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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM 10-Q

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

For the quarterly period ended September 30, 2003

or

|         |  |                                                                                         
|-------- |  | ----------------------------------------------------------------------------------------
|[      ] |  | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from  to

Commission File Number 0-22334

LodgeNet Entertainment Corporation



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(Exact name of registrant as specified in its charter)


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

3900 West Innovation Street, Sioux Falls, South Dakota 57107

(Address of Principal Executive Offices)          (ZIP code)


(605) 988-1000



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(Registrants telephone number,
including area code)




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


Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [  ].

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

At October 27, 2003, there were 12,663,681 shares outstanding of the
Registrants common stock, $0.01 par value.

This report contains a total of 28 pages not including exhibits.



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TABLE OF CONTENTS



|                                            |                                                                                                |                                            |  |  |  |  |  | 
|------------------------------------------- | ---------------------------------------------------------------------------------------------- | ------------------------------------------ |  |  |  |  |  | 
|Part I  Financial Information             
|                                            | Item 1  Financial Statements                                                                 
|                                            |                                                                                                | Consolidated Balance Sheets               
|                                            |                                                                                                | Consolidated Statements of Operations     
|                                            |                                                                                                | Consolidated Statements of Cash Flows     
|                                            |                                                                                                | Notes to Consolidated Financial Statements
|                                            | Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations
|                                            | Item 3  Quantitative and Qualitative Disclosures About Market Risk                           
|                                            | Item 4  Controls and Procedures                                                              
|Part II  Other Information                
|                                            | Item 1  Legal Proceedings                                                                    
|                                            | Item 2  Changes in 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 and Reports on Form 8-K                                                     
|Signatures                                 
|EX-31 Certification Pursuant to Section 302
|EX-32 Certification Pursuant to Section 906



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##### Table of Contents



|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q

LodgeNet Entertainment Corporation and Subsidiaries

Index

|                                                                                               |                                                                                                                          |                               |                            |   |      |  | 
|---------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------ | ----------------------------- | -------------------------- | - | ---- |  | 
|                                                                                               |                                                                                                                          |                               |                            |   | Page
|                                                                                               |                                                                                                                          |                               |                            |   | No. 
|                                                                                               |                                                                                                                          | Part I. Financial Information |                            |   |      | 
|Item 1  Financial Statements:                                                                 |                                                                                                                          |                               |                            |  
|                                                                                               | Consolidated Balance Sheets (Unaudited) as of September 30, 2003 and December 31, 2002                                   |                               |                            | 3 |     
|                                                                                               | Consolidated Statements of Operations (Unaudited) for
the Three Months and Nine Months Ended September 30, 2003 and 2002 |                               |                            | 4 |     
|                                                                                               | Consolidated Statements of Cash Flows (Unaudited) for
the Nine Months Ended September 30, 2003 and 2002                  |                               |                            | 5 |     
|                                                                                               | Notes to Consolidated Financial Statements (Unaudited)                                                                   |                               |                            | 6 |     
|Item 2  Managements Discussion and Analysis of Financial Condition
and Results of Operations |                                                                                                                          |                               | 12                         |  
|Item 3  Quantitative and Qualitative Disclosures About Market Risk                            |                                                                                                                          |                               | 26                         |  
|Item 4  Controls and Procedures                                                               |                                                                                                                          |                               | 26                         |  
|                                                                                               |                                                                                                                          |                               | Part II. Other Information |   |      |  | 
|Item 1  Legal Proceedings                                                                     |                                                                                                                          |                               | 27                         |  
|Item 2  Changes in Securities and Use of Proceeds                                             |                                                                                                                          |                               | 27                         |  
|Item 3  Defaults Upon Senior Securities                                                       |                                                                                                                          |                               | 27                         |  
|Item 4  Submission of Matters to a Vote of Security Holders                                   |                                                                                                                          |                               | 27                         |  
|Item 5  Other Information                                                                     |                                                                                                                          |                               | 27                         |  
|Item 6  Exhibits and Reports on Form 8-K                                                      |                                                                                                                          |                               | 27                         |  
|Signatures                                                                                     |                                                                                                                          |                               | 28                         |  



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


|                   |        | 
|------------------ | ------ | 
|September 30, 2003 | Page 2 | 





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|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q




Part I  Financial Information




Item 1  Financial Statements




LodgeNet Entertainment Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollar amounts in thousands, except share data)

|                                                  |                                                                                                                                                                    |                                         |         |          |          |               |         |              |          |   |  | 
|------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------ | --------------------------------------- | ------- | -------- | -------- | ------------- | ------- | ------------ | -------- | - |  | 
|                                                  |                                                                                                                                                                    |                                         |         |          |          | September 30, |         | December 31,
|                                                  |                                                                                                                                                                    |                                         |         |          |          | 2003          |         | 2002        
|                                                  |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|Assets                                            |                                                                                                                                                                    |                                         |         |          |          |               |        
|Current assets:                                   |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|                                                  | Cash and cash equivalents                                                                                                                                          |                                         | $       | 4,607    |          |               | $       | 1,107        |         
|                                                  | Accounts receivable, net                                                                                                                                           |                                         |         | 30,493   |          |               |         | 28,373       |         
|                                                  | Prepaid expenses and other                                                                                                                                         |                                         |         | 3,044    |          |               |         | 3,772        |         
|                                                  |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|                                                  |                                                                                                                                                                    | Total current assets                    |         |          | 38,144   |               |         |              | 33,252   |  
|Property and equipment, net                       |                                                                                                                                                                    |                                         | 232,328 |          |          |               | 243,656 |             
|Debt issuance costs, net                          |                                                                                                                                                                    |                                         | 11,468  |          |          |               | 7,443   |             
|Intangible assets, net                            |                                                                                                                                                                    |                                         | 9,614   |          |          |               | 12,042  |             
|Other assets                                      |                                                                                                                                                                    |                                         | 2,339   |          |          |               | 1,691   |             
|                                                  |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|                                                  |                                                                                                                                                                    | $                                       | 293,893 |          |          | $             | 298,084 |             
|                                                  |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|Liabilities and Stockholders Equity (Deficiency) |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|Current liabilities:                              |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|                                                  | Accounts payable                                                                                                                                                   |                                         | $       | 20,736   |          |               | $       | 12,812       |         
|                                                  | Current maturities of long-term debt                                                                                                                               |                                         |         | 8,645    |          |               |         | 9,320        |         
|                                                  | Accrued expenses                                                                                                                                                   |                                         |         | 17,473   |          |               |         | 12,977       |         
|                                                  | Deferred revenue                                                                                                                                                   |                                         |         | 3,456    |          |               |         | 3,371        |         
|                                                  |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|                                                  |                                                                                                                                                                    | Total current liabilities               |         |          | 50,310   |               |         |              | 38,480   |  
|Long-term debt                                    |                                                                                                                                                                    |                                         | 353,176 |          |          |               | 344,470 |             
|Other long-term liability                         |                                                                                                                                                                    |                                         | 4,995   |          |          |               | 4,995   |             
|Derivative instruments                            |                                                                                                                                                                    |                                         | 7,995   |          |          |               | 11,443  |             
|                                                  |                                                                                                                                                                    |                                         |         |          |          |               |         |              |         
|                                                  | Total liabilities                                                                                                                                                  |                                         |         | 416,476  |          |               |         | 399,388      |         
|                                                  |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|Commitments and contingencies                     |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|Stockholders equity (deficiency):                |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|                                                  | Common stock, $.01 par value, 50,000,000 shares authorized;
12,574,017 and 12,431,149 shares outstanding at September 30,
2003 and December 31, 2002, respectively |                                         |         | 126      |          |               |         | 124          |         
|                                                  | Additional paid-in capital                                                                                                                                         |                                         |         | 153,777  |          |               |         | 153,363      |         
|                                                  | Accumulated deficit                                                                                                                                                |                                         |         | (268,619 | )        |               |         | (241,515     | )       
|                                                  | Accumulated other comprehensive loss                                                                                                                               |                                         |         | (7,867   | )        |               |         | (13,276      | )       
|                                                  |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|                                                  |                                                                                                                                                                    | Total stockholders equity (deficiency) |         |          | (122,583 | )             |         |              | (101,304 | )
|                                                  |                                                                                                                                                                    |                                         |         |          |          |               |         |             
|                                                  |                                                                                                                                                                    | $                                       | 293,893 |          |          | $             | 298,084 |             
|                                                  |                                                                                                                                                                    |                                         |         |          |          |               |         |             

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

|                   |        | 
|------------------ | ------ | 
|September 30, 2003 | Page 3 | 





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##### Table of Contents



|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q




LodgeNet Entertainment Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollar amounts in thousands, except share data)

|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |         |         | 
|--------------------------------------------------------------------------- | ----------------------------------- | --------------------------------------------------------------------------------- | ---------- | ------------------ | ------ | ----------------- | ---------- | ------ | ------ | ---- | ---------- | ------- | ------- | - | ---------- | ------- | ------- | 
|                                                                            |                                     |                                                                                   |            | Three Months Ended |        | Nine Months Ended
|                                                                            |                                     |                                                                                   |            | September 30,      |        | September 30,    
|                                                                            |                                     |                                                                                   |            |                    |        |                  
|                                                                            |                                     |                                                                                   |            | 2003               |        | 2002              |            | 2003   |        | 2002
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |     
|Revenues:                                                                   |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|                                                                            | Guest Pay                           |                                                                                   | $          | 66,304             |        |                   | $          | 61,408 |        |      | $          | 185,121 |         |   | $          | 170,226 |        
|                                                                            | Other                               |                                                                                   |            | 1,464              |        |                   |            | 2,252  |        |      |            | 4,697   |         |   |            | 7,143   |        
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|                                                                            |                                     | Total revenues                                                                    |            |                    | 67,768 |                   |            |        | 63,660 |      |            |         | 189,818 |   |            |         | 177,369 | 
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|Direct costs:                                                               |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|                                                                            | Guest Pay                           |                                                                                   |            | 30,408             |        |                   |            | 26,519 |        |      |            | 83,454  |         |   |            | 71,252  |        
|                                                                            | Other                               |                                                                                   |            | 701                |        |                   |            | 1,262  |        |      |            | 2,182   |         |   |            | 3,939   |        
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|                                                                            |                                     | Total direct costs (exclusive
of other operating expenses
shown separately below) |            |                    | 31,109 |                   |            |        | 27,781 |      |            |         | 85,636  |   |            |         | 75,191  | 
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|Gross profit (exclusive of other
operating expenses shown separately
below) |                                     |                                                                                   | 36,659     |                    |        |                   | 35,879     |        |        |      | 104,182    |         |         |   | 102,178    |        
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|Operating expenses:                                                         |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|                                                                            | Guest Pay operations                |                                                                                   |            | 8,092              |        |                   |            | 7,711  |        |      |            | 23,518  |         |   |            | 22,171  |        
|                                                                            | Selling, general and administrative |                                                                                   |            | 5,446              |        |                   |            | 5,718  |        |      |            | 15,742  |         |   |            | 16,439  |        
|                                                                            | Depreciation and amortization       |                                                                                   |            | 19,447             |        |                   |            | 19,242 |        |      |            | 59,157  |         |   |            | 56,534  |        
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|                                                                            |                                     | Total operating expenses                                                          |            |                    | 32,985 |                   |            |        | 32,671 |      |            |         | 98,417  |   |            |         | 95,144  | 
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|Operating income                                                            |                                     |                                                                                   | 3,674      |                    |        |                   | 3,208      |        |        |      | 5,765      |         |         |   | 7,034      |        
|Investment gains                                                            |                                     |                                                                                   | 243        |                    |        |                   | (73        | )      |        |      | 250        |         |         |   | 753        |        
|Loss on early retirement of debt                                            |                                     |                                                                                   |           |                    |        |                   |           |        |        |      | (7,061     | )       |         |   |           |        
|Interest expense                                                            |                                     |                                                                                   | (8,749     | )                  |        |                   | (8,258     | )      |        |      | (25,765    | )       |         |   | (24,659    | )      
|Other income (expense), net                                                 |                                     |                                                                                   | (497       | )                  |        |                   | (256       | )      |        |      | 52         |         |         |   | (580       | )      
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|Loss before income taxes                                                    |                                     |                                                                                   | (5,329     | )                  |        |                   | (5,379     | )      |        |      | (26,759    | )       |         |   | (17,452    | )      
|Provision for income taxes                                                  |                                     |                                                                                   | (100       | )                  |        |                   | (133       | )      |        |      | (345       | )       |         |   | (427       | )      
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|Net loss                                                                    |                                     | $                                                                                 | (5,429     | )                  |        | $                 | (5,512     | )      |        | $    | (27,104    | )       |         | $ | (17,879    | )      
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|Net loss per common share (basic and
diluted)                               |                                     | $                                                                                 | (0.43      | )                  |        | $                 | (0.44      | )      |        | $    | (2.18      | )       |         | $ | (1.45      | )      
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        
|Weighted average shares outstanding                                         |                                     |                                                                                   | 12,503,325 |                    |        |                   | 12,406,919 |        |        |      | 12,455,494 |         |         |   | 12,363,428 |        
|                                                                            |                                     |                                                                                   |            |                    |        |                   |            |        |        |      |            |         |         |   |            |        

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

|                   |        | 
|------------------ | ------ | 
|September 30, 2003 | Page 4 | 





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##### Table of Contents



|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q




LodgeNet Entertainment Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollar amounts in thousands)

|                                                     |                                                                                 |                                             |                                       |          |                   |        |         |         |        |        |  
|---------------------------------------------------- | ------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------- | -------- | ----------------- | ------ | ------- | ------- | ------ | ------ | -
|                                                     |                                                                                 |                                             |                                       |          | Nine Months Ended
|                                                     |                                                                                 |                                             |                                       |          | September 30,    
|                                                     |                                                                                 |                                             |                                       |          |                  
|                                                     |                                                                                 |                                             |                                       |          | 2003              |        | 2002   
|                                                     |                                                                                 |                                             |                                       |          |                   |        |        
|Operating activities:                                |                                                                                 |                                             |                                       |          |                   |        |         |        
|                                                     | Net loss                                                                        |                                             | $                                     | (27,104  | )                 |        | $       | (17,879 | )     
|                                                     | Adjustments to reconcile net loss to net cash provided
by operating activities: |                                             |                                       |          |                   |        |         |         |       
|                                                     |                                                                                 | Depreciation and amortization               |                                       |          | 59,157            |        |         |         | 56,534 |       
|                                                     |                                                                                 | Investment gains                            |                                       |          | (250              | )      |         |         | (753   | )     
|                                                     |                                                                                 | Loss on early retirement of debt            |                                       |          | 2,477             |        |         |         |       |       
|                                                     |                                                                                 | Change in operating assets and liabilities: |                                       |          |                   |        |         |         |        |       
|                                                     |                                                                                 |                                             | Accounts receivable                   |          |                   | (1,897 | )       |         |        | (4,813 | )
|                                                     |                                                                                 |                                             | Prepaid expenses                      |          |                   | 757    |         |         |        | (866   | )
|                                                     |                                                                                 |                                             | Accounts payable                      |          |                   | 7,852  |         |         |        | 2,445  |  
|                                                     |                                                                                 |                                             | Accrued expenses and deferred revenue |          |                   | 4,427  |         |         |        | 4,676  |  
|                                                     |                                                                                 |                                             | Other                                 |          |                   | 321    |         |         |        | 25     |  
|                                                     |                                                                                 |                                             |                                       |          |                   |        |         |        
|Net cash provided by operating activities            |                                                                                 |                                             | 45,740                                |          |                   |        | 39,369  |        
|                                                     |                                                                                 |                                             |                                       |          |                   |        |         |        
|Investing activities:                                |                                                                                 |                                             |                                       |          |                   |        |         |        
|                                                     | Property and equipment additions                                                |                                             |                                       | (41,305  | )                 |        |         | (56,974 | )     
|                                                     | Note receivable advances                                                        |                                             |                                       | (1,000   | )                 |        |         |        |       
|                                                     | Proceeds from affiliates, net                                                   |                                             |                                       | 250      |                   |        |         | 1,287   |       
|                                                     |                                                                                 |                                             |                                       |          |                   |        |         |         |       
|Net cash used for investing activities               |                                                                                 |                                             | (42,055                               | )        |                   |        | (55,687 | )      
|                                                     |                                                                                 |                                             |                                       |          |                   |        |         |        
|Financing activities:                                |                                                                                 |                                             |                                       |          |                   |        |         |        
|                                                     | Proceeds from long-term debt                                                    |                                             |                                       | 200,000  |                   |        |         |        |       
|                                                     | Repayment of long-term debt                                                     |                                             |                                       | (157,926 | )                 |        |         | (7,156  | )     
|                                                     | Borrowings under revolving credit facility                                      |                                             |                                       | 18,500   |                   |        |         | 29,000  |       
|                                                     | Repayments of revolving credit facility                                         |                                             |                                       | (52,500  | )                 |        |         | (6,000  | )     
|                                                     | Repayment of capital lease obligations                                          |                                             |                                       | (782     | )                 |        |         | (492    | )     
|                                                     | Debt issuance costs                                                             |                                             |                                       | (7,902   | )                 |        |         | (269    | )     
|                                                     | Exercise of stock options                                                       |                                             |                                       | 147      |                   |        |         | 1,027   |       
|                                                     |                                                                                 |                                             |                                       |          |                   |        |         |         |       
|Net cash (used for) provided by financing activities |                                                                                 |                                             | (463                                  | )        |                   |        | 16,110  |        
|                                                     |                                                                                 |                                             |                                       |          |                   |        |         |        
|Effect of exchange rates on cash                     |                                                                                 |                                             | 278                                   |          |                   |        | 3       |        
|                                                     |                                                                                 |                                             |                                       |          |                   |        |         |        
|Increase (decrease) in cash and cash equivalents     |                                                                                 |                                             | 3,500                                 |          |                   |        | (205    | )      
|Cash and cash equivalents at beginning of period     |                                                                                 |                                             | 1,107                                 |          |                   |        | 1,528   |        
|                                                     |                                                                                 |                                             |                                       |          |                   |        |         |        
|Cash and cash equivalents at end of period           |                                                                                 | $                                           | 4,607                                 |          |                   | $      | 1,323   |        
|                                                     |                                                                                 |                                             |                                       |          |                   |        |         |        
|Supplemental cash flow information:                  |                                                                                 |                                             |                                       |          |                   |        |         |        
|                                                     | Cash paid for interest                                                          |                                             | $                                     | 21,416   |                   |        | $       | 21,574  |       
|                                                     |                                                                                 |                                             |                                       |          |                   |        |         |        

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

|                   |        | 
|------------------ | ------ | 
|September 30, 2003 | Page 5 | 





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##### Table of Contents



|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q




LodgeNet Entertainment Corporation and Subsidiaries
Notes to Consolidated Financial Statements (Unaudited)

Note 1  Basis of Presentation

The accompanying consolidated financial statements as of September 30, 2003,
and for the three and nine month periods ended September 30, 2003 and 2002,
have been prepared by LodgeNet Entertainment Corporation (the Company),
without audit, pursuant to the rules and regulations of the Securities and
Exchange Commission (the Commission). The information furnished in the
accompanying consolidated financial statements reflects all adjustments,
consisting of normal recurring adjustments, which, in the opinion of
management, are necessary for a fair presentation of such financial statements.

Certain information and footnote disclosures, normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles, have been condensed or omitted pursuant to the rules and
regulations of the Commission. Although the Company believes that the
disclosures are adequate to make the information presented herein not
misleading, it is recommended that these unaudited consolidated financial
statements be read in conjunction with the more detailed information contained
in the Companys Annual Report on Form 10-K for 2002, as filed with the
Commission. The results of operations for the three and nine month periods
ended September 30, 2003 and 2002 are not necessarily indicative of the results
of operations for the full year due to inherent seasonality within the
business, among other factors.

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

Note 2  Property and Equipment, Net

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

|                                     |                            |       |          |               |         |              |          |         |         | 
|------------------------------------ | -------------------------- | ----- | -------- | ------------- | ------- | ------------ | -------- | ------- | ------- | 
|                                     |                            |       |          | September 30, |         | December 31,
|                                     |                            |       |          | 2003          |         | 2002        
|                                     |                            |       |          |               |         |             
|Land, building and equipment         |                            | $     | 75,316   |               |         | $            | 73,152   |        
|Free-to-guest equipment              |                            |       | 30,313   |               |         |              | 28,160   |        
|Guest Pay systems:                   |                            |       |          |               |         |              |          |        
|                                     | Installed                  |       |          | 423,714       |         |              |          | 403,366 |        
|                                     | Customer acquisition costs |       |          | 46,181        |         |              |          | 43,291  |        
|                                     | System components          |       |          | 25,963        |         |              |          | 28,867  |        
|                                     | Software costs             |       |          | 18,873        |         |              |          | 17,224  |        
|                                     |                            |       |          |               |         |              |          |        
|                                     |                            | Total |          |               | 620,360 |              |          |         | 594,060 | 
|Less
- depreciation and amortization |                            |       | (388,032 | )             |         |              | (350,404 | )      
|                                     |                            |       |          |               |         |              |          |        
|Property and equipment, net          |                            | $     | 232,328  |               |         | $            | 243,656  |        
|                                     |                            |       |          |               |         |              |          |        

Note 3  Loss Per Share Computation

The Company follows SFAS No. 128, Earnings Per Share, which requires the
computation and disclosure of two EPS amounts, basic and diluted. Basic EPS is
computed based only on the weighted average number of common shares actually
outstanding during the period. Diluted EPS is computed based on the weighted
average number of common shares outstanding plus all potentially dilutive
common shares outstanding during the period. Potential common shares that have
an anti-dilutive effect are excluded from diluted earnings per share.

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|LodgeNet Entertainment Corporation |  | Form 10-Q

The loss per common share for the three months ended September 30, 2003 and
2002, and the nine months ended September 30, 2003 and 2002, is based on
12,503,325, 12,406,919, 12,455,494 and 12,363,428 weighted average shares
outstanding during the respective periods. Potential common shares were not
included in the computation of
diluted earnings per share because their inclusion would be anti-dilutive. As
of September 30, 2003 and 2002, the number of potential common shares was
approximately 4,946,000 and 4,729,000, respectively. Such potential dilutive
common shares consist of stock options and warrants.

Note 4  Stock-Based Compensation

The Company measures compensation costs associated with its stock option plans
using the intrinsic value method. Accordingly, compensation costs for stock
options are measured as the excess, if any, of the quoted market price of the
Companys stock at the date of grant over the amount an employee must pay to
acquire the stock. Had compensation costs been determined based on the fair
value at the date of grant for awards, net loss and loss per share would have
changed to the pro forma amounts as follows for the periods ended September 30
(in thousands of dollars, except per share amounts):

|                                                                                                              |             |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------- | ----------- | - | ------------------ | ----- | ----------------- | - | ------ | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                              |             |   | Three Months Ended |       | Nine Months Ended
|                                                                                                              |             |   | September 30,      |       | September 30,    
|                                                                                                              |             |   |                    |       |                  
|                                                                                                              |             |   | 2003               |       | 2002              |   | 2003   |       | 2002
|                                                                                                              |             |   |                    |       |                   |   |        |       |     
|Net loss, as reported                                                                                         |             | $ | (5,429             | )     |                   | $ | (5,512 | )     |      | $ | (27,104 | )     |   | $ | (17,879 | )    
|Add: stock based employee
compensation expense determined
under fair value method, net of
related tax effects |             |   | (862               | )     |                   |   | (636   | )     |      |   | (1,811  | )     |   |   | (2,671  | )    
|                                                                                                              |             |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |      
|Net loss, pro forma                                                                                           |             | $ | (6,291             | )     |                   | $ | (6,148 | )     |      | $ | (28,915 | )     |   | $ | (20,550 | )    
|                                                                                                              |             |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |      
|Loss per share (basic and diluted)                                                                            |             |   |                    |       |                   |   |        |       |      |   |         |       |   |   |         |      
|                                                                                                              | As reported |   | $                  | (0.43 | )                 |   | $      | (0.44 | )    |   | $       | (2.18 | ) |   | $       | (1.45 | )
|                                                                                                              | Pro forma   |   |                    | (0.50 | )                 |   |        | (0.50 | )    |   |         | (2.32 | ) |   |         | (1.66 | )

Note 5  Long-term Debt and Credit Facilities

Long-term debt was comprised as follows (in thousands):

|                        |                           |   |               |         |              |   |         |         |  
|----------------------- | ------------------------- | - | ------------- | ------- | ------------ | - | ------- | ------- | -
|                        |                           |   | September 30, |         | December 31,
|                        |                           |   | 2003          |         | 2002        
|                        |                           |   |               |         |             
|Bank Credit Facility:   |                           |   |               |         |              |   |         |        
|                        | Bank term loan            |   | $             | 147,000 |              |   | $       | 148,125 |  
|                        | Revolving credit facility |   |               |        |              |   |         | 34,000  |  
|10.25% senior notes     |                           |   |              |         |              |   | 150,000 |        
|9.50% senior notes      |                           |   | 200,000       |         |              |   |        |        
|11.50% senior notes     |                           |   | 12,000        |         |              |   | 18,000  |        
|                        | Less unamortized discount |   |               | (104    | )            |   |         | (186    | )
|Capital leases          |                           |   | 2,925         |         |              |   | 3,050   |        
|Other                   |                           |   |              |         |              |   | 801     |        
|                        |                           |   |               |         |              |   |         |         |  
|                        |                           |   | 361,821       |         |              |   | 353,790 |        
|Less current maturities |                           |   | (8,645        | )       |              |   | (9,320  | )      
|                        |                           |   |               |         |              |   |         |         |  
|                        |                           | $ | 353,176       |         |              | $ | 344,470 |        
|                        |                           |   |               |         |              |   |         |         |  

Bank Credit Facility On August 29, 2001, the Company entered into a $225
million bank credit facility, comprised of a $150 million term loan and a $75
million revolving credit facility that may be increased to $100 million,
subject to certain limitations. The term loan matures in August 2008 and
quarterly repayments began in December 2001. The term loan bears interest at
the Companys option of (1) the banks base rate plus a margin of 2.75% or (2)
LIBOR plus a margin of 4.00%. The term loan interest rate as of September 30,
2003 was 5.14%. The revolving credit facility matures in August 2007 and
borrowings under the credit facility bear interest at the Companys option of
(1) the banks base rate plus a margin of from 1.00% to 1.75%, or (2) LIBOR
plus a margin of from 2.25% to 3.00%. As of September 30, 2003, there were no
amounts outstanding under the revolving credit
facility. Loans under the
credit facility are collateralized by a first priority security interest in all
of the Companys assets.

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The facility provides for the issuance of letters of credit up to $10 million,
subject to customary terms and conditions. As of September 30, 2003, the
Company had outstanding letters of credit totaling $500,000.

The facility includes terms and conditions which require compliance in
accordance with a material adverse effect covenant as well as the maintenance
of certain financial ratios and place limitations on capital expenditures,
additional indebtedness, liens, investments, guarantees, asset sales and
certain payments or distributions in respect of the common stock. In June 2003,
the Company received consent to offer the 9.50% senior subordinated notes
described below, and amended its existing bank credit facility. The amendment
modified the covenants for maximum consolidated total leverage ratio and
minimum consolidated interest coverage ratio. The allowable maximum
consolidated total leverage ratio increased from 4.5 to 5.0 until the end of
the fourth quarter 2003 at which time, the ratio steps down to 4.75 times for
the first two quarters of 2004 and to 4.5 times for the last two quarters of
2004. The minimum consolidated interest coverage ratio change from 2.25 to
2.50 was deferred from the third quarter 2004 until the first quarter 2005.
The Company had previously amended its bank credit facility in August 2002. As
of September 30, 2003, the Companys leverage and interest coverage ratios were
4.41 and 2.45, respectively. Upon refinancing of the 10.25% Notes, the
Company, at its sole discretion and without the payment of any additional
costs, expenses or fees, extended the maturity dates of the term loan and the
revolver loan from June 2006 to August 2008 and August 2007, respectively. In
addition, the Company was in compliance with all covenants, terms and
conditions of the bank credit facility.

9.50% Senior Notes In June 2003, the Company issued $200 million of unsecured
9.50% Senior Subordinated Notes (the 9.50% Notes), due June 15, 2013. The
proceeds of the 9.50% Notes, which were issued at par, after underwriter fees
and offering expenses, were approximately $192.5 million. Approximately $154.8
million of such proceeds were used to redeem the outstanding principal amount
of the 10.25% Senior Notes, pay accrued interest, pay call premiums, and pay
related fees. Approximately $35 million of the proceeds were used to pay all
outstanding amounts under the Companys revolving credit facility. The
remaining proceeds of approximately $2.7 million were placed in cash for use in
funding general corporate purposes.

The 9.50% Notes are unsecured, are subordinated in right of payment to all
existing and future senior debt of the Company and rank pari passuin right of
payment with any future senior subordinated indebtedness of the Company. The
9.50% Notes require semi-annual interest payments, commencing December 15,
2003, and contain covenants which restrict the ability of the Company to incur
additional indebtedness, create liens, pay dividends or make certain
distributions in respect to its common stock, redeem capital stock, issue or
sell stock of subsidiaries in certain circumstances, effect certain business
combinations and effect certain transactions with affiliates or stockholders.
As of September 30, 2003, the Company was in compliance with all covenants,
terms, and conditions of the 9.50% Notes.

The 9.50% Notes are redeemable at the option of the Company, in whole or in
part, on or after June 15, 2008, initially at 104.75% of their principal amount
(plus accrued and unpaid interest), declining ratably to 100% of their
principal amount (plus accrued and unpaid interest) on or after June 15, 2011.
At any time prior to June 15, 2006, the Company may redeem up to 35% of the
aggregate principal amount at 109.50% of the principal amount (plus accrued and
unpaid interest) with the cash proceeds of certain equity offerings.

10.25% Senior Notes In December 1996, the Company issued $150 million of
unsecured 10.25% senior notes (the 10.25% Notes), due December 15, 2006. The
10.25% Notes were unsecured, ranked pari passuin right of payment with future
unsubordinated unsecured indebtedness and ranked senior in right of payment to
all subordinated indebtedness of the Company. The 10.25% Notes required
semi-annual interest payments and contained certain covenants including
limitations on indebtedness, liens, guarantees, asset sales and certain
payments or distributions in respect to capital stock. On June 20, 2003, the
Company redeemed approximately 79% of its outstanding 10.25% Notes at 102.688%
of their principal amount, with the balance of the outstanding 10.25% Notes
redeemed on July 1, 2003 at 102.563% of their principal amount, as part of its
refinancing in which the 9.50% Notes were issued.

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|LodgeNet Entertainment Corporation |  | Form 10-Q

11.50% Senior Notes During 1995, the Company issued $30 million principal
amount of unsecured 11.50% senior notes (the 11.50% Notes). The 11.50% Notes
are unsecured, rank pari passuin right of payment with future unsubordinated
unsecured indebtedness and rank senior in right of payment to all subordinated
indebtedness of the
Company. Annual principal payments of $6 million commenced in July 2001 and
continue through July 2005. The 11.50% Notes require semi-annual interest
payments and contain certain covenants including limitations on indebtedness,
liens, guarantees, asset sales and certain payments or distributions in respect
to capital stock. As of September 30, 2003, the Company was in compliance with
all covenants, terms, and conditions of the 11.50% Notes.

The Company issued a total of 480,000 warrants to purchase common stock of the
Company in connection with the issuance of the 11.50% Notes. Each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $7.00 per share. The value of the warrants, $1.68 million, was recorded as
additional paid-in capital and shown as a discount on the 11.50% Notes.

Capital Leases As of September 30, 2003, the Company has total capital lease
obligations of $2,925,000. Equipment acquired under capital lease
arrangements totaled $2,208,000 during the year ended December 31, 2002, and
$722,000 during the nine months ended September 30, 2003.

Long-term debt has the following scheduled principal maturities for the twelve
months ended September 30 (in thousands of dollars): 2004  $8,645; 2005 
$8,322; 2006  $2,150; 2007  $1,705 and thereafter $340,999.

The Company does not utilize special purpose entities or off-balance sheet
financial arrangements.

Note 6  Accounting for Derivative Instruments and Hedging Activities

In August 2003, the Company entered into a $50 million interest rate swap
agreement, which expires in June 2013, to effectively change the underlying
debt from a fixed interest rate to a variable interest rate. In addition, the
Company had existing interest rate swap agreements on $100 million of long-term
debt, of which $50 million expire in December 2005 and $50 million expire in
March 2006, to effectively change the underlying debt from a variable interest
rate to a fixed interest rate for the term of the swap agreements. The Company
is required by its bank credit facility to have a minimum of 50% of its term
loan balance covered under interest rate swap arrangements and cannot exceed
$150 million in swap agreements. The swap agreements have been designated as,
and meet the criteria for, cash flow hedges and are not considered speculative
in nature.

Note 7  Loss on Early Retirement of Debt

In connection with the issuance of the 9.50% Notes in June 2003, the Company
redeemed its 10.25% Notes due December 15, 2006. As a result of this early
redemption, the Company incurred call and tender premiums, and related
expenses, in the amount of $4.6 million and wrote off unamortized debt issuance
costs of $2.5 million.

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|LodgeNet Entertainment Corporation |  | Form 10-Q

Note 8  Comprehensive Loss

Statement of Financial Accounting Standard No. 130, Reporting Comprehensive
Income, provides standards for reporting and disclosure of comprehensive loss
and its components. Comprehensive loss reflects the changes in equity during a
period from transactions and other events and circumstances. For the Company,
comprehensive loss was as follows for the periods ended September 30 (in
thousands):

|                                                 |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  
|------------------------------------------------ |  | ------------------ | ------ | ----------------- |  | ---- | ------- | ---- |  | - | ------- | - |  | - | ------- | -
|                                                 |  | Three Months Ended |        | Nine Months Ended
|                                                 |  | September 30,      |        | September 30,    
|                                                 |  |                    |        |                  
|                                                 |  | 2003               |        | 2002              |  | 2003 |         | 2002
|                                                 |  |                    |        |                   |  |      |         |     
|Net loss                                         |  | $                  | (5,429 | )                 |  | $    | (5,512  | )    |  | $ | (27,104 | ) |  | $ | (17,879 | )
|Foreign currency translation adjustment          |  |                    | (72    | )                 |  |      | (531    | )    |  |   | 1,961   |   |  |   | 77      |  
|Unrealized gain (loss) on derivative
instruments |  |                    | 3,506  |                   |  |      | (4,332  | )    |  |   | 3,448   |   |  |   | (6,042  | )
|                                                 |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  
|Comprehensive loss                               |  | $                  | (1,995 | )                 |  | $    | (10,375 | )    |  | $ | (21,695 | ) |  | $ | (23,844 | )
|                                                 |  |                    |        |                   |  |      |         |      |  |   |         |   |  |   |         |  

Components of accumulated other comprehensive loss as shown on the Companys
consolidated balance sheets were as follows (in thousands):

|                                          |  |               |        |              |  |   |         |  
|----------------------------------------- |  | ------------- | ------ | ------------ |  | - | ------- | -
|                                          |  | September 30, |        | December 31,
|                                          |  | 2003          |        | 2002        
|                                          |  |               |        |             
|Unrealized loss on derivative instruments |  | $             | (7,995 | )            |  | $ | (11,443 | )
|Foreign currency translation adjustment   |  |               | 128    |              |  |   | (1,833  | )
|                                          |  |               |        |              |  |   |         |  
|Accumulated other comprehensive loss      |  | $             | (7,867 | )            |  | $ | (13,276 | )
|                                          |  |               |        |              |  |   |         |  

Note 9  Effect of Recently Issued Accounting Standards

In November 2002, the FASB Emerging Issues Task Force reached a consensus on
EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.
The EITF addresses how to account for multiple-deliverable revenue arrangements
and focuses on when a revenue arrangement should be separated into different
revenue-generating deliverables or units of accounting and if so, how the
arrangement considerations should be allocated to the different deliverables or
units of accounting. The provisions of EITF 00-21 are effective for fiscal
years beginning after December 15, 2002. The adoption of the EITF had no
impact on the Companys consolidated financial statements.

In November 2002, FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others was released and had no impact on the Companys
consolidated financial statements.

In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, Accounting for Stock Based CompensationTransition and Disclosureas
Amendment to FAS 123. SFAS 148 provides two additional transition methods for
entities that adopt the preferable method of accounting for stock based
compensation. In addition, the statement requires disclosure of comparable
information for all companies regardless of whether, when, or how an entity
adopts the preferable, fair value based method of accounting. These disclosures
are now required for interim periods in addition to the traditional annual
disclosure. The Company adopted the additional disclosure provisions of this
statement in the first quarter of 2003. The amendments to SFAS No. 123, which
provide for additional transition methods, are effective for periods beginning
after December 15, 2002. The transition methods were not applicable to the
Company as it continues to account for stock options using the intrinsic value
method.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by
business enterprises of variable interest entities that possess certain
characteristics. FIN 46 requires that if a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest entity must
be included in the consolidated financial statements with those of the
business enterprise. FIN 46 applies immediately to variable interest entities
created after January 31, 2003 and to variable interest entities in which an
enterprise obtains an interest after that date. For variable interest entities
in which an enterprise holds a variable interest that it acquired before
February 1, 2003, FIN 46 is effective for the first period ending after
December 15, 2003. The adoption of FIN 46 will not impact the Companys
financial condition or results of operations. The Company does not have
ownership in any variable interest entities.

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|LodgeNet Entertainment Corporation |  | Form 10-Q

In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This statement amends SFAS 133 to provide clarification on the
financial accounting and reporting of derivative instruments and hedging
activities and requires contracts with similar characteristics to be accounted
for on a comparable basis. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. The adoption of this statement, effective July 1,
2003, had no effect on the Companys financial condition or results of
operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
requires that certain financial instruments issued in the form of shares that
are mandatorily redeemable as well as certain other financial instruments be
classified as liabilities in the financial statements. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is generally effective at the beginning of the first interim
period after June 15, 2003. The adoption of this statement, effective July 1,
2003, had no impact on the Companys consolidated financial position or results
of operations.

Note 10  Gamet and PointOne

In the first quarter of 2003, the Company entered into an agreement with Gamet
Technology, Inc (Gamet), a company engaged in the casino system technology
industry, to form a limited liability company, PointOne Technologies, LLC
(PointOne). The business purpose of PointOne was to engage in the development
of server-based gaming systems for the casino industry by utilizing some of the
Companys intellectual property. The Company entered into a technology
licensing agreement with PointOne, for which the Company received a 37.5%
equity interest in PointOne, which could be diluted to less than 20% under
certain circumstances. The Companys contribution consisted of the license of
certain technology rights to PointOne, and accordingly did not record an
investment in PointOne as an asset. Gamet also contributed certain intellectual
property related to server-based gaming to PointOne and entered into a
technology licensing agreement with PointOne for other owned software, pursuant
to which Gamet received a 62.5% equity interest in PointOne.

Other than the non-exclusive and non-transferable rights to utilize the
Companys licensed technology, the Company did not provide additional funding
nor is the Company obligated or committed to providing any current and future
funds to PointOne. The Company also reserved the right to terminate its
technology licensing agreement if PointOne did not attain a specified level of
funding by September of 2003. PointOne raised $850,000 in financing from
private investors. However, PointOne was not able to obtain additional funds
through permanent equity financing or other sources and in May its operations
were suspended. The parties are currently in dispute regarding the ultimate
disposition of PointOne and its technology. During the second quarter, the
Company provided certain services to PointOne for which the Company invoiced
approximately $100,000. This amount due from PointOne was fully reserved as a
bad debt expense during the second quarter of 2003.

During the first quarter of 2003, the Company advanced $1.0 million to Gamet
pursuant to a written promissory note. The note is personally guaranteed by the
principal owners of Gamet and collateralized by the unconditional assignment of
rights to receive quarterly payments due to the principal owner pursuant to a
long-term note held by the principal owner in connection with the sale of a
prior business. The note was due and payable on April 18, 2003. On July 2,
2003, the Company filed a lawsuit in U.S. District Court, Southern Division, in
South Dakota, against Gamet and its principal owners demanding payment of the
promissory note. Gamet filed an answer and counterclaim against the Company,
alleging that its failure to repay the loan was caused by the Companys failure
to procure financing for PointOne and seeking unspecified damages. The Company
believes the counterclaim is without merit and intends to vigorously contest
it.

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|LodgeNet Entertainment Corporation |  | Form 10-Q




Item 2  Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis provides information concerning our
results of operations and financial condition. This discussion should be read
in conjunction with the accompanying consolidated financial statements and the
notes thereto.

Special Note Regarding Forward-Looking Statements

Certain statements in this Quarterly Report on Form 10-Q constitute
forward-looking statements. When used in this Quarterly Report, the words
expects, anticipates, estimates, believes, no assurance and similar
expressions and statements which are made in the future tense, are intended to
identify such forward-looking statements. Such forward-looking statements
within the meaning of the Securities Act of 1933, as amended, and the
Securities Exchange Act of 1934, as amended, are subject to risks,
uncertainties, and other factors that could cause the Companys actual results,
performance or achievements to be materially different from any future results,
performance or achievements expressed or implied by such forward-looking
statements. In addition to the risks and uncertainties discussed elsewhere in
this Report, such factors include, among others, the following: the effects of
economic conditions, including in particular the economic condition of the
lodging industry, competition, programming availability and quality,
technological developments, developmental difficulties and delays,
relationships with clients and property owners, the availability of capital to
finance growth, the impact of government regulations, international crises,
acts of terrorism, public health issues, and other factors detailed, from time
to time, in the Companys filings with the Securities and Exchange Commission.
These forward-looking statements speak only as of the date of this Quarterly
Report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Companys expectations with
regard thereto or any change in events, conditions or circumstances on which
any such statement is based.

Overview

LodgeNet Entertainment Corporation is the worlds largest and leading provider
of broadband, interactive TV systems and services to hotels, resorts and
casinos throughout the United States and Canada as well as select international
markets. More than 260 million guests a year can use a wide range of LodgeNet
interactive services including movies, music and television on-demand
programming as well as video games, high-speed Internet access and other
services designed to make their stay more enjoyable, productive and convenient.
As of September 30, 2003, the Company provided interactive television and other
services to approximately 5,800 hotel properties serving more than 980,000
rooms.

Guest Pay Interactive Services.Guest Pay interactive services are purchased by
guests on a per-view, hourly, or daily basis and include on-demand movies,
television on-demand programming, music and music videos, network-based video
games, Internet on television, and high-speed Internet access services. Guest
Pay packages may also include additional satellite-delivered basic and premium
cable television, video review of room charges, video checkout, guest
surveying, and merchandising services that are paid for by the hotel and
provided to guests at no charge.

The Companys Guest Pay interactive revenues depend on a number of factors,
including the number of rooms equipped with the Companys systems, hotel
occupancy rates and guest demographics, and the popularity, pricing, and
availability of programming. The primary direct costs of providing Guest Pay
interactive services are (i) license fees paid to studios for non-exclusive
distribution rights to recently-released major motion pictures; (ii) nominal
one-time license fees paid for independent films, most of which are non-rated
and intended for mature audiences; (iii) license fees for music rights
associated with motion pictures (iv) license fees for other interactive
services; (v) Internet connectivity costs; and (vi) the commission retained by
the hotel. Guest Pay operating expenses include costs of system maintenance
and support, programming delivery and distribution, data retrieval, insurance,
and personal property taxes.

The room installations for the twelve months ended September 30, 2003 represent
an increase of 5.7% for Guest Pay interactive rooms as compared to September
30, 2002. Additionally, digital services rooms increased 57.4% over the number
of installed rooms at September 30, 2002. De-installation activity is less
than 2% of the total installed room base.

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|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q

The Companys base of installed rooms was comprised as follows at September 30:

|                                |  |      |         |      |  |  |         | 
|------------------------------- |  | ---- | ------- | ---- |  |  | ------- | 
|                                |  | 2003 |         | 2002
|                                |  |      |         |     
|Guest Pay interactive rooms (1) |  |      | 913,118 |      |  |  | 863,777 | 
|Digital services rooms (2)      |  |      | 356,419 |      |  |  | 226,475 | 
|Total rooms served (3)          |  |      | 983,158 |      |  |  | 939,062 | 



| | (1) |  | 100% of Guest Pay interactive rooms are served by the Companys
on-demand interactive systems.                                                                                                                                                                                                                                                                                    
| | --- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Digital services rooms are equipped with the interactive digital
systems where on-demand movies, television on-demand programming, and
music content are updated and delivered via satellite to the Companys
systems within respective hotels. Digital rooms are included with the
total Guest Pay interactive rooms and represent 39% of the Guest Pay
interactive rooms served.
|
| | (3) |  | Total rooms served represent rooms receiving one or more of the
Companys services, including rooms served by international licensees.                                                                                                                                                                                                                                            

Free-to-Guest and Other Services.In addition to Guest Pay interactive
services, the Company provides satellite-delivered basic and premium cable
television programming for which the hotel, rather than its guests, pays the
charges. The hotel pays the Company a fixed monthly charge per room for each
programming channel provided. The Company obtains its free-to-guest programming
pursuant to multi-year agreements and pays a monthly service fee, which varies
depending on incentive programs in effect from time to time.

To meet the needs of its hotel customers related to the Companys service
offerings, the Company provides a variety of other services to its hotel
customers, including the sale of system equipment and service parts and labor.
Results from these other services and free-to-guest services delivered to rooms
not receiving Guest Pay interactive services are included in the other
components of revenues and direct costs related to such revenues are included
in the statements of operations.

Gamet and PointOne.In the first quarter of 2003, the Company entered into an
agreement with Gamet Technology, Inc (Gamet), a company engaged in the casino
system technology industry, to form a limited liability company, PointOne
Technologies, LLC (PointOne). The business purpose of PointOne was to engage
in the development of server-based gaming systems for the casino industry by
utilizing some of the Companys intellectual property. The Company entered into
a technology licensing agreement with PointOne, for which the Company received
a 37.5% equity interest in PointOne, which could be diluted to less than 20%
under certain circumstances. The Companys contribution consisted of the
license of certain technology rights to PointOne, and accordingly did not
record an investment in PointOne as an asset. Gamet also contributed certain
intellectual property related to server-based gaming to PointOne and entered
into a technology licensing agreement with PointOne for other owned software,
pursuant to which Gamet received a 62.5% equity interest in PointOne.

Other than the non-exclusive and non-transferable rights to utilize the
Companys licensed technology, the Company did not provide additional funding
nor is the Company obligated or committed to providing any current and future
funds to PointOne. The Company also reserved the right to terminate its
technology licensing agreement if PointOne did not attain a specified level of
funding by September of 2003. PointOne raised $850,000 in financing from
private investors. However, PointOne was not able to obtain additional funds
through permanent equity financing or other sources and in May its operations
were suspended. The parties are currently in dispute regarding the ultimate
disposition of PointOne and its technology. During the second quarter, the
Company provided certain services to PointOne for which the Company invoiced
approximately $100,000. This amount due from PointOne was fully reserved as a
bad debt expense during the second quarter of 2003.

|                   |         | 
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|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q

During the first quarter of 2003, the Company advanced $1.0 million to Gamet
pursuant to a written promissory note. The note is personally guaranteed by the
principal owners of Gamet and collateralized by the unconditional assignment of
rights to receive quarterly payments due to the principal owner pursuant to a
long-term note held by
the principal owner in connection with the sale of a prior business. The note
was due and payable on April 18, 2003. On July 2, 2003, the Company filed a
lawsuit in U.S. District Court, Southern Division, in South Dakota, against
Gamet and its principal owners demanding payment of the promissory note. Gamet
filed an answer and counterclaim against the Company, alleging that its failure
to repay the loan was caused by the Companys failure to procure financing for
PointOne and seeking unspecified damages. The Company believes the
counterclaim is without merit and intends to vigorously contest it.

|                   |         | 
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|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q

Critical Accounting Policies

Managements discussion and analysis of financial condition and results of
operations are based upon the Companys financial statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States of America. The Companys primary cost drivers are fact-based
with predetermined rates, such as hotel commissions, license fees paid for
major motion pictures, or one-time flat fees for independent films. However,
the preparation of financial statements requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses during the reporting period. The
Company bases its estimates on historical experience and on various other
assumptions that the Company believes to be reasonable based upon the available
information. The following critical policies relate to the more significant
judgments and estimates used in the preparation of the financial statements:

Revenue recognition.The Company recognizes revenue from the sale of
interactive television services in the period the related services are provided
to the hotel or guest. No future performance obligations exist on a service
that has been provided. The prices related to the Companys products or
services are fixed prior to delivery of the products or services. Revenue from
the sale of system equipment and service parts and labor is recognized when the
equipment is delivered or the service has been provided. The Company also has
advance billings for certain free-to-guest programming services where the
revenue is deferred and recognized in the periods that services are provided.

Allowance for doubtful accounts.The Company determines the estimate of the
allowance for doubtful accounts considering several factors, including: (1)
historical experience, (2) aging of the accounts receivable, and (3) contract
terms between the hotel and the Company. In accordance with the Companys hotel
contracts, monies collected by hotels for interactive television services are
held in trust on behalf of the Company. Collectibility is reasonably assured as
supported by the Companys nominal write-off history. If the financial
condition of a hotel chain or group of hotels were to deteriorate and reduce
the ability to remit the Companys monies, the Company may be required to
increase its allowance by recording additional bad debt expense.

Allowance for excess or obsolete system components.The Company regularly
evaluates component levels to ascertain build requirements based on its backlog
and service requirements based on its current installed base. When a certain
system component becomes obsolete due to technological changes and it is
determined that the component cannot be utilized within its current installed
base, the Company records a provision for excess and obsolete component
inventory based on estimated forecasts of product demand and service
requirements. The Company makes every effort to ensure the accuracy of its
forecasts of service requirements and future production, however any
significant unanticipated changes in demand or technological advances could
have an impact on the value of system components and reported operating
results.

Property and equipment.The Companys property and equipment is stated at
cost, net of accumulated depreciation and amortization. Installed Guest Pay
and free-to-guest systems consist of equipment, related costs of installation,
including certain payroll costs, and customer acquisition costs. Maintenance
costs, which do not significantly extend the useful lives of the respective
assets, and repair costs are charged to Guest Pay operations as incurred. The
Company begins depreciating Guest Pay and free-to-guest systems when such
systems are installed and activated. Depreciation of other equipment begins
when such equipment is placed in service. The Company attributes no salvage
value to equipment, and depreciation and amortization are computed using the
straight-line method over the following useful lives:

|                   |                            |  |        |       | 
|------------------ | -------------------------- |  | ------ | ----- | 
|                   |                            |  | Years 
|                   |                            |  |       
|Buildings          |                            |  | 30     |      
|Guest Pay systems: |                            |  |        |      
|                   | Installed                  |  |        | 2 - 7 | 
|                   | Customer acquisition costs |  |        | 5 - 7 | 
|                   | System components          |  |        | 5 - 7 | 
|                   | Software costs             |  |        | 3 - 5 | 
|Other equipment    |                            |  | 3 - 10 |      

|                   |         | 
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|September 30, 2003 | Page 15 | 





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|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q

Discussion and Analysis of Results of Operations
Three Months Ended September 30, 2003 and 2002

Revenue Analysis. The Companys total revenue for the third quarter of 2003
increased 6.5%, or $4.1 million, in comparison to the third quarter of 2002.
The following table sets forth the components of revenue (in thousands) for the
quarter ended September 30:

|          |           |   |        |        |          |  |          |      |          |   |        |        |          |  |       |      | 
|--------- | --------- | - | ------ | ------ | -------- |  | -------- | ---- | -------- | - | ------ | ------ | -------- |  | ----- | ---- | 
|          |           |   | 2003   |        | 2002    
|          |           |   |        |        |         
|          |           |   |        |        |          |  | Percent  |      |          |   |        |        | Percent 
|          |           |   |        |        |          |  | of Total |      |          |   |        |        | of Total
|          |           |   | Amount |        | Revenues |  | Amount   |      | Revenues
|          |           |   |        |        |          |  |          |      |         
|Revenues: |           |   |        |        |          |  |          |      |          |   |        |        |          |  |       |     
|          | Guest Pay |   | $      | 66,304 |          |  |          | 97.8 |          |   | $      | 61,408 |          |  |       | 96.5 | 
|          | Other     |   |        | 1,464  |          |  |          | 2.2  |          |   |        | 2,252  |          |  |       | 3.5  | 
|          |           |   |        |        |          |  |          |      |          |   |        |        |          |  |       |      | 
|          |           | $ | 67,768 |        |          |  | 100.0    |      |          | $ | 63,660 |        |          |  | 100.0 |     
|          |           |   |        |        |          |  |          |      |          |   |        |        |          |  |       |     

Guest Pay interactive revenue increased 8.0%, or $4.9 million, in the third
quarter of 2003 in comparison to the same quarter of 2002. This increase was
attributable to a 6.0% increase in the average number of installed Guest Pay
interactive rooms, including an additional 130,000 digital services rooms
deployed, compared to the third quarter of 2002. The following table sets
forth information in regard to average monthly revenue per Guest Pay room for
the quarter ended September 30:

|                                  |                                   |                          |   |       |       |      |   |       |       | 
|--------------------------------- | --------------------------------- | ------------------------ | - | ----- | ----- | ---- | - | ----- | ----- | 
|                                  |                                   |                          |   | 2003  |       | 2002
|                                  |                                   |                          |   |       |       |     
|Average monthly revenue per room: |                                   |                          |   |       |       |      |   |      
|                                  | Movie revenue                     |                          | $ | 18.99 |       |      | $ | 18.98 |      
|                                  | Other interactive service revenue |                          |   | 5.43  |       |      |   | 4.99  |      
|                                  |                                   |                          |   |       |       |      |   |       |      
|                                  |                                   | Total per Guest Pay room |   | $     | 24.42 |      |   | $     | 23.97 | 
|                                  |                                   |                          |   |       |       |      |   |      

Other interactive service revenue increased 8.8%, driven by expanding revenue
from TV Internet, TV on demand, digital music and music videos, cable
television programming services, and other interactive TV services available
with the digital system.

Revenue from other sources includes revenue from free-to-guest services
provided to hotels not receiving Guest Pay services and sales of system
equipment and service parts and labor. Other revenue decreased $788,000, or
35.0%, resulting from decreased equipment sales to international licensees.

Gross Profit (exclusive of other operating expenses discussed separately
below).Gross profit totaled $36.7 million for the third quarter ended
September 30, 2003, an increase of 2.2% over the third quarter of 2002.

|                     |           |   |        |        |      |   |        |        |  
|-------------------- | --------- | - | ------ | ------ | ---- | - | ------ | ------ | -
|                     |           |   | 2003   |        | 2002
|                     |           |   |        |        |     
|Gross profit:        |           |   |        |        |      |   |        |       
|                     | Guest Pay |   | $      | 35,896 |      |   | $      | 34,889 |  
|                     | Other     |   |        | 763    |      |   |        | 990    |  
|                     |           |   |        |        |      |   |        |        |  
|                     |           | $ | 36,659 |        |      | $ | 35,879 |       
|                     |           |   |        |        |      |   |        |       
|Gross profit margin: |           |   |        |        |      |   |        |       
|                     | Guest Pay |   |        | 54.1   | %    |   |        | 56.8   | %
|                     | Other     |   |        | 52.1   | %    |   |        | 44.0   | %
|                     | Composite |   |        | 54.1   | %    |   |        | 56.4   | %



|                   |         | 
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|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q

Gross profit on Guest Pay interactive services increased 2.9%, or $1.0 million
on an 8.0% increase in related revenue. Guest Pay direct costs include
primarily movie license fees, music license fees within major motion pictures,
license fees for other interactive services, Internet connectivity fees, and
the commission retained by the hotel, which generally fluctuate directly with
revenue. Conversely, Internet connectivity fees are fixed costs independent of
changes to revenue or occupancy. The addition of Internet connectivity costs
to the Companys direct cost base occurred with the transitioning of the TV
Internet product from InnMedia to the Company in August of 2002. As a
percentage of revenue, the decrease to gross profit margin from 56.8% to 54.1%
was due to programming costs, Internet connectivity costs, and hotel
commissions. The increase in programming costs was driven by a shift in the
type of programming purchased by hotel guests. As noted above, the addition of
Internet connectivity, fixed costs associated with the acquisition of the TV
Internet product, was a contributor to the change in gross margin. These costs
were only part of the direct cost base for the months of August and September
during the third quarter 2002. Hotel commissions increased as a result of the
Companys utilization of its pay for performance commission structure whereby
an increase in revenue per room could result in a higher commission paid to the
hotel. The change in commissions paid had a negative affect of less than 1% on
related margin.

Gross profit on other services decreased $227,000, or 22.9%, in the third
quarter of 2003 from the prior year quarter and the gross profit margin
increased from 44.0% to 52.1%. The resulting increased gross profit margin was
attributable to the decrease in lower margin sales of equipment to
international licensees.

As a percentage of revenue, the Companys overall gross profit margin of 54.1%
was lower than prior year quarter of 56.4%. In addition to the information
provided above, the following table sets forth the primary change drivers of
composite gross margin for the quarter ended September 30:

|                    |                   |  |      |   |      |  |        |   |  |  |      |      | 
|------------------- | ----------------- |  | ---- | - | ---- |  | ------ | - |  |  | ---- | ---- | 
|                    |                   |  | 2003 |   | 2002 |  | Change
|                    |                   |  |      |   |      |  |       
|Gross profit margin |                   |  | 54.1 | % |      |  | 56.4   | % |  |  | -2.3 | %   
|Change drivers:     |                   |  |      |   |      |  |        |   |  |  |      |     
|                    | Programming costs |  |      |   |      |  |        |   |  |  |      | -1.2 | 
|                    | TV Internet       |  |      |   |      |  |        |   |  |  |      | -0.6 | 
|                    | Hotel commissions |  |      |   |      |  |        |   |  |  |      | -0.5 | 
|                    |                   |  |      |   |      |  |        |   |  |  |      |     
|                    |                   |  |      |   |      |  |        |   |  |  | -2.3 | %   
|                    |                   |  |      |   |      |  |        |   |  |  |      |     

Operating Expenses.The following table sets forth information in regard to
the Companys operating expenses for the quarter ended September 30 (dollar
amounts in thousands):

|                    |                                     |                          |   |        |        |          |  |          |      |          |   |        |        |          |  |      |      | 
|------------------- | ----------------------------------- | ------------------------ | - | ------ | ------ | -------- |  | -------- | ---- | -------- | - | ------ | ------ | -------- |  | ---- | ---- | 
|                    |                                     |                          |   | 2003   |        | 2002    
|                    |                                     |                          |   |        |        |         
|                    |                                     |                          |   |        |        |          |  | Percent  |      |          |   |        |        | Percent 
|                    |                                     |                          |   |        |        |          |  | of Total |      |          |   |        |        | of Total
|                    |                                     |                          |   | Amount |        | Revenues |  | Amount   |      | Revenues
|                    |                                     |                          |   |        |        |          |  |          |      |         
|Operating expenses: |                                     |                          |   |        |        |          |  |          |      |          |   |        |        |          |  |     
|                    | Guest Pay operations                |                          | $ | 8,092  |        |          |  | 11.9     |      |          | $ | 7,711  |        |          |  | 12.1 |     
|                    | Selling, general and administrative |                          |   | 5,446  |        |          |  | 8.0      |      |          |   | 5,718  |        |          |  | 9.0  |     
|                    | Depreciation and amortization       |                          |   | 19,447 |        |          |  | 28.7     |      |          |   | 19,242 |        |          |  | 30.2 |     
|                    |                                     |                          |   |        |        |          |  |          |      |          |   |        |        |          |  |     
|                    |                                     | Total operating expenses |   | $      | 32,985 |          |  |          | 48.7 |          |   | $      | 32,671 |          |  |      | 51.3 | 
|                    |                                     |                          |   |        |        |          |  |          |      |          |   |        |        |          |  |     

Guest Pay operations expenses consist of costs directly related to the
operation of systems at hotel sites. The increase in Guest Pay operations
expenses of $381,000, or 4.9%, from the prior year quarter was due primarily to
the 6.0% increase in the average number of installed Guest Pay interactive
rooms, offset by continued operating improvements and efficiencies. On a per
average installed room basis, Guest Pay operations expenses were $2.98 per
month in the third quarter of 2003 as compared to $3.01 per month in the third
quarter of 2002.



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|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q

Selling, general and administrative expenses decreased $272,000, or 4.8%, in
the third quarter of 2003 compared to the year earlier quarter. This decrease
was attributable to reductions in professional fees, partially offset by
increases in payroll-related expenses. As a percentage of revenue, such
expenses decreased to 8.0% in the current quarter from 9.0% in the third
quarter of 2002.

Depreciation and amortization expenses increased 1.1% to $19.4 million in the
third quarter of 2003 from $19.2 million in the year earlier quarter. The
increase was driven by the 6.0% increase in average rooms in operation, the
amortization of intangibles and the amortization of product distribution rights
acquired in August 2002, offset by fully depreciated assets. As a percentage
of revenue, depreciation and amortization expenses decreased to 28.7% in the
current quarter from 30.2% in the third quarter of 2002.

Operating Income.As a result of the factors described above, the Company
generated operating income of $3.7 million in the third quarter of 2003
compared to $3.2 million in the third quarter of 2002.

Interest Expense.Interest expense increased $491,000, or 5.9%, to $8.7
million during the third quarter of 2003. Average principal amount of
long-term debt outstanding during the quarter ended September 30, 2003 was
approximately $368 million (at an average interest rate of approximately 9.5%)
as compared to an average principal amount outstanding of approximately $346
million (at an average interest rate of approximately 9.6%) during the
comparable period of 2002.

Other Income (Expense).During the third quarter of 2003, the Company recorded
an expense of $497,000 primarily related to the establishment of a contingency
accrual for the purpose of resolving certain investor matters associated with
PointOne.

Taxes.For the third quarter of 2003, the Company incurred franchise tax of
$100,000 versus $133,000 during the third quarter of 2002.

Net Loss.For the reasons previously described, the Companys net loss
decreased to $5.4 million in the third quarter of 2003 from a net loss of $5.5
million in the prior year quarter.



|                   |         | 
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|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q

Discussion and Analysis of Results of Operations
Nine Months Ended September 30, 2003 and 2002

Revenue Analysis. The Companys total revenue for the first nine months of
2003 increased 7.0%, or $12.4 million, in comparison to the same period of
2002. The following table sets forth the components of revenue (in thousands)
for the nine months ended September 30:

|         |           |   |         |         |         |  |          |      |         |   |         |         |          |  |       |      | 
|-------- | --------- | - | ------- | ------- | ------- |  | -------- | ---- | ------- | - | ------- | ------- | -------- |  | ----- | ---- | 
|         |           |   | 2003    |         | 2002   
|         |           |   |         |         |        
|         |           |   |         |         |         |  | Percent  |      |         |   |         |         | Percent 
|         |           |   |         |         |         |  | of Total |      |         |   |         |         | of Total
|         |           |   | Amount  |         | Revenue |  | Amount   |      | Revenue
|         |           |   |         |         |         |  |          |      |        
|Revenue: |           |   |         |         |         |  |          |      |         |   |         |         |          |  |       |     
|         | Guest Pay |   | $       | 185,121 |         |  |          | 97.5 |         |   | $       | 170,226 |          |  |       | 96.0 | 
|         | Other     |   |         | 4,697   |         |  |          | 2.5  |         |   |         | 7,143   |          |  |       | 4.0  | 
|         |           |   |         |         |         |  |          |      |         |   |         |         |          |  |       |      | 
|         |           | $ | 189,818 |         |         |  | 100.0    |      |         | $ | 177,369 |         |          |  | 100.0 |     
|         |           |   |         |         |         |  |          |      |         |   |         |         |          |  |       |     

Guest Pay interactive revenue increased 8.8% or $14.9 million, in the first
nine months of 2003 in comparison to the same period of 2002. This increase
was attributable to a 6.9% increase in the average number of installed Guest
Pay interactive rooms and a 1.7% increase in average monthly revenue per room.
The following table sets forth information in regard to average monthly Guest
Pay interactive revenue per room for the nine months ended September 30:

|                                  |                                   |                          |   |       |       |      |   |       |       | 
|--------------------------------- | --------------------------------- | ------------------------ | - | ----- | ----- | ---- | - | ----- | ----- | 
|                                  |                                   |                          |   | 2003  |       | 2002
|                                  |                                   |                          |   |       |       |     
|Average monthly revenue per room: |                                   |                          |   |       |       |      |   |      
|                                  | Movie revenue                     |                          | $ | 17.95 |       |      | $ | 18.09 |      
|                                  | Other interactive service revenue |                          |   | 5.08  |       |      |   | 4.54  |      
|                                  |                                   |                          |   |       |       |      |   |       |      
|                                  |                                   | Total per Guest Pay room |   | $     | 23.03 |      |   | $     | 22.63 | 
|                                  |                                   |                          |   |       |       |      |   |      

Average movie revenue per room decreased 0.8% as a result of a 120 basis point
decrease in occupancy levels versus the first nine months of 2002. Other
interactive service revenue per room increased by 11.9% due to the expanding
revenue from TV Internet, TV on demand, digital music and music videos, cable
television programming services, and other interactive TV services available
with the Companys digital system.

Revenue from other sources includes revenue from free-to-guest services
provided to hotels not receiving Guest Pay services and sales of system
equipment and service parts and labor. Other revenue decreased $2.4 million or
34.2% due to decreased equipment sales to international licensees.

Gross Profit (exclusive of other operating expenses discussed separately
below).Gross profit totaled $104.2 million for the nine months ended
September 30, 2003, an increase of 2.0% over the first nine months of 2002 on a
7.0% increase in revenue (dollar amounts in thousands).

|                     |           |   |         |         |      |   |         |        |  
|-------------------- | --------- | - | ------- | ------- | ---- | - | ------- | ------ | -
|                     |           |   | 2003    |         | 2002
|                     |           |   |         |         |     
|Gross profit:        |           |   |         |         |      |   |         |       
|                     | Guest Pay |   | $       | 101,667 |      |   | $       | 98,974 |  
|                     | Other     |   |         | 2,515   |      |   |         | 3,204  |  
|                     |           |   |         |         |      |   |         |        |  
|                     |           | $ | 104,182 |         |      | $ | 102,178 |       
|                     |           |   |         |         |      |   |         |       
|Gross profit margin: |           |   |         |         |      |   |         |       
|                     | Guest Pay |   |         | 54.9    | %    |   |         | 58.1   | %
|                     | Other     |   |         | 53.5    | %    |   |         | 44.9   | %
|                     | Composite |   |         | 54.9    | %    |   |         | 57.6   | %



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|                                   |  |          
|---------------------------------- |  | ---------
|LodgeNet Entertainment Corporation |  | Form 10-Q

Gross profit on Guest Pay interactive services increased 2.7% or $2.7 million,
on an 8.8% increase in related revenue. Guest Pay direct costs include
primarily movie license fees, music license fees within major motion pictures,
license fees for other interactive services, Internet connectivity fees, and
the commission retained by the hotel, which generally fluctuate directly with
revenue. Conversely, Internet connectivity fees are fixed costs independent of
changes to revenue or occupancy. The addition of Internet connectivity costs
to the Companys direct cost base occurred with the transitioning of the TV
Internet product from InnMedia to the Company in August of 2002. As a
percentage of revenue, the decrease to gross profit margin from 58.1% to 54.9%,
was due to Internet connectivity costs, programming costs, and hotel
commissions. As noted above, the addition of Internet connectivity, fixed
costs associated with the acquisition of the TV Internet product, was the
primary contributor to the change in gross margin. These costs were only part
of the direct cost base for two months during the nine month period in 2002.
The increase in programming costs was driven by a shift in the type of
programming purchased by hotel guests. Hotel commissions increased as a result
of the Companys utilization of its pay for performance commission structure
whereby an increase in revenue per room could result in a higher commission
paid to the hotel. The change in commissions paid had a negative affect of less
than 1% on related margin.

Gross profit on other services decreased $689,000 or 21.5% in the first nine
months of 2003 from the prior year nine months and the gross profit margin
increased from 44.9% to 53.5%. This increase was due to the decrease in lower
margin sales of equipment to international licensees.

As a percentage of revenue, the Companys overall gross profit margin decreased
from 57.6% to 54.9%. In addition to the information provided above, the
following table sets forth the primary change drivers of composite gross margin
for the nine months ended September 30:

|                    |                   |  |      |   |      |  |        |   |  |  |      |      | 
|------------------- | ----------------- |  | ---- | - | ---- |  | ------ | - |  |  | ---- | ---- | 
|                    |                   |  | 2003 |   | 2002 |  | Change
|                    |                   |  |      |   |      |  |       
|Gross profit margin |                   |  | 54.9 | % |      |  | 57.6   | % |  |  | -2.7 | %   
|Change drivers:     |                   |  |      |   |      |  |        |   |  |  |      |     
|                    | TV Internet       |  |      |   |      |  |        |   |  |  |      | -1.3 | 
|                    | Programming costs |  |      |   |      |  |        |   |  |  |      | -0.7 | 
|                    | Hotel commissions |  |      |   |      |  |        |   |  |  |      | -0.7 | 
|                    |                   |  |      |   |      |  |        |   |  |  |      |     
|                    |                   |  |      |   |      |  |        |   |  |  | -2.7 | %   
|                    |                   |  |      |   |      |  |        |   |  |  |      |     

Operating Expenses.The following table sets forth information in regard to
the Companys operating expenses for the nine months ended September 30 (dollar
amounts in thousands):

|                    |                                     |                          |   |        |        |          |  |          |      |          |   |        |        |          |  |      |      | 
|------------------- | ----------------------------------- | ------------------------ | - | ------ | ------ | -------- |  | -------- | ---- | -------- | - | ------ | ------ | -------- |  | ---- | ---- | 
|                    |                                     |                          |   | 2003   |        | 2002    
|                    |                                     |                          |   |        |        |         
|                    |                                     |                          |   |        |        |          |  | Percent  |      |          |   |        |        | Percent 
|                    |                                     |                          |   |        |        |          |  | of Total |      |          |   |        |        | of Total
|                    |                                     |                          |   | Amount |        | Revenues |  | Amount   |      | Revenues
|                    |                                     |                          |   |        |        |          |  |          |      |         
|Operating expenses: |                                     |                          |   |        |        |          |  |          |      |          |   |        |        |          |  |     
|                    | Guest Pay operations                |                          | $ | 23,518 |        |          |  | 12.4     |      |          | $ | 22,171 |        |          |  | 12.5 |     
|                    | Selling, general and administrative |                          |   | 15,742 |        |          |  | 8.3      |      |          |   | 16,439 |        |          |  | 9.3  |     
|                    | Depreciation and amortization       |                          |   | 59,157 |        |          |  | 31.2     |      |          |   | 56,534 |        |          |  | 31.9 |     
|                    |                                     |                          |   |        |        |          |  |          |      |          |   |        |        |          |  |     
|                    |                                     | Total operating expenses |   | $      | 98,417 |          |  |          | 51.8 |          |   | $      | 95,144 |          |  |      | 53.6 | 
|                    |                                     |                          |   |        |        |          |  |          |      |          |   |        |        |          |  |     

Guest Pay operations expenses consist of costs directly related to the
operation of systems at hotel sites. Guest Pay operations expenses of $23.5
million were $1.3 million or 6.1% higher than prior year nine months of $22.1
million, due primarily to a 6.9% increase in the average number of installed
Guest Pay interactive rooms. Per average installed room, Guest Pay operations
expenses of $2.93 per month in the first nine months of 2003 were comparable to
the $2.95 per month in the prior year period.



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|LodgeNet Entertainment Corporation |  | Form 10-Q

Selling, general and administrative expenses of $15.7 million were $697,000 or
4.2% below the prior year nine months of $16.4 million. This decrease was due
to reductions in the levels of bad debt and professional fees incurred in the
prior year related to InnMedia, partially offset by increases in
payroll-related and insurance expenses. As a percentage of revenue, such
expenses decreased to 8.3% in the first nine months of 2003 from 9.3% in the
prior year period.

Depreciation and amortization expenses increased $2.6 million or 4.6% to $59.2
million in the first nine months of 2003 from $56.5 million in the year earlier
nine months. This increase was due to the 6.9% increase in the average number
of rooms in operation driven by the installation of the digital platform. As of
September 30, 2003, the interactive digital system had been installed in more
than 356,000 rooms as compared to 226,000 rooms at September 30, 2002.
Additionally, the increase was due to amortization of intangibles and
distribution rights acquired in August 2002, offset by fully depreciated
assets. As a percentage of revenue, depreciation and amortization expenses
decreased to 31.2% in the first nine months of 2003 from 31.9% in the first
nine months of 2002.

Operating Income.For the reasons previously described, the Company generated
operating income of $5.8 million in the first nine months of 2003 compared to
$7.0 million in the same period of 2002.

Loss on Early Retirement of Debt.As a result of the early retirement of the
10.25% Senior Notes, the Company incurred a $7.1 million loss on the write off
of related debt issuance costs and payment of call and tender premiums, and
transaction expenses.

Interest Expense.Interest expense increased $1.1 million or 4.5%, to $25.8
million during the first nine months of 2003. Average principal amount of
long-term debt outstanding during the nine months ended September 30, 2003 was
approximately $360 million (at an average interest rate of approximately 9.6%)
as compared to an average principal amount outstanding of approximately $336
million (at an average interest rate of approximately 9.8%) during the
comparable period of 2002.

Other Income (Expense).During the first nine months of 2003, the Company
recorded a gain of $52,000 driven by a $413,000 refund from previously
collected and remitted sales tax monies, offset by the establishment of a
contingency accrual in the amount of $585,000 to resolve certain investor
matters associated with PointOne.

Taxes.For the first nine months of 2003, the Company incurred franchise tax
of $345,000 versus $427,000 during the first nine months of 2002.

Net Loss.For the reasons previously described, the Companys net loss
increased to $27.1 million in the first nine months of 2003 from a net loss of
$17.9 million in the prior year nine months.



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|LodgeNet Entertainment Corporation |  | Form 10-Q

Recent Accounting Developments

In November 2002, the FASB Emerging Issues Task Force reached a consensus on
EITF 00-21, Accounting for Revenue Arrangements with Multiple Deliverables.
The EITF addresses how to account for multiple-deliverable revenue arrangements
and focuses on when a revenue arrangement should be separated into different
revenue-generating deliverables or units of accounting and if so, how the
arrangement considerations should be allocated to the different deliverables or
units of accounting. The provisions of EITF 00-21 are effective for fiscal
years beginning after December 15, 2002. The adoption of the EITF had no
impact on the Companys consolidated financial statements.

In November 2002, FASB Interpretation No. 45, Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others was released and had no impact on the Companys
consolidated financial statements.

In December 2002, the Financial Accounting Standards Board (FASB) issued SFAS
No. 148, Accounting for Stock Based CompensationTransition and Disclosureas
Amendment to FAS 123. SFAS 148 provides two additional transition methods for
entities that adopt the preferable method of accounting for stock based
compensation. In addition, the statement requires disclosure of comparable
information for all companies regardless of whether, when, or how an entity
adopts the preferable, fair value based method of accounting. These disclosures
are now required for interim periods in addition to the traditional annual
disclosure. The Company adopted the additional disclosure provisions of this
statement in the first quarter of 2003. The amendments to SFAS No. 123, which
provide for additional transition methods, are effective for periods beginning
after December 15, 2002. The transition methods were not applicable to the
Company as it continues to account for stock options using the intrinsic value
method.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities. This interpretation of Accounting Research
Bulletin No. 51, Consolidated Financial Statements, addresses consolidation by
business enterprises of variable interest entities that possess certain
characteristics. FIN 46 requires that if a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest entity must
be included in the consolidated financial statements with those of the business
enterprise. FIN 46 applies immediately to variable interest entities created
after January 31, 2003 and to variable interest entities in which an enterprise
obtains an interest after that date. For variable interest entities in which an
enterprise holds a variable interest that it acquired before February 1, 2003,
FIN 46 is effective for the first period ending after December 15, 2003. The
adoption of FIN 46 will not impact the Companys financial condition or results
of operations. The Company does not have ownership in any variable interest
entities.

In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This statement amends SFAS 133 to provide clarification on the
financial accounting and reporting of derivative instruments and hedging
activities and requires contracts with similar characteristics to be accounted
for on a comparable basis. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. The adoption of this statement, effective July 1,
2003, had no effect on the Companys financial condition or results of
operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
requires that certain financial instruments issued in the form of shares that
are mandatorily redeemable as well as certain other financial instruments be
classified as liabilities in the financial statements. SFAS No. 150 is
effective for financial instruments entered into or modified after May 31, 2003
and otherwise is generally effective at the beginning of the first interim
period after June 15, 2003. The adoption of this statement, effective July 1,
2003, had no impact on the Companys consolidated financial position or results
of operations.



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|LodgeNet Entertainment Corporation |  | Form 10-Q

Seasonality

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

Liquidity and Capital Resources

The Company historically has required substantial amounts of capital to fund
operations, expand the Companys business and service existing indebtedness.
In 2002, cash flow from operations was sufficient to cover all debt service,
capital expenditures classified as renewal, general corporate, or maintenance
capital as well as a portion of growth capital. The funding for the balance of
the growth capital expenditures was provided by the Companys bank facility.
For the first nine months of 2003, cash flow from operations was sufficient to
cover all long-term debt service as well as all capital investments, including
growth capital. Capital expenditures for the first nine months of 2003 were
$41.3 million as compared to $57.0 million for the same period of 2002. Net
cash provided by operating activities was $45.7 million as compared to $39.4
million in the same period of 2002. The change in working capital during the
nine months ended 2003 was a source of cash of $11.5 million driven by the
companys efforts to accelerate billings to its customers as well as taking
advantage of the most beneficial payment terms with its suppliers of goods and
services versus $1.5 million during the comparable period of 2002. As a result
of these measures, working capital was negative $12.2 million as of September
30, 2003, compared to negative $5.2 million at December 31, 2002.

Depending on the rate of growth of its business and other factors, the Company
expects to incur capital expenditures of $55 to $56.5 million in 2003. Based
on that range, the Company would be able to install approximately 72,000 new
rooms and approximately 50,000 major upgrade rooms. As of September 30, 2003,
the Company was in compliance with all covenants related to its bank debt and
its Senior Notes. The Company is not aware of any events that qualify under
the material adverse effect clause of the current credit facility. The total
amount of long-term debt outstanding, including that portion of debt classified
as current, as of September 30, 2003 was $361.8 million versus $353.8 million
as of December 31, 2002.

The Company does not utilize special purpose entities or off-balance sheet
financial arrangements.

The Company believes that its operating cash flows and borrowing available
under the revolving credit facility will be sufficient for the foreseeable
future to fund the Companys future growth, financing obligations, and its
negative working capital. However, if current economic conditions persist for
an extended period of time resulting in lower than anticipated operating cash
flows, the Company anticipates that it could cover any short fall through any
combination of additional borrowings available under its current revolving
credit facility, a reduction in capital spending and/or a reduction in
operating expenses. If the Company were to reduce its projected capital
spending significantly, the Companys growth rate would be less than historical
levels.

In August 2002, the Company received unanimous consent from its lenders to
amend its existing bank credit facility. The amendment modified the covenants
for leverage and interest coverage by deferring the scheduled step-downs in
covenant terms that were to be effective as of December 31, 2002. The Maximum
Consolidated Total Leverage Ratio will remain at 4.5 times debt to EBITDA, as
defined by the bank credit facility, through the third quarter of 2003 with a
step-down to 4.4 times debt to EBITDA at the end of the fourth quarter 2003.
The Maximum Consolidated Senior Secured Leverage Ratio was modified to 2.5
times senior debt to EBITDA from 2.25 times. The 2.5 ratio is in effect through
the fourth quarter of 2004. The Minimum Consolidated Interest ratio coverage
ratio was amended to 2.25 times and will remain at that level through the
second quarter of 2004.

In May 2002, the Company filed a universal shelf registration statement with
the Securities and Exchange Commission (SEC) providing for the offering from
time to time of debt securities, common stock or preferred stock with aggregate
proceeds of up to $225 million. The Company may use the proceeds from possible
sale of securities for general corporate purposes, which include additions to
working capital, repayment or redemption of existing indebtedness, financing of
capital expenditures, research and development of new technologies, future
acquisitions and strategic investment opportunities. The timing and amount of
any offering under the registration statement will depend on the
market and general business conditions. The registration statement was declared
effective by the SEC on June 18, 2002. The Company utilized the shelf
registration in June 2003 to issue the $200 million 9.50% senior subordinated
notes.



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|LodgeNet Entertainment Corporation |  | Form 10-Q

In June 2003, the Company received consent to offer the 9.50% senior
subordinated notes described below, and amended its existing bank credit
facility. The amendment modified the covenants for maximum consolidated total
leverage ratio and minimum consolidated interest coverage ratio. The allowable
maximum consolidated total leverage ratio increased from 4.5 to 5.0 until the
end of the fourth quarter 2003 at which time, the ratio steps down to 4.75
times for the first two quarters of 2004 and to 4.5 times for the last two
quarters of 2004. The minimum consolidated interest coverage ratio change from
2.25 to 2.50 was deferred from the third quarter 2004 until the first quarter
2005. The Company had previously amended its bank credit facility in August
2002. As of September 30, 2003, the Companys leverage and interest coverage
ratios were 4.41 and 2.45, respectively. Upon refinancing of the 10.25% Notes,
the Company, at its sole discretion and without the payment of any additional
costs, expenses or fees, extended the maturity dates of the term loan and the
revolver loan from June 2006 to August 2008 and August 2007, respectively. In
addition, the Company was in compliance with all covenants, terms and
conditions of the bank credit facility.

On June 18, 2003, the Company issued $200 million, principal amount, of
unsecured 9.50% Senior Subordinated Notes (the 9.50% Notes), due June 15,
2013. The proceeds of the 9.50% Notes, which were issued at par, after
underwriter fees and offering expenses, were approximately $192.5 million.
Approximately $154.8 million of such proceeds were used to redeem the
outstanding principal amount of the 10.25% Senior Notes, pay accrued interest,
pay call premiums, and pay related fees. Approximately $35 million of the
proceeds were used to pay all outstanding amounts under the Companys revolving
credit facility. The remaining proceeds of approximately $2.7 million were
placed in cash for use in funding general corporate purposes.

The 9.50% Notes are unsecured, are subordinated in right of payment to all
existing and future senior debt of the Company and rank pari passuin right of
payment with any future senior subordinated indebtedness of the Company. The
9.50% Notes require semi-annual interest payments, commencing December 15,
2003, and contain covenants which restrict the ability of the Company to incur
additional indebtedness, create liens, pay dividends or make certain
distributions in respect to its common stock, redeem capital stock, issue or
sell stock of subsidiaries in certain circumstances, effect certain business
combinations and effect certain transactions with affiliates or stockholders.
As of September 30, 2003, the Company was in compliance with all covenants,
terms, and conditions of the 9.50% Notes.

The 9.50% Notes are redeemable at the option of the Company, in whole or in
part, on or after June 15, 2008, initially at 104.75% of their principal amount
(plus accrued and unpaid interest) declining ratably to 100% of their principal
amount (plus accrued and unpaid interest) on or after June 15, 2011. At any
time prior to June 15, 2006, the Company may redeem up to 35% of the aggregate
principal amount at 109.50% of the principal amount (plus accrued and unpaid
interest) with the cash proceeds of certain equity offerings.

10.25% Senior Notes In December 1996, the Company issued $150 million of
unsecured 10.25% senior notes (the 10.25% Notes), due December 15, 2006. The
10.25% Notes were unsecured, ranked pari passuin right of payment with future
unsubordinated unsecured indebtedness and ranked senior in right of payment to
all subordinated indebtedness of the Company. The 10.25% Notes required
semi-annual interest payments and contained certain covenants including
limitations on indebtedness, liens, guarantees, asset sales and certain
payments or distributions in respect to capital stock. On June 20, 2003, the
Company redeemed approximately 79% of its outstanding 10.25% Notes at 102.688%
of their principal amount, with the balance of the outstanding 10.25% Notes
redeemed on July 1, 2003 at 102.563% of their principal amount, as part of its
refinancing in which the 9.50% Notes were issued.

In the event of significant International crises, acts of terrorism, public
health issues, or catastrophic events such as the prolonged power outages
recently experienced in the northeastern part of the United States and Canada,
the Company believes that the general economy and the lodging industry could be
negatively affected. If such a crisis is protracted or the effects on the
lodging industry are severe, the effect on the Companys financial performance
could result in the Company being in violation of one or more of its bank
credit covenants. This could require the Company to renegotiate its bank
covenants, significantly reduce its growth plans and/or curtail expenditures
for operating expenses. While the Company believes it could renegotiate its
bank covenants, there is no assurance that this could be accomplished, nor can
it determine at this time the financial cost of such a renegotiation or that
refinancing, if required, would be available on terms favorable to the Company.



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|LodgeNet Entertainment Corporation |  | Form 10-Q

The foregoing statements regarding capital expenditures and cash requirements
are forward-looking statements and there can be no assurance in this regard.
The Companys actual cash flow and cash requirements will vary (and such
variations could be material) depending upon the number of new contracts for
services entered into by the Company, the cost of installations, demand for the
Companys services, competitive factors, hotel occupancy rates, general
economic factors and other factors including, without limitation, those set
forth above under the Special Note Regarding Forward-Looking Statements.

Obligations and Commitments as of September 30, 2003 (dollar amounts in
thousands):

|                         |                             |                               |   |                        |         |        |   |           |        |       |   |         |        |      |   |        |        |  |   |         |         | 
|------------------------ | --------------------------- | ----------------------------- | - | ---------------------- | ------- | ------ | - | --------- | ------ | ----- | - | ------- | ------ | ---- | - | ------ | ------ |  | - | ------- | ------- | 
|                         |                             |                               |   | Payments due by period
|                         |                             |                               |   |                       
|                         |                             |                               |   |                        |         |        |   | Less than |        | 1  3 |   | 4  5   |        | Over
|                         |                             |                               |   | Total                  |         | 1 year |   | years     |        | years |   | 5 years
|                         |                             |                               |   |                        |         |        |   |           |        |       |   |        
|Contractual obligations: |                             |                               |   |                        |         |        |   |           |        |       |   |         |        |      |   |        |        |  |   |        
|                         | Long-term debt(s)           |                               | $ | 361,821                |         |        | $ | 8,645     |        |       | $ | 10,472  |        |      | $ | 3,205  |        |  | $ | 339,499 |        
|                         | Interest on senior notes    |                               |   | 192,070                |         |        |   | 20,380    |        |       |   | 38,690  |        |      |   | 38,000 |        |  |   | 95,000  |        
|                         | Other long-term obligations |                               |   | 9,970                  |         |        |   | 2,524     |        |       |   | 3,409   |        |      |   | 3,987  |        |  |   | 50      |        
|                         |                             |                               |   |                        |         |        |   |           |        |       |   |         |        |      |   |        |        |  |   |         |        
|                         |                             | Total contractual obligations |   | $                      | 563,861 |        |   | $         | 31,549 |       |   | $       | 52,571 |      |   | $      | 45,192 |  |   | $       | 434,549 | 
|                         |                             |                               |   |                        |         |        |   |           |        |       |   |         |        |      |   |        |        |  |   |        

|                              |                           |  |                                            |     |        |  |           |     |       |  |         |   |      |  |   |   |  |  |   |   | 
|----------------------------- | ------------------------- |  | ------------------------------------------ | --- | ------ |  | --------- | --- | ----- |  | ------- | - | ---- |  | - | - |  |  | - | - | 
|                              |                           |  | Amount of commitment expiration per period
|                              |                           |  |                                           
|                              |                           |  |                                            |     |        |  | Less than |     | 1  3 |  | 4  5   |   | Over
|                              |                           |  | Total                                      |     | 1 year |  | years     |     | years |  | 5 years
|                              |                           |  |                                            |     |        |  |           |     |       |  |        
|Other commercial commitments: |                           |  |                                            |     |        |  |           |     |       |  |         |   |      |  |   |   |  |  |   |  
|                              | Standby letters of credit |  | $                                          | 500 |        |  | $         | 500 |       |  | $       |  |      |  | $ |  |  |  | $ |  | 
|                              |                           |  |                                            |     |        |  |           |     |       |  |         |   |      |  |   |   |  |  |   |   | 

Dependence on Performance of Lodging Industry

The Companys business is closely connected to the performance of the hotel
industry, where occupancy rates may fluctuate as a result of various factors.
Reduction in hotel occupancy resulting from business, economic, or other
events, such as significant International crises, acts of terrorism, public
health issues, or catastrophic events as in the case of the prolonged power
outages recently experienced in the northeastern part of the United States and
Canada could adversely impact the Companys results of operations.

While the average occupancy rate for the Companys served hotels is typically
higher than the average of the entire lodging industry, the Companys business
is clearly linked to the continued effects of changes in occupancy levels. For
the first nine months of 2003, occupancy rates were 130 basis points lower than
experienced in the first nine months of 2002. For full year 2003, occupancy
rates are forecasted by lodging industry sources to be flat versus 2002. If
hotel occupancy rates were to decline below forecasted levels, the Companys
revenues would be adversely affected.

To help mitigate the impact of a decrease in occupancy levels on operating
income, the Company continues to firmly control operating expenses and capital
spending. The Company plans to reassess its operating and capital expenditure
plans periodically to respond to changes in the economic environment. In
addition, the Companys room base is geographically diversified, with more than
two-thirds of properties served being in highway or suburban locations. In
addition, less than 5% of the room base is concentrated in the top ten urban
areas of the United States. By serving a wide variety of geographically
dispersed properties, the Company has mitigated reliance on any one geographic
sector.



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|LodgeNet Entertainment Corporation |  | Form 10-Q




Item 3  Quantitative and Qualitative Disclosures About Market Risk

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

Interest.At September 30, 2003, the Company had debt totaling $362 million.
The Company has interest rate swap arrangements covering debt with a notional
amount of $100 million to effectively change the underlying debt from a
variable interest rate to a fixed interest rate for the term of the swap
agreements. Additionally, the Company has an interest rate swap arrangement
covering debt with a notional amount of $50 million to effectively change the
underlying debt from a fixed interest rate to a variable interest rate. After
giving effect to the interest rate swap arrangements, the Company had fixed
rate debt of $265 million and variable rate debt of $97 million at September
30, 2003. For fixed rate debt, interest rate changes affect the fair market
value but do not impact earnings or cash flows. Conversely, for variable rate
debt, interest rate changes generally do not affect the fair market value but
do impact future earnings and cash flows, assuming other factors are held
constant. Assuming other variables remain constant (such as debt levels), a one
percentage point increase in interest rates would decrease the unrealized fair
market value of the fixed rate debt by an estimated $24 million. The impact on
earnings and cash flow for the next year resulting from a one percentage point
increase in interest rates would be approximately negative $970,000 assuming
other variables remain constant.

Foreign Currency Transactions.A portion of the Companys revenues are derived
from the sale of Guest Pay services in Canada. The results of operations and
financial position of the Companys operations in Canada are measured in
Canadian dollars and translated into U.S. dollars. The effects of foreign
currency fluctuations in Canada are somewhat mitigated by the fact that
expenses and liabilities are generally incurred in Canadian dollars. The
reported income of the Companys Canadian subsidiary will be higher or lower
depending on a weakening or strengthening of the U.S. dollar against the
Canadian dollar. In addition, a portion of the Companys assets are based in
Canada and are translated into U.S. dollars at foreign currency exchange rates
in effect as of the end of each period. Accordingly, the Companys
consolidated assets will fluctuate depending on the weakening or strengthening
of the U.S. dollar against the Canadian dollar. During the first nine months
of 2003, the Companys consolidated balance sheet increased $2.0 million due to
foreign currency fluctuations.




Item 4  Controls and Procedures

With the participation of management, the Companys chief executive officer and
chief financial officer evaluated the Companys disclosure controls and
procedures as of September 30, 2003. Based upon this evaluation, the chief
executive officer and chief financial officer concluded that the Companys
disclosure controls and procedures are effective in ensuring that material
information required to be disclosed is included in the reports that it files
with the Securities and Exchange Commission.

There were no significant changes in the Companys internal controls or, to the
knowledge of management of the Company, other factors that could significantly
affect internal controls subsequent to the date of the Companys most recent
evaluation of its disclosure controls and procedures utilized to compile
information in this filing.



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|LodgeNet Entertainment Corporation |  | Form 10-Q




Part II  Other Information




Item 1  Legal Proceedings

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

During
the first quarter of 2003, the Company advanced $1.0 million to
Gamet pursuant to a written promissory note. The note is personally
guaranteed by the principal owners of Gamet and collateralized by the
unconditional assignment of rights to receive quarterly payments due
to the principal owner pursuant to a long-term note held by the
principal owner in connection with the sale of a prior business. The
note was due and payable on April 18, 2003. On July 2,
2003, the Company filed a lawsuit in U.S. District Court, Southern
Division, in South Dakota, against Gamet and its principal owners
demanding payment of the promissory note. Gamet filed an answer and
counterclaim against the Company, alleging that its failure to repay the
loan was caused by the Companys failure to procure financing
for PointOne and seeking unspecified damages. The Company believes
the counterclaim is without merit and intends to vigorously contest
it.




Item 2  Changes in Securities and Use of Proceeds

Not applicable.




Item 3  Defaults Upon Senior Securities

Not applicable.




Item 4  Submission of Matters to a Vote of Security Holders

Not applicable.




Item 5  Other Information

Not applicable.




Item 6  Exhibits and Reports on Form 8-K



| | a. |  | Exhibits:
| | -- |  | ---------

|    |  |                                                                         
|--- |  | ------------------------------------------------------------------------
|31. |  | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
|   
|32. |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.



| | b. |  | Reports on Form 8-K:
| | -- |  | --------------------



| |  |  | The Company filed a Current Report on Form 8-K with the SEC on
September 5, 2003, and furnished under Item 9 a copy of a Power
Point presentation delivered by Registrants Chief Executive
Officer and President at the Kaufman Bros. 6th Annual
Communications, Media & Technology Conference held on September 4,
2003.                                                                                                                    
| |  |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | The Company filed a Current Report on Form 8-K with the SEC on
September 24, 2003, and furnished under Item 9 a copy of a press
releases dated September 24, 2003, reaffirming its third quarter
financial guidance and a copy of a Power Point presentation
delivered by Registrants Chief Executive Officer and President at
the Jefferies & Company High Yield Communications and Media
Conference in New York City on September 24, 2003.
|
| |  |  | The Company filed a Current Report on Form 8-K with the SEC on
October 16, 2003, and furnished under Item 12 a copy of press
release regarding its financial results for the third quarter of
2003 and certain other information and a copy of a Power Point
presentation posted on the Companys website in advance of an
earnings telephone conference held October 16, 2003.                                                               
|
| |  |  | The Company filed a Current Report on Form 8-K with the SEC on
November 10, 2003, indicating that the Companys Chief Executive
Officer had entered into a Prepaid Forward Contract with respect to
85,000 shares of LodgeNet Common Stock.                                                                                                                                                                                                   



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|September 30, 2003 | Page 27 | 





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##### Table of Contents



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|LodgeNet Entertainment Corporation |  | Form 10-Q

LodgeNet Entertainment Corporation and Subsidiaries




Signatures

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

|                        |  |                                               
|----------------------- |  | ----------------------------------------------
|                        |  | LodgeNet Entertainment Corporation            
|                        |  |                                               
|                        |  | (Registrant)                                  
|                        | 
|Date: November 11, 2003 |  | /s/ Scott C. Petersen                         
|                        | 
|                        |  | Scott C. Petersen                             
|                        |  | President and Chief Executive Officer         
|                        |  | (Principal Executive Officer)                 
|                        |  |                                               
|Date: November 11, 2003 |  | /s/ Gary H. Ritondaro                         
|                        | 
|                        |  | Gary H. Ritondaro                             
|                        |  | Senior Vice President, Chief Financial Officer
|                        |  | (Principal Financial & Accounting Officer)    



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