    
    $
    
    Page 14




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LodgeNet Interactive Corporation
    
    Form 10-Q
 
 Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion should be read in conjunction with our Consolidated Financial Statements,
including the notes thereto, appearing elsewhere herein.
 Special Note Regarding Forward-Looking Statements
 Certain statements in this report or document incorporated herein by reference constitute
forward-looking statements. When used in this report, the words intends, expects,
anticipates, estimates, believes, goal, no assurance and similar expressions, and
statements which are made in the future tense or refer to future events or developments, including,
without limitation, those related to restructuring costs, are intended to identify such
forward-looking statements. Such forward-looking statements are subject to risks, uncertainties,
and other factors that could cause the 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 in Item 1A of our
most recent Annual Report on Form 10-K for the year ended December 31, 2007 and filed on March 14,
2008, in any prospectus supplement or any report or document incorporated herein by reference, such
factors include, among others, the following:
 Ø
    
    the effects of economic conditions, including in particular the economic condition of
the lodging industry, which can be particularly affected by international crisis, acts or
threats of terrorism and public health issues;Ø
    
    competition from providers of similar services and from alternative sources;Ø

    
    changes in demand for our products and services, programming costs, availability,
timeliness, and quality;Ø

    
    technological developments by competitors;Ø
    
    developmental costs, difficulties, and delays;Ø
    
    relationships with clients and property owners;Ø
    
    the availability of capital to finance growth;Ø
    
    the impact of government regulations;Ø
    
    potential effects of litigation;Ø
    
    risks of expansion into new markets;Ø
    
    risks related to the security of our data systems; andØ
    
    other factors detailed, from time to time, in our filings with the SEC.
 With respect to any proposed or completed acquisition, we are subject to risks that integration
costs will exceed expectations, that synergies we anticipate will not be realized, or will take
longer than anticipated to realize, that our management and management systems will encounter
difficulties in dealing with a bigger, more diversified enterprise, and that the financial results
we expect from the acquisition will not be realized.
 Executive Overview
    Page 15




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LodgeNet Interactive Corporation
    
    Form 10-Q
       Page 16




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LodgeNet Interactive Corporation
    
    Form 10-Q
   Guest entertainment (includes purchases for on-demand movies, network-based video games, music and
music videos, Internet on television and television on-demand programming) and hotel services
(includes revenue from hotels for services such as free-to-guest television channels and recurring
broadband Internet service and support to the hotels).
  
    
    The number of rooms on our network.We can increase revenue over time by increasing the
number of rooms served by our interactive television 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 which may not meet our
return on investment requirement and may select programming from a local cable provider.
    
    The variety of services offered at the hotel.Rooms equipped with our high-definition or
standard 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 HDTV
system in all newly contracted rooms and by converting selected rooms to our HDTV 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 general economic conditions. Our
technology enables us to measure the popularity of our content and make decisions to best
position such content and optimize revenue from such content.
    
    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 for the properties we serve 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.
    
    The availability of alternative programming. We compete directly for customers with a
variety of other interactive service providers, including other interactive television service
providers, cable television companies, direct broadcast satellite companies, television
networks and programmers, Internet service providers and portals, companies offering web sites
that provide on-demand movies, rental companies that




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 provide videocassettes and DVDs that can be viewed in properly equipped hotel rooms or on other
portable viewing devices, and hotels that offer in-room laptops with Internet access or other
types of Internet access systems. We also compete, in varying degrees, with other leisure-time
activities such as movie theaters, the Internet, radio, print media, personal computers and
other alternative sources of entertainment and information.
  Ø
    
    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;Ø
    
    commissions paid to our hotel customers, which are also based on a percent of
guest-generated revenue;Ø
    
    fixed monthly programming charges paid primarily to DIRECTV for satellite-delivered
basic and premium television programming;Ø
    
    broadband Internet connectivity costs and call center support;Ø
    
    license fees, which are based on a percent of guest-generated revenue, for television on
demand, music, music video, video games and sports programming; andØ
    
    one-time license fees paid for independent films, most of which are non-rated and
intended for mature audiences.
 System Sales, Advertising and Other Services.
  Ø
    
    revenue generated from our advertising and media services within the hotels;Ø
    
    revenue generated from the sale of our interactive systems to healthcare facilities,
along with recurring support for interactive content, software maintenance and technical
field service for a fixed fee;Ø
    
    revenue generated from the sale of our interactive systems to hotels, along with
recurring support for interactive content, software maintenance and technical field
service for a fixed fee;Ø
    
    revenue from the sale of miscellaneous system equipment such as multi-service
connection equipment, television remotes and service parts and labor to the hotels;Ø
    
    revenues from the sale of equipment to our international licensees within the hotel or
lodging industry;Ø
    
    revenues from the installation of master antenna low voltage wiring and related
infrastructure to the hotels;Ø
    
    revenues from the sale and installation of DIRECTV satellite systems to the hotels; andØ
    
    revenue generated from delivery of satellite basic and premium television programming
for which the hotel pays us a fixed monthly charge per room.
 Key Metrics:
 Special Note Regarding the Use of Non-GAAP Financial Information
    Page 18




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net free cash flow
    
    $
    10,759
    
    
    $
    (360,955
    )
    
    $
    3,721
    
    
    $
    (373,694
    )Add:Cash used for property and equipment additions19,788
    
    
    
    22,945
    
    
    
    38,723
    
    
    
    38,842Cash used for acquisitions and other activities
    
    
    
    
    
    
    334,098
    
    
    
    
    
    
    
    348,967Cash provided by (used for) operating activities
    
    $
    30,547
    
    
    $
    (3,912
    )
    
    $
    42,444
    
    
    $
    14,115
 Free Cash Flow
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cash provided by (used for) operating activities
    
    $
    30,547
    
    
    $
    (3,912
    )
    
    $
    42,444
    
    
    $
    14,115Property and equipment additions
    
    
    (19,788
    )
    
    
    (22,945
    )
    
    
    (38,723
    )
    
    
    (38,842
    )10,759
    
    
    
    (26,857
    )
    
    
    3,721
    
    
    
    (24,727
    )Cash used for acquisition and other activities (1)
    
    
    
    
    
    
    (334,098
    )
    
    
    
    
    
    
    (348,967
    )$
    10,759
    
    
    $
    (360,955
    )
    
    $
    3,721
    
    
    $
    (373,694
    )
 
 (1)
    
    Cash used for acquisition activities related to the acquisitions of On Command and
StayOnline.  Page 19




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Expansion capital investment (1)
    
    $
    5,649
    
    
    $
    7,778
    
    
    $
    11,518
    
    
    $
    13,409Renewal investment (2)
    
    
    5,522
    
    
    
    7,195
    
    
    
    11,594
    
    
    
    11,356Corporate capital and minor extensions (3)
    
    
    8,617
    
    
    
    7,972
    
    
    
    15,611
    
    
    
    14,077$
    19,788
    
    
    $
    22,945
    
    
    $
    38,723
    
    
    $
    38,842
 
 (1)
    
    Capital investment to install newly contracted rooms with our digital or HDTV system.(2)
    
    Capital investment to convert rooms to our digital or HDTV system in exchange for long-term
contract extensions.(3)
    
    Capital investment for corporate infrastructure including computers, equipment, software
development, minor system upgrades and system components. Rooms Served
  June 30,2008
    
    2007Total rooms served (1)
    
    
    1,969,524
    
    
    
    1,943,183Total guest entertainment rooms (2)
    
    
    1,865,594
    
    
    
    1,844,451Total HD rooms (3)
    
    
    137,034
    
    
    
    48,348Total Television Programming (FTG) rooms (4)
    
    
    1,087,448
    
    
    
    1,044,352Total Broadband Internet rooms (5)
    
    
    222,421
    
    
    
    209,145Net new guest entertainment rooms for the three months ended (6)
    
    
    9,044
    
    
    
    7,921Net new guest entertainment rooms for the six months ended (6)
    
    
    18,200
    
    
    
    13,959
 
 (1)
    
    Total rooms served include rooms receiving one or more of our services including rooms served
by international licensees.(2)
    
    Guest entertainment rooms are equipped with our interactive television systems.(3)
    
    HD rooms are equipped with high-definition capabilities.(4)
    
    Television programming (FTG) rooms receiving basic or premium television programming.(5)
    
    Represents rooms receiving high-speed Internet service included in total rooms served.(6)
    
    Amounts shown are net of de-installations during the period. The gross number of new rooms
installed was 14,676 and 20,623 for the three months ended June 30, 2008 and 2007,
respectively, and 32,007 and 38,287 for the six months ended June 30, 2008 and 2007,
respectively. High Definition and Digital Room Growth
  Page 20




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  June 30,2008
    
    2007Net new standard digital and HDTV rooms for the three months ended
    
    
    18,208
    
    
    
    34,235Net new standard digital and HDTV rooms for the six months ended
    
    
    36,399
    
    
    
    60,252Net new HDTV rooms for the three months ended (1)
    
    
    27,054
    
    
    
    11,005Net new HDTV rooms for the six months ended (1)
    
    
    50,642
    
    
    
    24,846Total HDTV rooms installed (2)
    
    
    137,034
    
    
    
    48,348Total standard digital and HDTV rooms installed
    
    
    1,501,730
    
    
    
    1,411,560Digital rooms as a percent of total guest entertainment
interactive rooms
    
    
    80.5
    %
    
    
    76.5
    %
 
 (1)
    
    HDTV rooms, including new installations and major upgrades, are equipped with high-definition
capabilities and are included in total digital rooms.(2)
    
    HDTV rooms, including new installations and major upgrades, are included in the total digital
rooms installed. Capital Investment Per Room
  Three Months Ended
    
    Years EndedJune 30,
    
    June 30,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2007
    
    2006Average cost per room  new installation
    
    $
    411
    
    
    $
    387
    
    
    $
    399
    
    
    $
    354Average cost per room  conversion
    
    $
    299
    
    
    $
    307
    
    
    $
    309
    
    
    $
    252Average cost per HD room  new
installation
    
    $
    410
    
    
    $
    463
    
    
    $
    460
    
    
    $
    438Average cost per HD room  conversion
    
    $
    314
    
    
    $
    338
    
    
    $
    329
    
    
    $
    289
  Revenue Per Room
   Page 21




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Average monthly revenue per room:Guest entertainment
    
    $
    17.09
    
    
    $
    18.11
    
    
    $
    17.46
    
    
    $
    18.09Hotel services
    
    
    5.40
    
    
    
    4.53
    
    
    
    5.34
    
    
    
    4.46System sales, advertising and
other
    
    
    2.16
    
    
    
    1.81
    
    
    
    2.07
    
    
    
    1.64Total revenue per room
    
    $
    24.65
    
    
    $
    24.45
    
    
    $
    24.87
    
    
    $
    24.19
 Direct Costs
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Guest entertainment and hotel services direct costs per
room
    
    $
    11.45
    
    
    $
    11.22
    
    
    $
    11.78
    
    
    $
    11.19Guest entertainment and hotel services direct costs as a
percent of total revenue
    
    
    46.4
    %
    
    
    45.9
    %
    
    
    47.3
    %
    
    
    45.2
    %
 Operating Expenses
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Sytems operations expenses
    
    $
    2.66
    
    
    $
    2.75
    
    
    $
    2.71
    
    
    $
    2.75SG&A expenses
    
    
    2.44
    
    
    
    2.94
    
    
    
    2.59
    
    
    
    2.77Depreciation and amortization (D&A)
    
    
    5.83
    
    
    
    6.09
    
    
    
    5.89
    
    
    
    6.12Restructuring expenses
    
    
    0.15
    
    
    
    0.46
    
    
    
    0.25
    
    
    
    0.45Other operating income, net
    
    
    (0.16
    )
    
    
    (0.15
    )
    
    
    (0.07
    )
    
    
    (0.08
    )$
    10.92
    
    
    $
    12.09
    
    
    $
    11.37
    
    
    $
    12.01Systems operations as a percent of
total revenue
    
    
    10.8
    %
    
    
    11.3
    %
    
    
    10.9
    %
    
    
    11.3
    %SG&A as a percent of total revenue
    
    
    9.9
    %
    
    
    12.0
    %
    
    
    10.4
    %
    
    
    11.4
    %D&A as a percent of total revenue
    
    
    23.7
    %
    
    
    24.9
    %
    
    
    23.7
    %
    
    
    23.6
    %
  Page 22




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Net Loss
  Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2008
    
    2007
    
    2008
    
    2007Net loss
    
    $
    (7,461
    )
    
    $
    34,032
    )
    
    $
    (20,472
    )
    
    $
    (34,060
    )
 Liquidity and Capital Resources
     2008
    
    2007Actual consolidated total leverage ratio (1) (3)
    
    
    4.31
    
    
    
    4.23Maximum per covenant
    
    
    4.75
    
    
    
    5.00Actual consolidated interest coverage ratio (2) (3)
    
    
    3.21
    
    
    
    4.87Minimum per covenant
    
    
    2.50
    
    
    
    2.25
  Page 23




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 
 (1)
    
    Our maximum consolidated total 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 terms of the bank Credit Facility.(2)
    
    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 terms of the bank Credit Facility.(3)
    
    Maximum consolidated total 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.   Q3 2010Q3 2008
    
    Q1 2009
    
    Q3 2009
    
    Q1 2010
    
    to maturityMaximum consolidated leverage ratio
    
    
    4.50
    
    
    
    4.25
    
    
    
    4.00
    
    
    
    3.75
    
    
    
    3.50Minimum consolidated interest
coverage ratio
    
    
    2.50
    
    
    
    2.75
    
    
    
    2.75
    
    
    
    3.00
    
    
    
    3.00
    9.50% Senior Notes 3⁄4 pari passu
  Page 24




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##### Table of Contents



LodgeNet Interactive 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)
    
    $
    616,309
    
    
    $
    7,328
    
    
    $
    13,861
    
    
    $
    12,620
    
    
    $
    582,500Interest on bank term loan (1)
    
    
    167,618
    
    
    
    29,818
    
    
    
    58,721
    
    
    
    57,502
    
    
    
    21,577Interest on derivative
instruments (net)
    
    
    59,019
    
    
    
    11,143
    
    
    
    20,499
    
    
    
    19,906
    
    
    
    7,471Operating lease payments
    
    
    5,826
    
    
    
    2,738
    
    
    
    3,056
    
    
    
    32
    
    
    
    Uncertain tax positions (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations (3)
    
    
    11,395
    
    
    
    11,395
    
    
    
    
    
    
    
    
    
    
    
    Nintendo minimum royalty (4)
    
    
    20,650
    
    
    
    4,200
    
    
    
    8,400
    
    
    
    8,050
    
    
    
    Minimum royalties and
commissions (5)
    
    
    6,132
    
    
    
    2,500
    
    
    
    3,503
    
    
    
    129
    
    
    
    Total contractual obligations
    
    $
    886,949
    
    
    $
    69,122
    
    
    $
    108,040
    
    
    $
    98,239
    
    
    $
    611,548
 Amount of commitment expiration per periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    478
    
    
    $
    478
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)
    
    Interest payments are estimates based on current LIBOR and scheduled amortization.(2)
    
    Effective January 1, 2007, we adopted FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes  An Interpretation of FASB Statement No. 109. FIN 48 clarifies
the accounting for uncertainty in income taxes recognized in a companys financial statements
and prescribes a recognition threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected to be taken in a tax return.
As of June 30, 2008, we do not have unresolved income tax positions.(3)
    
    Consists of open purchase orders primarily for the procurement of system components.(4)
    
    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.(5)
    
    In connection with our programming related agreements, we may guarantee minimum royalties for
specific periods or by individual programming content. Seasonality
   Page 25




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Discussion and Analysis of Results of Operations
Three Months Ended June 30, 2008 and 2007
 Revenue Analysis.
 2008
    
    
    2007Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Guest entertainment
    
    $
    95,208
    
    
    
    69.3
    %
    
    $
    99,931
    
    
    
    74.1
    %Hotel services
    
    
    30,083
    
    
    
    21.9
    %
    
    
    24,997
    
    
    
    18.5
    %System sales, advertising and other
    
    
    12,056
    
    
    
    8.8
    %
    
    
    9,986
    
    
    
    7.4
    %$
    137,347
    
    
    
    100.0
    %
    
    $
    134,914
    
    
    
    100.0
    %
  2008
    
    
    2007Average monthly revenue per room:Movie revenue
    
    $
    15.80
    
    
    $
    16.70Other interactive service revenue
    
    
    1.29
    
    
    
    1.41Total per guest entertainment room
    
    $
    17.09
    
    
    $
    18.11
   2008
    
    
    2007Average monthly revenue per room:Television programming
    
    $
    4.85
    
    
    $
    4.08Broadband
    
    
    0.55
    
    
    
    0.45Total hotel services per room
    
    $
    5.40
    
    
    $
    4.53
   Page 26




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
    2008
    
    
    2007Average monthly revenue per room:Guest entertainment
    
    $
    17.09
    
    
    $
    18.11Hotel services
    
    
    5.40
    
    
    
    4.53System sales, advertising and other
    
    
    2.16
    
    
    
    1.81Total revenue per room
    
    $
    24.65
    
    
    $
    24.45
 Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
  2008
    
    2007
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    53.3
    %
    
    
    51.1
    %
    
    
    2.2
    %Change drivers:Broadband related
    
    
    
    
    
    
    
    
    
    
    0.2
    %Television programming related (FTG)
    
    
    
    
    
    
    
    
    
    
    2.1
    %Guest entertainment related costs
    
    
    
    
    
    
    
    
    
    
    -1.9
    %Other direct costs (Non guest entertainment)
    
    
    
    
    
    
    
    
    
    
    1.8
    %2.2
    %
  Page 27




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Operating Expenses.
 2008
    
    
    2007Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations
    
    $
    14,839
    
    
    
    10.8
    %
    
    $
    15,197
    
    
    
    11.3
    %Selling, general
and administrative
    
    
    13,575
    
    
    
    9.9
    %
    
    
    16,218
    
    
    
    12.0
    %Depreciation and amortization
    
    
    29,886
    
    
    
    21.8
    %
    
    
    31,008
    
    
    
    23.0
    %Amortization of
acquired intangibles
    
    
    2,616
    
    
    
    1.9
    %
    
    
    2,583
    
    
    
    1.9
    %Restructuring expense
    
    
    817
    
    
    
    0.6
    %
    
    
    2,515
    
    
    
    1.9
    %Other operating income
    
    
    (877
    )
    
    
    (0.7
    )%
    
    
    (816
    )
    
    
    (0.7
    )%Total operating expenses
    
    $
    60,856
    
    
    
    44.3
    %
    
    $
    66,705
    
    
    
    49.4
    %
        Page 28




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Operating Income (Loss).
 Interest Expense.
 Loss on Early Retirement of Debt
 Other (Expense) Income.
 Taxes.
 Net Loss.
  Page 29




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Discussion and Analysis of Results of Operations
Six Months Ended June 30, 2008 and 2007
 Revenue Analysis.
 2008
    
    
    2007Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Guest entertainment
    
    $
    194,410
    
    
    
    70.2
    %
    
    $
    155,382
    
    
    
    73.9
    %Hotel services
    
    
    59,493
    
    
    
    21.5
    %
    
    
    40,241
    
    
    
    19.1
    %System sales, advertising and other
    
    
    23,231
    
    
    
    8.3
    %
    
    
    14,576
    
    
    
    7.0
    %$
    277,134
    
    
    
    100.0
    %
    
    $
    210,199
    
    
    
    100.0
    %
  2008
    
    
    2007Average monthly revenue per room:Movie revenue
    
    $
    16.15
    
    
    $
    16.70Other interactive service revenue
    
    
    1.31
    
    
    
    1.39Total per guest entertainment room
    
    $
    17.46
    
    
    $
    18.09
   2008
    
    
    2007Average monthly revenue per room:Television programming
    
    $
    4.81
    
    
    $
    4.06Broadband
    
    
    0.53
    
    
    
    0.41Total hotel services per room
    
    $
    5.34
    
    
    $
    4.47
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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
    2008
    
    
    2007Average monthly revenue per room:Guest entertainment
    
    $
    17.46
    
    
    $
    18.09Hotel services
    
    
    5.34
    
    
    
    4.47System sales, advertising and other
    
    
    2.08
    
    
    
    1.63Total revenue per room
    
    $
    24.88
    
    
    $
    24.19
 Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
  2008
    
    2007
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    53.8
    %
    
    
    50.1
    %
    
    
    3.7
    %Change drivers:Broadband related
    
    
    
    
    
    
    
    
    
    
    0.5
    %Television programming related (FTG)
    
    
    
    
    
    
    
    
    
    
    2.4
    %Guest entertainment related costs
    
    
    
    
    
    
    
    
    
    
    -0.8
    %Other direct costs (Non guest entertainment)
    
    
    
    
    
    
    
    
    
    
    1.6
    %3.7
    %
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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Operating Expenses.
 2008
    
    
    2007Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations
    
    $
    30,226
    
    
    
    10.9
    %
    
    $
    23,731
    
    
    
    11.3
    %Selling,
general and administrative
    
    
    28,800
    
    
    
    10.4
    %
    
    
    24,063
    
    
    
    11.4
    %Depreciation and amortization
    
    
    59,834
    
    
    
    21.6
    %
    
    
    46,966
    
    
    
    22.3
    %Amortization
of acquired intangibles
    
    
    5,768
    
    
    
    2.1
    %
    
    
    2,714
    
    
    
    1.3
    %Restructuring expense
    
    
    2,818
    
    
    
    1.0
    %
    
    
    2,756
    
    
    
    1.3
    %Other operating income
    
    
    (867
    )
    
    
    (0.3
    )%
    
    
    (816
    )
    
    
    (0.3
    )%Total operating expenses
    
    $
    126,579
    
    
    
    45.7
    %
    
    $
    99,414
    
    
    
    47.3
    %
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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  Operating Income.
 Interest Expense.
 Loss on Early Retirement of Debt
 Other (Expense) Income.
 Taxes.
 Net Loss.
 Critical Accounting Policies
  Revenue Recognition 
 
    
    Guest Entertainment 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 entertainment 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.
    
    Television Programming Services.We generate revenue from the sale of basic and premium
television programming to individual hotels. In contrast to Guest Entertainment Services,
where the hotel guest is charged directly for the service, we charge the hotel for our
Television Programming Services. We recognize revenue from the sale of Television Programming
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
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LodgeNet Interactive Corporation
    
    Form 10-Q
 Obligations
exist on programming which 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 basic and premium programming services
where the revenue is deferred and recognized in the periods which services are provided.
    
    Broadband System Sales.We provide broadband 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, which can be acquired from other manufacturers or retailers, has
stand-alone value to the customer. The software used within these systems can also 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.
    
    Broadband Service and Support.We provide ongoing maintenance, service and call center
support services to hotel properties which have been installed by us and also to hotel
properties which 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 is 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.
    
    Advertising and Media Services.We generate revenue from the sale of advertising-based
media services within our hospitality media and connectivity businesses through our
wholly-owned subsidiary, The Hotel Networks, and server based channels within our interactive
room base. The Hotel Networks, which was acquired in the On Command transaction, delivers
targeted advertising to more than 355,000 hotel rooms on 10 popular satellite-delivered
channels such as MSNBC, CNBC, Fox News and The Weather Channel. In addition to the satellite
platform, we generate revenue from server based channels, which we have operating in
approximately 550,000 of our rooms today, and other interactive and location-based
applications which can be delivered by our interactive television platform. Advertising
revenue is recognized, net of agency commissions, when advertisements are broadcast and when
collection is reasonably assured. We establish the prices charged to each advertiser and no
future performance obligations exist on advertising which has been broadcast. Persuasive
evidence of an arrangement exists through our contracts with each advertiser.
    
    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) support agreements with the facility to provide
software maintenance, programming and system maintenance for one year. Historically, revenue
from the sale and installation of our interactive system was recognized ratably over the
one-year maintenance period after the equipment is installed. The contracted system hardware,
installation and maintenance elements were not separable during this start-up phase due to
insufficient vendor specific objective evidence (VSOE) of fair value. The package price of
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. In the fourth quarter of 2007, we attained 100%
renewal activity for maintenance services therefore establishing VSOE of the fair value of
maintenance services. Effective in the fourth quarter of 2007, the entire selling price of the
interactive system is recognized upon installation using the residual method.
    
    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
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LodgeNet Interactive Corporation
    
    Form 10-Q
 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 the three-year maintenance period, which includes the original
one-year warranty and the two-year extension, 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. Management expects VSOE to be established after at least
eighteen months of market history and meaningful renewal activity for maintenance services.
Once VSOE has been established, the entire selling price of the interactive system will be
recognized 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 entertainment
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.
    
    Master Antenna Television (MATV) Services.We generate revenues from the installation of
master antenna wiring and related infrastructure. Revenues are recognized upon completion of
the MATV installation and the prices of the services are fixed and determinable prior to
delivery. MATV equipment and services are not proprietary and can be supplied by other
vendors.
    
    Satellite System Sales.We also generate revenues from the sale and installation of DIRECTV
satellite systems. Revenues are recognized upon installation of the satellite system and the
prices for these services are fixed and determinable prior to delivery. DIRECTV equipment and
installation services are not proprietary and can be supplied by other vendors other than us.
    
    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 which has been provided.
 Allowance for Doubtful Accounts.
 Allowance for Excess or Obsolete System Components.
 Long-Lived Assets.
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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  Property and Equipment.
 YearsBuildings
    
    
    30Hotel systems:Installed system costs
    
    
    2  7Customer acquisition costs
    
    
    5  7System components
    
    
    5  7Software costs
    
    
    3  5Other equipment
    
    
    3  10
 Allowance for System Removal.
 Goodwill and Other Intangibles Assets.
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LodgeNet Interactive Corporation
    
    Form 10-Q
  YearsHotel contracts and relationships
    
    
    10  20Tradenames
    
    
    7Acquired technologies and patents
    
    
    5Content agreements and relationships
    
    
    4
 Recent Accounting Developments
   
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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
    Present Fairly in Conformity With
Generally Accepted Accounting Principles
 
 Item 3  Quantitative and Qualitative Disclosures About Market Risk
  Interest.
 Carrying
    
    
    Fair
    
    
    Weighted AverageAmount
    
    
    Value
    
    
    Interest RateBank Credit Facility:Bank term loan
    
    $
    613,750
    
    
    $
    564,650
    
    
    
    4.81
    %Capital leases
    
    
    2,559
    
    
    
    2,559
    
    
    
    8.40
    %$
    616,309
    
    
    $
    567,209
    
    
    
    4.82
    %
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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  Economic Condition.
 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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##### Table of Contents



LodgeNet Interactive 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
  
    
    To elect two directors to three year terms expiring in 2011.
    
    To ratify the Rights Plan dated as of February 28, 2008 between the Company and
Computershare Investor Services, LLC, a Delaware limited liability company, as Rights Agent
(the Amended Rights Plan).
    
    To ratify the appointment of PricewaterhouseCoopers LLP as the Companys independent
registered public accounting firm for the year ending December 31, 2008.
  Election of Directors
 For
    
    WithholdR.F. Leyendecker
    
    
    18,890,666
    
    
    
    1,666,468Vikki I. Pachera
    
    
    18,884,102
    
    
    
    1,673,032
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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  Ratification of Amended Rights Plan
 For
    
    Against
    
    Abstain
    
    Non-Votes9,684,257
    
    9,056,253
    
    18,123
    
    1,798,501
 Ratification of Appointment of PricewaterhouseCoopers
 For
    
    Against
    
    Abstain
    
    Non-Votes20,505,854
    
    32,777
    
    18,503
    
    0
 
 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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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 LodgeNet Interactive Corporation and Subsidiaries
 
 Signatures
  LodgeNet Interactive Corporation(Registrant)Date:  August 6, 2008
    /s/  Scott C. PetersenScott C. PetersenPresident, Chief Executive Officer and
Chairman of the Board of Directors
(Principal Executive Officer)Date:  August 6, 2008
    /s/  Gary H. RitondaroGary H. RitondaroSenior Vice President, Chief Financial Officer
(Principal Financial & Accounting Officer)  Page 42