<PAGE>

                      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 PERIOD ENDED SEPTEMBER 30, 1997


Commission File Number 0-22334


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


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


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


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


            808 WEST AVENUE NORTH, SIOUX FALLS, SOUTH DAKOTA 57104
            ------------------------------------------------------
                       (Former name, former address and
              former fiscal year, if changed since last report)



    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d)  of the Securities  Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes   X   No
                                                ---     ---
    At  November 7, 1997, there were 11,386,669 shares outstanding of the
Registrant's common stock, $0.01 par value.

THIS REPORT CONTAINS A TOTAL OF 20 PAGES, EXCLUDING EXHIBITS.  THE EXHIBIT INDEX
APPEARS ON PAGE 19.

                                       1

<PAGE>

                      LODGENET ENTERTAINMENT CORPORATION

                                  FORM 10-Q
                                    INDEX
                                                                          Page
                                                                          No.

PART I.  FINANCIAL INFORMATION
------------------------------
Item 1 -- Financial Statements:
    Consolidated Balance Sheets as of  December 31, 1996 and 
         September 30, 1997 (Unaudited)                                     3
    Consolidated Statements of Operations (Unaudited) for
         the Three and Nine Months Ended September 30, 1996 and 1997        4
    Consolidated Statements of Cash Flows (Unaudited) for
         the Nine Months Ended September 30, 1996 and 1997                  5
    Notes to Consolidated Financial Statements.                             6
Item 2 -- Management's Discussion and Analysis of Financial 
          Condition and Results of Operations.                              8

PART II.  OTHER INFORMATION
---------------------------
Item 1 -- Legal Proceedings.                                               19
Item 2 -- Changes in Securities.                                           19
Item 3 -- Defaults Upon Senior Securities.                                 19
Item 4 -- Submission of Matters to a Vote of Security Holders.             19
Item 5 -- Other Information.                                               19
Item 6 -- Exhibits and Reports on Form 8-K.                                19

SIGNATURES                                                                 20



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

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

                                       2

<PAGE>

                       PART I -- FINANCIAL INFORMATION

                      LODGENET ENTERTAINMENT CORPORATION
                         CONSOLIDATED BALANCE SHEETS
                        (Dollar amounts in thousands)


<TABLE>
<CAPTION>
                                                              December 31,  September 30,
                                                                      1996           1997
                                                              ------------  -------------
                                                                              (Unaudited)
<S>                                                              <C>           <C>
Assets
Current assets:
   Cash and cash equivalents                                     $  86,177      $  20,070
   Accounts receivable, net of allowance for doubtful accounts      18,428         22,736
   Prepaid expenses and other                                        1,935          3,206
                                                              ------------   ------------
      Total current assets                                         106,540         46,012

Property and equipment, net                                        164,157        207,801
Debt issuance costs, net of accumulated amortization                 8,509          8,002
Other assets, net                                                      562          4,249
                                                              ------------   ------------
                                                                $  279,768      $ 266,064
                                                              ------------   ------------
                                                              ------------   ------------
Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable                                              $  16,775      $  16,452
   Current portion of long-term debt                                   425            614
   Accrued expenses                                                  4,596          7,255
                                                              ------------   ------------
      Total current liabilities                                     21,796         24,321

Deferred revenue                                                     2,956          3,717
Long-term debt                                                     179,233        179,460
Minority interest in consolidated subsidiary                           231            246
                                                              ------------   ------------
   Total liabilities                                               204,216        207,744
                                                              ------------   ------------

Stockholders' equity:
   Common stock, $0.01 par value, 20 million shares authorized;
      11,125,369 shares outstanding at December 31, 1996 and
      11,386,669 shares outstanding at September 30, 1997              111            114
   Additional paid-in capital                                      120,539        120,756
   Accumulated deficit                                             (45,098)       (62,550)
                                                              ------------   ------------
      Total stockholders' equity                                    75,552         58,320
                                                              ------------   ------------
                                                                $  279,768     $  266,064
                                                              ------------   ------------
                                                              ------------   ------------
</TABLE>

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

                                       3
<PAGE>

                     LODGENET ENTERTAINMENT CORPORATION
            CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
            (Amounts, except per share amounts, in thousands)

<TABLE>
<CAPTION>

                                                  Three Months Ended           Nine Months Ended
                                                     September 30,                September 30,
                                             ------------------------      -----------------------
                                               1996           1997           1996           1997
                                             ---------      ---------      ---------     ---------
<S>                                         <C>            <C>            <C>           <C>        
Revenue:
   Guest Pay                                 $  23,349      $  32,164      $  60,912     $  85,850 
   Free-to-guest                                 2,225          2,146          6,416         6,417 
   Other                                         1,345          2,382          3,068         7,213 
                                             ---------      ---------      ---------     ---------
      Total revenue                             26,919         36,692         70,396        99,480 
                                             ---------      ---------      ---------     ---------

Direct costs:
   Guest Pay                                     9,545         12,641         24,305        32,971 
   Free-to-guest                                 1,775          1,323          5,040         4,686 
   Other                                         1,174          1,767          2,591         5,229 
                                             ---------      ---------      ---------     ---------
      Total direct costs                        12,494         15,731         31,936        42,886 
                                             ---------      ---------      ---------     ---------

Gross profit                                    14,425         20,961         38,460        56,594 
                                             ---------      ---------      ---------     ---------

Operating expenses:
   Guest Pay operations                          3,876          5,252         10,614        14,951 
   Selling, general and administrative           3,068          5,147          9,280        14,930 
   Depreciation and amortization                 7,560         10,963         20,891        31,153 
                                             ---------      ---------      ---------     ---------
      Total operating expenses                  14,504         21,362         40,785        61,034 
                                             ---------      ---------      ---------     ---------

Operating loss                                     (79)          (401)        (2,325)       (4,440)
Interest expense, net                            1,769          4,638          5,769        13,004 
                                             ---------      ---------      ---------     ---------

Loss before income taxes                        (1,848)        (5,039)        (8,094)      (17,444)
Provision for income taxes                           9             11             31            41 
                                             ---------      ---------      ---------     ---------

Net loss                                     $  (1,857)     $  (5,050)     $  (8,125)    $ (17,485)
                                             ---------      ---------      ---------     ---------
                                             ---------      ---------      ---------     ---------

Net loss per common share                    $   (0.17)     $   (0.45)     $   (0.89)    $   (1.55)
                                             ---------      ---------      ---------     ---------
                                             ---------      ---------      ---------     ---------
Weighted average shares                         11,094         11,315          9,126        11,281 
                                             ---------      ---------      ---------     ---------
                                             ---------      ---------      ---------     ---------


</TABLE>

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



                                       4


<PAGE>

                           LODGENET ENTERTAINMENT CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                           (DOLLAR AMOUNTS IN THOUSANDS)

                                                        NINE MONTHS ENDED
                                                           SEPTEMBER 30,
                                                      -----------------------
                                                         1996          1997
                                                      ---------     ---------
Operating activities:
 Net loss                                             $  (8,125)    $ (17,485)
 Adjustments to reconcile net loss to net cash 
  provided by operating activities:
    Depreciation and amortization                        20,891        31,153
    Minority interest                                       -              15
    Change in current assets and liabilities:
      Accounts receivable                                (6,374)       (4,256)
      Prepaid expenses and other                         (2,067)       (1,271)
      Accounts payable                                    4,125          (436)
      Accrued expenses and deferred revenue               2,406         3,420
      Other                                                  -             57
                                                       --------     ---------
Net cash provided by operating activities                10,856        11,197
                                                       --------     ---------
Investing activities:
 Property and equipment additions                       (61,106)      (73,222)
 Purchase of Cable TV operation                             -          (4,562)
                                                       --------     ---------
Net cash used in investing activities                   (61,106)      (77,784)
                                                       --------     ---------
Financing activities:
 Proceeds from long-term debt                               901           665
 Debt issuance costs                                     (1,169)          -  
 Repayments of long-term debt                            (4,327)         (411)
 Borrowings under revolving credit facility              35,858           -  
 Repayments of revolving credit facility                (25,858)          -  
 Proceeds from issuance of common stock                  44,635           -  
 Stock option activity                                       42           193
                                                       --------     ---------
Net cash provided by financing activities                50,082           447
                                                       --------     ---------
Effect of exchange rates on cash                             (1)           33
                                                       --------     ---------
Decrease in cash and cash equivalents                      (169)      (66,107)

Cash and equivalents at beginning of period               2,252        86,177
                                                       --------     ---------
Cash and equivalents at end of period                  $  2,083     $  20,070
                                                       --------     ---------
                                                       --------     ---------
Supplemental cash flow information:
   Cash paid for interest                              $  6,246     $  10,010 
                                                       --------     ---------
                                                       --------     ---------

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

September 30, 1997                                                       Page 5

<PAGE>
                          LODGENET ENTERTAINMENT CORPORATION
                      NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                           
                                           
Note 1 -- Basis of Presentation

    The  accompanying consolidated financial statements as of September 30, 
1997, and for the three and nine month periods ended September 30, 1996 and 
1997, have been prepared by LodgeNet Entertainment Corporation (the 
"Company"), without audit, pursuant to the rules and regulations of the 
Securities and Exchange Commission (the "Commission").  The information 
furnished in the accompanying consolidated financial statements reflects all 
adjustments, consisting only of normal recurring adjustments, which, in the 
opinion of management, are necessary for a fair presentation of such 
financial statements.

    Certain information and footnote disclosures, normally included in 
financial statements prepared in accordance with generally accepted 
accounting principles, have been condensed or omitted pursuant to the rules 
and regulations of the Commission.   Although the Company believes that the 
disclosures are adequate to make the information presented herein not 
misleading, it is recommended that these unaudited consolidated financial 
statements be read in conjunction with the more detailed information 
contained in the Company's Annual Report on Form 10-K for the fiscal year 
ended December 31, 1996, as filed with the Commission.  The results of 
operations for the three and nine month periods ended September 30, 1997 are 
not necessarily indicative of the results of operations for the full year.

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

Note 2 -- Property and Equipment, net

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

    

                                       December 31,  September 30,
                                           1996           1997
                                       ------------  -------------
     Land, building and equipment       $  15,914     $  21,107 
     Free-to-guest equipment                7,369        10,645 
     Cable television equipment             5,291         9,397 
     Guest Pay systems:
        Installed                         173,607       208,908 
        System components                  23,290        34,064 
        Software costs                      6,266         7,536 
     Building construction in progress      2,528        12,500 
                                       ------------  -------------
                                          234,265       304,157 
     Depreciation and amortization        (70,108)      (96,356)
                                       ------------  -------------
     Property and equipment, net       $  164,157    $  207,801 
                                       ------------  -------------
                                       ------------  -------------


Note 3 -- Net Loss Per Common Share

    The net loss per common share was computed using the weighted average 
number of shares outstanding and, where applicable, outstanding warrants and 
options.


                                       6

<PAGE>

Note 4 -- Effect of Recently Issued Accounting Pronouncements

    During March 1997, the Financial Accounting Standards Board released 
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings 
per Share", which requires the disclosure of basic earnings per share and 
diluted earnings per share.  The Company will adopt SFAS 128 at the end of 
1997 and anticipates that it will have no effect on previously reported 
earnings per share.

Note 5 -- Reclassifications

    Certain amounts have been reclassified to conform to the 1997 
presentation. Such reclassifications had no effect on previously reported 
results of operations or stockholders' equity.





                                       7

<PAGE>

                   MANAGEMENT'S DISCUSSION AND ANALYSIS OF
                FINANCIAL CONDITION AND RESULTS OF OPERATIONS
                                           
OVERVIEW

    The Company provides video on-demand, network-based video games, cable 
television programming and other interactive entertainment and information 
services to the lodging and multi-family dwelling unit markets utilizing its 
proprietary b-LAN-SM- (broadband local area network) system architecture. 

LODGING SERVICES

    GUEST PAY SERVICES.  The Company's Guest Pay services include Guest 
Scheduled-SM- on-demand movies, network-based Super Nintendo-Registered 
Trademark-video games and other interactive entertainment and information 
services for which the hotel guest pays on a per-view or per-play basis. The 
growth that the Company has experienced has principally resulted from its 
rapid expansion of guest pay-per-view services, which the Company began 
installing in 1986. In May 1992, the Company introduced and began installing 
its on-demand guest pay service. It has been the Company's experience that 
rooms featuring the "on-demand" guest pay service generate significantly more 
revenue and gross profit per room than comparable rooms having only the 
scheduled format.
 
    The Company's guest pay revenues depend on a number of factors, including 
the number of rooms equipped with the Company's systems, guest pay buy rates, 
hotel occupancy rates, the popularity, selection and pricing of the Company's 
program offerings and the length of time programming is available to the 
Company prior to its release to the home video and cable television markets. 
The primary direct costs of providing guest pay services are (i) license fees 
paid to studios for non-exclusive distribution rights to recently-released 
major motion pictures generally based on the Company's gross revenues derived 
from each picture, (ii) nominal one-time license fees paid for independent 
films, which are duplicated by the Company for distribution to its operating 
sites, (iii) license fees for video games and other services, and (iv) the 
commission retained by the hotel, generally 10% to 15% of gross revenues, 
depending on the services provided and other factors. Guest pay operating 
expenses include costs of system maintenance and support, in-room marketing, 
video tape duplication and distribution, data retrieval, insurance and 
personal property taxes. 

    The Company also provides video games and interactive multimedia 
entertainment and information services through its guest pay systems. 
Services include folio review, video check-out and guest satisfaction 
surveys. In 1993 the Company entered into a seven-year non-exclusive license 
agreement with Nintendo of America, Inc. ("Nintendo") to provide hotels with 
a network-based Super Nintendo-Registered Trademark- video game playing 
system. 

    FREE-TO-GUEST SERVICES.  In addition to guest pay services, the Company 
provides cable television programming for which the hotel, rather than its 
guests, pays the charges. Free-to-guest services include the satellite 
delivery of various programming channels through a satellite earth station, 
which generally is owned or leased by the hotel. For free-to-guest services 
the hotel pays the Company a fixed monthly charge per room for each 
programming channel provided. Such monthly charges range generally from $2.90 
to $3.50 per room per month for premium channels and from $.15 to $.85 per 
room per month for non-premium channels. The Company obtains its 
free-to-guest programming pursuant to multi-year agreements with the 
programmers and pays a fixed monthly fee per room, which ranges generally 
from 75% to 80% of revenues for such services, depending on incentive 
programs in effect from time to time from the programming networks. In April 
1996, the Company entered into an agreement with PRIMESTAR Partners, L.P. 
("PRIMESTAR") pursuant to which the Company was appointed as the exclusive 
third-party provider (other than partners in PRIMESTAR and their affiliated 
distributors) of the PRIMESTAR-Registered Trademark- DBS (digital direct 
broadcast satellite) signal to the lodging industry. Pursuant to this 
agreement, the Company will pay a fee to PRIMESTAR for access to the 
PRIMESTAR signal, which will enable the Company to provide free-to-guest 
digital satellite programming to a broader segment of the lodging industry 
than can be cost-effectively served with traditional C-band satellite 
systems. 

RESIDENTIAL INDUSTRY SERVICES

    In January 1996, the Company formed ResNet Communications, Inc. 
("ResNet") for the purpose of extending the Company's proprietary b-LAN-SM- 
system architecture and operational expertise into the Multi-family Dwelling 
Unit ("MDU") market.  In October 1996, TCI Satellite ("TSAT"), an affiliate 
of Tele-Communications, 


                                       8

<PAGE>

Inc. ("TCI"), agreed to invest up to $40 million in ResNet in exchange for up 
to a 36.9% interest in ResNet and agreed to provide ResNet with long-term 
access to DBS signals for the MDU market on a nationwide basis.  In June 
1997, the Company and TSAT reorganized ResNet as a Delaware limited liability 
company, "ResNet Communications, LLC." The Company believes that the MDU 
business has financial and technological requirements similar to those of the 
Company's lodging industry business.  ResNet began installations of its first 
systems during the quarter ended September 30, 1996.  During the quarter 
ended March 31, 1997, ResNet purchased, for approximately $4.6 million, the 
assets and contracts of a private cable television operation with 
approximately 11,000 passings in the Detroit metropolitan area.  The results 
of ResNet's operations during the three and nine months ended September 30, 
1997 were not material to the Company's consolidated results of operations.

LODGING ROOM BASE

    During the three months ended September 30, 1997, the Company installed 
26,396 new Guest Pay rooms, equipped 29,721 rooms with its Nintendo game 
system, and installed 18,128 free-to-guest rooms.  From September 30, 1996 
through September 30, 1997, the Company has installed 121,641 new Guest Pay 
rooms, equipped 135,782 rooms with its Nintendo game system, and installed 
47,918 free-to-guest rooms; representing increases of 32.9%, 47.1% and 17.0%, 
respectively, in its installed room bases.  The Company's base of installed 
rooms was comprised as follows at September 30:

                                         1996                     1997
                                --------------------     --------------------
                                 Rooms          %         Rooms          % 
                                -------       ------     -------       ------
Guest Pay rooms:
  Scheduled                      44,497        12.0%      31,683         6.4%
  On-demand                     325,485        88.0%     459,940        93.6%
                                -------       ------     -------       ------
                                369,982       100.0%     491,623       100.0%
                                -------       ------     -------       ------
                                -------       ------     -------       ------

Nintendo game system rooms      288,408                  424,190
                                -------                  -------
                                -------                  -------

Free-to-guest rooms (1)         282,637                  330,555
                                -------                  -------
                                -------                  -------

(1) - Includes rooms which receive only free-to-guest services as well as
      rooms which receive both free-to-guest and Guest Pay services.
    

YEAR 2000 INFORMATION

    The Divisions of Corporation Finance and Investment Management of the 
Securities and Exchange Commission have issued Staff Legal Bulletin No. 5 
regarding disclosure obligations associated with computer software year 2000 
issues.  The Company has undertaken a comprehensive review of its computer 
systems and software and has determined that the Company does not anticipate 
any material costs, problems or uncertainties, nor any material adverse 
change in the Company's future operating results, financial condition, 
products, services or competitive position as a result of such issues.


                                       9


<PAGE>

                                RESULTS OF OPERATIONS
                    THREE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997

REVENUE ANALYSIS

    The Company's total revenue for the third quarter of 1997 increased 36.3%,
or $9.8 million, in comparison to the third quarter of 1996.  The following
table sets forth the components of the Company's revenue for the quarter ending
September 30 (dollar amounts in thousands):


                                    1996                     1997
                           ----------------------   ----------------------
                                        PERCENT OF              PERCENT OF
                                          TOTAL                    TOTAL
                             AMOUNT      REVENUES     AMOUNT      REVENUES
                           ---------     --------   ---------     --------
       Guest Pay           $  23,349        86.7%   $  32,164        87.7%
       Free-to-guest           2,225         8.3%       2,146         5.8%
       Other                   1,345         5.0%       2,382         6.5%
                           ---------     --------   ---------     --------
       Total revenue       $  26,919       100.0%   $  36,692       100.0%
                           ---------     --------   ---------     --------
                           ---------     --------   ---------     --------


    Guest Pay Revenue -- Guest Pay revenues increased 37.8%, or $8.8 million,
in the third quarter of 1997 in comparison to the same quarter of 1996.  This
increase was primarily the result of a 36.2% increase in the average number of
installed Guest Pay rooms.  Additionally, average monthly revenue per room
increased slightly as illustrated in the following table. 



                                               THREE MONTHS ENDED
                                                  SEPTEMBER 30,
                                                1996        1997
                                              --------   ---------
       Average monthly revenue per room:
          Movie revenue                       $  18.80   $  18.66 
          Video game/information service          3.51       3.91
                                              --------   ---------
              Total per Guest Pay room        $  22.31   $  22.57 
                                              --------   ---------
                                              --------   ---------

    Average movie revenue per room, for all Guest Pay rooms, was impacted by 
lower average buy rates and lower hotel occupancy rates, and partially offset 
by the effect of higher average movie prices; all in comparison to the year 
earlier period. The comparative decrease in buy rates is attributed to a 
relatively less popular selection of newly-released major motion pictures, 
and to the effect of viewers' interest in the television coverage concerning 
the death of Princess Diana, both in the current quarter as compared to the 
year earlier period. The slight increase in average movie price is due to 
price increases in certain Guest Pay rooms; the Company's movie prices are 
generally $7.95 or $8.95.

    Average video game and information service revenue per room increased 
primarily as a result of the increase in the average number of rooms with 
video game services installed.  On a per-room basis, average monthly video 
game revenues were $2.90 and $2.86 during the quarters ended September 30, 
1997 and 1996, respectively.  The Company had installed its video game 
service in 424,190 and 288,408 Guest Pay rooms as of September 30, 1997 and 
1996, respectively.

    Free-to-guest Revenue -- Free-to-guest revenues decreased 3.6%, or 
$79,000, in the third quarter of 1997 as compared to the same quarter of 
1996.  This decrease is the result of reclassifying the revenue from certain 
rooms, which had previously only received free-to-guest service, to Guest Pay 
services revenue upon the installation of Guest Pay systems for those rooms.

                                       10


<PAGE>

    Other Revenue -- Revenue from other sources, including sales of cable 
television services by ResNet and the sale of televisions, system equipment, 
and service parts and labor, increased by $1.0 million or 77.1%, in the third 
quarter of 1997 as compared to the same quarter of 1996.  The increase was 
attributable to higher sales of cable television services by ResNet and 
increased sales of televisions and service labor.

Expense Analysis

    Direct Costs -- The following table sets forth information in regard to the
Company's direct costs and gross profit margin for the quarter ending September
30 (dollar amounts in thousands):


                                                 1996       1997
                                               --------  ---------
    Direct costs:
      Guest Pay                                $  9,545  $  12,641 
      Free-to-guest                               1,775      1,323
      Other revenue                               1,174      1,767
                                               --------  ---------
    Total direct costs                         $ 12,494  $  15,731 
                                               --------  ---------
                                               --------  ---------

    Gross profit margin:
      Guest Pay                                   59.1%      60.7%
      Free-to-guest                               20.2%      38.4%
      Other revenue                               12.7%      25.8%
      Overall (composite)                         53.6%      57.1%


    Guest Pay direct costs increased 32.4%, or $3.1 million, in the third 
quarter of 1997 as compared to the year earlier quarter.  Since Guest Pay 
direct costs (primarily studio license fees, video game license fees and the 
commission retained by the hotel) are primarily based on related revenue, 
such direct costs tend to vary more or less directly with revenue.  As a 
percentage of revenue, such costs decreased from 40.9% in the third quarter 
of 1996 to 39.3% in the current quarter.  The relative decrease in Guest Pay 
direct costs (as a percentage of revenue) reflects lower movie-related costs 
due to proportionately less revenue from newly-released motion pictures, 
partially offset by the cost-related effect of increased video game revenue 
(which generally has a higher direct cost on a percentage of revenue basis 
than movies) in the Guest Pay revenue mix.

    Free-to-guest direct costs decreased 25.5% or $452,000 in the third 
quarter of 1997 as compared to the year earlier quarter.  As a percentage of 
free-to-guest revenue, free-to-guest direct costs were 79.8% in the third 
quarter of 1996 compared to 61.6% in the current quarter.  The relative 
decrease in free-to-guest direct costs is due to incentive discounts earned 
from programming networks, partially offset by higher costs for both premium 
and non-premium programming.
    
    Direct costs associated with other revenue increased 50.5% to $1.8 
million in the third quarter of 1997 from $1.2 million in the year earlier 
quarter.  As a percentage of related revenues, such direct costs decreased to 
74.2% of other revenue in the current quarter versus 87.3% in the third 
quarter of 1996.  This relative decrease was due to increased sales of cable 
television services by ResNet, which typically earn margins above those 
earned from sales of televisions, system equipment, and service parts and 
labor.

    The Company's overall gross profit increased 45.3%, or $6.5 million, to 
$21.0 million in the third quarter of 1997 on a 36.3% increase in revenues in 
comparison to the same period in the prior year.  The Company's overall gross 
profit margin was 57.1% in the current quarter, as compared to the year 
earlier 53.6%.

                                       11

<PAGE>

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

                                             1996                 1997
                                     --------------------   ------------------
                                                PERCENT OF           PERCENT OF
                                                  TOTAL                TOTAL
                                       AMOUNT    REVENUES     AMOUNT  REVENUES
                                     --------    --------   --------  --------
Guest Pay operations                 $  3,876      14.4%    $  5,252   14.3%
Selling, general and administrative     3,068      11.4%       5,147   14.0%
Depreciation and amortization           7,560      28.1%      10,963   29.9%
                                     --------    --------   --------  --------
   Total operating expenses          $ 14,504      53.9%    $ 21,362   58.2%
                                     --------    --------   --------  --------
                                     --------    --------   --------  --------

    Guest Pay operations expense increased 35.5%, or $1.4 million, from $3.9 
million in the comparable quarter of the previous year.  This increase is 
primarily attributable to the 36.2% increase in the average number of 
installed Guest Pay rooms in the current period as compared to the year 
earlier quarter. Per average installed Guest Pay room, such expenses averaged 
$3.46 per month in the current quarter as compared to $3.72 per month in the 
same quarter of 1996. The comparative decrease on a per-room basis was 
primarily the result of lower service and support expenses.

    Selling, general and administrative expenses increased 67.8%, or $2.1 
million, from $3.1 million in the third quarter of 1997.  The increase 
reflects the effects of  increased litigation-related expenses, an increase 
in the number of development and administrative personnel and increased 
facilities-related expenses.  As a percentage of revenue, such expenses were 
14.0% in the current quarter as compared to 11.4% in the year earlier quarter.

    Depreciation and amortization expenses increased 45.0% to $11.0 million 
in the third quarter of 1997 from $7.6 million in the year earlier quarter.  
This increase is directly attributable to the increases in the number of 
installed Guest Pay and game service equipped rooms previously discussed, 
associated software and other capitalized costs such as service vans, 
equipment and computers that are related to the increased number of rooms in 
service since the year earlier quarter.

    Operating Loss -- The Company's operating loss, as a result of the 
factors previously discussed, was $(401,000) in the current quarter as 
compared to $(79,000) in the same quarter of 1996.

    Interest Expense -- Interest expense, net of interest income, increased 
to $4.6 million in the current quarter from $1.8 million in the comparable 
quarter of 1996 due to increases in long-term debt to fund the Company's 
continuing expansion of its business.  Long-term debt increased from $68.3 
million at September 30, 1996 to $180.0 million at September 30, 1997.  
Average principal amount of long-term debt outstanding, during the quarter 
ended September 30, 1997, was approximately $180 million (at an average 
interest rate of approximately 10.5%) as compared to an average principal 
amount outstanding of approximately $66 million (at an average interest rate 
of approximately 10.7%) during the comparable period of 1996.

    Net Loss -- For the reasons previously discussed, the Company's net loss 
increased to $(5.1) million in the third quarter of 1997 from a net loss of 
$(1.9) million in the same quarter a year earlier.

    EBITDA -- As a result of increasing revenues from Guest Pay services, and 
the other factors previously discussed, EBITDA (defined as "earnings before 
interest, income taxes, depreciation and amortization") increased 41.2% to 
$10.6 million in the third quarter of 1997 as compared to $7.5 million in the 
third quarter of 1996.  EBITDA as a percentage of total revenues was 28.8% in 
the current quarter as compared to 27.8% in the same quarter of 1996.  EBITDA 
is included herein because it is a widely accepted financial indicator used 
by certain investors and financial analysts to assess and compare companies 
on the basis of operating performance.  EBITDA is not intended to represent 
an alternative to net income (as determined in accordance with generally 
accepted accounting principles) as a measure of performance, but management 
believes that it does provide an important additional perspective on the 
Company's operating results and the Company's ability to service its 
long-term debt and to fund the Company's continuing growth.

                                       12

<PAGE>
                                RESULTS OF OPERATIONS
                    NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997


Revenue Analysis

    The Company's total revenue for the first nine months of 1997 increased 
41.3%, or $29.1 million, in comparison to the same period in 1996.  The 
following table sets forth the components of the Company's revenue for the 
nine months ended September 30 (dollar amounts in thousands):

                           1996                     1997
                  ---------------------    ---------------------
                              PERCENT OF               PERCENT OF
                                 TOTAL                    TOTAL
                    AMOUNT     REVENUES      AMOUNT     REVENUES
                  ---------    --------    ---------    --------
Guest Pay         $  60,912        86.5%   $  85,850        86.2%
Free-to-guest         6,416         9.1%       6,417         6.5%
Other                 3,068         4.4%       7,213         7.3%
                  ---------    --------    ---------    --------
Total revenue     $  70,396       100.0%   $  99,480       100.0%
                  ---------    --------    ---------    --------
                  ---------    --------    ---------    --------

    Guest Pay Revenue -- Guest Pay revenues increased 40.9%, or $24.9 
million, in the first nine months of 1997 in comparison to the same period of 
1996.  This increase was primarily the result of a 41.5% increase in the 
average number of installed Guest Pay rooms, which offset a slight decline in 
average monthly revenue per room.  The following table sets forth information 
in regard to average monthly revenue per installed Guest Pay room for the 
nine months ended September 30:

                                           1996          1997
                                         --------      --------
Average monthly revenue per room:
   Movie revenue                         $  18.60      $  18.09 
   Video game/information service            2.96          3.39
                                         --------      --------
       Total per Guest Pay room          $  21.56      $  21.48 
                                         --------      --------
                                         --------      --------

    Average movie revenue per room, for all Guest Pay rooms, was impacted by 
lower average buy rates and lower hotel occupancy rates, and partially offset 
by the effect of higher average movie prices. The comparative decrease in buy 
rates is attributed to a relatively less popular selection of newly-released 
major motion pictures in the current period as compared to a year earlier. 
The slight increase in average movie price is due to price increases in 
certain Guest Pay rooms; the Company's movie prices are generally $7.95 or 
$8.95.  

    Average video game and information service revenue per room increased 
primarily as a result of the increase in the average number of rooms with 
video game services installed.  On a per-room basis, average monthly video 
game revenues were $2.43 and $2.34 during the nine months ended September 30, 
1997 and 1996, respectively.  The Company had installed its video game 
service in 424,190 and 288,408 Guest Pay rooms as of September 30, 1997 and 
1996, respectively.

    Free-to-guest Revenue -- Free-to-guest revenues were $6.4 million in the 
first nine months of 1997 and 1996.  Increased revenue per room offset the 
effect of the reclassification of revenue from certain rooms, which had 
previously only received free-to-guest service, to Guest Pay services revenue 
upon the installation of Guest Pay systems for those rooms. 

    Other Revenue -- Revenue from other sources, including sales of cable 
television services by ResNet and the sale of televisions, system equipment, 
and service parts and labor, and increased by $4.1 million or 135%, in the 
first nine months of 1997 as compared to the same period of 1996.  The 
increase was attributable to increased sales of cable television services by 
ResNet, and increased sales of televisions, system equipment, and service 
labor.

                                       13


<PAGE>

Expense Analysis

    Direct Costs -- The following table sets forth information in regard to 
the Company's direct costs and gross profit margin for the nine months ended 
September 30 (dollar amounts in thousands):

                                   1996          1997
                                ---------     ---------
    Direct costs:
      Guest Pay                 $  24,305     $  32,971 
      Free-to-guest                 5,040         4,686
      Other revenue                 2,591         5,229
                                ---------     ---------
    Total direct costs          $  31,936     $  42,886 
                                ---------     ---------
                                ---------     ---------

    Gross profit margin:
      Guest Pay                      60.1%         61.6%
      Free-to-guest                  21.4%         27.0%
      Other revenue                  15.5%         27.5%
      Overall (composite)            54.6%         56.9%


    Guest Pay direct costs increased 35.7%, or $8.7 million, in the first 
nine months of 1997 as compared to the same period of 1996.  Since Guest Pay 
direct costs (primarily studio license fees, video game license fees and the 
commission retained by the hotel) are primarily based on related revenue, 
such direct costs tend to vary more or less directly with revenue.  As a 
percentage of revenue, such costs decreased from 39.9% in the first nine 
months of 1996 to 38.4% in the current period.  The relative decrease in 
Guest Pay direct costs (as a percentage of revenue) reflects lower 
movie-related costs due to proportionately less revenue from newly-released 
motion pictures, partially offset by the cost-related effect of increased 
video game revenue (which generally has a higher direct cost on a percentage 
of revenue basis than movies) in the Guest Pay revenue mix.

    Free-to-guest direct costs decreased 7.0% or $354,000 in the first nine 
months of 1997 as compared to the same period of 1996.  As a percentage of 
free-to-guest revenue, free-to-guest direct costs decreased to 73.0% from 
78.6% in the year-earlier period.  The relative decrease in free-to-guest 
direct costs (as a percentage of revenue) resulted from incentive discounts 
earned from programming networks, partially offset by higher costs for both 
premium and non-premium programming.
    
    Direct costs associated with other revenue increased 102% to $5.2 million 
in the first nine months of 1997 from $2.6 million in the year earlier 
period. As a percentage of related revenues, such direct costs decreased to 
72.5% of other revenue in the current nine month period versus 84.5% in the 
first nine months of 1996, primarily reflecting the effect of the increased 
equipment sales and cable television service revenues discussed above.

    The Company's overall gross profit increased 47.2%, or $18.1 million, to 
$56.6 million in the first nine months of 1997 on a 41.3% increase in 
revenues in comparison to the same period in the prior year.  The Company's 
overall gross profit margin was 56.9% in the current nine month period, as 
compared to the year earlier 54.6%.


                                       14

<PAGE>

     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):

                                            1996                  1997
                                   -------------------------------------------
                                              PERCENT OF            PERCENT OF
                                                 TOTAL                 TOTAL
                                    AMOUNT     REVENUES   AMOUNT     REVENUES
                                   ---------   --------  ---------   --------
Guest Pay operations               $  10,614     15.1%   $  14,951     15.0%
Selling, general and administrative    9,280     13.2%      14,930     15.0%
Depreciation and amortization         20,891     29.6%      31,153     31.4%
                                   ---------   --------  ---------   --------
   Total operating expenses        $  40,785     57.9%   $  61,034     61.4%
                                   ---------   --------  ---------   --------
                                   ---------   --------  ---------   --------


    Guest Pay operations expense increased 40.9%, or $4.3 million during the 
nine months ended September 30, 1997, from $10.6 million in the comparable 
nine month period of the previous year.  This increase is primarily 
attributable to the 41.5% increase in the average number of installed Guest 
Pay rooms in the current nine month period as compared to the year earlier 
period.  Per average installed Guest Pay room, such expenses averaged $3.58 
per month in the current nine month period as compared to $3.78 per month in 
the same period of 1996. The comparative decrease on a per-room basis was 
primarily the result of lower service and support expenses.

    Selling, general and administrative expenses increased 60.9%, or $5.7 
million, from $9.3 million in the first nine months of 1996.  The increase 
reflects the effects of substantially increased litigation-related expenses, 
an increase in the number of development and administrative personnel and 
increased facilities-related expenses.  As a percentage of revenue, such 
expenses were 15.0% in the current nine month period as compared to 13.2% in 
the year earlier period.

    Depreciation and amortization expenses increased 49.1% to $31.2 million 
in the first nine months of 1997 from $20.9 million in the year earlier 
period. This increase is directly attributable to the increases in the number 
of installed Guest Pay and game service equipped rooms previously discussed, 
associated software and other capitalized costs such as service vans, 
equipment and computers that are related to the increased number of rooms in 
service since the year earlier quarter.

    Operating Loss -- The Company's operating loss, as a result of the 
factors previously discussed, was $(4.4) million in the current nine month 
period as compared to $(2.3) million in the same period of 1996.

    Interest Expense -- Interest expense, net of interest income, increased 
to $13.0 million in the current nine month period from $5.8 million in the 
comparable period of 1996 due to increases in long-term debt to fund the 
Company's continuing expansion of its business.  Long-term debt increased 
from $68.3 million at September 30, 1996 to $180.0 million at September 30, 
1997. Average principal amount of long-term debt outstanding during the nine 
months ended September 30, 1997, was approximately $180 million (at an 
average interest rate of approximately 10.5%) as compared to an average 
principal amount outstanding of approximately $70 million (at an average 
interest rate of approximately 10.6%) during the comparable period of 1996.

    Net Loss -- For the reasons previously discussed, the Company's net loss 
increased to $(17.5) million in the first nine months of 1997 from a net loss 
of $(8.1) million in the same period a year earlier.

    EBITDA -- As a result of increasing revenues from Guest Pay services, and 
the other factors previously discussed, EBITDA increased 43.9% (on a 41.3% 
increase in revenues) to $26.7 million in the first nine months of 1997 as 
compared to $18.6 million in the same period of 1996.  EBITDA as a percentage 
of total revenues was 26.9% in the current period as compared to 26.4% in the 
same period of 1996.


                                       15

<PAGE>

                                  SEASONALITY

    The Company's operating results from its lodging activities are subject 
to fluctuation depending upon hotel occupancy rates and buy rates, among 
other factors.  Typically, occupancy rates are higher during the second and 
third calendar quarters than in the first and fourth quarters due to seasonal 
travel patterns.

                                           
                 FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
                                           
    On September 15, 1994, the Company issued $28 million principal amount of 
9.95% Senior Notes to three insurance companies in a private placement. On 
April 13, 1995, concurrently with certain amendments to the Note Purchase 
Agreement, the Company issued $5 million principal amount of 10.35% Senior 
Notes under such agreement in a private placement to certain holders of the 
9.95% Senior Notes. As part of the transaction in which the Company issued 
its 10.25% Senior Notes (discussed further below) the Company redeemed the 
9.95% and 10.35% Senior Notes in their entirety, which represented a use of 
proceeds of approximately $28.9 million in principal amount, plus accrued 
interest, and a make-whole premium of approximately $2.8 million.

    On August 9, 1995, the Company issued $20 million principal amount of its 
11.5% Senior Subordinated Notes due July 15, 2005 (the 11.5% Senior Notes) to 
three insurance companies in a private placement. On October 4, 1995, the 
Company issued an additional $10 million principal amount of such 11.5% 
Senior Notes to the same purchasers and under identical terms and conditions. 
 In connection with the issuance of its 10.25% Senior Notes, the Company and 
the holders of the 11.5% Senior Notes amended the terms of the 11.5% Senior 
Notes to provide that such notes rank PARI PASSU with, and  have 
substantially the same covenants as,  the 10.25% Senior Notes. The 11.5% 
Senior Notes are unsecured and bear interest at the fixed rate of 11.5%, 
payable semi-annually.  Mandatory annual principal payments of $6 million 
commence July 15, 2001.

    Net proceeds of the August 9, 1995 issue of the 11.5% Senior Notes, net 
of original issue discount and issuance-related expenses, were approximately 
$18.1 million, and were used to (i) repay $10.0 million outstanding under the 
Company's then existing revolving facility and (ii) provide funding for 
capital expenditures to expand the Company's guest pay services business. The 
net proceeds from the October 4, 1995 issue of  the 11.5% Senior Notes, net 
of original issue discount and issuance-related expenses, were approximately 
$9.2 million and provided additional capital to fund the expansion of the 
Company's guest pay services business. 

    In connection with the December 19, 1996 issuance of its 10.25% Senior 
Notes, the Company repaid all of the outstanding borrowing under its then 
bank credit facility, approximately $20.4 million, and amended and restated 
such facility. The amended and restated bank credit facility (the 1996 
Facility) provides for total lending commitments of $100.0 million (which can 
be increased to $175.0 million with the consent of NatWest Bank) and contains 
certain covenants, including the maintenance of certain financial ratios, 
limitations on the incurrence of additional indebtedness, limitations on the 
incurrence of certain liens, limitations on certain payments or distributions 
in respect of the common stock and provisions for acceleration of principal 
repayment in certain circumstances.  The Company was in compliance with all 
such covenants as of September 30, 1997.  The 1996 Facility is secured by (i) 
a first priority security interest in all of the Company's and certain of its 
subsidiaries' tangible and intangible assets and (ii) a guarantee by ResNet 
of all amounts advanced to it by the Company.  Amounts borrowed under the 
1996 Facility bear interest at either (i) LIBOR plus from 1.25% to 2.00% or 
(ii) the greater of (a) the NatWest Bank prime rate plus from .25% to 1.00% 
or (b) the federal funds rate plus from .75% to 1.50%, depending on the 
Company's total leverage, as defined in the agreement.  The banks' commitment 
under the 1996 Facility is subject to a scheduled reduction of 15% beginning 
in December 1998 and annually thereafter as follows: December 1999 -- 20%; 
December 2000 -- 20%; December 2001 -- 20%; and December 2002 -- 25%.

    On May 23, 1996, the Company sold 3,680,000 shares of the Company's 
Common Stock for net proceeds of approximately $44.6 million. Such proceeds 
were used to repay approximately $25.9 million of borrowings then outstanding 
under the Existing Credit Facility, and to provide working capital for the 
continuing expansion of the Company's lodging and residential business. 

    On October 21, 1996, the Company and ResNet entered into agreements with 
TCI Satellite pursuant to which TCI Satellite acquired a 4.99% equity 
interest in ResNet for a purchase price of $5.4 million in cash (the 


                                       16

<PAGE>

"Stock Payment") and agreed to provide ResNet with long-term access to a DBS 
signal on a nationwide basis. In addition, TCI Satellite agreed to advance up 
to $34.6 million to ResNet during the five years ending October 21, 2001, 
under a convertible note agreement (the "TCI Convertible Note") to purchase 
DBS equipment. The TCI Convertible Note is subject to mandatory conversion 
into a maximum 32.0% equity interest in ResNet at such time as conversion is 
not restricted by FCC regulations. The TCI Convertible Note is unsecured, 
payable solely in shares of ResNet's common stock, non-recourse to the 
Company, and subordinated to all present and future borrowings by ResNet 
including any borrowings from the Company by ResNet. Interest accrues 
(generally at TCI's average borrowing rate) on amounts outstanding under the 
TCI Convertible Note, but such interest is not payable in cash (and does not 
increase the equity interest into which the TCI Convertible Note will be 
converted). 

    On December 19, 1996, the Company issued $150 million, principal amount, 
of unsecured 10.25% Senior Notes (the Notes) in a private offering in 
accordance with Rule 144A of The Securities Act of 1933, as amended (the 
Securities Act). The proceeds of the Notes, which were issued at par, after 
placement fees and offering expenses, were approximately $143.2 million.  
Approximately $31.7 million of such proceeds was used to redeem the 
outstanding principal amounts of the 9.95% and 10.35% Senior Notes and to 
prepay all outstanding amounts under the Company's then revolving credit 
facility, both as previously discussed.  The remaining proceeds, 
approximately $91.1 million, were invested in highly liquid, interest-bearing 
securities pending their use for funding capital expenditures to expand the 
Company's lodging and residential businesses.  On April 11, 1997, the Company 
filed a registration statement to effect an offer to exchange the Notes for 
identical Notes registered under the Securities Act of 1933, as amended.

    The Company has incurred operating and net losses due in large part to 
the depreciation, amortization and interest expenses related to the capital 
required to expand its lodging and residential businesses. The growth of the 
Company's business requires substantial indebtedness to finance expansion of 
its lodging and multi-family residential businesses. The Company expects that 
losses will increase as the Company implements its expansion strategy. 
Historically, cash flow from operations has not been sufficient to fund the 
cost of expanding the Company's business and to service existing 
indebtedness. Capital expenditures were approximately $78 million during the 
first nine months of 1997, and net cash provided by operating activities was 
approximately $11.2 million.

    Depending on the rate of growth of its lodging and residential businesses 
and other factors, the Company expects to incur capital expenditures of 
between approximately $15 to $25 million during the remainder of 1997 and 
anticipates capital expenditures of between approximately $75 to $90 million 
for 1998, and substantial amounts thereafter. The actual amount and timing of 
the Company's capital expenditures in these periods will vary (and such 
variations could be material) depending upon the number of new contracts for 
services entered into by the Company, the costs of installations and other 
factors; however, this is a forward-looking statement and there can be no 
assurance in this regard. In addition, the 1996 Facility limits the amount of 
the Company's annual capital expenditures to a certain base amount plus the 
amounts of certain additional financing. 

    The Company believes that the net proceeds from the 10.25% Senior Notes, 
the funds to be provided by TCI Satellite, its operating cash flows and 
borrowings permitted under the 1996 Facility will be sufficient to fund the 
Company's cash requirements for 12 to 18 months; however, this is a 
forward-looking statement and there can be no assurance in this regard.  
After such time, the Company may incur additional amounts of indebtedness.  
If the Company's plans or assumptions change, if its assumptions prove to be 
inaccurate or if the Company experiences unanticipated costs or competitive 
pressures, the Company may be required to seek additional capital sooner than 
currently anticipated. There can be no assurance that the Company will be 
able to obtain financing, or, if such financing is available, that the 
Company will be able to obtain it on acceptable terms. Failure to obtain 
additional financing, if needed, could result in the delay or abandonment of 
some or all of the Company's expansion plans.


                                       17

<PAGE>

EFFECT OF RECENTLY ISSUED ACCOUNTING STANDARDS

    During March 1997, the Financial Accounting Standards Board released 
Statement of Financial Accounting Standards No. 128 ("SFAS 128"), "Earnings 
per Share", which requires the disclosure of basic earnings per share and 
diluted earnings per share.  The Company will adopt SFAS 128 at the end of 
1997 and anticipates that it will have no effect on previously reported 
earnings per share.

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


                                       18

<PAGE>

                          PART II -- OTHER INFORMATION
                                           
ITEM 1 -- LEGAL PROCEEDINGS

    On February 16, 1995, On Command Video Corporation  filed a lawsuit in 
Federal District Court for the Northern District of California asserting 
patent infringement by the Company relating to its on-demand video system.  
The complaint requests an unspecified amount of damages and injunctive 
relief. The Company filed an answer and counterclaim to the lawsuit on April 
17, 1995, denying the claims, asserting affirmative defenses and asserting a 
counterclaim for declaratory relief.  The Company is currently engaged in 
litigation with respect to this matter, however, as of the date hereof, no 
trial date is scheduled.  Based on the advice of special patent counsel and 
technical experts retained by the Company, as well as the Company's 
independent analysis, the Company believes that the claims of infringement 
are unfounded.  The Company has and will continue to vigorously defend itself 
in this matter.  Patent litigation is especially complex, both as to factual 
allegations and the legal interpretation of patent claims, which makes such 
lawsuits difficult to assess with certainty.  While the Company and its 
patent counsel believe the Company has a number of defenses available, which, 
if properly considered, would eliminate or minimize any liability for the 
Company, an unexpected unfavorable resolution, depending on the amount and 
timing thereof, could adversely affect the Company.  Although the outcome of 
any litigation cannot be predicted with certainty, the Company believes that 
the ultimate disposition of this matter will not have a material adverse 
effect on the Company's business or financial condition.

    From time to time, the Company is subject to other litigation arising in 
the course of its business.  As of the date hereof, in the opinion of 
management, the resolution of such other litigation will not have a material 
adverse effect upon the Company's business or financial condition.

ITEM 2 -- CHANGES IN SECURITIES

    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:

         Exhibit 11.1 -- Statement Regarding Computation of  Net Loss Per
         Common Share.
    
    B.  REPORTS ON FORM 8-K:

         The Company filed no Reports on Form 8-K during the three months 
         ended September 30, 1997.


                                       19

<PAGE>

                         LODGENET ENTERTAINMENT CORPORATION
                                           
                                   FORM 10-Q
                                           
                                           
                                           
                                   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 7, 1997           / s /  TIM C. FLYNN
                                  -----------------------------------
                                  Tim C. Flynn
                                  President and Chief Executive Officer
                                  (Principal Executive Officer)



Date:  November 7, 1997           / s /  JEFFREY T. WEISNER
                                  ------------------------------------
                                  Jeffrey T. Weisner
                                  Vice President - Finance
                                  (Principal Financial and Accounting Officer)



                                       20