##### 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, 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
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 3900 West Innovation Street, Sioux Falls, South Dakota 57107
  (605) 988-1000
 (Registrants telephone number,
  (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 September 30, 2008 and December 31, 2007
    
    
    3Consolidated Statements of Operations (Unaudited) for the Three Months and Nine Months Ended September 30, 2008 and 2007
    
    
    4Consolidated Statements of Cash Flows (Unaudited) for the Nine Months Ended September 30, 2008 and 2007
    
    
    5Notes to Consolidated Financial Statements (Unaudited)
    
    
    6Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3  Quantitative and Qualitative Disclosures About Market Risk
    
    
    40Item 4  Controls and Procedures
    
    
    41Part II. Other InformationItem 1  Legal Proceedings
    
    
    42Item 1A  Risk Factors
    
    
    42Item 2  Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    43Item 3  Defaults Upon Senior Securities
    
    
    43Item 4  Submission of Matters to a Vote of Security Holders
    
    
    43Item 5  Other Information
    
    
    43Item 6  Exhibits
    
    
    43Signatures
    
    
    44EX-31.1EX-31.2EX-32
     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)
  September 30,
    
    
    December 31,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    14,917
    
    
    $
    25,569Accounts receivable, net
    
    
    71,121
    
    
    
    73,580Other current assets
    
    
    10,272
    
    
    
    11,359Total current assets
    
    
    96,310
    
    
    
    110,508Property and equipment, net
    
    
    292,408
    
    
    
    323,963Debt issuance costs, net
    
    
    9,859
    
    
    
    11,374Intangible assets, net
    
    
    118,269
    
    
    
    126,530Goodwill
    
    
    111,293
    
    
    
    111,293Other assets
    
    
    9,358
    
    
    
    10,155Total assets
    
    $
    637,497
    
    
    $
    693,823Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    48,356
    
    
    $
    50,559Current maturities of long-term debt
    
    
    7,547
    
    
    
    7,398Accrued expenses
    
    
    24,081
    
    
    
    30,118Deferred revenue
    
    
    13,560
    
    
    
    14,354Total current liabilities
    
    
    93,544
    
    
    
    102,429Long-term debt
    
    
    602,905
    
    
    
    617,196Other long-term liabilities
    
    
    21,008
    
    
    
    22,440Total liabilities
    
    
    717,457
    
    
    
    742,065Commitments and contingenciesStockholders deficiency:Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 50,000,000 shares authorized;
23,014,164 and 22,969,775 shares outstanding at September 30,
2008 and December 31, 2007, respectively
    
    
    230
    
    
    
    230Treasury stock, at cost: 530,000 and 60,000 shares at
September 30,
2008 and December 31, 2007, respectively
    
    
    (5,737
    )
    
    
    (1,075
    )Additional paid-in capital
    
    
    332,113
    
    
    
    330,405Accumulated deficit
    
    
    (394,388
    )
    
    
    (367,638
    )Accumulated other comprehensive loss
    
    
    (12,178
    )
    
    
    (10,164
    )Total stockholders deficiency
    
    
    (79,960
    )
    
    
    (48,242
    )Total liabilities and stockholders deficiency
    
    $
    637,497
    
    
    $
    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
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Revenues:Guest entertainment and hotel services
    
    $
    124,522
    
    
    $
    132,297
    
    
    $
    378,425
    
    
    $
    327,899System sales, advertising and other
    
    
    10,798
    
    
    
    10,334
    
    
    
    34,030
    
    
    
    24,931Total revenues
    
    
    135,320
    
    
    
    142,631
    
    
    
    412,455
    
    
    
    352,830Direct Costs and Operating Expenses:Direct costs (exclusive of operating
expenses and
depreciation and amortization shown
separately
below):Guest entertainment and hotel
services
    
    
    65,917
    
    
    
    68,103
    
    
    
    197,063
    
    
    
    163,087System sales, advertising and other
    
    
    8,116
    
    
    
    7,839
    
    
    
    26,080
    
    
    
    18,250Operating expenses:System operations
    
    
    14,888
    
    
    
    15,505
    
    
    
    45,115
    
    
    
    39,236Selling, general and administrative
    
    
    12,484
    
    
    
    16,137
    
    
    
    41,285
    
    
    
    40,200Depreciation and amortization
    
    
    29,046
    
    
    
    34,135
    
    
    
    94,648
    
    
    
    83,816Restructuring
    
    
    323
    
    
    
    2,296
    
    
    
    3,142
    
    
    
    5,052Other operating (income) expense
    
    
    (79
    )
    
    
    42
    
    
    
    (947
    )
    
    
    (774
    )Total direct costs and operating
expenses
    
    
    130,695
    
    
    
    144,057
    
    
    
    406,386
    
    
    
    348,867Income (loss) from operations
    
    
    4,625
    
    
    
    (1,426
    )
    
    
    6,069
    
    
    
    3,963Other Income and (Expenses):Interest expense
    
    
    (10,543
    )
    
    
    (11,741
    )
    
    
    (31,999
    )
    
    
    (29,527
    )Loss on early retirement of debt
    
    
    (76
    )
    
    
    (25
    )
    
    
    (155
    )
    
    
    (22,195
    )Minority interest in income of
subsidiary
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    165Other (expense) income
    
    
    (10
    )
    
    
    724
    
    
    
    (23
    )
    
    
    1,289Loss before income taxes
    
    
    (6,004
    )
    
    
    (12,468
    )
    
    
    (26,108
    )
    
    
    (46,305
    )Provision for income taxes
    
    
    (274
    )
    
    
    1,058
    
    
    
    (642
    )
    
    
    836Net loss
    
    $
    (6,278
    )
    
    $
    (11,410
    )
    
    $
    (26,750
    )
    
    $
    (45,469
    )Net loss per common share (basic and
diluted)
    
    $
    (0.28
    )
    
    $
    (0.50
    )
    
    $
    (1.19
    )
    
    $
    (2.12
    )Weighted average shares outstanding
(basic and diluted)
    
    
    22,296,886
    
    
    
    22,742,001
    
    
    
    22,397,466
    
    
    
    21,417,266
   Page 4




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows (Unaudited)
  Nine Months Ended September 30,2008
    
    
    2007Operating activities:Net loss
    
    $
    (26,750
    )
    
    $
    (45,469
    )Adjustments to reconcile net loss to net cash provided
by operating activities:Depreciation and amortization
    
    
    94,648
    
    
    
    83,816Loss on early retirement of debt
    
    
    155
    
    
    
    3,583Share-based compensation
    
    
    1,735
    
    
    
    1,296Gain due to insurance proceeds
    
    
    (815
    )
    
    
    Insurance proceeds related to business interruption
    
    
    815
    
    
    
    Other, net
    
    
    (32
    )
    
    
    (215
    )Change in operating assets and liabilities:Accounts receivable, net
    
    
    2,195
    
    
    
    (5,890
    )Other current assets
    
    
    946
    
    
    
    (2,792
    )Accounts payable
    
    
    (1,617
    )
    
    
    7,970Accrued expenses and deferred revenue
    
    
    (8,580
    )
    
    
    1,018Other
    
    
    691
    
    
    
    (904
    )Net cash provided by operating activities
    
    
    63,391
    
    
    
    42,413Investing activities:Property and equipment additions
    
    
    (53,428
    )
    
    
    (60,591
    )Acquisition of StayOnline, Inc.
    
    
    
    
    
    
    (14,311
    )Acquisition of THN (20% minority interest)
    
    
    
    
    
    
    (5,000
    )Acquisition of On Command Corporation, net of cash acquired
    
    
    
    
    
    
    (335,364
    )Other investing activities
    
    
    
    
    
    
    638Net cash used for investing activities
    
    
    (53,428
    )
    
    
    (414,628
    )Financing activities:Proceeds from long-term debt
    
    
    
    
    
    
    625,000Repayment of long-term debt
    
    
    (14,698
    )
    
    
    (269,677
    )Payment of capital lease obligations
    
    
    (1,066
    )
    
    
    (1,419
    )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
    
    
    
    
    
    
    23,290Exercise of stock options
    
    
    
    
    
    
    16,468Net cash (used for) provided by financing activities
    
    
    (20,426
    )
    
    
    381,224Effect of exchange rates on cash
    
    
    (189
    )
    
    
    346(Decrease) increase in cash and cash equivalents
    
    
    (10,652
    )
    
    
    9,355Cash and cash equivalents at beginning of period
    
    
    25,569
    
    
    
    22,795Cash and cash equivalents at end of period
    
    $
    14,917
    
    
    $
    32,150
   Page 5




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 LodgeNet Interactive Corporation and Subsidiaries
 
 Notes to Consolidated Financial Statements (Unaudited)
           Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,Pro Forma2008
    
    2007
    
    2008
    
    2007Total revenue
    
    $
    135,320
    
    
    $
    142,631
    
    
    $
    412,455
    
    
    $
    414,973Net loss
    
    $
    (6,278
    )
    
    $
    (11,410
    )
    
    $
    (26,750
    )
    
    $
    (59,070
    )Net loss per share
    
    $
    (0.28
    )
    
    $
    (0.50
    )
    
    $
    (1.19
    )
    
    $
    (2.63
    )
  Page 6




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
    September 30,
    
    
    December 31,2008
    
    
    2007Land, building and equipment
    
    $
    114,852
    
    
    $
    105,247Hotel systems:Installed system costs
    
    
    650,733
    
    
    
    646,095Customer acquisition costs
    
    
    57,717
    
    
    
    55,080System components
    
    
    30,205
    
    
    
    24,966Software costs
    
    
    35,452
    
    
    
    33,783Total
    
    
    888,959
    
    
    
    865,171Less  depreciation and amortization
    
    
    (596,551
    )
    
    
    (541,208
    )Property and equipment, net
    
    $
    292,408
    
    
    $
    323,963
       Page 7




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  September 30, 2008
    
    
    December 31, 2007Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired contracts and relationships
    
    $
    120,315
    
    
    $
    (9,678
    )
    
    $
    120,315
    
    
    $
    (4,884
    )Other acquired intangibles
    
    
    12,984
    
    
    
    (10,005
    )
    
    
    12,984
    
    
    
    (8,263
    )Tradenames
    
    
    3,039
    
    
    
    (942
    )
    
    
    2,955
    
    
    
    (225
    )Acquired patents
    
    
    5,079
    
    
    
    (2,523
    )
    
    
    5,032
    
    
    
    (1,384
    )$
    141,417
    
    
    $
    (23,148
    )
    
    $
    141,286
    
    
    $
    (14,756
    )
       September 30,
    
    
    December 31,2008
    
    
    2007Property,
sales and other taxes
    
    $
    8,835
    
    
    $
    8,405Compensation
    
    
    8,502
    
    
    
    11,485Interest
    
    
    97
    
    
    
    Programming related
    
    
    1,782
    
    
    
    1,785Restructuring
    
    
    1,260
    
    
    
    5,774Other
    
    
    3,605
    
    
    
    2,669$
    24,081
    
    
    $
    30,118
  Page 8




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
   September 30,
    
    
    December 31,2008
    
    
    2007Bank Credit Facility:Bank term loan
    
    $
    607,188
    
    
    $
    621,875Revolving credit facility
    
    
    
    
    
    
    9.50% senior notes
    
    
    
    
    
    
    10Capital leases
    
    
    3,264
    
    
    
    2,709610,452
    
    
    
    624,594Less current maturities
    
    
    (7,547
    )
    
    
    (7,398
    )$
    602,905
    
    
    $
    617,196
 Bank Credit Facility 3⁄4
     Page 9




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 9.50% Senior Notes 3⁄4
 Capital Leases
  2008
    
    
    2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    ThereafterLong-term debt
    
    $
    1,563
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    580,625Capital leases
    
    
    414
    
    
    
    1,379
    
    
    
    1,055
    
    
    
    598
    
    
    
    183
    
    
    
    1,977
    
    
    
    7,629
    
    
    
    7,305
    
    
    
    6,848
    
    
    
    6,433
    
    
    
    580,625Less amount representing
interest on capital leases
    
    
    (55
    )
    
    
    (167
    )
    
    
    (95
    )
    
    
    (39
    )
    
    
    (9
    )
    
    
    $
    1,922
    
    
    $
    7,462
    
    
    $
    7,210
    
    
    $
    6,809
    
    
    $
    6,424
    
    
    $
    580,625
  3⁄4
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net loss
    
    $
    (6,278
    )
    
    $
    (11,410
    )
    
    $
    (26,750
    )
    
    $
    (45,469
    )Foreign currency translation adjustment
    
    
    (1,053
    )
    
    
    1,839
    
    
    
    (1,520
    )
    
    
    4,334Unrealized loss on interest rate swap
agreements
    
    
    (914
    )
    
    
    (10,310
    )
    
    
    (494
    )
    
    
    (5,895
    )Comprehensive loss
    
    $
    (8,245
    )
    
    $
    (19,881
    )
    
    $
    (28,764
    )
    
    $
    (47,030
    )
  September 30,
    
    
    December 31,2008
    
    
    2007Unrealized loss on interest rate swap
agreements
    
    $
    (17,391
    )
    
    $
    (16,897
    )Foreign currency translation adjustment
    
    
    5,213
    
    
    
    6,733Accumulated other comprehensive loss
    
    $
    (12,178
    )
    
    $
    (10,164
    )
 3⁄4
   Page 10




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##### Table of Contents



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




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Present Fairly in Conformity With
Generally Accepted Accounting Principles
      Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Compensation cost (benefit):Stock options
    
    $
    275
    
    
    $
    149
    
    
    $
    875
    
    
    $
    357Non-vested shares
    
    
    267
    
    
    
    293
    
    
    
    860
    
    
    
    939Total share based compensation expense
    
    $
    542
    
    
    $
    442
    
    
    $
    1,735
    
    
    $
    1,296Compensation expense per common share (basic and diluted):
    
    $
    0.02
    
    
    $
    0.02
    
    
    $
    0.08
    
    
    $
    0.06
  Page 12




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  Stock Option Valuation and Expense Information under SFAS No. 123R
  Non-Vested Shares (Restricted Stock)
      Page 13




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  12/31/07
    
    
    Charges to
    
    
    Cash
    
    
    9/30/08Balance
    
    
    Expense
    
    
    Payments
    
    
    BalanceSeverance and other benefit related costs
    
    $
    5,289
    
    
    $
    1,390
    
    
    $
    (6,014
    )
    
    $
    665Cost of closing redundant acquired
facilities
    
    
    485
    
    
    
    1,571
    
    
    
    (1,461
    )
    
    
    595Other
    
    
    
    
    
    
    181
    
    
    
    (181
    )
    
    
    Total
    
    $
    5,774
    
    
    $
    3,142
    
    
    $
    (7,656
    )
    
    $
    1,260
     September 30, 2008
    
    December 31, 2007Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueInterest rate swaps
- liability
position
    
    $
    17,391
    
    
    $
    17,391
    
    
    $
    16,897
    
    
    $
    16,897Long-term debt
    
    $
    610,452
    
    
    $
    522,410
    
    
    $
    624,594
    
    
    $
    599,718
        Page 14




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  Total
    
    Quoted Prices inFair Value
    
    Active Markets for
    
    Significant Other
    
    SignificantMeasurement
    
    Identical Asset
    
    Observable Inputs
    
    Unobservable InputsSeptember 30, 2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Interest rate swaps 
liability position
    
    $
    17,391
    
    
    $
    
    
    
    $
    17,391
    
    
    $
    
      Page 15




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##### Table of Contents



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 capital investment, spending reductions and 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 general financial conditions (including
those represented recently by liquidity crises, government bailouts and assistance plans,
bank failures, and recessionary threats and developments);Ø
    
    the economic condition of the lodging industry, which can
be particularly affected by the
financial conditions referenced above, as well as by high gas prices, levels of
unemployment, consumer confidence, acts or threats of terrorism and public health issues;Ø
    
    competition from providers of similar services and from alternative systems for
accessing in-room entertainment;Ø
    
    competition from HSIA providers;Ø
    
    changes in demand for our products and services; programming availability, timeliness,
quality, and costs;Ø
    
    technological developments by competitors;Ø
    
    developmental costs, difficulties, and delays;Ø
    
    relationships with customers and property owners, in particular as we reduce capital investment;Ø
    
    the availability of capital to finance growth;Ø
    
    compliance with credit facility covenants;Ø
    
    the impact of governmental 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 Securities and Exchange Commission.
 With respect to any 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 16




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LodgeNet Interactive Corporation
    
    Form 10-Q
       Page 17




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##### Table of Contents



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 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 newly constructed hotel properties and the
attractiveness of our technology, service and support to hotels currently operating without an
interactive television system.
 
    
    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 hotel services 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
profitability.
 
    
    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 profitability. 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.
  Page 18




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LodgeNet Interactive Corporation
    
    Form 10-Q
 
 
    
    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
which provide on-demand movies, rental companies which provide videocassettes and DVDs that
can be viewed in properly equipped hotel rooms or on other portable viewing devices, and
hotels which 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 variable and 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 variable and based on a percent
of guest-generated revenue;Ø
    
    fixed monthly programming charges paid primarily to DIRECTV for satellite-delivered
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 HD televisions, 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 19




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LodgeNet Interactive Corporation
    
    Form 10-Q
  Net Free Cash Flow
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Cash provided by operating activities
    
    $
    20,947
    
    
    $
    28,298
    
    
    $
    63,391
    
    
    $
    42,413Property and equipment additions
    
    
    (14,705
    )
    
    
    (21,749
    )
    
    
    (53,428
    )
    
    
    (60,591
    )6,242
    
    
    
    6,549
    
    
    
    9,963
    
    
    
    (18,178
    )Cash used for acquisition and other activities (1)
    
    
    
    
    
    
    (5,070
    )
    
    
    
    
    
    
    (354,037
    )$
    6,242
    
    
    $
    1,479
    
    
    $
    9,963
    
    
    $
    (372,215
    )
 
 (1)
    
    Cash used for acquisition activities related to the acquisitions of On Command, StayOnline
and the minority interest for THN.  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Expansion capital investment (1)
    
    $
    5,994
    
    
    $
    6,326
    
    
    $
    17,512
    
    
    $
    19,735Renewal investment (2)
    
    
    3,875
    
    
    
    7,373
    
    
    
    15,468
    
    
    
    18,729Corporate capital and minor extensions (3)
    
    
    4,836
    
    
    
    8,050
    
    
    
    20,448
    
    
    
    22,127$
    14,705
    
    
    $
    21,749
    
    
    $
    53,428
    
    
    $
    60,591
 
 (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.  Page 20




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LodgeNet Interactive Corporation
    
    Form 10-Q
 Rooms Served
  September 30,2008
    
    2007Total rooms served (1)
    
    
    1,970,752
    
    
    
    1,954,116Total guest entertainment rooms (2)
    
    
    1,862,885
    
    
    
    1,852,124Total HD rooms (3)
    
    
    163,768
    
    
    
    63,502Total Television Programming (FTG) rooms (4)
    
    
    1,098,687
    
    
    
    1,059,440Total Broadband Internet rooms (5)
    
    
    227,880
    
    
    
    215,581Net new guest entertainment rooms for the three months ended
(6)
    
    
    9,167
    
    
    
    7,673Net new guest entertainment rooms for the nine months ended (6)
    
    
    27,367
    
    
    
    21,632
 
 (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 15,917 and 17,790 for the three months ended September 30, 2008 and 2007,
respectively, and 47,924 and 56,077 for the nine months ended September 30, 2008 and 2007,
respectively. High Definition and Digital Room Growth
  September 30,2008
    
    2007Net new standard digital and HDTV rooms for the
three months ended
    
    
    16,050
    
    
    
    31,743Net new standard digital and HDTV rooms for the
nine months ended
    
    
    52,449
    
    
    
    91,995Net new HDTV rooms for the three months ended (1)
    
    
    26,206
    
    
    
    15,154Net new HDTV rooms for the nine months ended (1)
    
    
    76,848
    
    
    
    40,000Total HDTV rooms installed (2)
    
    
    163,768
    
    
    
    63,502Total standard digital and HDTV rooms installed
    
    
    1,517,780
    
    
    
    1,443,303Digital rooms as a percent of total guest
entertainment interactive rooms
    
    
    81.5
    %
    
    
    77.9
    %
 
 (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.  Page 21




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LodgeNet Interactive Corporation
    
    Form 10-Q
 Capital Investment Per Room
  Three Months Ended
    
    Years EndedSeptember 30,
    
    September 30,
    
    December 31,
    
    December 31,2008
    
    2007
    
    2007
    
    2006Average cost per room  new installation
    
    $
    400
    
    
    $
    399
    
    
    $
    399
    
    
    $
    354Average cost per room  conversion
    
    $
    298
    
    
    $
    310
    
    
    $
    309
    
    
    $
    252Average cost per HD room  new
installation
    
    $
    400
    
    
    $
    441
    
    
    $
    460
    
    
    $
    438Average cost per HD room  conversion
    
    $
    299
    
    
    $
    331
    
    
    $
    329
    
    
    $
    289
  Revenue Per Room
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Average monthly revenue per room:Guest entertainment
    
    $
    16.85
    
    
    $
    19.06
    
    
    $
    17.25
    
    
    $
    18.48Hotel services
    
    
    5.52
    
    
    
    4.80
    
    
    
    5.40
    
    
    
    4.60System sales, advertising and
other
    
    
    1.93
    
    
    
    1.87
    
    
    
    2.04
    
    
    
    1.70Total revenue per room
    
    $
    24.30
    
    
    $
    25.73
    
    
    $
    24.69
    
    
    $
    24.78
  Page 22




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Direct Costs
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Guest entertainment and hotel services direct costs per
room
    
    $
    11.84
    
    
    $
    12.28
    
    
    $
    11.80
    
    
    $
    11.64Guest entertainment and hotel services direct costs as a
percent of total revenue
    
    
    48.7
    %
    
    
    47.7
    %
    
    
    47.8
    %
    
    
    46.2
    %
 Operating Expenses
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Systems operations expenses
    
    $
    2.67
    
    
    $
    2.80
    
    
    $
    2.70
    
    
    $
    2.75SG&A expenses
    
    
    2.24
    
    
    
    2.91
    
    
    
    2.47
    
    
    
    2.78Depreciation and amortization (D&A)
    
    
    5.22
    
    
    
    6.16
    
    
    
    5.67
    
    
    
    6.15Restructuring expenses
    
    
    0.06
    
    
    
    0.41
    
    
    
    0.19
    
    
    
    0.43Other operating income, net
    
    
    (0.01
    )
    
    
    0.01
    
    
    
    (0.06
    )
    
    
    (0.05
    )$
    10.18
    
    
    $
    12.29
    
    
    $
    10.97
    
    
    $
    12.06Systems operations as a percent of total revenue
    
    
    11.0
    %
    
    
    10.9
    %
    
    
    10.9
    %
    
    
    11.1
    %SG&A as a percent of total revenue
    
    
    9.2
    %
    
    
    11.3
    %
    
    
    10.0
    %
    
    
    11.4
    %D&A as a percent of total revenue
    
    
    21.4
    %
    
    
    24.0
    %
    
    
    22.9
    %
    
    
    23.8
    %Total operating expenses as a percent of total
revenue
    
    
    41.9
    %
    
    
    47.8
    %
    
    
    44.4
    %
    
    
    47.5
    %
  Page 23




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Net Loss
  Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2008
    
    2007
    
    2008
    
    2007Net loss
    
    $
    (6,278
    )
    
    $
    (11,410
    )
    
    $
    (26,750
    )
    
    $
    (45,469
    )
  Liquidity and Capital Resources
      Page 24




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
   2008
    
    2007Actual consolidated total leverage ratio (1) (3)
    
    
    4.38
    
    
    
    4.30Maximum per covenant
    
    
    4.50
    
    
    
    5.00Actual consolidated interest coverage ratio (2) (3)
    
    
    3.21
    
    
    
    4.07Minimum per covenant
    
    
    2.50
    
    
    
    2.25
 
 (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 2010Q1 2009
    
    Q3 2009
    
    Q1 2010
    
    to maturityMaximum consolidated leverage ratio
    
    
    4.25
    
    
    
    4.00
    
    
    
    3.75
    
    
    
    3.50Minimum consolidated interest coverage ratio
    
    
    2.75
    
    
    
    2.75
    
    
    
    3.00
    
    
    
    3.00
   Page 25




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
    9.50% Senior Notes 3⁄4
  Payments due by periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsContractual obligations:Long-term debt(s)
    
    $
    610,452
    
    
    $
    7,547
    
    
    $
    14,181
    
    
    $
    12,786
    
    
    $
    575,938Interest on bank term loan (1)
    
    
    190,409
    
    
    
    35,384
    
    
    
    69,671
    
    
    
    68,209
    
    
    
    17,145Interest on derivative instruments (net)
    
    
    31,568
    
    
    
    5,898
    
    
    
    11,441
    
    
    
    11,389
    
    
    
    2,840Operating lease payments
    
    
    6,782
    
    
    
    2,875
    
    
    
    3,060
    
    
    
    575
    
    
    
    272Uncertain tax positions (2)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Purchase obligations (3)
    
    
    8,929
    
    
    
    8,929
    
    
    
    
    
    
    
    
    
    
    
    Nintendo minimum royalty (4)
    
    
    19,600
    
    
    
    4,200
    
    
    
    8,400
    
    
    
    7,000
    
    
    
    Minimum royalties and commissions (5)
    
    
    5,873
    
    
    
    2,644
    
    
    
    3,122
    
    
    
    107
    
    
    
    Total contractual obligations
    
    $
    873,613
    
    
    $
    67,477
    
    
    $
    109,875
    
    
    $
    100,066
    
    
    $
    596,195
 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 debt 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 September 30, 2008, we do not have unresolved income tax positions.  Page 26




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
  (3)
    
    Consists of open purchase orders primarily for the procurement of system components.(4)
    
    Nintendo video game royalties 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 27




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Discussion and Analysis of Results of Operations
Three Months Ended September 30, 2008 and 2007
 Revenue Analysis.
 2008
    
    
    2007Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Guest entertainment
    
    $
    93,808
    
    
    
    69.3
    %
    
    $
    105,673
    
    
    
    74.1
    %Hotel services
    
    
    30,714
    
    
    
    22.7
    %
    
    
    26,624
    
    
    
    18.7
    %System sales, advertising and other
    
    
    10,798
    
    
    
    8.0
    %
    
    
    10,334
    
    
    
    7.2
    %$
    135,320
    
    
    
    100.0
    %
    
    $
    142,631
    
    
    
    100.0
    %
  Three Months EndedSeptember 30,2008
    
    
    2007Average monthly revenue per room:Movie revenue
    
    $
    15.65
    
    
    $
    17.44Other interactive service revenue
    
    
    1.20
    
    
    
    1.62Total per guest entertainment room
    
    $
    16.85
    
    
    $
    19.06
   2008
    
    
    2007Average monthly revenue per room:Television programming
    
    $
    4.99
    
    
    $
    4.29Broadband
    
    
    0.53
    
    
    
    0.51Total hotel services per room
    
    $
    5.52
    
    
    $
    4.80
  Page 28




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
    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):
    
    
    54.7
    %
    
    
    53.2
    %
    
    
    1.5
    %Change drivers:Television programming related (FTG)
    
    
    
    
    
    
    
    
    
    
    2.6
    %Guest entertainment related costs
    
    
    
    
    
    
    
    
    
    
    (2.1
    )%Other direct costs (Non guest entertainment)
    
    
    
    
    
    
    
    
    
    
    1.0
    %1.5
    %
  Page 29




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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
    
    $
    14,888
    
    
    
    11.0
    %
    
    $
    15,505
    
    
    
    10.9
    %Selling, general and administrative
    
    
    12,484
    
    
    
    9.2
    %
    
    
    16,137
    
    
    
    11.3
    %Depreciation and amortization
    
    
    26,430
    
    
    
    19.5
    %
    
    
    31,025
    
    
    
    21.8
    %Amortization of acquired intangibles
    
    
    2,616
    
    
    
    1.9
    %
    
    
    3,110
    
    
    
    2.2
    %Restructuring expense
    
    
    323
    
    
    
    0.3
    %
    
    
    2,296
    
    
    
    1.6
    %Other operating (income) expense
    
    
    (79
    )
    
    
    
    
    
    
    42
    
    
    
    Total operating expenses
    
    $
    56,662
    
    
    
    41.9
    %
    
    $
    68,115
    
    
    
    47.8
    %
      Operating Income (Loss).
  Page 30




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Interest Expense.
 Loss on Early Retirement of Debt
 Other (Expense) Income.
 Taxes.
 Net Loss.
  Page 31




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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Discussion and Analysis of Results of Operations
Nine Months Ended September 30, 2008 and 2007
 Revenue Analysis.
 2008
    
    
    2007Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:Guest entertainment
    
    $
    288,218
    
    
    
    69.9
    %
    
    $
    261,055
    
    
    
    74.0
    %Hotel services
    
    
    90,207
    
    
    
    21.9
    %
    
    
    66,844
    
    
    
    18.9
    %System sales, advertising and other
    
    
    34,030
    
    
    
    8.2
    %
    
    
    24,931
    
    
    
    7.1
    %$
    412,455
    
    
    
    100.0
    %
    
    $
    352,830
    
    
    
    100.0
    %
  2008
    
    
    2007Average monthly revenue per room:Movie revenue
    
    $
    15.98
    
    
    $
    17.00Other interactive service revenue
    
    
    1.27
    
    
    
    1.48Total per guest entertainment room
    
    $
    17.25
    
    
    $
    18.48
   2008
    
    
    2007Average monthly revenue per room:Television programming
    
    $
    4.87
    
    
    $
    4.15Broadband
    
    
    0.53
    
    
    
    0.45Total hotel services per room
    
    $
    5.40
    
    
    $
    4.60
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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
   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):
    
    
    54.1
    %
    
    
    51.4
    %
    
    
    2.7
    %Change drivers:Television programming related (FTG)
    
    
    
    
    
    
    
    
    
    
    2.4
    %Guest entertainment related costs
    
    
    
    
    
    
    
    
    
    
    (1.4
    )%Other direct costs (Non guest entertainment)
    
    
    
    
    
    
    
    
    
    
    1.7
    %2.7
    %
 Operating Expenses.
 2008
    
    
    2007Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations
    
    $
    45,115
    
    
    
    10.9
    %
    
    $
    39,236
    
    
    
    11.1
    %Selling, general and administrative
    
    
    41,285
    
    
    
    10.0
    %
    
    
    40,200
    
    
    
    11.4
    %Depreciation and amortization
    
    
    86,264
    
    
    
    20.9
    %
    
    
    77,991
    
    
    
    22.1
    %Amortization of acquired intangibles
    
    
    8,384
    
    
    
    2.0
    %
    
    
    5,825
    
    
    
    1.7
    %Restructuring expense
    
    
    3,142
    
    
    
    0.8
    %
    
    
    5,052
    
    
    
    1.4
    %Other operating income
    
    
    (947
    )
    
    
    (0.2
    )%
    
    
    (774
    )
    
    
    (0.2
    )%Total operating expenses
    
    $
    183,243
    
    
    
    44.4
    %
    
    $
    167,530
    
    
    
    47.5
    %
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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
       Operating Income.
 Interest Expense.
 Loss on Early Retirement of Debt
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##### Table of Contents



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



LodgeNet Interactive Corporation
    
    Form 10-Q
 
    
    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 360,000 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 more than
565,000 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 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.
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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 
    
    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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##### Table of Contents



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
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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Interest.
 Carrying
    
    
    Fair
    
    
    Weighted AverageAmount
    
    
    Value
    
    
    Interest RateBank Credit Facility:Bank term loan
    
    $
    607,188
    
    
    $
    519,146
    
    
    
    5.77
    %Capital leases
    
    
    3,264
    
    
    
    3,264
    
    
    
    8.43
    %$
    610,452
    
    
    $
    522,410
    
    
    
    5.78
    %
   Economic Condition.
  
 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
 Our business could be adversely impacted by conditions affecting the lodging industrys
performance.
  If our hotel customers become dissatisfied with our service, they may elect not to renew or to
terminate service agreements with us and, in that event, our ability to maintain or grow our
revenue would be adversely affected.
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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 Our revenue is affected by seasonality and dependent on other factors beyond our control including
a recession in the United States.
 
 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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##### Table of Contents



LodgeNet Interactive Corporation
    
    Form 10-Q
 LodgeNet Interactive Corporation and Subsidiaries
 
 Signatures
  LodgeNet Interactive Corporation(Registrant)Date: November 7, 2008
    
    / s / Scott C. PetersenScott C. PetersenPresident, Chief Executive Officer andChairman of the Board of Directors(Principal Executive Officer)Date: November 7, 2008
    
    / s / Gary H. RitondaroGary H. RitondaroSenior Vice President, Chief Financial Officer(Principal Financial & Accounting Officer)
  Page 44