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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

Form 10-K

(Mark One)

|  |  |                                                                                     
|- |  | ------------------------------------------------------------------------------------
|x |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2002
or

|  |  |                                                                                             
|- |  | --------------------------------------------------------------------------------------------
|o |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

Commission File Number: 0-22334

LodgeNet Entertainment Corporation

|                         |  |                                     
|------------------------ |  | ------------------------------------
|Delaware                 |  | 46-0371161                          
|                         |  |                                     
|(State of Incorporation) |  | (IRS Employer Identification Number)

3900 West Innovation Street, Sioux Falls, South Dakota      57107

(605) 988-1000

Securities registered pursuant to Section 12(b) of the Act: None.

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $.01 par value.



| |                                                                                                                                                                                                                                                                                                                                                                     
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | 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 o.
|
| | Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained
to the best of Registrants knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. x                               
|
| | Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes x No o                                                                                                                                                                                                                                             
|
| | State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of
such common equity, as of the last business day of the registrants most
recently completed second fiscal quarter. $127,366,000.              

The number of shares of common stock of the Registrant outstanding as of March
10, 2003, was 12,431,149 shares.

DOCUMENTS INCORPORATED BY REFERENCE   Portions of the Registrants definitive
proxy statement for the 2003 Annual Meeting of Stockholders, which will be
filed within 120 days of the fiscal year ended December 31, 2002, are
incorporated by reference in Part III of this Form 10-K.



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This Report contains a total of 66 pages, excluding exhibits. The exhibit index appears on page 33.





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TABLE OF CONTENTS



|                                                                                               |                                |  |  |  |  |  |  | 
|---------------------------------------------------------------------------------------------- | ------------------------------ |  |  |  |  |  |  | 
|PART I                                                                                        
|Item 1  Business                                                                             
|                                                                                               | Overview                      
|                                                                                               | Markets and Customers         
|                                                                                               | Services and Products         
|                                                                                               | Operations                    
|                                                                                               | Competition                   
|                                                                                               | Business Strategy             
|                                                                                               | Regulation                    
|                                                                                               | Employees                     
|                                                                                               | Web Site Access to SEC Filings
|Item 2  Properties                                                                           
|Item 3  Legal Proceedings                                                                    
|Item 4  Submission of Matters to a Vote of Security Holders                                  
|Item 5  Market for Registrants Common Equity and Related Stockholder Matters                
|                                                                                               | Dividends                     
|                                                                                               | Stockholder Rights Plan       
|Item 6  Selected Financial Data                                                              
|Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations
|Item 7A  Quantitative and Qualitative Disclosures About Market Risk                          
|Item 8  Financial Statements and Supplementary Data                                          
|Item 9  Changes In and Disagreements With Accountants on Accounting and Financial Disclosure 
|Item 10  Directors and Executive Officers of the Registrant                                  
|Item 11  Executive Compensation                                                              
|Item 12  Security Ownership of Certain Beneficial Owners and Management                      
|Item 13  Certain Relationships and Related Transactions                                      
|Item 14  Controls and Procedures                                                             
|Item 15   Exhibits, Financial Statement Schedules and Reports on Form 8-K                    
|EX-10.27 Employment Agreement - Stephen D. McCarty                                            
|EX-10.28 Executive Severance Agreement - S.McCarty                                            
|EX-10.29 Employment Agreement - Steven Pofahl                                                 
|EX-10.30 Executive Severance Agreement - S. Pofahl                                            
|EX-10.31 Employment Agreement-Steven Truckenmiller                                            
|EX-12.1 Statement of computation of ratios                                                    
|EX-21.1 Subsidiaries of the Company                                                           
|EX-23.1 Consent of Independent Public Accountants                                             
|EX-99.1 Certification Pursuant to Section 906                                                 



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Table of Contents

|                                                                                               |                                |  |    |    | 
|---------------------------------------------------------------------------------------------- | ------------------------------ |  | -- | -- | 
|Item 1 - Business                                                                              |                                |  | 1  |   
|                                                                                               | Overview                       |  |    | 1  | 
|                                                                                               | Markets and Customers          |  |    | 3  | 
|                                                                                               | Services and Products          |  |    | 3  | 
|                                                                                               | Operations                     |  |    | 4  | 
|                                                                                               | Competition                    |  |    | 7  | 
|                                                                                               | Business Strategy              |  |    | 8  | 
|                                                                                               | Regulation                     |  |    | 9  | 
|                                                                                               | Employees                      |  |    | 10 | 
|                                                                                               | WEB Site Access to SEC Filings |  |    | 10 | 
|Item 2 - Properties                                                                            |                                |  | 10 |   
|Item 3 - Legal Proceedings                                                                     |                                |  | 10 |   
|Item 4 - Submission of Matters to a Vote of Security Holders                                   |                                |  | 11 |   
|Item 5 - Market for Registrants Common Equity and Related Stockholder Matters                 |                                |  | 11 |   
|                                                                                               | Dividends                      |  |    | 11 | 
|                                                                                               | Stockholder Rights Plan        |  |    | 11 | 
|Item 6 - Selected Financial Data                                                               |                                |  | 13 |   
|Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations |                                |  | 15 |   
|Item 7A - Quantitative and Qualitative Disclosures About Market Risk                           |                                |  | 30 |   
|Item 8 - Financial Statements and Supplementary Data                                           |                                |  | 31 |   
|Item 9 - Changes In and Disagreements with Accountants on Accounting and Financial Disclosure  |                                |  | 31 |   
|Item 10 - Directors and Officers of the Registrant                                             |                                |  | 32 |   
|Item 11 - Executive Compensation                                                               |                                |  | 32 |   
|Item 12 - Security Ownership of Certain Beneficial Owners and Management                       |                                |  | 32 |   
|Item 13 - Certain Relationships and Related Transactions                                       |                                |  | 32 |   
|Item 14 - Controls and Procedures                                                              |                                |  | 32 |   
|Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K                      |                                |  | 33 |   



---

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

LodgeNet, the LodgeNet logo, and TechConnection are service marks or
registered trademarks of LodgeNet Entertainment Corporation; all other
trademarks or servicemarks used herein are the property of their respective
owners.

|                                   |  |   |  |               
|---------------------------------- |  | - |  | --------------
|LodgeNet Entertainment Corporation |  | i |  | Form 10-K 2002





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##### Table of Contents






PART I




Item 1  Business




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 digital 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 December 31, 2002, the Company provided
interactive television services to approximately 5,700 hotel properties serving
more than 950,000 rooms, more properties and rooms than any other provider in
the world.

The Companys services are purchased by guests on a per-view, hourly, or
daily basis and include digital movies, video games, music and music videos,
television on-demand programming, Internet on television which does not require
a laptop for access, and high-speed laptop Internet access services (all of
which are referred to by the Company as Guest Pay interactive services).
Service packages may also include satellite-delivered basic and premium cable
television programming, and other interactive entertainment and information
services that are paid for by the hotel and provided to guests at no charge
(referred to by the Company as free-to-guest services). The Company provides
its services to various corporate-managed hotel chains such as Hilton,
Doubletree, Embassy Suites, Sheraton, Ritz-Carlton, Harrahs, Omni Hotels,
Delta Hotels, Outrigger, La Quinta Inns, Wingate Inns, Homewood Suites, Grand
Casinos, Hampton Inns & Suites, Baymont Inns & Suites, and Red Roof Inns, plus
various major REITs and management companies such as MeriStar, Felcor,
Flagstone, Prime, WestCoast Hospitality, as well as many independent properties
using the Marriott, Holiday Inn, Inter-Continental, Courtyard by Marriott,
Prince, Radisson, W Hotel, Westin and other trade names.

As shown in the table below, the Company has experienced substantial
revenue growth over the past five years, primarily as the result from the rapid
expansion of the number of rooms installed with the Companys interactive
services. Since 1998, the Companys interactive room base has increased by more
than 279,000 rooms while its revenue has also increased by 41%. During the same
period, the Companys EBITDA (defined by the Company as earnings before
interest, income taxes, depreciation, amortization and other non-operating
income or expenses) has increased by 69% to $81.9 million in 2002, while its
EBITDA margin improved to 34.8% from 29.2%. Management believes that EBITDA
provides an important additional perspective on the Companys operating
results, the Companys ability to service its long-term obligations, the
Companys ability to fund continuing growth, and the Companys ability to
continue as a going concern. Despite the heavy investment associated with the
Companys strong room growth, driven by the addition of 265,000 rooms served by
the Companys next-generation digital television platform during 2001 and 2002,
the Companys leverage ratio and interest coverage show marked improvement
during the five-year period. Dollar amounts are in thousands.

|                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                            |  | Year Ended December 31, |        
|                                            |  |                         |        
|                                            |  | 2002                    |         |   | 2001 |   |         | 2000 |  |   | 1999    |   |  | 1998 |        
|                                            |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |        
|Selected Operations Data:                   |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Total Guest Pay interactive rooms (1)       |  |                         | 876,348 |   |      |   | 812,149 |      |  |   | 725,075 |   |  |      | 661,691 |   |  |   | 596,806 |  
|Total Digital Rooms (1) (2)                 |  |                         | 265,097 |   |      |   | 115,378 |      |  |   |        |   |  |      |        |   |  |   |        |  
|Total rooms served (1) (3)                  |  |                         | 952,673 |   |      |   | 890,546 |      |  |   | 806,112 |   |  |      | 761,509 |   |  |   | 703,325 |  
|Total Revenue                               |  | $                       | 234,990 |   |      | $ | 216,895 |      |  | $ | 196,817 |   |  | $    | 181,272 |   |  | $ | 166,351 |  
|EBITDA (4)                                  |  | $                       | 81,893  |   |      | $ | 75,128  |      |  | $ | 67,764  |   |  | $    | 60,100  |   |  | $ | 48,576  |  
|EBITDA margin (4)                           |  |                         | 34.8    | % |      |   | 34.6    | %    |  |   | 34.4    | % |  |      | 33.2    | % |  |   | 29.2    | %
|Net Loss                                    |  | $                       | (29,126 | ) |      | $ | (26,408 | )    |  | $ | (39,014 | ) |  | $    | (36,428 | ) |  | $ | (39,912 | )
|Ratio of total long-term debt to
EBITDA (4) |  |                         | 4.32x   |   |      |   | 4.33x   |      |  |   | 4.29x   |   |  |      | 4.71x   |   |  |   | 5.52x   |  
|Ratio of EBITDA to interest expense (4)     |  |                         | 2.48x   |   |      |   | 2.48x   |      |  |   | 2.44x   |   |  |      | 2.21x   |   |  |   | 2.09x   |  
|Capital Expenditures                        |  | $                       | 72,115  |   |      | $ | 78,386  |      |  | $ | 60,195  |   |  | $    | 51,226  |   |  | $ | 68,733  |  

|                                   |  |   |  |               
|---------------------------------- |  | - |  | --------------
|LodgeNet Entertainment Corporation |  | 1 |  | Form 10-K 2002





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| | (1) |  | End of year statistics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
| | --- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (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 more than 30% of the Guest Pay interactive rooms served in
2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|
| | (3) |  | Total rooms served include those rooms receiving one or more
of the Companys services, including rooms served by international
licensees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
|
| | (4) |  | EBITDA is defined as earnings before interest, income taxes,
depreciation, amortization and other non-operating income or
expenses. EBITDA is not intended to represent an alternative to net
income or cash flows from operating, financing or investing
activities (as determined in accordance with generally accepted
accounting principles) as a measure of performance, and is not
representative of funds available for discretionary use due to the
Companys financing obligations. EBITDA, as defined by the Company,
may not be calculated consistently among other companies applying
similar reporting measures. 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. Management believes that EBITDA provides an
important additional perspective on the Companys operating results,
the Companys ability to service its long-term obligations, the
Companys ability to fund continuing growth, and the Companys
ability to continue as a going concern.

The Company provides its services directly to customers throughout the
United States and Canada, and through licensing arrangements with established
companies in other select countries. The Companys contracts with hotels,
resorts and casinos are exclusive and typically have initial, non-cancelable
terms of five to seven years. As of December 31, 2002, the Companys average
remaining contract term was approximately four years. The exclusive nature of
these contracts allows the Company to estimate (based on certain operating
assumptions) future revenues, cash flows and rates of return related to the
contracts prior to making a capital investment decision.

The Company designs, develops, owns and operates the broadband,
interactive television systems installed at each property. The interactive
system connects each individual hotel room to a server, referred to as the
headend located in the hotel. Because of the flexible and modular design of
the system architecture, the Company can periodically upgrade its software and
hardware to support the introduction of new interactive services and integrate
new technologies as they become commercially available and economically viable.

In 2001, the Company introduced its interactive digital system that
enhances and expands the delivery of content and services through its
interactive television network, providing travelers with enhanced levels of
choice, convenience and control in the guest room. In addition to the on-demand
movies, video games, and other services already provided by the Companys
installed tape-based systems, the interactive digital system offers (i)
increased variety and availability of video selections; (ii) television
on-demand programming; (iii) digital music and music videos; (iv) Internet on
television; (v) access to Internet-sourced content; (vi) on-screen controls
that allow the guest more viewing control and flexibility; (vii) improved guest
marketing and merchandising capabilities; and (viii) a system architecture that
transmits video and music content via satellite, resulting in operating cost
reductions for the Company. As of December 31, 2002, the Company had installed
the interactive digital system in over 265,000 rooms or 30% of its interactive
installed base. The Company plans to continue to install its next-generation
digital system in newly installed hotel properties and in existing sites as
current service contracts are successfully renewed and extended.

The Companys long-term business strategy is based on five key elements:
(i) continue to expand the Companys interactive digital room base; (ii)
increase revenue per room by continuing to expand product offering to the
guests; (iii) continue to increase operating margins; (iv) continue to
integrate cost-effective system technologies; and (v) drive the Company toward
free cash flow and profitability.

|                                   |  |   |  |               
|---------------------------------- |  | - |  | --------------
|LodgeNet Entertainment Corporation |  | 2 |  | Form 10-K 2002





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##### Table of Contents



The Companys principal executive offices are located at 3900 West
Innovation Street, Sioux Falls, South Dakota 57107, (605) 988-1000.




Markets and Customers

Domestic Market. The Companys primary market for its services is
predominantly in the mid-size and large hotel segments within the United States
and Canada. Based on industry sources, the Company estimates that these
segments account for approximately 78%, or 3.5 million, of the lodging
industrys estimated 4.5 million rooms. Furthermore, whereas the Company
currently serves over 876,000 interactive rooms as of December 31, 2002, the
Company believes that significant growth opportunities remain available through
(i) economically-viable rooms not yet served by any provider; (ii) supply
growth within the lodging industry; and (iii) rooms currently served by other
service providers whose contracts expire over the next few years.

Diversified Customer Base.The Company believes that its interactive hotel
base is well diversified in terms of (i) location; (ii) demographics; and (iii)
customer contracts. As of December 31, 2002, no single state or province
accounted for more than 10% of the hotel properties served by the Company. In
segmenting the Companys hotel base according to six demographic
classifications set by industry sources, no segment of the Companys served
hotels represented more than 30% of its interactive base. The Company provides
its services to various corporate-managed hotel chains such as Hilton,
Doubletree, Embassy Suites, Sheraton, Ritz-Carlton, Harrahs, Omni Hotels,
Delta Hotels, Outrigger, La Quinta Inns, Wingate Inns, Homewood Suites, Grand
Casinos, Hampton Inns & Suites, Baymont Inns & Suites, and Red Roof Inns, as
well as many individual properties using the Marriott, Holiday Inn,
Inter-Continental, Courtyard by Marriott, Prince, Radisson, W Hotel, Westin and
other trade names. No single contract represented greater than 10% of the
Companys revenue for the year ended December 31, 2002. In 2000, the Company
signed a contract with Hilton Hotels Corporation (Hilton) to install, on an
exclusive basis, its interactive television system in all Hilton owned
properties and to be the exclusive recommended provider of choice for its
Hilton managed and franchised properties. At December 31, 2002, the Company has
installed its interactive system in approximately 73,000 Hilton rooms with the
remaining installation base continuing into 2007.

International Market.The Company also provides services in select
international countriesprimarily countries located in Central and South
Americathrough licensing arrangements with established entities in these
areas. Under the arrangements, the Company does not provide any capital
investment. Instead, the Company sells equipment and licenses its interactive
television system and technologies to the licensee and receives a royalty based
on gross revenue. Financial information related to the Companys international
operations is included within the Companys consolidated financial statements.




Services and Products

Guest Pay Interactive Services.The Companys primary source of revenue
is providing in-room, interactive television services to the lodging industry,
for which the hotel guest pays on a per-view, hourly or daily basis. The
high-speed, two-way digital communications design of the Companys broadband
system architecture enables the Company to provide sophisticated interactive
features such as on-demand movies, network-based video games, music services,
Internet on television, and television on-demand programs. Guest Pay packages
may also include satellite-delivered cable television programming which are
paid for by the hotel and provided to guests free of charge, as well as other
interactive services such as review of room charges and video checkout, guest
surveying, merchandising, and other services that enable hotel owners to
broadcast informational and promotional messages.

In May 1993, the Company entered into a non-exclusive license agreement
with Nintendo of America Inc. (Nintendo) to provide hotels with a network-based
video game system. In May 1998, this agreement was revised and extended for ten
years. Pursuant to this extended agreement, Nintendo provides the Company with
access to its video game system and games. The Company uses its broadband
system architecture to allow guests to play the video games over the hotel
master antenna system. Hotel guests are charged a fee based on the amount of
time they play the video games. The Company had over 854,000 rooms
installed90% of its room basewith the Nintendo video game systems as of
December 31, 2002.

|                                   |  |   |  |               
|---------------------------------- |  | - |  | --------------
|LodgeNet Entertainment Corporation |  | 3 |  | Form 10-K 2002





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##### Table of Contents



In 2001, the Company began wide-scale deployment of its new interactive
digital system. In addition to the services already offered in its existing
tape-based systems, the digital system allows guests to choose from an expanded
menu of digital video as well as digital music selections. Rooms having the
Companys digital system generate an average of 37% more revenue than the
traditional tape-based systems, due to the increased variety and availability
of video content, the introduction of digital music services, access to
Internet content through the television, improved guest marketing and
merchandising capabilities, and on-screen controls that allow the guest more
viewing control and flexibility. Additionally, the interactive digital systems
are equipped so that content such as on-demand movies and music are updated and
delivered via satellite to the Companys system within the hotel. This not only
eliminates videotapes and shipping costs and reduces the need for technician
visits to update the content, but also ensures that all of the Companys
digital hotels can offer the content as of the first date available for
exhibition. As of December 31, 2002, the Company had over 265,000 digital
interactive television rooms.

The revenues generated from Guest Pay interactive services at any given
property are dependent upon a number of factors: (i) the occupancy rate at the
property; (ii) the buy rate or percentage of occupied rooms that purchase a
movie, video game, music service, Internet access or other interactive service
offered at the property; and (iii) the price of the service purchased by the
hotel guest. Occupancy rates vary by property based on the propertys
competitive position within its marketplace, over time based on seasonal
factors, and as a result of changes in general economic conditions. Typically,
occupancy rates are higher during the second and third quarters due to seasonal
travel patterns. Historically, the properties served by the Company have
experienced higher occupancy rates versus the industry average. Buy rates
generally reflect the hotels guest mix profile, the popularity of the
available programming and the guests other entertainment alternatives. Buy
rates also vary over time with general economic conditions. The price charged
for each programming option is established by the Company and is set according
to the guest mix profile at each property and overall economic conditions.
Movie prices are set by the Company on a title-by-title basis and may be higher
in some locations and for certain highly popular titles.

Free-to-Guest and Other Services.In addition to Guest Pay interactive
services, the Company provides cable television programming for which the
hotel, rather than its guests, pays the charges. Programming is delivered via
satellite and distributed to guest rooms over the network. The hotel pays the
Company a fixed monthly charge per room for each programming channel selected.
The hotel provides these channels to its guests free of charge. Premium
channels, such as HBO, Showtime and The Disney Channel broadcast major motion
pictures and specialty programming, while non-premium channels, such as CNN,
ESPN and WTBS, broadcast news, sports and informational programs, among others.
Premium programming suppliers typically contract only with cable companies and
other large volume subscribers, such as the Company, and will not generally
provide programming directly to individual hotel properties. The Company
successfully competes with local cable television operators by tailoring
different programming packages to provide specific channels desired by the
hotel subscriber, which typically reduces the overall cost of the services
provided.

The Company also provides a variety of other services to its hotel
customers including the sale of system equipment and service parts and labor.
The Company believes that these services complement its goal of being a
full-service provider of in-room entertainment and information services to the
lodging industry.




Operations

Contracts.The Company provides its Guest Pay interactive services under
contracts with lodging properties that generally run for a term of five to
seven years. Over the five year period ended December 31, 2002, the average
initial term of new contracts was six and a half years. The Companys contracts
typically provide that the Company will be the exclusive provider of in-room,
on-demand television entertainment services to the hotels, permit the Company
to set prices for Guest Pay interactive services, and allow the Company to
terminate the contract and remove its systems if the results of operation of
the Companys system installed at the hotel do not meet the Companys return on
investment criteria. The contracts also typically grant the Company a right of
first refusal regarding the provision of additional video related services to
the hotel. Under these contracts, the Company installs its system in the hotel
free of charge and retains ownership of all equipment utilized in providing its
services. The terms contained in the contract with corporate-managed hotels for
any one chain generally are negotiated by that chains corporate management,
and the hotels subscribe at the direction of corporate management. In the case
of franchised hotels, the contracts are generally negotiated separately with
each hotel. For Guest Pay interactive services which are paid for by the hotel
guest, the hotel

|                                   |  |   |  |               
|---------------------------------- |  | - |  | --------------
|LodgeNet Entertainment Corporation |  | 4 |  | Form 10-K 2002





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##### Table of Contents



collects such charges, coincident with the collection of room and other charges
made by the hotel guest, and the hotel remits monthly to the Company. The
hotels retain a commission from such charges, which varies depending on the
size and profitability of the system and other factors. The Company generally
seeks to extend and renew hotel contracts in advance of their expiration on
substantially similar terms. The average remaining life of the Companys
current Guest Pay interactive contracts is approximately four years with less
than 12% of these contracts coming up for renewal before 2004.

Technology, Product Development and Patents.The Company designs and
develops its own broadband interactive television systems. Because such systems
utilize an open architecture platform incorporating industry standard
interfaces, the Company can upgrade system software to support the introduction
of new services or integrate new technologies as they become economically
viable. The Companys interactive television system incorporates the Companys
scaleable broadband system architecture with commercially manufactured, readily
available electronic and computer components and hardware.

The Companys broadband system architecture utilizes the Companys
proprietary, two-way digital communications design to process and respond
rapidly to input commands from the viewer. This capability enables the Company
to provide sophisticated interactive television services such as on-demand
movies, network-based video games, music services, Internet on television, and
a variety of other interactive services such as review of room charges and
video checkout, guest surveying, and other guest services.

The Companys interactive systems consist of equipment located within the
guest room connected via a local cable distribution network to a headend
(associated equipment required for the reception, storage, amplification and
modulation of signals) located elsewhere in the hotel. Typical in-room
equipment includes a terminal unit, a hand-held television remote control and a
video game controller. For those properties equipped with the digital systems,
in-room equipment may also include an infrared computer keyboard. Those rooms
equipped for high-speed Internet capabilities have a desktop device, which
allows for the guest to link to a high-speed Internet connection. Video and
music programming originates from the system headend and is transmitted to
individual rooms over the network. Video game programs are downloaded into
dedicated video game processors also located within the headend. Keystrokes
and other system commands and communications are transmitted from the room
using the Companys proprietary communications infrastructure and the video and
other signals are transmitted to the guest room over the network. The system
computer controls the delivery of the Guest Pay interactive services to the
guest room and also automatically records purchase transactions and billing
data to the hotels accounting system, which automatically posts the charge to
the guests bill.

It is the Companys policy to apply for patents on those product designs
which management believes may be of significance to the Company. The Company
currently owns twelve United States patents, and has other applications for
patents pending in the U.S. Patent and Trademark Office dealing with various
aspects of the Companys interactive systems. The Company also licenses
industry-related technology from third parties.

The Company uses a number of registered and unregistered trademarks for
its products and services. The Company has applications for registration
pending for certain unregistered trademarks, and those trademarks for which the
Company has not sought registration are governed by common law and state unfair
competition laws. Because the Company believes that these trademarks are
significant to the Companys business, the Company has taken legal steps to
protect its trademarks in the past and intends to actively protect these
trademarks in the future. The Company believes that its trademarks are
generally well recognized by consumers of its products and are associated with
a high level of quality and value.

Sales and Marketing.The Company focuses its sales and marketing
strategies on acquiring new contracts from hotels, extending and retaining
existing contracts, and marketing the Companys Guest Pay interactive services
to the hotel guest. The Companys sales and marketing organization includes
national account representatives who develop relationships with national hotel
franchise organizations and management groups, and regional sales
representatives who maintain relationships primarily with regional hotel
management and ownership organizations. The Company markets its services and
products to hotels by advertising in industry trade publications, attending
industry trade shows, direct marketing and telemarketing. Sales activities are
coordinated from the Companys headquarters.

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The Company markets its services to hotel guests by means of an
interactive, image-based menu and purchasing protocol using on-screen graphics,
promotions and programming information. The system also generates a Welcome
Channel, which appears on-screen when the television is turned on and
describes the programming and interactive services available through the
Companys system.

Installation Operations.The Companys installation personnel prepare
engineering surveys at each hotel, install the Companys systems, train the
hotel staff to operate the systems and perform quality control tests. Due to
the Companys diversified customer base, it is more cost effective for the
Company to utilize subcontract installation teams. In 2002, approximately 82%
of the installation was completed by subcontractors where an employee of the
Company managed the installation project from inception through completion.

Service Operations.The Company believes that high quality and consistent
systems support and maintenance are essential to competitive success in its
industry. The Company emphasizes the use of Company-employed service personnel
residing in 26 locations throughout the United States and Canada, but also uses
Company-trained subcontractors in areas where there is not a sufficient
concentration of Company-served hotels to warrant a Company-employed service
representative. Currently, the Companys service organization has
responsibility for approximately 89% of the Guest Pay interactive hotel rooms
served by the Company. Service personnel are responsible for all preventive and
corrective systems maintenance.

The Company also maintains a toll-free customer support hot line,
TechConnection SM, which is staffed 24 hours a day, 365 days a year by
Company-employed and trained support technicians. The on-line diagnostic
capability of the Companys systems enables the Company to identify and resolve
a majority of reported system malfunctions from the Companys service control
center without visiting the hotel property. When a service visit is required,
the modular design of the Companys systems permits service personnel to
replace only those components that are defective at the hotel site.

Programming.The Company obtains non-exclusive rights to show recently
released major motion pictures from motion picture studios pursuant to a
long-term master agreement with each studio. The license period is typically 2
to 3 years in length and royalty rate for each movie are pre-determined, with
the studio receiving a percentage of the Companys gross revenue from the
movie. For recently released motion pictures, the Company typically obtains
rights to exhibit the picture while it is still in theatrical release, but
prior to its release to the home video market or for exhibition on cable
television. Generally, studios make a master of their movies available for
distribution sufficiently in advance of the release dates for the lodging
industry so that all of the Companys hotels can offer the movies as of the
first date they are available for exhibition. For its television on-demand
programming, the Company obtains rights to release television on-demand hits
where the Company pays a predetermined percentage of gross revenue or a flat
fee. The Company obtains independent films, most of which are non-rated and
intended for mature audiences, for a one-time flat fee that is nominal in
relation to the licensing fees paid for major motion pictures and which permits
the Company to distribute the films as necessary to its hotel sites. During
2002, the Company also entered into agreements with Broadcast Music Inc. and
the American Society of Composers, Authors and Publishers, where the Company
pays music license fees for certain music performances used within major motion
pictures. The Company also obtains non-exclusive rights to market its digital
music services through an agreement with a third party vendor whereby the
Company pays a predetermined percentage of the gross revenue from the music
service. The Company obtains its selection of Nintendo video games pursuant to
a ten-year non-exclusive license agreement with Nintendo entered into in 1998.
Under the terms of the agreement, the Company pays Nintendo a monthly fee based
on the number of rooms offering Nintendo video game services. The Company
continuously monitors guests entertainment selections and adjusts its
programming to respond to viewing patterns.

The Company obtains its basic and premium cable television programming
pursuant to multiyear license agreements and pays its programming suppliers a
fixed, monthly fee for each room or subscriber receiving the service.
Management believes that relations with the programming suppliers are good and
expects to renew these contracts as necessary on competitive terms. In January
2000, the Company entered into a seven year agreement with DIRECTV, Inc. to
make DIRECTV® programming available to the properties it serves.

Suppliers.The Company contracts directly with various electronics firms
for the manufacture and assembly of certain of its systems hardware, the design
of which is controlled by the Company. The Company has found these

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suppliers to be dependable and generally able to meet delivery schedules
on time. The Company believes that, in the event of a termination of any of its
sources, with proper notification from the supplier, alternate suppliers could
be located without incurring significant costs or delays. Certain electronic
component parts used within the Companys products are available from a limited
number of suppliers and can be subject to temporary shortages because of
general economic conditions and the demand and supply for such component parts.
If the Company were to experience a shortage of any given electronic part, the
Company believes that alternative parts could be obtained or system design
changes implemented. In such event, the Company could experience a temporary
reduction in the rate of new room installations and/or an increase in the cost
of such installations. All other components of the Companys systems are
standard commercial products, such as computers, hard drives, modulators and
amplifiers that are available from multiple sources. The Company believes its
anticipated growth can be accommodated through existing suppliers.




Competition

Based on the number of hotels and rooms served, 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, serving
over 5,700 hotels and 950,000 rooms. Competition in this industry is very
active and includes virtually all aspects of the entertainment industry. Market
participants include, but are not limited to (i) other interactive television
service providers (such as On Command Corporation, Hospitality Networks,
SeaChange, InRoomVideo, and other international providers); (ii) cable
television companies (such as AT&T, AOL Time Warner, Cox Cable, and Comcast);
(iii) direct broadcast satellite companies (such as DirecTV and EchoStar
Communications); (iv) television networks and programmers (such as ABC, NBC,
CBS, FOX, HBO, and Showtime); (v) Internet service providers and portals (such
as AOL Time Warner and Yahoo); (vi) companies offering web sites that provide
on-demand movies; and (vii) rental companies that provide videocassettes and
DVDs that can be viewed in properly equipped hotel rooms. Lodging industry
guests also obtain entertainment and information from print media (such as
newspapers, magazines, and books), concerts, sporting events, and movie
theatres. Given the dynamism of communications technology, the Company expects
to continue to confront new sources of competitionmany of which have access to
cheaper and more available financing.

A number of potential competitors could use their existing infrastructure
to provide in-room entertainment services to the lodging industry, including
some of the aforementioned franchised and wireless cable operators,
telecommunications companies, Internet service and digital broadcast service
providers. Some of these potential competitors are already providing
free-to-guest or Internet-related services to the lodging industry and have
announced plans to offer guest pay services. Some of these companies have
substantially greater financial and other resources than the Company, and it is
possible that such competitors may develop a technology that is more cost
effective than the Companys. To respond to competition, the Company will need
to continue to enhance its interactive systems, expand its operations and meet
the increasing demands for competitive pricing, service quality and
availability of value-added product offerings.

Competition with respect to new hotel contracts centers on a variety of
factors, depending upon the features important to a particular hotel. Among the
more important factors are: (i) the features and benefits of the entertainment
systems; (ii) the quality of the vendors technical support and maintenance
services; (iii) the financial terms and conditions of the proposed contract
(including commissions to the hotel); and (iv) the ability to complete system
installation in a timely and efficient manner. In addition, with respect to
hotel properties already receiving in-room entertainment services, the
incumbent provider may have certain informational and installation cost
advantages as compared to outside competitors.

The Company believes that its competitive advantages include: (i) its
broadband, interactive television system architecture that enables the Company
to deliver a broad range of interactive features and services such as on-demand
movies, television on-demand programming, network-based video games, music
services, Internet on television, and high speed Internet connectivity; (ii)
the flexible design of the Companys system which enables it to add
enhancements or integrate new technologies and services as they become
commercially available and economically viable; (iii) high quality customer
support and field service operations; and (iv) an experienced management team
and well-trained professional sales organization. The Company believes that its
success in securing contracts reflects the strong competitive position of the
Companys products and services.

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While the Company believes that its system architecture is comparable or
superior to the systems currently being used by its competitors in the lodging
industry, there can be no assurance that such competitors will not develop a
cost-effective system that is comparable or superior to the Companys system.
There can be no assurance that the Company will continue its current level of
success in obtaining new contracts from hotels currently served by other
vendors or previously unserved, or that the Company will be able to retain
contracts with hotels it serves when those contracts expire.

Although in the free-to-guest market, the local franchised cable operator
in a hotels market may have a substantial market presence, such operators
typically offer the hotel owner only standard packages of programming typically
developed for the residential market rather than the lodging market, and at a
fixed price per room based on all the channels provided. The Company competes
with the franchised cable operator for free-to-guest contracts by customizing
packages of programming to provide only those channels desired by the hotel,
typically reducing the overall cost per room to the hotel operator.

Competitive pressures in the guest pay and free-to-guest segments could
result in reduced market share for the Company, higher hotel commissions, lower
margins and increased expenditures for marketing, product development and
systems installation, each of which could adversely affect the Companys
financial condition and operating results.




Business Strategy

Continue to Expand Interactive Room Base.Within the Companys target
market of hotels with 75 or more rooms (which is estimated, based on industry
resources, to contain 3.5 million hotel rooms), the Company believes
substantial opportunity exists for continued, selective growth in its Guest Pay
interactive room base. The Company estimates that 335,000 rooms are presently
not served by any interactive services provider and fit its target economic
profile. The Company also estimates that 130,000 newly constructed lodging
rooms will open within the next two years that meet or exceed target criteria.
In addition, the Company estimates that another 290,000 rooms, which are under
contract with the Companys competitors, will be approaching expiration over
the next two years. Historically, LodgeNet has had significant success in
capturing such rooms. Over the last seven years, 30% of the Companys growth
has come from other providers while, during the same time, the Company has lost
an average of less than 2% of its installed base. Of those hotels that the
Company did not renew, the majority was at the discretion of the Company, as
the expected return on required renewal upgrade capital did not meet the
Companys return criteria. The Company believes that the cost-effective and
flexible design of its scaleable interactive digital system which offers
enhanced revenue opportunities, combined with its expertise in installation,
programming, technical support and customer service, will allow the Company to
continue to expand and retain its interactive room base pursuant to long-term
contracts. Internationally, the Company intends to continue to expand into
selected countries in Asia, Latin America, South America and other regions
through licensing agreements with established entities in those areas.

Increase Revenue per Room from Expanded Installation of the
Next-Generation Digital System.The Company plans to increase the revenue it
realizes from each Guest Pay interactive room by expanding and enhancing the
scope of its interactive television programming. The Company intends to
continue installing its interactive digital system in new rooms and in selected
existing properties currently served by the Company in exchange for long-term
contract extensions of its services. The Companys interactive digital system,
which is currently installed in approximately 30% of the Companys Guest Pay
interactive room base, generates 37.5% more revenue than the traditional
tape-based rooms due to the increased variety and availability of video
content, television on-demand programming, digital music services, Internet on
television, improved marketing and merchandising capabilities, and on-screen
controls that allow the guest more viewing control and flexibility.

Continue to Increase Operating Margins. Complementing the Companys room
and revenue growth objectives is its ongoing goal of increasing operating
margins by reducing direct and overhead expenses, as measured on a percentage
of revenue and on a per-installed unit basis. Since 1998, the Company has
increased its EBITDA margin to 34.8% from 29.2% as it spread its expenses
related to corporate overhead and operating infrastructure over a larger base
of installed rooms, as well as a broader range of revenue generating sources.
Further, the Companys digital system continues to lower operating costs as the
platform distributes video, television on-demand programming, and music content
via satellite, eliminating videotape and shipping costs as well as a
technicians visit to the hotel to load the content. The on-line diagnostic
capabilities of the Companys systems also

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enable the Company to identify and resolve a majority of reported system
malfunctions from the Companys service control center without visiting the
hotel property. The Company believes that further efficiencies will be achieved
as it continues to expand the number of installed rooms and the scope of its
interactive television and interactive product offerings.

Continue to Integrate Cost-effective System Technologies.The Company
intends to continue to use its product design and development expertise to make
system improvements as well as lower the installation cost of new and upgraded
systems. Lower installation costs allow the Company to economically install its
system into more diverse hotel properties as the Company makes its investment
decisions based upon estimates of future revenues, cash flows and rates of
return related to the contracts. In addition, lower installation and upgrade
costs increase the return on invested capital for any given revenue stream.
Lastly, system enhancements typically increase the market demand for the
Companys interactive systems based on new system features and benefits and
many times also increase the revenue generating capability of the system.

Drive the Company toward Free Cash Flow and Profitability.During 2002,
the Company generated $43.8 million in cash flow from operations and $6.0
million of operating income. The expansion of the Companys interactive digital
room base coupled with the renewal of its current room base pursuant to long
term contracts at capital reinvestment levels substantially below the cost of a
new interactive room will tend to drive increased revenue, EBITDA and operating
income. Given the Companys current business plan for projected capital
investment over the next several years, the Company anticipates that it will
begin reducing its level of outstanding long-term debt and associated interest
costs, all of which will create more cash flow from operations and ultimately
net income.




Regulation

Cable Television Regulation. The Communications Act of 1934, as amended
by the Cable Communications Policy Act of 1984, the Cable Television Consumer
Protection and Competition Act of 1992, and the Telecommunications Act of 1996,
(collectively, the Communications Act) governs the regulation of cable
systems. The law defines a cable system as a facility, consisting of a set
of closed transmission paths and associated signal generation, reception, and
control equipment that is designed to provide cable service which includes
video programming and which is provided to multiple subscribers within a
community, but the law exempts from that definition, among other facilities, a
facility that serves subscribers without using any public rights-of-way. The
Company constructs and operates separate headend systems at each hotel and
those systems do not use public rights-of-way. Consequently, the Company is
not required to comply with many of the Federal Communication Commissions
(FCC) rules relating to cable systems, including, among other things, rate
regulation and the requirement to obtain a franchise from local government
authorities in order to provide video services.

As a multichannel video programming distributor, however, the Company is
subject to various provisions of the Communications Act. These include laws
and regulations that benefit the Company, such as provisions that ensure the
Company access to programming on fair, reasonable and nondiscriminatory terms,
as well as provisions that subject the Company to additional requirements, such
as the requirement to obtain consent from broadcasters in order to retransmit
their signals over the Companys systems.

Internet Regulation. The Internet-based services offered by the Company
potentially may be affected by various laws and government regulations. There
are currently few laws or regulations directly applicable to access to or
commerce on commercial online services or the Internet. However, because of
the increasing popularity and use of commercial online services and the
Internet, new laws and regulations may be adopted. The adoption of such laws or
regulations in the future may slow the growth of commercial online services and
the Internet, which could in turn cause a decline in the demand for the
Companys Internet-based services and products or otherwise have an adverse
effect on the Company.

On January 18, 2001, the FCC released a Notice of Inquiry regarding
interactive television services (ITV) over cable television. The FCC sought
comment on, among other things, an appropriate definition of ITV services,
whether access to a high-speed connection is necessary to realize ITV
capabilities, and whether a nondiscrimination

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rule is necessary and/or appropriate. The FCC has not yet taken any action in
response to this proceeding. It is not possible at this time to predict the
outcome of the proceedings or its effect on the Company.

The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the video
programming industry. Other existing federal, state and local laws and
regulations currently are, or may be, the subject of a variety of judicial
proceedings, legislative hearings, and administrative and legislative proposals
that could change in varying degrees the manner in which private cable
operators, other video programming distributors, and Internet service providers
operate. The Company cannot predict the outcome of these proceedings or their
impact upon its operations at this time.




Employees

As of December 31, 2002, the Company had 807 employees in the United
States and Canada, none of which are covered by a collective bargaining
agreement. The Company has not experienced any significant labor problems and
believes that its relationship with its employees is good.




Web Site Access to SEC Filings

The Companys Web site address is www.lodgenet.com. It makes its Annual
Report on Form 10-K, Quarterly Reports on Form 10-Q, and Current Reports on
Form 8-K and all amendments to those reports available free of charge on its
Web site as soon as reasonably practicable after such material is
electronically filed with the SEC.




Item 2  Properties

The Companys headquarters, including its distribution center and
principal executive offices, are located in Sioux Falls, South Dakota. The
Company owned facility occupies approximately 228,500 square feet including
approximately 126,500 square feet for executive, administrative and support
functions, approximately 60,000 square feet for assembly and distribution
functions, and approximately 42,000 square feet for warehouse space. The
opening of the facility in 1997 allowed the Company to consolidate its local
operations into a single, multipurpose facility, which is designed to enhance
operational efficiency and to facilitate any necessary future expansion needs
of the Company. The Company believes that its facility is sufficient to
accommodate its foreseeable local operational space requirements.

The Company leases 25 facilities, in various locations, from unaffiliated
third parties. These facilities are combination warehouse/office facilities for
installation and service operations and are located throughout the United
States and Canada. Twenty-four of these facilities occupy less than 3,500
square feet and one occupies over 7,700 square feet.




Item 3  Legal Proceedings

During 2002, the Company entered into settlement agreements with Broadcast
Music Inc. (BMI) and the American Society of Composers, Authors and Publishers
(ASCAP), which resolved claims for alleged nonpayment of royalties on
copyrighted musical works performed in major motion pictures. BMI and ASCAP had
asserted that the music, primarily background music, used within major motion
pictures required licensing. BMI and ASCAP sought damages for public
performances of such music from their respective catalogues. As a result of the
settlements, the Company recorded a provision for the litigation settlements of
$2.7 million that is related to pre-2002 reporting periods. This nonrecurring
charge has been reported as a litigation expense in the accompanying statements
of operations. The Company has paid approximately $1.2 million of the
settlement amount with the balance to be paid ratably over the next five
quarters, the first payment scheduled during the first quarter of 2003. In
addition, the Company recorded approximately $420,000 as 2002 operating expense
to accurately reflect music royalty costs directly related to current year
operating activities.

The Company is subject to litigation arising in the ordinary course of
business. As of the date hereof, the Company believes it is unlikely that
resolution of such litigation will have a material adverse effect upon the
Companys financial condition or results of operations.

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

There were no matters submitted to a vote of security holders during the
quarter ended December 31, 2002.

PART II




Item 5  Market for Registrants Common Equity and Related Stockholder Matters

The Companys Common Stock currently trades on the NASDAQ National Market
System (NASDAQ NMS) under the symbol LNET. The Companys Common Stock began
trading on the NASDAQ NMS on October 14, 1993 upon the effectiveness of its
initial public offering. As of March 10, 2003 there were outstanding 12,431,149
shares of the Companys Common Stock.

The following table sets forth, for the fiscal quarters indicated, the
range of high and low sales prices of the Companys Common Stock as reported by
NASDAQ NMS.

|                   |  |      |       |  |     |  |       |               |  |                    |  |  |       |  |  |  |       | 
|------------------ |  | ---- | ----- |  | --- |  | ----- | ------------- |  | ------------------ |  |  | ----- |  |  |  | ----- | 
|Quarter Ended      |  | High |       |  | Low |  |       | Quarter Ended |  | High               |  |  | Low   | 
|                   |  |      |       |  |     |  |       |               |  |                    |  |  |       | 
|March 31, 2002     |  |      | 18.20 |  |     |  | 14.10 |               |  | March 31, 2001     |  |  | 17.75 |  |  |  | 13.87 | 
|June 30, 2002      |  |      | 19.98 |  |     |  | 14.00 |               |  | June 30, 2001      |  |  | 19.97 |  |  |  | 13.50 | 
|September 30, 2002 |  |      | 15.40 |  |     |  | 7.30  |               |  | September 30, 2001 |  |  | 23.20 |  |  |  | 8.90  | 
|December 31, 2002  |  |      | 12.37 |  |     |  | 4.80  |               |  | December 31, 2001  |  |  | 18.10 |  |  |  | 11.74 | 

On March 10, 2003, the closing price of the Companys Common Stock, as
reported by NASDAQ NMS was $7.14. Stockholders are urged to obtain current
market quotations for the Companys Common Stock. As of March 10, 2003, there
were 122 stockholders of record of the Company with approximately 99% of the
shares held in street name. The Company estimates that as of March 10, 2003,
there were more than 2,500 stockholders of the Company.




Dividends

No dividends have been paid to date on the Common Stock of the Company.
Management of the Company does not intend to pay any cash dividends on Common
Stock of the Company in the foreseeable future, rather, it is expected that the
Company will retain earnings to finance its operations and growth. The terms
and conditions of the Companys 10.25% Senior Notes and of the Companys bank
credit facility both contain covenants which restrict and limit payments or
distributions in respect of the Common Stock of the Company.

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Stockholder Rights Plan

On February 28, 1997, the Company adopted a stockholder rights plan. The
rights plan is intended to maximize stockholder value by providing flexibility
to the Board of Directors in the event that an offer for the Company is
received that is either inadequate or not in the best interest of all
stockholders.

Under the rights plan, the Board of Directors declared a dividend
distribution of one right for each outstanding share of common stock to
stockholders of record at the close of business on March 10, 1997. Each right,
when exercisable, entitles the registered holder to purchase one one-thousandth
of a share of a new series of Series A Participating Preferred Stock, at a
price of $60.00.

Initially, the rights are attached to the common stock and trade with
the common stock. They separate from the common stock if a person or group
acquires 15% or more of the outstanding shares of common stock or a public
announcement of a tender offer or exchange offer is made which would result in
someone becoming the owner of 15% or more of the outstanding common stock.
Following a separation, the rights become exercisable, are separately tradable
and the Company will mail separate rights certificates to stockholders.

The rights expire on the earliest of February 28, 2007, the date of the
consummation of a merger with a person who acquired common stock with the
approval of the Board of Directors or the redemption of the rights by the
Company.

The number of rights is adjusted to prevent dilution in the event of a
stock split or stock dividend. The purchase price, and the number of shares of
preferred stock issuable upon exercise of the rights, are also adjusted for
stock splits and dividends, as well as for other events, including the issuance
of preferred stock at less than the market price or the distribution of Company
assets to preferred stockholders.

If the Company is acquired without the approval of the directors who are
neither officers of the Company nor related to the acquirer, the rights become
exercisable for shares of common stock of the acquiring company with a market
value of two times the exercise price. If there is merely an acquisition of at
least 15% of the common stock of the Company without such approval, the rights
become exercisable for common stock with a market value of two times the
exercise price

Prior to a 15% acquisition or the expiration of the rights, the Company
may redeem the rights at a price of $.01 per right. The rights are also
redeemable in connection with a merger or other similar transaction not
involving a 15% acquirer or if the acquirer has acquired less than 15% and
there are no other acquirers.

In addition, the Board of Directors may, after a 15% acquisition (but less
than a 50% acquisition), exchange the rights for shares of common stock on a
one for one basis or for cash or other assets or securities of the Company.

If issued, the preferred stock will be nonredeemable and junior to any
other series of preferred stock the Company may issue, but will have a
preferential quarterly dividend equal to 1,000 times the dividend, if any,
declared on each share of common stock, but not less than $25.00 and, in the
event of liquidation of the Company, a preferred liquidation preference equal
to the greater of $1,000 or 1,000 times the payment per share of common stock.
Each share of preferred stock will have 1,000 votes and will vote together with
the common stock.

Until a right is exercised, the holder will have no rights as a
stockholder of the Company. The Company and the rights agent have broad
discretion to amend the Rights Agreement governing the rights; however,
following a separation, no amendment may adversely affect the rights holders.

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Item 6  Selected Financial Data

The following is a summary of Selected Data, the Statement of Operations
data and other data is derived from the audited financial statements. The data
should be read in conjunction with the Companys Consolidated Financial
Statements, the notes thereto, and Managements Discussion and Analysis of
Financial Condition and Results of Operations, all included elsewhere herein.
Dollar amounts are in thousands, except share data and per room amounts.

|                                                     |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |         |         | 
|---------------------------------------------------- | --------------------------------------------- | --------------------- | ------- | ----------------------- | ------- | - | ------- | ------- | ------- | ---- | ------- | ------- | ------- | - | ------- | ------- | ------- | - | ------- | ------- | ------- | 
|                                                     |                                               |                       |         | Year Ended December 31, |        
|                                                     |                                               |                       |         |                         |        
|                                                     |                                               |                       |         | 2002                    |         |   | 2001    |         |         | 2000 |         |         | 1999    |   |         | 1998    |        
|                                                     |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |         |         |        
|Statement of Operations Data:                        |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Revenues:                                            |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                                     | Guest Pay                                     |                       | $       | 226,238                 |         |   | $       | 206,001 |         |      | $       | 186,718 |         |   | $       | 169,850 |         |   | $       | 146,481 |        
|                                                     | Other                                         |                       |         | 8,752                   |         |   |         | 10,894  |         |      |         | 10,099  |         |   |         | 11,422  |         |   |         | 19,870  |        
|                                                     |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |        
|                                                     |                                               | Total revenue         |         |                         | 234,990 |   |         |         | 216,895 |      |         |         | 196,817 |   |         |         | 181,272 |   |         |         | 166,351 | 
|Direct costs (exclusive of other operating
expenses) |                                               |                       | 100,782 |                         |         |   | 92,090  |         |         |      | 82,450  |         |         |   | 78,490  |         |         |   | 74,008  |        
|                                                     |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |         |        
|Gross profit (exclusive of other operating
expenses) |                                               |                       | 134,208 |                         |         |   | 124,805 |         |         |      | 114,367 |         |         |   | 102,782 |         |         |   | 92,343  |        
|Operating expenses                                   |                                               |                       | 128,233 |                         |         |   | 115,685 |         |         |      | 112,073 |         |         |   | 103,460 |         |         |   | 102,282 |        
|                                                     |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |        
|Operating income (loss)                              |                                               |                       | 5,975   |                         |         |   | 9,120   |         |         |      | 2,294   |         |         |   | (678    | )       |         |   | (9,939  | )      
|Investment gains (losses)                            |                                               |                       | 872     |                         |         |   | (2,790  | )       |         |      | (13,593 | )       |         |   | (9,584  | )       |         |   | (6,550  | )      
|Litigation settlements (1)                           |                                               |                       | (2,700  | )                       |         |   |        |         |         |      |        |         |         |   |        |         |         |   |        |        
|Loss on early retirement of debt (2)                 |                                               |                       |        |                         |         |   | (2,091  | )       |         |      |        |         |         |   |        |         |         |   |        |        
|Interest expense                                     |                                               |                       | (33,037 | )                       |         |   | (30,306 | )       |         |      | (27,809 | )       |         |   | (27,210 | )       |         |   | (23,261 | )      
|Other income                                         |                                               |                       | 314     |                         |         |   | 348     |         |         |      | 419     |         |         |   | 1,414   |         |         |   | 213     |        
|                                                     |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |        
|Loss before income taxes                             |                                               |                       | (28,576 | )                       |         |   | (25,719 | )       |         |      | (38,689 | )       |         |   | (36,058 | )       |         |   | (39,537 | )      
|Provision for income taxes                           |                                               |                       | (550    | )                       |         |   | (689    | )       |         |      | (325    | )       |         |   | (370    | )       |         |   | (375    | )      
|                                                     |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |        
|Net loss                                             |                                               | $                     | (29,126 | )                       |         | $ | (26,408 | )       |         | $    | (39,014 | )       |         | $ | (36,428 | )       |         | $ | (39,912 | )      
|                                                     |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |        
|                                                     | Net loss per common share (basic and
diluted) |                       | $       | (2.35                   | )       |   | $       | (2.16   | )       |      | $       | (3.21   | )       |   | $       | (3.05   | )       |   | $       | (3.45   | )      
|                                                     |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |        
|Other Data:                                          |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|EBITDA (3)                                           |                                               | $                     | 81,893  |                         |         | $ | 75,128  |         |         | $    | 67,764  |         |         | $ | 60,100  |         |         | $ | 48,576  |        
|EBITDA margin (3)                                    |                                               |                       | 34.8    | %                       |         |   | 34.6    | %       |         |      | 34.4    | %       |         |   | 33.2    | %       |         |   | 29.2    | %      
|Capital expenditures (4)                             |                                               | $                     | 72,115  |                         |         | $ | 78,386  |         |         | $    | 60,195  |         |         | $ | 51,226  |         |         | $ | 69,660  |        
|Depreciation and amortization                        |                                               |                       | 75,918  |                         |         |   | 66,008  |         |         |      | 65,470  |         |         |   | 60,778  |         |         |   | 55,215  |        
|Ratio of total long-term debt to EBITDA (3)          |                                               |                       | 4.32x   |                         |         |   | 4.33x   |         |         |      | 4.29x   |         |         |   | 4.71x   |         |         |   | 5.52x   |        
|Ratio of EBITDA to interest expense (3)              |                                               |                       | 2.48x   |                         |         |   | 2.48x   |         |         |      | 2.44x   |         |         |   | 2.21x   |         |         |   | 2.09x   |        
|Non-Financial Operating Data:                        |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|Guest Pay rooms served (5)
On-demand                 |                                               |                       | 876,348 |                         |         |   | 812,149 |         |         |      | 725,075 |         |         |   | 661,691 |         |         |   | 581,893 |        
|                                                     | Scheduled                                     |                       |         |                        |         |   |         |        |         |      |         |        |         |   |         |        |         |   |         | 14,913  |        
|                                                     |                                               | Total Guest Pay rooms |         |                         | 876,348 |   |         |         | 812,149 |      |         |         | 725,075 |   |         |         | 661,691 |   |         |         | 596,806 | 
|                                                     |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |        
|Rooms with Nintendo® game systems (5)                |                                               |                       | 854,425 |                         |         |   | 788,196 |         |         |      | 697,703 |         |         |   | 627,592 |         |         |   | 546,324 |        
|Rooms with Digital services (5)                      |                                               |                       | 265,097 |                         |         |   | 115,378 |         |         |      |        |         |         |   |        |         |         |   |        |        
|Free-to-guest rooms served (5)                       |                                               |                       | 477,698 |                         |         |   | 449,485 |         |         |      | 405,977 |         |         |   | 399,046 |         |         |   | 384,324 |        
|Total rooms served (5) (6)                           |                                               |                       | 952,673 |                         |         |   | 890,546 |         |         |      | 806,112 |         |         |   | 761,509 |         |         |   | 703,325 |        
|Average monthly revenue per Guest Pay room:          |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |         |         |         |   |         |        
|                                                     | Movie revenue                                 |                       | $       | 17.77                   |         |   | $       | 17.93   |         |      | $       | 18.19   |         |   | $       | 18.62   |         |   | $       | 18.44   |        
|                                                     | Other interactive service revenue             |                       |         | 4.57                    |         |   |         | 4.48    |         |      |         | 4.27    |         |   |         | 3.85    |         |   |         | 3.62    |        
|                                                     |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |         |        
|                                                     |                                               | Total                 |         | $                       | 22.34   |   |         | $       | 22.41   |      |         | $       | 22.46   |   |         | $       | 22.47   |   |         | $       | 22.06   | 
|                                                     |                                               |                       |         |                         |         |   |         |         |         |      |         |         |         |   |        

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 13 |  | Form 10-K 2002





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##### Table of Contents



|                                        |  |                    |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         | 
|--------------------------------------- |  | ------------------ | -------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | 
|                                        |  | As of December 31, |         
|                                        |  |                    |         
|                                        |  | 2002               |          |   | 2001 |   |         | 2000 |  |   | 1999    |   |  | 1998 |        
|                                        |  |                    |          |   |      |   |         |      |  |   |         |   |  |      |        
|Balance Sheet Data:                     |  |                    |          |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         | 
|Cash and cash equivalents               |  | $                  | 1,107    |   |      | $ | 1,528   |      |  | $ | 4,059   |   |  | $    | 1,644   |   |  | $ | 5,240   | 
|Total assets                            |  |                    | 298,084  |   |      |   | 291,485 |      |  |   | 281,605 |   |  |      | 305,275 |   |  |   | 306,030 | 
|Total debt                              |  |                    | 353,790  |   |      |   | 325,831 |      |  |   | 290,659 |   |  |      | 282,990 |   |  |   | 268,093 | 
|Total stockholders equity (deficiency) |  |                    | (101,304 | ) |      |   | (67,568 | )    |  |   | (36,426 | ) |  |      | (5,504  | ) |  |   | 11,774  | 

|                                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|------------------------------------- |  | ----------------------- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | - |  | ---- | ------- | - |  | - | ------- | -
|                                      |  | Year Ended December 31, |        
|                                      |  |                         |        
|                                      |  | 2002                    |         |   | 2001 |   |         | 2000 |  |   | 1999    |   |  | 1998 |        
|                                      |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |        
|Statement of Cash Flows Data:         |  |                         |         |   |      |   |         |      |  |   |         |   |  |      |         |   |  |   |         |  
|Cash provided by operating activities |  | $                       | 43,769  |   |      | $ | 46,477  |      |  | $ | 41,180  |   |  | $    | 40,782  |   |  | $ | 13,243  |  
|Cash used for investing activities    |  |                         | (70,708 | ) |      |   | (77,995 | )    |  |   | (50,248 | ) |  |      | (55,445 | ) |  |   | (77,578 | )
|Cash provided by financing activities |  |                         | 26,513  |   |      |   | 29,039  |      |  |   | 11,510  |   |  |      | 11,030  |   |  |   | 68,608  |  



|(1) |  | During 2002, the Company entered into settlement agreements with
Broadcast Music Inc. (BMI) and the American Society of Composers, Authors
and Publishers (ASCAP), which resolved claims for alleged nonpayment of
royalties on copyrighted musical works performed in major motion pictures.
BMI and ASCAP had asserted that the music, primarily background music,
used within major motion pictures required licensing. BMI and ASCAP
sought damages for public performances of such music from their respective
catalogues. As a result of the settlements, the Company recorded a
provision for the litigation settlements of $2.7 million that is related
to pre-2002 reporting periods. This nonrecurring charge has been reported
as a litigation expense in the accompanying statements of operations. The
Company has paid approximately $1.2 million of the settlement amount with
the balance to be paid ratably over the next five quarters, the first
payment scheduled during the first quarter of 2003. In addition, the
Company recorded approximately $420,000 as 2002 operating expense to
accurately reflect music royalty costs directly related to current year
operating activities.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. Under SFAS No. 145, gains
and losses on extinguishments of debt will no longer be classified as
extraordinary items as previously required under SFAS No. 4. Extraordinary
treatment will be required for certain extinguishments as provided in APB
Opinion No. 30. Effective January 1, 2002, the Company adopted the
provisions of SFAS No. 145. In connection with the adoption, the Company
reclassified the $2.1 million loss on early retirement of its 1999 bank
credit facility, which was recorded in the third quarter of 2001 as an
extraordinary item, to other expense within the Companys consolidated
statement of operations.                                                                                                                                                                                                                                                                                                                                                              
|   
|(3) |  | EBITDA is defined as earnings before interest, income taxes,
depreciation, amortization and other non-operating income or expenses.
EBITDA is not intended to represent an alternative to net income or cash
flows from operating, financing or investing activities (as determined in
accordance with generally accepted accounting principles) as a measure of
performance, and is not representative of funds available for
discretionary use due to the Companys financing obligations. EBITDA, as
defined by the Company, may not be calculated consistently among other
companies applying similar reporting measures. 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. Management believes that EBITDA provides
an important additional perspective on the Companys operating results,
the Companys ability to service its long-term obligations, the Companys
ability to fund continuing growth, and the Companys ability to continue
as a going concern.                                                                                
|   
|(4) |  | Presented as cash used for property and equipment additions as reported
in the Statement of Cash Flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(5) |  | End of year statistics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(6) |  | Total rooms served include those rooms receiving one or more of the
Companys services, including rooms served by international licensees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 

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|LodgeNet Entertainment Corporation |  | 14 |  | Form 10-K 2002





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Special Note Regarding Forward-Looking Statements

Certain statements in this Annual Report on Form 10-K, including, without
limitation, statements in Item 1, including certain statements under the
headings Overview, Markets and Customers, Services and Products,
Operations, Competition, Business Strategy, and Regulation, in Item 3
under the heading Legal Proceedings, and in Item 7 under the heading
Managements Discussion and Analysis of Financial Condition and Results of
Operations, constitute forward-looking statements. When used in this Annual
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, and 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 in the foregoing sections, 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, 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 Annual 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.




Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations

The following discussion should be read in conjunction with the
Consolidated Financial Statements of the Company, including the notes thereto,
appearing elsewhere herein.

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 digital 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 December 31, 2002, the Company provided interactive
television services to approximately 5,700 hotel properties serving more than
950,000 rooms, more properties and rooms than any other provider in the world.

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.

|                                   |  |    |  |               
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|LodgeNet Entertainment Corporation |  | 15 |  | Form 10-K 2002





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##### Table of Contents



During the years ended December 31, the Company installed its systems in the
following number of rooms, net of de-installations:

|                            |  |      |         |  |      |  |         |      |  |  |        | 
|--------------------------- |  | ---- | ------- |  | ---- |  | ------- | ---- |  |  | ------ | 
|                            |  | 2002 |         |  | 2001 |  |         | 2000 | 
|                            |  |      |         |  |      |  |         |      | 
|Guest Pay interactive rooms |  |      | 64,199  |  |      |  | 87,074  |      |  |  | 63,384 | 
|Digital services rooms      |  |      | 149,719 |  |      |  | 115,378 |      |  |  |       | 

De-installation activity is less than 2% of the total installed number of
rooms.

The Companys base of installed rooms was comprised as follows at December 31:

|                                |  |      |         |  |      |  |         |      |  |  |         | 
|------------------------------- |  | ---- | ------- |  | ---- |  | ------- | ---- |  |  | ------- | 
|                                |  | 2002 |         |  | 2001 |  |         | 2000 | 
|                                |  |      |         |  |      |  |         |      | 
|Guest Pay interactive rooms (1) |  |      | 876,348 |  |      |  | 812,149 |      |  |  | 725,075 | 
|Digital services rooms (2)      |  |      | 265,097 |  |      |  | 115,378 |      |  |  |        | 
|Total rooms served (3)          |  |      | 952,673 |  |      |  | 890,546 |      |  |  | 806,112 | 



|(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 more than 30% of the Guest Pay
interactive rooms served in 2002.
|   
|(3) |  | Total rooms served, representing 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 fee per room,
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 in the statements of operations.

InnMedia LLC.During the fourth quarter of 2000, the Company entered into
an arrangement with Hilton Hotels Corporation (Hilton) to form a new
broadband, interactive media company, InnMedia LLC (InnMedia). InnMedia
provided hotel guests new and innovative interactive television content through
Internet on television as well as customized hotel and guest information. Under
this arrangement, InnMedia supplied Internet portal and interactive television
content to LodgeNet for distribution to subscribing hotels using LodgeNets
broadband, interactive system for which it paid LodgeNet a fee for the use of
LodgeNets system. The arrangement included $5 million in financing from
LodgeNet and $5 million in financing from Hilton to fund start-up and near-term
operating costs. The Company had a 47.5% equity interest in InnMedia and
accounted for its investment using the equity method of accounting. For the
years ended December 31, 2001 and 2000, the Company recorded equity losses of
$2.6 million and $3.0 million, respectively.

InnMedia began delivery of content and services in the third quarter of
2001 under the arrangement described above. In connection with the services
provided, the Company charged InnMedia for system access fees of

|                                   |  |    |  |               
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|LodgeNet Entertainment Corporation |  | 16 |  | Form 10-K 2002





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##### Table of Contents



$866,000, connectivity costs of $1.2 million, and support and
administrative expenses of $1.4 million for the year ended December 31, 2001.

On April 12, 2002, the Company terminated the Distribution and Carriage
Agreement, dated October 9, 2000, and Services Agreement, dated October 9,
2000, with InnMedia. The terminations followed the institution of legal
proceedings by InnMedia against the Company. The agreements were terminated due
to, among other things, InnMedias effective repudiation of the agreements and
InnMedias failure to perform. As a result of the dispute with InnMedia, the
Company charged off $471,000 in uncollectable receivables and continued to
incur the costs associated with the provisioning of InnMedias services,
totaling $914,000 through the end of July 2002. Prior to the terminations, the
Company had charged InnMedia for system access fees of $633,000, connectivity
costs of $793,000, and support and administrative expenses of $355,000 related
to the first quarter of 2002.

Effective July 31, 2002, the Company and InnMedias co-owner, Hilton,
mutually agreed to dissolve InnMedia. InnMedia and the Company mutually
released their claims against each other, and the lawsuit filed by InnMedia
against the Company was dismissed with prejudice on August 7, 2002. During the
third quarter of 2002, the Company contributed $252,000 for its share of
pre-dissolution operating costs. For the year ended December 31, 2002, the
Company recorded an equity loss of $419,000. The Company expects InnMedia to be
fully dissolved in 2003 with no additional funding required to cover
dissolution expenses.

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 fee 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 price 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 the hotel 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. For periods
ended December 31, 2002, 2001, and 2000, charges to the allowance for doubtful
account for related interactive television services were $283,000, $148,000,
and $340,000 respectively. 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,

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|LodgeNet Entertainment Corporation |  | 17 |  | Form 10-K 2002





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however any significant unanticipated changes in demand or technological
advances could have an impact on the value of system components and reported
operating results.

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|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 18 |  | Form 10-K 2002





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##### Table of Contents



Results of Operations  Years Ended December 31, 2002 and 2001

Revenue Analysis

Total revenue for 2002 was $235.0 million, an increase of $18.1 million or
8.3% compared to 2001. The increase resulted from a 10.2% increase in average
Guest Pay interactive rooms in operation, driven by the addition of nearly
150,000 rooms served by the Companys next-generation interactive digital
system, which represents a 129.8% increase over 2001.

Guest Pay Interactive Services.Guest Pay interactive service revenue
increased 9.8%, or $20.2 million, in 2002 as compared to 2001. The increase was
primarily due to the additional 77,800 average Guest Pay rooms in operation and
the growth of Guest Pay rooms installed with the interactive digital system.
The following table sets forth the components of the Companys revenue (in
thousands) for the years ended December 31:

|          |           |       |   |         |         |  |          |          |       |        |   |         |          |  |          |      |       | 
|--------- | --------- | ----- | - | ------- | ------- |  | -------- | -------- | ----- | ------ | - | ------- | -------- |  | -------- | ---- | ----- | 
|          |           |       |   | 2002    |         |  | 2001     |         
|          |           |       |   |         |         |  |          |         
|          |           |       |   |         |         |  |          | Percent  |       |        |   |         |          |  | Percent  |     
|          |           |       |   |         |         |  |          | of Total |       |        |   |         |          |  | of Total |     
|          |           |       |   | Amount  |         |  | Revenues |          |       | Amount |   |         | Revenues | 
|          |           |       |   |         |         |  |          |          |       |        |   |         |          | 
|Revenues: |           |       |   |         |         |  |          |          |       |        |   |         |          |  |          |     
|          | Guest Pay |       | $ | 226,238 |         |  |          | 96.3     |       |        | $ | 206,001 |          |  |          | 95.0 |      
|          | Other     |       |   | 8,752   |         |  |          | 3.7      |       |        |   | 10,894  |          |  |          | 5.0  |      
|          |           |       |   |         |         |  |          |          |       |        |   |         |         
|          |           | Total |   | $       | 234,990 |  |          |          | 100.0 |        |   | $       | 216,895  |  |          |      | 100.0 | 
|          |           |       |   |         |         |  |          |          |       |        |   |        

Average movie revenue per room decreased 1.0% from 2001 due to a 110 basis
point decline in occupancy rates of the properties served by the Company. This
factor was partially offset by higher prices charged for movies. The following
table sets forth information with respect to revenue per Guest Pay room for the
years ended December 31:

|                                  |                                   |                          |   |       |       |  |      |       |       | 
|--------------------------------- | --------------------------------- | ------------------------ | - | ----- | ----- |  | ---- | ----- | ----- | 
|                                  |                                   |                          |   | 2002  |       |  | 2001 |      
|                                  |                                   |                          |   |       |       |  |      |      
|Average monthly revenue per room: |                                   |                          |   |       |       |  |      |      
|                                  | Movie revenue                     |                          | $ | 17.77 |       |  | $    | 17.93 |      
|                                  | Other interactive service revenue |                          |   | 4.57  |       |  |      | 4.48  |      
|                                  |                                   |                          |   |       |       |  |     
|                                  |                                   | Total per Guest Pay room |   | $     | 22.34 |  |      | $     | 22.41 | 
|                                  |                                   |                          |   |       |       | 

Average other interactive service revenue per room increased 2.0% from the
prior year. This increase was primarily due to the increase in the number of
rooms served by the interactive digital system, which provides a broader range
of products available to the hotel guests.

Other Revenue.Revenue from other sources is comprised of free-to-guest
services provided to hotels not receiving Guest Pay services and sales of
system equipment and service parts and labor. The $2.1 million decrease in
other revenue was primarily driven by decreased equipment sales to
international licensees due to the civil and economic uncertainties in the
international market where the Company serves.

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|LodgeNet Entertainment Corporation |  | 19 |  | Form 10-K 2002





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##### Table of Contents



Expense Analysis

Direct Costs.The following table sets forth information regarding the
Companys direct costs (in thousands) and gross profit margin for the years
ended December 31:

|                     |           |   |         |        |   |      |        |        |  
|-------------------- | --------- | - | ------- | ------ | - | ---- | ------ | ------ | -
|                     |           |   | 2002    |        |   | 2001 |       
|                     |           |   |         |        |   |      |       
|Direct costs:        |           |   |         |        |   |      |        |       
|                     | Guest Pay |   | $       | 96,043 |   |      | $      | 85,288 |  
|                     | Other     |   |         | 4,739  |   |      |        | 6,802  |  
|                     |           |   |         |        |   |      |       
|                     |           | $ | 100,782 |        |   | $    | 92,090 |       
|                     |           |   |         |        |   |     
|Gross profit margin: |           |   |         |        |   |      |        |       
|                     | Guest Pay |   |         | 57.5   | % |      |        | 58.6   | %
|                     | Other     |   |         | 45.9   | % |      |        | 37.6   | %
|                     | Total     |   |         | 57.1   | % |      |        | 57.5   | %

Guest Pay interactive direct costs increased 12.6% to $96.0 million in
2002 from $85.3 million in the prior year. Guest Pay direct costs (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) are primarily based on related revenue, and such costs
generally vary directly with revenue. The decrease of gross profit margin from
58.6% to 57.5% was primarily attributable to the costs that the Company
absorbed upon termination of InnMedia and increases in hotel commissions,
offset by reductions in video game royalties. InnMedia costs included Internet
connectivity, hotel commissions, royalties, and technical support fees, and
other direct expenses.

Other direct costs associated with other revenue decreased $2.1 million,
or 30.3%, in 2002 from the prior year and the gross profit margin increased
from 37.6% in 2001 to 45.9% in 2002. The resulting increased gross profit
margin was attributable to the reduction of lower margin sales of equipment to
international licensees.

The Companys overall gross profit increased 7.5% in 2002 to $134.2
million on an 8.3% increase in revenue as compared to 2001. As a percentage of
revenue, the overall gross profit margin was 57.1% in 2002 compared to 57.5% in
the prior year. The change was primarily due to the costs that the Company
absorbed upon termination of InnMedia and increases in hotel commissions,
offset by reductions in video game license fees and a nominal shift in sales
from higher margin Guest Pay interactive services, such as movies, to lower
margin free to guest and Internet services.

Operating Expenses.The following table sets forth information in regard
to the Companys operating expenses (in thousands) for the years ended December
31:

|                    |                                     |                          |   |        |         |  |          |          |      |        |   |        |          |  |          |      |      | 
|------------------- | ----------------------------------- | ------------------------ | - | ------ | ------- |  | -------- | -------- | ---- | ------ | - | ------ | -------- |  | -------- | ---- | ---- | 
|                    |                                     |                          |   | 2002   |         |  | 2001     |         
|                    |                                     |                          |   |        |         |  |          |         
|                    |                                     |                          |   |        |         |  |          | Percent  |      |        |   |        |          |  | Percent  |     
|                    |                                     |                          |   |        |         |  |          | of Total |      |        |   |        |          |  | of Total |     
|                    |                                     |                          |   | Amount |         |  | Revenues |          |      | Amount |   |        | Revenues | 
|                    |                                     |                          |   |        |         |  |          |          |      |        |   |        |          | 
|Operating expenses: |                                     |                          |   |        |         |  |          |          |      |        |   |        |          |  |          |     
|                    | Guest Pay operations                |                          | $ | 30,207 |         |  |          | 12.9     |      |        | $ | 28,698 |          |  |          | 13.2 |     
|                    | Selling, general and administrative |                          |   | 22,108 |         |  |          | 9.4      |      |        |   | 20,979 |          |  |          | 9.7  |     
|                    | Depreciation and amortization       |                          |   | 75,918 |         |  |          | 32.3     |      |        |   | 66,008 |          |  |          | 30.4 |     
|                    |                                     |                          |   |        |         |  |          |          |      |        |   |        |         
|                    |                                     | Total operating expenses |   | $      | 128,233 |  |          |          | 54.6 |        |   | $      | 115,685  |  |          |      | 53.3 | 
|                    |                                     |                          |   |        |         |  |          |          |      |        |   |       

Guest Pay operations expenses consist of costs directly related to the
operation of systems at hotel sites. Guest Pay operations expenses increased by
$1.5 million, or 5.3%, in 2002 from the prior year. This increase is primarily
attributable to the 10.2% increase in average installed Guest Pay interactive
rooms in operation during 2002 as compared to 2001. Offsetting the increased
operating costs were greater operating efficiencies resulting from reduced
truck rolls related to tape changes and related freight costs and improved
economies of scale. Per average installed room, Guest Pay operations expenses
decreased by 4.5% to $2.98 per month in 2002 as compared to $3.12 per month in
2001.

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|LodgeNet Entertainment Corporation |  | 20 |  | Form 10-K 2002





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Selling, general and administrative expenses increased 5.4% to $22.1
million in 2002 from $21.0 million in 2001. The increase was substantially
attributable to an InnMedia bad debt charge of $471,000 taken in the second
quarter and approximately $640,000 of professional fees connected with the
InnMedia-related litigation that was dismissed with prejudice pursuant to a
settlement reached in August 2002. As a percentage of revenue, selling, general
and administrative expenses were 9.4% in 2002 and 9.7% in 2001.

Depreciation and amortization expenses increased 15.0% to $75.9 million in
2002 from $66.0 million in the prior year. The increase was primarily due to
the additional 77,800 average Guest Pay interactive rooms in operation. During
the fourth quarter, the Company also expensed approximately $1.4 million of
unamortized costs related to browser software that the Company replaced with
new browser software that provides greater functionality. Additionally, the
Company also incurred depreciation expense of $860,000 for other capitalized
costs including new service vans, equipment, and computers, and additional
amortization expense of $1.3 million for software development and other
intangibles, offset by the changes in fully depreciated assets remaining in
service. As a percentage of revenue, depreciation and amortization expenses
increased to 32.3% in 2002 from 30.4% in 2001.

Operating Income.As a result of increased Guest Pay interactive revenue
and decreased operating expenses as a percent of revenue driven by greater
operating efficiencies, the Company generated operating income of $6.0 million
in 2002 as compared to operating income of $9.1 million in 2001. As noted
above, the change in operating income was primarily driven by hotel
commissions, costs that the Company absorbed upon termination of InnMedia, bad
debt and professional fees connected with the InnMedia-related litigation,
depreciation and amortization, and service costs related to the 10.2% increase
in average installed Guest Pay interactive rooms in operation.

Investment Losses

InnMedia LLC.As previously described, InnMedia was formed by LodgeNet
and Hilton during the fourth quarter of 2000. The Company has a 47.5% equity
interest in InnMedia and recorded losses under the equity method of accounting
for an investment of $2.6 million during 2001 and $3.0 million during 2000.

On April 12, 2002, the Company terminated the Distribution and Carriage
Agreement, dated October 9, 2000, and Services Agreement, dated October 9,
2000, with InnMedia. The terminations followed the institution of legal
proceedings by InnMedia against the Company. The agreements were terminated due
to, among other things, InnMedias effective repudiation of the agreements and
InnMedias failure to perform. As a result of the dispute with InnMedia, the
Company charged off $471,000 in uncollectable receivables and continued to
incur the costs associated with the provisioning of InnMedias services,
totaling $914,000 through the end of July 2002. Prior to the terminations, the
Company had charged InnMedia for system access fees of $633,000, connectivity
costs of $793,000, and support and administrative expenses of $355,000 related
to the first quarter of 2002.

Effective July 31, 2002, the Company and InnMedias co-owner, Hilton,
mutually agreed to dissolve InnMedia. InnMedia and the Company mutually
released their claims against each other, and the lawsuit filed by InnMedia
against the Company was dismissed with prejudice on August 7, 2002. During the
third quarter of 2002, the Company contributed $252,000 for its share of
pre-dissolution operating costs. For the year ended December 31, 2002, the
Company recorded an equity loss of $419,000. The Company expects InnMedia to be
fully dissolved in 2003 with no additional funding required to cover
dissolution expenses.

ResNet Merger/GICC Investment.In November 1998, the operations of the
Companys majority-owned subsidiary, ResNet Communications, LLC (ResNet),
were merged with two non-affiliated entities to form Global Interactive
Communications Corporation (GICC). GICCs business consisted of providing
cable television programming and telecommunications services to the
multi-family dwelling unit market. The Company contributed net assets totaling
$31.3 million in exchange for a 30% equity interest in GICC and notes
receivable totaling $10.8 million. The Company accounted for its investment in
GICC using the equity method of accounting and recorded losses of $183,000 and
$4.2 million for the years ended 2001 and 2000, respectively. In the second
quarter of 2001, the Company transferred its equity interest back to GICC and
had no further financing obligation to GICC. GICC filed for bankruptcy
protection in the third quarter of 2001. In 2002, the Company recovered the
full amount of its

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|LodgeNet Entertainment Corporation |  | 21 |  | Form 10-K 2002





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receivable, which was $316,000 as of December 31, 2001, and recorded an
investment gain of $1.3 million from the $1.7 million in proceeds derived from
the sale of GICCs assets.

Loss On Early Retirement of Debt.In April 2002, the Financial Accounting
Standards Board issued SFAS No. 145, Rescission of FASB Statements No. 4, 44
and 64, Amendment of FASB Statement No. 13, and Technical Corrections. Under
SFAS No. 145, gains and losses on extinguishments of debt will no longer be
classified as extraordinary items as previously required under SFAS No. 4.
Extraordinary treatment will be required for certain extinguishments as
provided in APB Opinion No. 30. Effective January 1, 2002, the Company adopted
the provisions of SFAS No. 145. In connection with the adoption, the Company
reclassified the $2.1 million loss on early retirement of its 1999 bank credit
facility, which was recorded in the third quarter of 2001 as an extraordinary
item, to other expense within the Companys consolidated statement of
operations.

Litigation Settlements.During 2002, the Company entered into settlement
agreements with Broadcast Music Inc. (BMI) and the American Society of
Composers, Authors and Publishers (ASCAP), which resolved claims for alleged
nonpayment of royalties on copyrighted musical works performed in major motion
pictures. BMI and ASCAP had asserted that the music, primarily background
music, used within major motion pictures required licensing. BMI and ASCAP
sought damages for public performances of such music from their respective
catalogues. As a result of the settlements, the Company recorded a provision
for the litigation settlements of $2.7 million that is related to pre-2002
reporting periods. This nonrecurring charge has been reported as a litigation
expense in the accompanying statements of operations. The Company has paid
approximately $1.2 million of the settlement amount with the balance to be paid
ratably over the next five quarters, the first payment scheduled during the
first quarter of 2003. In addition, the Company recorded approximately $420,000
as 2002 operating expense to accurately reflect music royalty costs directly
related to current year operating activities.

Interest Expense.Interest expense was $33.0 million in 2002 compared to
$30.3 million in 2001 due to increases in long-term debt to fund the Companys
continuing expansion of its business. The average principal amount of
long-term debt outstanding during 2002 was approximately $339 million (at a
weighted average interest rate of approximately 9.8%) as compared to an average
principal amount outstanding of approximately $307 million (at a weighted
average interest rate of approximately 9.9%) during 2001.

Net Loss.As a result of factors previously described, the Company
incurred a net loss of $29.1 million as compared to a net loss of $26.4 million
in 2001.

EBITDA.EBITDA (defined by the Company as earnings before interest,
income taxes, depreciation, amortization and other non-operating income or
expenses) increased 9.0% to $81.9 million in 2002 as compared to $75.1 million
in 2001. This increase was primarily due to a 10.2% increase in the average
number of installed rooms receiving Guest Pay interactive services and the
related increase in Guest Pay revenue, as well as increased gross profit earned
on Guest Pay revenue and other revenue as described above. As a percentage of
total revenue, EBITDA increased to 34.8% in 2002 as compared to 34.6% in 2001.

EBITDA is not intended to represent an alternative to net income or cash
flows from operating, financing or investing activities (as determined in
accordance with generally accepted accounting principles) as a measure of
performance, and is not representative of funds available for discretionary use
due to the Companys financing obligations. EBITDA, as defined by the Company,
may not be calculated consistently among other companies applying similar
reporting measures. 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. Management
believes that EBITDA provides an important additional perspective on the
Companys operating results, the Companys ability to service its long-term
obligations, the Companys ability to fund continuing growth, and the Companys
ability to continue as a going concern.

|                                   |  |    |  |               
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|LodgeNet Entertainment Corporation |  | 22 |  | Form 10-K 2002





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Results of Operations  Years Ended December 31, 2001 and 2000

Revenue Analysis

The Companys total revenue for 2001 increased 10.2%, or $20.1 million, in
comparison to 2000. The following table sets forth the components of the
Companys revenue (in thousands) for the years ended December 31:

|          |           |       |   |         |         |  |          |          |       |        |   |         |          |  |          |      |       | 
|--------- | --------- | ----- | - | ------- | ------- |  | -------- | -------- | ----- | ------ | - | ------- | -------- |  | -------- | ---- | ----- | 
|          |           |       |   | 2001    |         |  | 2000     |         
|          |           |       |   |         |         |  |          |         
|          |           |       |   |         |         |  |          | Percent  |       |        |   |         |          |  | Percent  |     
|          |           |       |   |         |         |  |          | of Total |       |        |   |         |          |  | of Total |     
|          |           |       |   | Amount  |         |  | Revenues |          |       | Amount |   |         | Revenues | 
|          |           |       |   |         |         |  |          |          |       |        |   |         |          | 
|Revenues: |           |       |   |         |         |  |          |          |       |        |   |         |          |  |          |     
|          | Guest Pay |       | $ | 206,001 |         |  |          | 95.0     |       |        | $ | 186,718 |          |  |          | 94.9 |      
|          | Other     |       |   | 10,894  |         |  |          | 5.0      |       |        |   | 10,099  |          |  |          | 5.1  |      
|          |           |       |   |         |         |  |          |          |       |        |   |         |         
|          |           | Total |   | $       | 216,895 |  |          |          | 100.0 |        |   | $       | 196,817  |  |          |      | 100.0 | 
|          |           |       |   |         |         |  |          |          |       |        |   |        

Guest Pay Interactive Services.Guest Pay interactive service revenue
increased 10.3%, or $19.3 million, in 2001 as compared to 2000. This increase
was primarily due to a 10.6% increase in the average number of installed Guest
Pay rooms. The following table sets forth information with respect to revenue
per Guest Pay room for the years ended December 31:

|                                  |                                   |                          |   |       |       |  |      |       |       | 
|--------------------------------- | --------------------------------- | ------------------------ | - | ----- | ----- |  | ---- | ----- | ----- | 
|                                  |                                   |                          |   | 2001  |       |  | 2000 |      
|                                  |                                   |                          |   |       |       |  |      |      
|Average monthly revenue per room: |                                   |                          |   |       |       |  |      |      
|                                  | Movie revenue                     |                          | $ | 17.93 |       |  | $    | 18.19 |      
|                                  | Other interactive service revenue |                          |   | 4.48  |       |  |      | 4.27  |      
|                                  |                                   |                          |   |       |       |  |     
|                                  |                                   | Total per Guest Pay room |   | $     | 22.41 |  |      | $     | 22.46 | 
|                                  |                                   |                          |   |       |       | 

Average movie revenue per room decreased 1.4% from 2000 due to a lower
occupancy rate throughout the hotel industry, which was attributable to the
tragic events of September 11th and the impact on the general economy, and due
to a relatively less popular selection of major motion pictures during the
early part of 2001. These factors were partially offset by higher prices
charged for movies.

Average other interactive service revenue per room increased 4.9% from the
prior year. This increase was primarily due to (i) increased per room revenue
from Internet services resulting from increased penetration of Internet
services into Guest Pay rooms, an expanded selection of revenue generating
Internet services, and increasing interest in Internet services from hotel
guests; and (ii) increased revenue from cable television programming services
resulting from decreased incentive credits granted to hotels and increases in
the number of cable television programming channels supplied by hotels to their
guests.

Other Revenue.Revenue from other sources is comprised of free-to-guest
services provided to hotels not receiving Guest Pay services and sales of
system equipment and service parts and labor. The 7.9%, or $795,000, increase
in other revenue was due to increased equipment sales to international
licensees.

Expense Analysis

Direct Costs.The following table sets forth information regarding the
Companys direct costs (in thousands) and gross profit margin for the years
ended December 31:

|              |           |   |        |        |  |      |        |        | 
|------------- | --------- | - | ------ | ------ |  | ---- | ------ | ------ | 
|              |           |   | 2001   |        |  | 2000 |       
|              |           |   |        |        |  |      |       
|Direct costs: |           |   |        |        |  |      |        |       
|              | Guest Pay |   | $      | 85,288 |  |      | $      | 76,586 | 
|              | Other     |   |        | 6,802  |  |      |        | 5,864  | 
|              |           |   |        |        |  |      |       
|              |           | $ | 92,090 |        |  | $    | 82,450 |       
|              |           |   |        |        |  |     

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|LodgeNet Entertainment Corporation |  | 23 |  | Form 10-K 2002





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|                     |           |  |  |      |   |  |  |      |  
|-------------------- | --------- |  |  | ---- | - |  |  | ---- | -
|Gross profit margin: |           |  |  |      |   |  |  |     
|                     | Guest Pay |  |  | 58.6 | % |  |  | 59.0 | %
|                     | Other     |  |  | 37.6 | % |  |  | 41.9 | %
|                     | Composite |  |  | 57.5 | % |  |  | 58.1 | %

Guest Pay interactive direct costs increased 11.4% to $85.3 million in
2001 from $76.6 million in the prior year. Guest Pay direct costs (movie
license fees, license fees for other interactive services, Internet
connectivity fees, and the commission retained by the hotel) are primarily
based on related revenue, and such costs generally vary directly with revenue.
The nominal decrease to gross profit margin from 59.0% to 58.6% was primarily
due to the shift from sales of higher margin Guest Pay interactive services to
lower margin free-to-guest and Internet services.

Other direct costs associated with other revenue increased $938,000 or
16.0% in 2001 from the prior year and the gross profit margin decreased from
41.9% in 2000 to 37.6% in 2001. The resulting decreased gross profit margin
was due to lower profit margin sales of equipment to international licensees.

The Companys overall gross profit increased 9.1% in 2001 to $124.8
million on a 10.2% increase in revenue as compared to 2000. As a percentage of
revenue, the overall gross profit margin decreased to 57.5% in 2001 from 58.1%
in the prior year. The decrease was due to increased equipment sales to
international licensees, which generally earns a lower profit margin and a
nominal shift in sales from higher margin Guest Pay interactive services such
as movies to lower margin free to guest and Internet services.

Operating Expenses.The following table sets forth information in regard
to the Companys operating expenses (in thousands) for the years ended December
31:

|                    |                                     |                          |   |        |         |  |          |          |      |        |   |        |          |  |          |      |      | 
|------------------- | ----------------------------------- | ------------------------ | - | ------ | ------- |  | -------- | -------- | ---- | ------ | - | ------ | -------- |  | -------- | ---- | ---- | 
|                    |                                     |                          |   | 2001   |         |  | 2000     |         
|                    |                                     |                          |   |        |         |  |          |         
|                    |                                     |                          |   |        |         |  |          | Percent  |      |        |   |        |          |  | Percent  |     
|                    |                                     |                          |   |        |         |  |          | of Total |      |        |   |        |          |  | of Total |     
|                    |                                     |                          |   | Amount |         |  | Revenues |          |      | Amount |   |        | Revenues | 
|                    |                                     |                          |   |        |         |  |          |          |      |        |   |        |          | 
|Operating expenses: |                                     |                          |   |        |         |  |          |          |      |        |   |        |          |  |          |     
|                    | Guest Pay operations                |                          | $ | 28,698 |         |  |          | 13.2     |      |        | $ | 27,356 |          |  |          | 13.9 |     
|                    | Selling, general and administrative |                          |   | 20,979 |         |  |          | 9.7      |      |        |   | 19,247 |          |  |          | 9.8  |     
|                    | Depreciation and amortization       |                          |   | 66,008 |         |  |          | 30.4     |      |        |   | 65,470 |          |  |          | 33.3 |     
|                    |                                     |                          |   |        |         |  |          |          |      |        |   |        |         
|                    |                                     | Total operating expenses |   | $      | 115,685 |  |          |          | 53.3 |        |   | $      | 112,073  |  |          |      | 56.9 | 
|                    |                                     |                          |   |        |         |  |          |          |      |        |   |       

Guest Pay operations expenses consist of costs directly related to the
operation of systems at hotel sites. Guest Pay operations expenses increased
by $1.3 million or 4.9% in 2001 from the prior year. This increase is
primarily attributable to the 10.6% increase in average installed Guest Pay
interactive rooms in 2001 as compared to 2000. Offsetting the increased
operating costs were improved cost controls and greater operating efficiencies.
Per average installed room, Guest Pay operations expenses were $3.12 per month
in 2001 as compared to $3.29 per month in 2000.

Selling, general and administrative expenses increased 9.0% to $21.0
million in 2001 from $19.2 million in 2000. This increase was primarily due to
increased payroll, related employee benefits, and outside professional fees.
As a percentage of revenue, selling, general and administrative expenses were
9.7% in 2001 and 9.8% in 2000.

Depreciation and amortization expenses increased 0.8% to $66.0 million in
2001 from $65.5 million in the prior year. This increase was due to the
increase in the number of installed Guest Pay interactive rooms previously
described, as well as the associated software costs and other capitalized costs
including service vans, equipment, and computers that are related to the
increased number of rooms in service since the prior year offset by the
increase in fully depreciated assets remaining in service. As a percentage of
revenue, depreciation and amortization expenses decreased to 30.4% in 2001 from
33.3% in 2000.

Operating Income.As a result of increased Guest Pay interactive revenue
and decreased operating expenses as a percent of revenue driven by greater
internal cost and operating controls, the Company generated operating income of
$9.1 million in 2001 as compared to operating income of $2.3 million in 2000.

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Investment Losses. Effective November 30, 1998, the operations of the
Companys majority-owned subsidiary, ResNet Communications, LLC (ResNet),
were merged with two non-affiliated entities to form Global Interactive
Communications Corporation (GICC). GICCs business consists of providing
cable television programming and telecommunications services to the
multi-family dwelling unit market. The Company contributed net assets totaling
$31.3 million in exchange for a 30% equity interest in GICC and notes
receivable totaling $10.8 million.

The Company accounted for its investment in GICC using the equity method
of accounting for an investment. During 1999, the management and board of GICC
approved a plan to sell its assets. The Company recorded losses of $4.2
million and $22.1 million for the years ended 2000 and 1999, respectively.
During first quarter 2001, the Company recorded equity losses of $183,000. In
the second quarter of 2001, the Company transferred its equity interest in GICC
back to GICC and has no further financing obligation to GICC. As of December
31, 2001, the Company has a receivable of $316,000 included in the accompanying
consolidated balance sheets.

Marketable Securities.During the fourth quarter of 2000, the Company
recorded losses on its investment in CMGI common stock of $6.4 million
reflecting a market value decline in the securities, which was deemed to be
permanent. The recorded value of this investment was $1.4 million as of
December 31, 2000. During 2001, the Company sold the investment for $1.4
million.

InnMedia LLC.As previously described, InnMedia was formed by LodgeNet
and Hilton during the fourth quarter of 2000. The Company has a 50% equity
interest in InnMedia and recorded losses under the equity method of accounting
for an investment of $2.6 million during 2001 and $3.0 million during 2000.
During the fourth quarter of 2001, the Company completed the $5 million
financing commitment to InnMedia. InnMedia is projected to need an additional
round of financing during the second quarter of 2002. The Company, Hilton, and
InnMedia are exploring options regarding future funding plans for InnMedia. As
of December 31, 2001, the Company had a receivable from InnMedia of $531,000, a
payable to InnMedia of $773,000 and an investment balance of $167,000.

Interest Expense.Interest expense increased to $30.3 million in 2001
from $27.8 million in 2000 due to increases in long-term debt to fund the
Companys continuing expansion of its business. The average principal amount
of long-term debt outstanding during 2001 was approximately $307 million (at a
weighted average interest rate of approximately 9.9%) as compared to an average
principal amount outstanding of approximately $282 million (at a weighted
average interest rate of approximately 9.9%) during 2000.

Loss On Early Retirement of Debt. In August 2001, the Company retired its
1999 bank credit facility that was due in February 2005. As a result of the
early retirement, the Company wrote off related unamortized debt issuance costs
of $2.1 million under Other Expense as a loss on early retirement of debt.

EBITDA.EBITDA (defined by the Company as earnings before interest,
income taxes, depreciation, amortization and other non-operating income or
expenses) increased 10.9% to $75.1 million in 2001 as compared to $67.8 million
in 2000. This increase was primarily due to a 10.6% increase in the average
number of installed rooms receiving Guest Pay interactive services and the
related increase in Guest Pay revenue, as well as increased gross profit earned
on Guest Pay revenue and other revenue as described above. As a percentage of
total revenue, EBITDA increased to 34.6% in 2001 as compared to 34.4% in 2000.

EBITDA is not intended to represent an alternative to net income or cash
flows from operating, financing or investing activities (as determined in
accordance with generally accepted accounting principles) as a measure of
performance, and is not representative of funds available for discretionary use
due to the Companys financing obligations. EBITDA, as defined by the Company,
may not be calculated consistently among other companies applying similar
reporting measures. 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. Management
believes that EBITDA provides an important additional perspective on the
Companys operating results, the Companys ability to service its long-term
obligations, the Companys ability to fund continuing growth, and the Companys
ability to continue as a going concern.

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Recent Accounting Developments

In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 142, Goodwill and Other Intangible Assets which eliminates the current
requirement to amortize goodwill and indefinite-lived intangible assets,
addresses the amortization of intangible assets with a defined life and
addresses the impairment testing and recognition for goodwill and intangible
assets. Effective January 1, 2002, the Company adopted the provisions of this
statement, which had no impact on its consolidated financial statements.

In June 2001, the FASB issued SFAS No. 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets. SFAS No. 143 primarily
establishes accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement costs. The
provisions of SFAS No. 143 will be effective for fiscal years beginning after
June 15, 2002. The Company has determined the adoption of this statement will
not impact its consolidated financial statements.

In October 2001, the Financial Accounting Standards Board issued SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No.
144 supercedes SFAS 121, Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to Be Disposed Of. SFAS No. 144 primarily addresses
significant issues relating to the implementation of SFAS No. 121 and develops
a single accounting model for long-lived assets to be disposed of, whether
previously held and used or newly acquired. Effective January 1, 2002, the
Company adopted the provisions of SFAS No. 144, which had no impact on its
consolidated financial statements.

In November 2001, the FASB Emerging Issues Task Force issued EITF 01-9,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendors Products. The EITF concluded that certain consideration from a
vendor to a customer is to be reported as a reduction of revenue. Effective
January 1, 2002, the Company adopted the provisions of EITF 01-9, which had no
impact on its consolidated financial statements.

In April 2002, the Financial Accounting Standards Board issued SFAS No.
145, Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB
Statement No. 13, and Technical Corrections. Under SFAS No. 145, gains and
losses on extinguishments of debt will no longer be classified as extraordinary
items as previously required under SFAS No. 4. Extraordinary treatment will be
required for certain extinguishments as provided in APB Opinion No. 30.
Effective January 1, 2002, the Company adopted the provisions of SFAS No. 145.
In connection with the adoption, the Company reclassified the $2.1 million of
other expense  loss on early retirement of its 1999 bank credit facility,
which was recorded in the third quarter of 2001 as an extraordinary item, as a
separate line below operating income in the Companys consolidated statement of
operations.

In June 2002, the Financial Accounting Standards Board issued SFAS No.
146, Accounting for Costs Associated with Exit or Disposal
Activities,which
addresses financial accounting and reporting for costs associated with exit or
disposal activities and supersedes EITF Issue 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A liability for an exit cost as
defined in EITF 94-3 is recognized at the date of an entitys commitment to an
exit plan. SFAS No. 146 also establishes that the liability should initially be
measured and recorded at fair value. The Company will adopt the provisions of
SFAS No. 146 for exit or disposal activities that are initiated after December
31, 2002. Adoption of this standard will not have an impact on the Companys
consolidated financial statements.

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 will be

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effective for fiscal years beginning after December 15, 2002. The Company
does not believe the adoption of the EITF will have an impact on its
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 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 amendments to SFAS No. 123, which provides for additional
transition methods, are effective for periods beginning after December 15,
2002, although earlier application is permitted. Certain disclosure amendments
are required for financial statements for fiscal years ending after December
15, 2002, and have been reflected in these consolidated financial statements.
The remaining amendments to the disclosure requirements are required for
financial reports containing condensed financial statements for interim periods
beginning after December 15, 2002. The Company adopted the disclosure
provisions of this statement and had no impact to the consolidated financial
statements.

In January 2003, FASB Interpretation No. 46, Consolidation of Variable
Interest Entities was released and had no impact on the Companys consolidated
financial statements.

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 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. Commencing in 2001, net 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 of the remaining portion of growth capital expenditures was provided by
the Companys bank facility. For 2001, capital expenditures were $78.4 million
and net cash provided by operating activities was $46.5 million. For 2002,
capital expenditures were $72.1 million and net cash provided by operating
activities was $43.8 million. During 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. As of December 31, 2002, working
capital was negative $5.2 million as compared to negative $5.0 million in 2001.

Depending on the rate of growth of its business and other factors, the
Company expects to incur capital expenditures of $60 to $65 million in 2003.
Based on that range, the Company would be able to install 57,000 to 60,000 net
new rooms and 60,000 to 65,000 major upgrade rooms. As of December 31, 2002,
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 December 31, 2002 was $353.8 million versus $325.8 million as of
December 31, 2001.

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 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

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anticipated operating cash flows, the Company would 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
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. No securities have been issued
under this registration statement as of December 31, 2002.

In the event of hostilities in the Middle East, other significant
International crises, or acts of terrorism, the Company believes that the
general economy and the lodging industry could be negatively affected. If such
a conflict or crisis is protracted or the effects on the lodging industry are
more severe than currently expected by industry experts, the affect on the
Companys financial performance could result in the Company being in violation
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.

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.

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Obligations and Commitments as of December 31, 2002 (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)           |                               | $ | 353,790 |         |  | $                      | 9,320  |        |       | $ | 16,448 |        |  | $ | 328,022 |         |  | $ |   |   
|                         | Interest on senior notes    |                               |   | 65,664  |         |  |                        | 17,466 |        |       |   | 32,822 |        |  |   | 15,376  |         |  |   |   |   
|                         | Other long-term obligations |                               |   | 10,859  |         |  |                        | 3,202  |        |       |   | 3,548  |        |  |   | 4,027   |         |  |   | 82 |   
|                         |                             |                               |   |         |         |  |                        |        |        |       |   |        |        |  |   |        
|                         |                             | Total contractual obligations |   | $       | 430,313 |  |                        | $      | 29,988 |       |   | $      | 52,818 |  |   | $       | 347,425 |  |   | $  | 82 | 
|                         |                             |                               |   |         |         |  |                        |        |        |       |   |        |        |  |  

|                              |                           |  |   |       |  |  |                                            |       |  |       |   |   |       |  |   |         |  |  |   |   |  | 
|----------------------------- | ------------------------- |  | - | ----- |  |  | ------------------------------------------ | ----- |  | ----- | - | - | ----- |  | - | ------- |  |  | - | - |  | 
|                              |                           |  |   |       |  |  | 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 |  | $ | 2,000 |  |  | $                                          | 2,000 |  |       | $ |  |       |  | $ |        |  |  | $ |  | 
|                              |                           |  |   |       |  |  |                                            |       |  |       |   |   |       |  |   |        
|                              |                           |  |   |       |  |  |                                            |       |  |       |   |   |       |  |   |         |  |  |   |   |  | 

Business Risks

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 resulting from various factors. Reduction in hotel
occupancy resulting from business, economic, or other events, such as
hostilities in the Middle East, other significant International crisis, or acts
of terrorism,could adversely impact the Companys results of operations.

The overall travel industry has been adversely affected by the weaker
general economic climate and the threat of terrorist attacks and the Iraqi
situation. Occupancy rates from the properties served by the Company during
2002 were 110 basis points below the level experienced in 2001. 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. Occupancy rates
have been below the level experienced in 2001 and prior years. For 2003,
occupancy rates are forecasted to be flat or slightly lower than 2002 and may
be even more adversely impacted by current events. If hotel occupancy rates
were to decline significantly below forecasted levels, the Companys revenues
would be adversely affected.

To help mitigate the impact of occupancy levels on operating profit and
EBITDA, 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 mitigates reliance on any one geographic
sector.

Technological Developments, Developmental Difficulties and Delays. The
entertainment and communications industry is ever-changing as new technologies
are introduced. Technological advances may result in an adverse competitive
situation for the Company. While the Company mitigates risks by continually
designing, engineering, and developing products and systems that can be
upgraded to support new services or integrated with new technologies as they
become economically viable, there can be no assurance that the Company will
continue to be successful in these efforts. In addition, the Company may
experience difficulties and delays in developing new products and systems or in
integrating the Companys system with new technologies.

Relationships with Clients and Property Owners.The Company believes that
its interactive hotel base is well diversified in terms of (i) location; (ii)
demographics; and (iii) customer contracts. As of December 31, 2002, no single
customer, state, or province accounted for more than 10% of the hotel
properties served by the Company. The Company

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provides its services to various corporate-managed hotel chains such as
Hilton, Doubletree, Embassy Suites, Sheraton, Ritz-Carlton, Harrahs, Omni
Hotels, Delta Hotels, Outrigger, La Quinta Inns, Wingate Inns, Homewood Suites,
Grand Casinos, Hampton Inns & Suites, Baymont Inns & Suites, and Red Roof Inns,
plus various major REITs and management companies such as MeriStar, Felcor,
Flagstone, Prime, WestCoast Hospitality, as well as many independent properties
using the Marriott, Holiday Inn, Inter-Continental, Courtyard by Marriott,
Prince, Radisson, W Hotel, Westin and other trade names. The Company relies on
its diverse hotel base and geographic diversity to mitigate these exposures, as
well as the fact that the Companys services are provided under long-term
contracts, Nevertheless, the Companys success depends on maintaining good
relationships with the clients and property owners it serves. The loss of any
group of customers or the loss of significant number of hotel chains could have
an adverse effect on the results of operations.

Programming Availability and Quality.The Company depends upon major
motion picture studios for its major motion picture programming content. The
Company obtains non-exclusive rights to recently released major motion pictures
from motion picture studios pursuant to agreements with each studio. The
quality and popularity of the major motion pictures available at any given time
and from year to year can vary widely. Generally the more popular titles at the
box office will also be more popular with hotel guests. The Company also
obtains independent films, most of which are non-rated and intended for mature
audiences, from distributors and studios. The Company provides music services
through an agreement with a third party vendor. The Company provides Nintendo
video game services through an agreement with Nintendo. The Companys success
depends upon its ability to provide content that hotel guests are willing to
pay to view. However, the Company cannot predict the future popularity or
quality of the movies, music, games or other content that the Company provides
or may provide in the future. If, for any reason, such content became less
popular than it is currently, the Companys business could be adversely
impacted. In addition, if any significant portion of the content the Company
provides to hotel guests were to become unavailable, for reasons which could
include licensing difficulties, governmental regulation or issues of public
standards, the Companys business could be adversely impacted.

Availability of Capital to Finance Growth.While the Company believes
that its operating cash flows and borrowings under its revolving credit
facility will be sufficient to fund the Companys future growth, its financing
obligations, and its negative working capital, if operating cash flows are
significantly below the amount anticipated in its current business plan, the
Company expects to cover the short fall through any combination of additional
borrowings available under its 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
would be adversely affected. While the Company is currently in compliance with
all of the covenants in its credit facility, and believes it would remain in
compliance even if hotel occupancy rates were less than anticipated for 2003,
if the lodging industry were to suffer a dramatic decrease in occupancy rates,
due to an extraordinary event such as war or acts of terrorism, the resulting
impact on the Companys business could result in a violation of one or more
financial covenants. 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.

Competition.See Item 1  Business Competition.

Government Regulation.See Item 1  Regulation.




Item 7A 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 December 31, 2002, the Company had debt totaling $354
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. After giving effect to the interest rate swap arrangements, the
Company had fixed rate debt of $272 million and variable rate debt of $82
million at December 31, 2002. For fixed rate debt, interest rate fluctuations
affect the fair market value but do not impact earnings or cash

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flows. Conversely, for variable rate debt, interest rate fluctuations 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 to
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 to interest rates
would be approximately $820,000 assuming other variables remain constant.

Foreign Currency Transactions.A portion of the Companys revenues is
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. Additionally, 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. No significant foreign currency
fluctuations occurred during 2002 to materially impact consolidated results of
operations or financial condition.




Item 8  Financial Statements and Supplementary Data

See Item 14  Exhibits, Financial Statement Schedules and Reports on Form
8-K for the Companys Consolidated Financial Statements, the Notes thereto and
Schedules filed as a part of this report.




Item 9  Changes In and Disagreements With Accountants on Accounting and
Financial Disclosure

On June 3, 2002, the Company filed a Current Report on Form 8-K with the
SEC announcing the appointment of PricewaterhouseCoopers LLP as the Companys
independent auditor for the fiscal year 2002. Prior to the selection of
PricewaterhouseCoopers LLP, Arthur Andersen LLP had served as the Companys
independent auditor. The decision to change auditors was not the result of any
disagreement between the Company and Arthur Andersen LLP on any matter of
accounting principles or practice, financial statement disclosure, or auditing
scope or procedure.

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 31 |  | Form 10-K 2002





---



##### Table of Contents



PART III




Item 10  Directors and Executive Officers of the Registrant

The information concerning directors and executive officers of the Company
is incorporated by reference from the sections entitled Executive Officers,
Election of Directors  Board of Directors and Nominees and Compliance with
Reporting Requirements of Section 16 of the Exchange Act of the Companys
definitive Proxy Statement to be filed pursuant to Regulation 14A within 120
days after the end of the last fiscal year.




Item 11  Executive Compensation

Information concerning executive remuneration and transactions is
incorporated by reference from the section entitled Beneficial Ownership of
Principal Stockholders and Management of the Companys definitive Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after the end
of the last fiscal year.




Item 12  Security Ownership of Certain Beneficial Owners and Management

Information concerning security ownership of certain beneficial owners and
management is incorporated by reference from the section entitled Beneficial
Ownership of Principal Stockholders and Management of the Companys definitive
Proxy Statement to be filed pursuant to Regulation 14A within 120 days after
the end of the last fiscal year.




Item 13  Certain Relationships and Related Transactions

Information concerning certain relationships and related transactions with
management is incorporated by reference from the section entitled Certain
Transactions with Management and Others of the Companys definitive Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after the end
of the fiscal year.

PART IV




Item 14  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 within 90 days of the filing of this annual report. Based upon
this evaluation, the Chief Executive Officer and the 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 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 annual report, and there were no significant
deficiencies or material weaknesses which required corrective actions.

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 32 |  | Form 10-K 2002





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##### Table of Contents






Item 15  Exhibits, Financial Statement Schedules and Reports on Form 8-K



| | (a) |  | Consolidated Financial Statements and Schedules  Reference is made
to the Index to Consolidated Financial Statements of LodgeNet
Entertainment Corporation, located at page F  1 of this PART IV, for a
list of the financial statements and schedules for the year ended
December 31, 2002 included herein. With the participation of
management, the Companys chief executive officer and chief financial
officer evaluated the Companys disclosure controls and procedures
within 90 days of the filing date of this annual report (the
Evaluation Date). 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.
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (b) |  | Reports on Form 8-K  During the quarter ended December 31, 2002,
the Company filed the following reports on Form 8-K:                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      



| | (i)  |  | On November 13, 2002, the Company filed a Report on Form 8-K
to file, as an exhibit, a copy of the certifications of LodgeNets
financial statements by its chief executive officer and chief
financial officer attached to its Quarterly Report on Form 10-Q
filed on October 13, 2002.                                                                                                                                                           
| | ---- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (ii) |  | On December 12, 2002, the Company filed a Report on Form 8-K
to file, as an exhibit, the Companys Press Release dated December
11, 2002 concerning the Companys announcement that it is adding a
comprehensive, high-speed Internet access (HSIA) service offering to
the services it provides to the United States hospitality industry
and to updated guidance for the fourth quarter and full-year of
2002.                                   
|
| | (c)  |  | Exhibits  Following is a list of Exhibits filed with this report.
Exhibits 10.14, 10.19, 10.26, 10.27, 10.29 and 10.31 constitute
management contracts. Exhibits 10.1, 10.3, 10.4, 10.5, 10.6, 10.7,
10.8, 10.21, 10.22, 10.28 and 10.30 constitute compensatory plans.                                                                                                                                                                           
|
| |      |  | If you would like a copy of any of the Exhibits listed herein, please
submit a request in writing to LodgeNet Entertainment Corporation,
Attention: Corporate Secretary, 3900 West Innovation Street, Sioux Falls,
South Dakota 57107-7002, and the Company will provide you with such
Exhibit(s) upon the payment of a nominal fee, such fee being limited to
the expenses incurred by the Company in providing you with the requested
Exhibit(s).

Exhibit No.

|    |  |                                                                                                                                                                                                             
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|3.1 |  | Certificate of Incorporation of the Company (1)                                                                                                                                                             
|    |  |                                                                                                                                                                                                             
|3.2 |  | By-Laws of the Registrant (1)                                                                                                                                                                               
|    |  |                                                                                                                                                                                                             
|3.3 |  | Amendment No. 1 to Restated Certificate of Incorporation of the Company (11)                                                                                                                                
|    |  |                                                                                                                                                                                                             
|4.1 |  | Registration Rights Agreement dated as of December 16, 1996, between
LodgeNet Entertainment Corporation and Morgan Stanley & Co. Incorporated,
NatWest Capital Markets Limited and Montgomery Securities (6)
|    |  |                                                                                                                                                                                                             
|4.2 |  | Indenture dated as of December 19, 1996, between LodgeNet Entertainment
Corporation and Marine Midland Bank, as trustee, including the form of
Senior Note (6)                                              
|    |  |                                                                                                                                                                                                             
|4.3 |  | Form of Senior Notes (included in Exhibit 4.2)                                                                                                                                                              

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 33 |  | Form 10-K 2002





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##### Table of Contents



|      |  |                                                                                                                                                                                                                                                                
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|4.4   |  | First Supplemental Indenture dated October 15, 1998, among LodgeNet
Entertainment Corporation and Marine Midland Bank, as trustee, to the
Indenture dated December 19, 1996 (see Exhibit 4.2)                                                                  
|      |  |                                                                                                                                                                                                                                                                
|10.1  |  | LodgeNet Entertainment Corporation Stock Option Plan (as amended and
restated effective May 8, 2001) (6)                                                                                                                                                       
|      |  |                                                                                                                                                                                                                                                                
|10.2  |  | License Agreement dated May 2, 1993 between Nintendo of America, Inc. and
LodgeNet Entertainment Corporation (2)                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                
|10.3  |  | Stock Option Agreements dated as of February 29, 1988 between the Company
and Tim C. Flynn, as extended by Extension Agreement dated as of July 15,
1991 (2)                                                                                                   
|      |  |                                                                                                                                                                                                                                                                
|10.4  |  | Stock Option Agreements dated as of February 29, 1988 between the Company
and Scott C. Petersen, as extended by Extension Agreement dated as of July
15, 1991 (2)                                                                                              
|      |  |                                                                                                                                                                                                                                                                
|10.5  |  | Stock Option Agreement dated as of December 31, 1992 between the Company
and John M. OHaugherty (2)                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                
|10.6  |  | Stock Option Agreement dated as of December 31, 1992 between the Company
and David M. Bankers (2)                                                                                                                                                              
|      |  |                                                                                                                                                                                                                                                                
|10.7  |  | Form of Stock Option Agreement for Non-Employee Directors (3)                                                                                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                
|10.8  |  | Form of Incentive Stock Option Agreement for Key Employees (3)                                                                                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                
|10.9  |  | Securities Purchase Agreement, by and between LodgeNet Entertainment
Corporation, John Hancock Mutual Life Insurance Company, Allstate Life
Insurance Company, Connecticut Mutual Life Insurance and CMA Life
Insurance Company, dated as of August 9, 1995 (4)
|      |  |                                                                                                                                                                                                                                                                
|10.10 |  | Amendment to Securities Purchase Agreement, dated as of December 19,
1996 (6)                                                                                                                                                                                  
|      |  |                                                                                                                                                                                                                                                                
|10.11 |  | Form of Executive Severance Agreement between the Company and each of
Scott C. Petersen, John M. OHaugherty, David M. Bankers and Steven D.
Truckenmiller; all dated of July 25, 1995 (5)                                                                     
|      |  |                                                                                                                                                                                                                                                                
|10.12 |  | First Amendment, dated October 17, 1996, to License Agreement between
Nintendo of America, Inc. and LodgeNet Entertainment Corporation (6)                                                                                                                     
|      |  |                                                                                                                                                                                                                                                                
|10.13 |  | Confidential License Agreement for Use of Nintendo Video Game Systems
with Hotel Entertainment System, dated May 12, 1998, between LodgeNet
Entertainment Corporation and Nintendo of America Inc.  (7)                                                       
|      |  |                                                                                                                                                                                                                                                                
|10.14 |  | Form of Employment Agreement between the Company and each of David M.
Bankers and John M. OHaugherty (8)                                                                                                                                                      
|      |  |                                                                                                                                                                                                                                                                
|10.15 |  | Master Services Agreement between Hilton Hotels Corporation and LodgeNet
Entertainment Corporation dated October 9, 2000  (9)                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                                
|10.16 |  | Warrant to Purchase Common Stock of LodgeNet Entertainment Corporation
dated October 9, 2000 (9)                                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                
|10.17 |  | InnMedia LLC Operating Agreement effective as of October 9, 2000 (9)                                                                                                                                                                                           
|      |  |                                                                                                                                                                                                                                                                
|10.18 |  | Executive Severance Agreement between the Company and Gary H. Ritondaro
dated March 1, 2001 (10)                                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                                
|10.19 |  | Employment Agreement between the Company and Gary H. Ritondaro dated
March 1, 2001 (10)                                                                                                                                                                        

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 34 |  | Form 10-K 2002





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##### Table of Contents



|      |  |                                                                                                                                                                                                                                                          
|----- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|10.20 |  | Credit Agreement dated August 29, 2001 by and among LodgeNet
Entertainment Corporation, Canadian Imperial Bank of Commerce, Bear
Stearns Corporate Lending, Inc., U. S. Bank National Association, Fleet
National Bank and the Lenders Named Therein (11)
|      |  |                                                                                                                                                                                                                                                          
|10.21 |  | Amendment No. 2 dated as of December 6, 2001, to Stock Option Agreement
dated as of December 31, 1992 between the Company and David M. Bankers
(12)                                                                                                      
|      |  |                                                                                                                                                                                                                                                          
|10.22 |  | Amendment No. 2 dated as of December 6, 2001, to Stock Option Agreement
dated as of December 31, 1992 between the Company and John M. OHaugherty
(12)                                                                                                   
|      |  |                                                                                                                                                                                                                                                          
|10.23 |  | Amendment To Master Services Agreement dated August 2, 2002 by and
between Hilton Hotels Corporation and LodgeNet Entertainment Corporation
(13)                                                                                                         
|      |  |                                                                                                                                                                                                                                                          
|10.24 |  | Hilton LodgeNet Agreement dated August 2, 2002 by and between Hilton
Hotels Corporation and LodgeNet Entertainment Corporation (13)                                                                                                                      
|      |  |                                                                                                                                                                                                                                                          
|10.25 |  | First Amendment to Credit Agreement, dated August 19, 2002, by and
between LodgeNet Entertainment Corporation and Canadian Imperial Bank (as
Administrative Agent) (14)                                                                                  
|      |  |                                                                                                                                                                                                                                                          
|10.26 |  | Employment Agreement between the Company and Scott C. Petersen dated September 23, 2002. (15)                                                                                                                                                            
|      |  |                                                                                                                                                                                                                                                          
|10.27 |  | Employment Agreement between the Company and Stephen D. McCarty dated March 1, 2003.                                                                                                                                                                     
|      |  |                                                                                                                                                                                                                                                          
|10.28 |  | Executive Severance Agreement between the Company and Stephen D. McCarty dated March 1, 2003.                                                                                                                                                            
|      |  |                                                                                                                                                                                                                                                          
|10.29 |  | Employment Agreement between the Company and Steven Pofahl dated March 1, 2003.                                                                                                                                                                          
|      |  |                                                                                                                                                                                                                                                          
|10.30 |  | Executive Severance Agreement between the Company and Steven Pofahl dated March 1, 2003.                                                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                          
|10.31 |  | Employment Agreement between the Company and Steven D. Truckenmiller dated March 1, 2003.                                                                                                                                                                
|      |  |                                                                                                                                                                                                                                                          
|12.1  |  | Statement of computation of ratios.                                                                                                                                                                                                                      
|      |  |                                                                                                                                                                                                                                                          
|21.1  |  | Subsidiaries of the Company.                                                                                                                                                                                                                             
|      |  |                                                                                                                                                                                                                                                          
|23.1  |  | Consent of Independent Public Accountants.                                                                                                                                                                                                               
|      |  |                                                                                                                                                                                                                                                          
|99.1  |  | Certification Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                 
|      |  |                                                                                                                                                                                                                                                          



---

| Confidential Treatment has been requested with respect to certain portions of
these agreements.
|-------------------------------------------------------------------------------------------------
|                                                                                                 
|(1)                                                                                              
|                                                                                                 
|(2)                                                                                              
|                                                                                                 
|(3)                                                                                              
|                                                                                                 
|(4)                                                                                              

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 35 |  | Form 10-K 2002



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##### Table of Contents



|(5)  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995, as filed with the Securities and
Exchange Commission, November 14, 1995.
|---- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|    
|(6)  |  | Incorporated by Reference to the Companys Annual Report on Form 10-K for
the year ended December 31, 1996, as filed with the Securities and
Exchange Commission, March 17, 1997.          
|    
|(7)  |  | Incorporated by Reference to the Companys Annual Report on Form 10-K for
the year ended December 31, 1998, as filed with the Securities and
Exchange Commission, March 25, 1999.          
|    
|(8)  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999, as filed with the Securities and
Exchange Commission, August 13, 1999.       
|    
|(9)  |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000, as filed with the Securities and
Exchange Commission, November 14, 2000.
|    
|(10) |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001, as filed with the Securities and
Exchange Commission, May 14, 2001.         
|    
|(11) |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, as filed with the Securities and
Exchange Commission, November 14, 2001.
|    
|(12) |  | Incorporated by Reference to the Companys Annual Report on Form 10-K for
the year ended December 31, 2001, as filed with the Securities and
Exchange Commission, March 20, 2002.          
|    
|(13) |  | Incorporated by Reference to the Companys Current Report on Form 8-K, as
filed with the Securities and Exchange Commission, August 15, 2002.                                              
|    
|(14) |  | Incorporated by Reference to the Companys Current Report on Form 8-K, as
filed with the Securities and Exchange Commission, August 20, 2002.                                              
|    
|(15) |  | Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002, as filed with the Securities and
Exchange Commission, November 13, 2002.

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 36 |  | Form 10-K 2002





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##### Table of Contents



Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Sioux
Falls, State of South Dakota, on March 18, 2003.

| |  |     |  |                                       
| |  | --- |  | --------------------------------------
| |  |     |  | LodgeNet Entertainment Corporation    
| |  |     |  |                                       
| |  | By: |  | /s/ Scott C. Petersen                 
| |  |     |  |                                       
| |  |     |  | Scott C. Petersen,                    
| |  |     |  | President, Chief Executive Officer and
| |  |     |  | Chairman of the Board of Directors    

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, and in the capacities indicated, on March 18, 2003.

|                                           |  |                                                                                                         |  |               
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                  |  | Title                                                                                                   |  | Date          
|                                           |  |                                                                                                         |  |               
|/s/ Scott C. PetersenScott C. Petersen     |  | President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer) |  | March 18, 2003
|                                          
|/s/ Gary H. RitondaroGary H. Ritondaro     |  | Senior Vice President
Chief Financial Officer
(Principal Financial & Accounting Officer)                |  | March 18, 2003
|                                          
|/s/ R. Douglas BradburyR. Douglas Bradbury |  | Director                                                                                                |  | March 18, 2003
|                                          
|/s/ Lawrence Flinn, Jr.Lawrence Flinn, Jr. |  | Director                                                                                                |  | March 18, 2003
|                                          
|/s/ Richard R. HyllandRichard R. Hylland   |  | Director                                                                                                |  | March 18, 2003
|                                          
|/s/ R. F. LeyendeckerR. F. Leyendecker     |  | Director                                                                                                |  | March 18, 2003
|                                          
|/s/ Jarl MohnJarl Mohn                     |  | Director                                                                                                |  | March 18, 2003

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 37 |  | Form 10-K 2002





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##### Table of Contents



Certification

I, Gary Ritondaro, certify that:

1.     I have reviewed this annual report on Form 10-K of LodgeNet Entertainment
Corporation;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                                
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information
relating to the registrant, including its consolidated subsidiaries, is
made known to us by
others within those entities, particularly during the period in which this
annual report is
being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as of
a date within 90 days prior to the filing date of this annual report (the
Evaluation
Date); and                                                                                                  
|
| | c) presented in this annual report our conclusions about the effectiveness
of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                        

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal
controls which could
adversely affect the registrants ability to record, process, summarize
and report financial
data and have identified for the registrants auditors any material
weaknesses in internal
controls; and
|
| | b) any fraud, whether or not material, that involves management or other
employees who
have a significant role in the registrants internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 18, 2003

/s/ Gary H. Ritondaro
Gary H. Ritondaro
Chief Financial Officer (Principal Financial & Accounting Officer)

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 38 |  | Form 10-K 2002





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##### Table of Contents



Certification

I, Scott C. Petersen, certify that:

1.     I have reviewed this annual report on Form 10-K of LodgeNet Entertainment
Corporation;

2.     Based on my knowledge, this annual report does not contain any untrue
statement of a material fact or omit to state a material fact necessary to make
the statements made, in light of the circumstances under which such statements
were made, not misleading with respect to the period covered by this annual
report;

3.     Based on my knowledge, the financial statements, and other financial
information included in this annual report, fairly present in all material
respects the financial condition, results of operations and cash flows of the
registrant as of, and for, the periods presented in this annual report;

4.     The registrants other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as defined in
Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:



| |                                                                                                                                                                                                                                                                                               
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) designed such disclosure controls and procedures to ensure that
material information
relating to the registrant, including is consolidated subsidiaries, is
made known to us by
others within those entities, particularly during the period in which this
annual report
is being prepared;
|
| | b) evaluated the effectiveness of the registrants disclosure controls and
procedures as
of a date within 90 days prior to the filing date of this annual report
(the Evaluation
Date); and                                                                                                 
|
| | c) presented in this annual report our conclusions about the effectiveness
of the
disclosure controls and procedures based on our evaluation as of the
Evaluation Date;                                                                                                                       

5.     The registrants other certifying officers and I have disclosed, based on
our most recent evaluation, to the registrants auditors and the audit
committee of registrants board of directors (or persons performing the
equivalent function):



| |                                                                                                                                                                                                                                                                                                  
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | a) all significant deficiencies in the design or operation of internal
controls which could
adversely affect the registrants ability to record, process, summarize
and report financial
data and have identified for the registrants auditors any material
weaknesses in internal
controls; and
|
| | b) any fraud, whether or not material, that involves management of other
employees who
have a significant role in the registrants internal controls; and                                                                                                                                        

6.     The registrants other certifying officers and I have indicated in this
annual report whether or not there were significant changes in internal
controls or in other factors that could significantly affect internal controls
subsequent to the date of our most recent evaluation, including any corrective
actions with regard to significant deficiencies and material weaknesses.

Date: March 18, 2003

/s/ Scott C. Petersen
Scott C. Petersen
Chief Executive Officer (Principal Executive Officer)

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 39 |  | Form 10-K 2002





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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

LodgeNet Entertainment Corporation and Subsidiaries

Index to Consolidated Financial Statements

|                                                                                                   |  |  |        |  | 
|-------------------------------------------------------------------------------------------------- |  |  | ------ |  | 
|                                                                                                   |  |  | Page   | 
|                                                                                                   |  |  |        | 
|Reports of Independent Accountants                                                                 |  |  | F - 2  | 
|Consolidated Balance Sheets as of December 31, 2002 and 2001                                       |  |  | F - 4  | 
|Consolidated Statements of Operations  Three Years Ended December 31, 2002                        |  |  | F - 5  | 
|Consolidated Statements of Stockholders Equity (Deficiency)  Three Years
Ended December 31, 2002 |  |  | F - 6  | 
|Consolidated Statements of Cash Flows  Three Years Ended December 31, 2002                        |  |  | F - 7  | 
|Notes to Consolidated Financial Statements                                                         |  |  | F - 8  | 
|Index to Financial Schedules                                                                      
|Reports of Independent Accountants on Schedule                                                     |  |  | F - 23 | 
|Schedule II  Valuation and Qualifying Accounts                                                    |  |  | F - 25 | 

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-1 |  | Form 10-K 2002





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##### Table of Contents



Report of Independent Accountants

To the Board of Directors and Stockholders,
LodgeNet Entertainment Corporation:

In our opinion, the accompanying consolidated balance sheet as of December 31,
2002, and the related consolidated statements of operations, stockholders
equity (deficiency) and cash flows for the year then ended present fairly, in
all material respects, the financial position of LodgeNet Entertainment
Corporation and its subsidiaries as of December 31, 2002, and the results of
their operations and their cash flows for the year then ended in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Companys management;
our responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. The financial statements of the Company as
of December 31, 2001 and for each of the two years in the period ended December
31, 2001, prior to the revision discussed in the Summary of Significant
Accounting Policies note, were audited by other independent accountants who
have ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statements in their report dated February 6, 2002.

As discussed above, the financial statements of LodgeNet Entertainment
Corporation as of December 31, 2001, and for each of the two years in the
period ended December 31, 2001, were audited by other independent accountants
who have ceased operations. As described in the Summary of Significant
Accounting Policies note, these financial statements have been revised to
include the reclassification required by SFAS No. 145, Rescission of FASB
Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Correctionwhich was adopted by the Company during the year ended December 31,
2002. We audited the reclassification in 2001 related to the adoption of SFAS
145 as described in the Summary of Significant Accounting Policies note. In
our opinion, the reclassification for 2001 is appropriate. However, we were
not engaged to audit, review, or apply any procedures to the 2001 and 2000
financial statements of the Company other than with respect to such
reclassification, accordingly, we do not express an opinion or any other form
of assurance on the 2001 and 2000 financial statements taken as a whole.

/S/ PRICEWATERHOUSECOOPERS LLP

Minneapolis Minnesota
February 3, 2003

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-2 |  | Form 10-K 2002





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##### Table of Contents



Report of Independent Accountants

The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP. As discussed in the
Summary of Significant Accounting Policies note, the corporation has reflected
the impact of adopting SFAS 145 on the 2001 consolidated financial statements
by reclassifying the loss on the early retirement of debt in 2001. The Arthur
Andersen LLP report does not extend to this change to the 2001 consolidated
financial statements. The adjustment to the 2001 consolidated financial
statements were reported on by PricewaterhouseCoopers LLP as stated in their
report appearing herein.

To LodgeNet Entertainment Corporation:

We have audited the accompanying consolidated balance sheets of LodgeNet
Entertainment Corporation (a Delaware corporation) and Subsidiaries as of
December 31, 2001 and 2000*, and the related consolidated statements of
operations, stockholders equity (deficit) and cash flows for each of the three
years in the period ended December 31, 2001*. These financial statements are
the responsibility of the Companys management. Our responsibility is to
express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of LodgeNet Entertainment
Corporation and Subsidiaries as of December 31, 2001 and 2000, and the results
of their operations and their cash flows for each of the three years in the
period ended December 31, 2001, in conformity with accounting principles
generally accepted in the United States.

As discussed in Note 2 to the consolidated financial statements, effective
January 1, 2001, LodgeNet Entertainment Corporation and Subsidiaries adopted
Statement of Financial Accounting Standard No. 133 Accounting for Derivative
Instruments and Hedging Activities which changed its method of accounting for
interest rate swaps and other derivatives.

Arthur Andersen LLP

Minneapolis, Minnesota
February 6, 2002

*     The 2000 consolidated balance sheet and the 1999 consolidated statements of
operations, stockholders equity (deficit) and cash flows are not required to
be presented in the 2002 annual report.

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-3 |  | Form 10-K 2002





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##### Table of Contents



LodgeNet Entertainment Corporation and Subsidiaries

Consolidated Balance Sheets
(Dollar amounts in thousands, except share data)

|                                                         |                                                                                                                                                      |                                         |                                                   |          |          |              |         |          |         |   |  | 
|-------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ------------------------------------------------- | -------- | -------- | ------------ | ------- | -------- | ------- | - |  | 
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          | December 31, |        
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          |              |        
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          | 2002         |         |          | 2001    |  
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          |              |         |          |         |  
|                                                         |                                                                                                                                                      |                                         |                                                   | Assets   |          |              |         |          |         |   |  | 
|Current assets:                                          |                                                                                                                                                      |                                         |                                                   |          |          |              |         |         
|                                                         | Cash and cash equivalents                                                                                                                            |                                         | $                                                 | 1,107    |          |              | $       | 1,528    |        
|                                                         | Accounts receivable, net                                                                                                                             |                                         |                                                   | 28,373   |          |              |         | 26,677   |        
|                                                         | Prepaid expenses                                                                                                                                     |                                         |                                                   | 3,772    |          |              |         | 2,864    |        
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          |             
|                                                         |                                                                                                                                                      | Total current assets                    |                                                   |          | 33,252   |              |         |          | 31,069  |  
|Property and equipment, net                              |                                                                                                                                                      |                                         | 243,656                                           |          |          |              | 240,274 |         
|Investments in and advances to unconsolidated affiliates |                                                                                                                                                      |                                         |                                                  |          |          |              | 484     |         
|Debt issuance costs, net                                 |                                                                                                                                                      |                                         | 7,443                                             |          |          |              | 9,176   |         
|Intangible assets, net                                   |                                                                                                                                                      |                                         | 12,042                                            |          |          |              | 8,565   |         
|Other assets                                             |                                                                                                                                                      |                                         | 1,691                                             |          |          |              | 1,917   |         
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          |              |        
|                                                         |                                                                                                                                                      | $                                       | 298,084                                           |          |          | $            | 291,485 |         
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          |             
|                                                         |                                                                                                                                                      |                                         | Liabilities and Stockholders Equity (Deficiency) |          |          |              |         |          |         |   | 
|Current liabilities:                                     |                                                                                                                                                      |                                         |                                                   |          |          |              |         |         
|                                                         | Accounts payable                                                                                                                                     |                                         | $                                                 | 12,812   |          |              | $       | 14,502   |        
|                                                         | Current maturities of long-term debt                                                                                                                 |                                         |                                                   | 9,320    |          |              |         | 8,168    |        
|                                                         | Accrued expenses                                                                                                                                     |                                         |                                                   | 12,977   |          |              |         | 10,251   |        
|                                                         | Deferred revenue                                                                                                                                     |                                         |                                                   | 3,371    |          |              |         | 3,100    |        
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          |             
|                                                         |                                                                                                                                                      | Total current liabilities               |                                                   |          | 38,480   |              |         |          | 36,021  |  
|Long-term debt                                           |                                                                                                                                                      |                                         | 344,470                                           |          |          |              | 317,663 |         
|Other long-term liability                                |                                                                                                                                                      |                                         | 4,995                                             |          |          |              |        |         
|Derivative instruments                                   |                                                                                                                                                      |                                         | 11,443                                            |          |          |              | 5,369   |         
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          |              |        
|                                                         | Total liabilities                                                                                                                                    |                                         |                                                   | 399,388  |          |              |         | 359,053  |        
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          |             
|Commitments and contingencies (Note 10)                  |                                                                                                                                                      |                                         |                                                   |          |          |              |         |         
|Stockholders equity (deficiency):                       |                                                                                                                                                      |                                         |                                                   |          |          |              |         |         
|                                                         | Common stock, $.01 par value, 50,000,000 shares authorized;
12,431,149 and 12,284,998 shares outstanding at December 31,
2002 and 2001, respectively |                                         |                                                   | 124      |          |              |         | 123      |        
|                                                         | Additional paid-in capital                                                                                                                           |                                         |                                                   | 153,363  |          |              |         | 151,990  |        
|                                                         | Accumulated deficit                                                                                                                                  |                                         |                                                   | (241,515 | )        |              |         | (212,389 | )      
|                                                         | Accumulated other comprehensive loss                                                                                                                 |                                         |                                                   | (13,276  | )        |              |         | (7,292   | )      
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          |              |        
|                                                         |                                                                                                                                                      | Total stockholders equity (deficiency) |                                                   |          | (101,304 | )            |         |          | (67,568 | )
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          |              |        
|                                                         |                                                                                                                                                      | $                                       | 298,084                                           |          |          | $            | 291,485 |         
|                                                         |                                                                                                                                                      |                                         |                                                   |          |          |             

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

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-4 |  | Form 10-K 2002





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##### Table of Contents



LodgeNet Entertainment Corporation and Subsidiaries

Consolidated Statements of Operations
(Dollar amounts in thousands, except share data)

|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |         |      |            |         |         | 
|--------------------------------------------------------------------------- | ----------------------------------- | --------------------------------------------------------------------------------- | ---------- | ------------------------ | ------- | - | ---------- | ------- | ------- | ---- | ---------- | ------- | ------- | 
|                                                                            |                                     |                                                                                   |            | Years Ended December 31, |        
|                                                                            |                                     |                                                                                   |            |                          |        
|                                                                            |                                     |                                                                                   |            | 2002                     |         |   | 2001       |         |         | 2000 |           
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |         |      |           
|Revenues:                                                                   |                                     |                                                                                   |            |                          |         |   |            |         |         |      |            |        
|                                                                            | Guest Pay                           |                                                                                   | $          | 226,238                  |         |   | $          | 206,001 |         |      | $          | 186,718 |        
|                                                                            | Other                               |                                                                                   |            | 8,752                    |         |   |            | 10,894  |         |      |            | 10,099  |        
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |         |     
|                                                                            |                                     | Total revenues                                                                    |            |                          | 234,990 |   |            |         | 216,895 |      |            |         | 196,817 | 
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |        
|Direct costs:                                                               |                                     |                                                                                   |            |                          |         |   |            |         |         |      |            |        
|                                                                            | Guest Pay                           |                                                                                   |            | 96,043                   |         |   |            | 85,288  |         |      |            | 76,586  |        
|                                                                            | Other                               |                                                                                   |            | 4,739                    |         |   |            | 6,802   |         |      |            | 5,864   |        
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |         |     
|                                                                            |                                     | Total direct costs (exclusive of other operating
expenses shown separately below) |            |                          | 100,782 |   |            |         | 92,090  |      |            |         | 82,450  | 
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |        
|Gross profit (exclusive of other operating expenses
shown separately below) |                                     |                                                                                   | 134,208    |                          |         |   | 124,805    |         |         |      | 114,367    |        
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |        
|Operating expenses:                                                         |                                     |                                                                                   |            |                          |         |   |            |         |         |      |            |        
|                                                                            | Guest Pay operations                |                                                                                   |            | 30,207                   |         |   |            | 28,698  |         |      |            | 27,356  |        
|                                                                            | Selling, general and administrative |                                                                                   |            | 22,108                   |         |   |            | 20,979  |         |      |            | 19,247  |        
|                                                                            | Depreciation and amortization       |                                                                                   |            | 75,918                   |         |   |            | 66,008  |         |      |            | 65,470  |        
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |         |     
|                                                                            |                                     | Total operating expenses                                                          |            |                          | 128,233 |   |            |         | 115,685 |      |            |         | 112,073 | 
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |        
|Operating income                                                            |                                     |                                                                                   | 5,975      |                          |         |   | 9,120      |         |         |      | 2,294      |        
|Investment gains (losses)                                                   |                                     |                                                                                   | 872        |                          |         |   | (2,790     | )       |         |      | (13,593    | )      
|Litigation settlements                                                      |                                     |                                                                                   | (2,700     | )                        |         |   |           |         |         |      |           |        
|Loss on early retirement of debt                                            |                                     |                                                                                   |           |                          |         |   | (2,091     | )       |         |      |           |        
|Interest expense                                                            |                                     |                                                                                   | (33,037    | )                        |         |   | (30,306    | )       |         |      | (27,809    | )      
|Other income                                                                |                                     |                                                                                   | 314        |                          |         |   | 348        |         |         |      | 419        |        
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |        
|Loss before income taxes                                                    |                                     |                                                                                   | (28,576    | )                        |         |   | (25,719    | )       |         |      | (38,689    | )      
|Provision for income taxes                                                  |                                     |                                                                                   | (550       | )                        |         |   | (689       | )       |         |      | (325       | )      
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |        
|Net loss                                                                    |                                     | $                                                                                 | (29,126    | )                        |         | $ | (26,408    | )       |         | $    | (39,014    | )      
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |        
|Net loss per common share (basic and diluted)                               |                                     | $                                                                                 | (2.35      | )                        |         | $ | (2.16      | )       |         | $    | (3.21      | )      
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |        
|Weighted average shares outstanding (basic and diluted)                     |                                     |                                                                                   | 12,378,678 |                          |         |   | 12,248,301 |         |         |      | 12,145,109 |        
|                                                                            |                                     |                                                                                   |            |                          |         |   |            |         |         |     

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

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-5 |  | Form 10-K 2002





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##### Table of Contents



LodgeNet Entertainment Corporation and Subsidiaries

Consolidated Statements of Stockholders Equity (Deficiency)
(Dollar amounts in thousands, except share data)

|                           |                              |                                               |            |              |   |   |            |   |   |             |         |        |               |       |          |               |         |   |         |             |         |   |          |        |         |  
|-------------------------- | ---------------------------- | --------------------------------------------- | ---------- | ------------ | - | - | ---------- | - | - | ----------- | ------- | ------ | ------------- | ----- | -------- | ------------- | ------- | - | ------- | ----------- | ------- | - | -------- | ------ | ------- | -
|                           |                              |                                               |            |              |   |   |            |   |   |             |         |        |               |       |          |               |         |   |         | Accumulated |         |   |          |        |        
|                           |                              |                                               |            | Common Stock |   |   | Additional |   |   |             |         |        |               | Other |          |               |         |   |        
|                           |                              |                                               |            |              |   |   | Paid-in    |   |   | Accumulated |         |        | Comprehensive |       |          |               |         |  
|                           |                              |                                               |            | Shares       |   |   | Amount     |   |   | Capital     |         |        | Deficit       |       |          | Income/(Loss) |         |   | Total   |            
|                           |                              |                                               |            |              |   |   |            |   |   |             |         |        |               |       |          |               |         |   |         |            
|Balance, December 31, 1999 |                              |                                               | 11,970,852 |              |   | $ | 120        |   |   | $           | 124,021 |        |               | $     | (146,967 | )             |         | $ | 17,322  |             |         | $ | (5,504   | )     
|                           | Common stock option activity |                                               |            | 241,187      |   |   |            | 2 |   |             |         | 2,326  |               |       |          |              |         |   |         |            |         |   |          | 2,328  |        
|                           | Disgorged profits            |                                               |            |             |   |   |            |  |   |             |         | 2,468  |               |       |          |              |         |   |         |            |         |   |          | 2,468  |        
|                           | Warrants issued (Note 13)    |                                               |            |             |   |   |            |  |   |             |         | 21,848 |               |       |          |              |         |   |         |            |         |   |          | 21,848 |        
|                           | Comprehensive loss:          |                                               |            |              |   |   |            |   |   |             |         |        |               |       |          |               |         |   |         |             |         |   |          |        |        
|                           |                              | Net loss                                      |            |              |  |   |            |   |  |             |         |        |              |       |          |               | (39,014 | ) |         |             |        |   |          |        |         |  
|                           |                              | Foreign currency
translation adjustment       |            |              |  |   |            |   |  |             |         |        |              |       |          |               |        |   |         |             | (424    | ) |          |        |         |  
|                           |                              | Unrealized loss on
marketable securities      |            |              |  |   |            |   |  |             |         |        |              |       |          |               |        |   |         |             | (18,128 | ) |          |        |         |  
|                           |                              | Comprehensive loss                            |            |              |  |   |            |   |  |             |         |        |              |       |          |               |        |   |         |             |        |   |          |        | (57,566 | )
|                           |                              |                                               |            |              |   |   |            |   |   |             |         |        |               |       |          |               |         |  
|Balance, December 31, 2000 |                              |                                               | 12,212,039 |              |   |   | 122        |   |   |             | 150,663 |        |               |       | (185,981 | )             |         |   | (1,230  | )           |         |   | (36,426  | )     
|                           | Common stock option activity |                                               |            | 72,959       |   |   |            | 1 |   |             |         | 793    |               |       |          |              |         |   |         |            |         |   |          | 794    |        
|                           | Warrants issued (Note 13)    |                                               |            |             |   |   |            |  |   |             |         | 534    |               |       |          |              |         |   |         |            |         |   |          | 534    |        
|                           | Comprehensive loss:          |                                               |            |              |   |   |            |   |   |             |         |        |               |       |          |               |         |   |         |             |         |   |          |        |        
|                           |                              | Net loss                                      |            |              |  |   |            |   |  |             |         |        |              |       |          |               | (26,408 | ) |         |             |        |   |          |        |         |  
|                           |                              | Foreign currency
translation adjustment       |            |              |  |   |            |   |  |             |         |        |              |       |          |               |        |   |         |             | (693    | ) |          |        |         |  
|                           |                              | Cumulative effect of
adoption of SFAS No. 133 |            |              |  |   |            |   |  |             |         |        |              |       |          |               |        |   |         |             | (1,287  | ) |          |        |         |  
|                           |                              | Unrealized loss on
derivative instruments     |            |              |  |   |            |   |  |             |         |        |              |       |          |               |        |   |         |             | (4,082  | ) |          |        |         |  
|                           |                              | Comprehensive loss                            |            |              |  |   |            |   |  |             |         |        |              |       |          |               |        |   |         |             |        |   |          |        | (32,470 | )
|                           |                              |                                               |            |              |   |   |            |   |   |             |         |        |               |       |          |               |         |  
|Balance, December 31, 2001 |                              |                                               | 12,284,998 |              |   |   | 123        |   |   |             | 151,990 |        |               |       | (212,389 | )             |         |   | (7,292  | )           |         |   | (67,568  | )     
|                           | Common stock option activity |                                               |            | 146,151      |   |   |            | 1 |   |             |         | 1,030  |               |       |          |              |         |   |         |            |         |   |          | 1,031  |        
|                           | Warrants issued (Note 13)    |                                               |            |             |   |   |            |  |   |             |         | 343    |               |       |          |              |         |   |         |            |         |   |          | 343    |        
|                           | Comprehensive loss:          |                                               |            |              |   |   |            |   |   |             |         |        |               |       |          |               |         |   |         |             |         |   |          |        |        
|                           |                              | Net loss                                      |            |              |  |   |            |   |  |             |         |        |              |       |          |               | (29,126 | ) |         |             |        |   |          |        |         |  
|                           |                              | Foreign currency
translation adjustment       |            |              |  |   |            |   |  |             |         |        |              |       |          |               |        |   |         |             | 89      |   |          |        |         |  
|                           |                              | Unrealized loss on
derivative instruments     |            |              |  |   |            |   |  |             |         |        |              |       |          |               |        |   |         |             | (6,073  | ) |          |        |         |  
|                           |                              | Comprehensive loss                            |            |              |  |   |            |   |  |             |         |        |              |       |          |               |        |   |         |             |        |   |          |        | (35,110 | )
|                           |                              |                                               |            |              |   |   |            |   |   |             |         |        |               |       |          |               |         |  
|Balance, December 31, 2002 |                              |                                               | 12,431,149 |              |   | $ | 124        |   |   | $           | 153,363 |        |               | $     | (241,515 | )             |         | $ | (13,276 | )           |         | $ | (101,304 | )     
|                           |                              |                                               |            |              |   |   |            |   |   |             |         |        |               |       |          |               |         |  

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

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-6 |  | Form 10-K 2002





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##### Table of Contents



LodgeNet Entertainment Corporation and Subsidiaries

Consolidated Statements of Cash Flows
(Dollar amounts in thousands)

|                                                 |                                                                                 |                                             |                                       |         |                          |        |         |         |        |       |         |         |        |        |  
|------------------------------------------------ | ------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------- | ------- | ------------------------ | ------ | ------- | ------- | ------ | ----- | ------- | ------- | ------ | ------ | -
|                                                 |                                                                                 |                                             |                                       |         | Years Ended December 31, |       
|                                                 |                                                                                 |                                             |                                       |         |                          |       
|                                                 |                                                                                 |                                             |                                       |         | 2002                     |        |         | 2001    |        |       | 2000    |        
|                                                 |                                                                                 |                                             |                                       |         |                          |        |         |         |        |       |         |        
|Operating activities:                            |                                                                                 |                                             |                                       |         |                          |        |         |         |        |       |         |        
|                                                 | Net loss                                                                        |                                             | $                                     | (29,126 | )                        |        | $       | (26,408 | )      |       | $       | (39,014 | )     
|                                                 | Adjustments to reconcile net loss to net cash provided
by operating activities: |                                             |                                       |         |                          |        |         |         |        |       |         |         |       
|                                                 |                                                                                 | Depreciation and amortization               |                                       |         | 75,918                   |        |         |         | 66,008 |       |         |         | 65,470 |       
|                                                 |                                                                                 | Investment (gains) losses                   |                                       |         | (872                     | )      |         |         | 2,790  |       |         |         | 13,593 |       
|                                                 |                                                                                 | Loss on early retirement of debt            |                                       |         |                         |        |         |         | 2,091  |       |         |         |       |       
|                                                 |                                                                                 | Change in operating assets and liabilities: |                                       |         |                          |        |         |         |        |       |         |         |        |       
|                                                 |                                                                                 |                                             | Accounts receivable                   |         |                          | (1,684 | )       |         |        | (212  | )       |         |        | 3,011  |  
|                                                 |                                                                                 |                                             | Prepaid expenses                      |         |                          | (844   | )       |         |        | 1,080 |         |         |        | (1,948 | )
|                                                 |                                                                                 |                                             | Accounts payable                      |         |                          | (1,694 | )       |         |        | 1,435 |         |         |        | (1,926 | )
|                                                 |                                                                                 |                                             | Accrued expenses and deferred revenue |         |                          | 2,208  |         |         |        | (86   | )       |         |        | 296    |  
|                                                 |                                                                                 |                                             | Other                                 |         |                          | (137   | )       |         |        | (221  | )       |         |        | 1,698  |  
|                                                 |                                                                                 |                                             |                                       |         |                          |        |         |         |       
|Net cash provided by operating activities        |                                                                                 |                                             | 43,769                                |         |                          |        | 46,477  |         |        |       | 41,180  |        
|                                                 |                                                                                 |                                             |                                       |         |                          |        |         |         |       
|Investing activities:                            |                                                                                 |                                             |                                       |         |                          |        |         |         |        |       |         |        
|                                                 | Property and equipment additions                                                |                                             |                                       | (72,115 | )                        |        |         | (78,386 | )      |       |         | (60,195 | )     
|                                                 | Proceeds from sale of investments                                               |                                             |                                       |        |                          |        |         | 1,393   |        |       |         | 7,200   |       
|                                                 | Proceeds from (investments in) affiliates                                       |                                             |                                       | 1,407   |                          |        |         | (1,002  | )      |       |         | 2,747   |       
|                                                 |                                                                                 |                                             |                                       |         |                          |        |         |         |        |      
|Net cash used for investing activities           |                                                                                 |                                             | (70,708                               | )       |                          |        | (77,995 | )       |        |       | (50,248 | )      
|                                                 |                                                                                 |                                             |                                       |         |                          |        |         |         |       
|Financing activities:                            |                                                                                 |                                             |                                       |         |                          |        |         |         |        |       |         |        
|                                                 | Proceeds from long-term debt                                                    |                                             |                                       |        |                          |        |         | 150,000 |        |       |         |        |       
|                                                 | Repayment of long-term debt                                                     |                                             |                                       | (7,542  | )                        |        |         | (81,428 | )      |       |         | (39     | )     
|                                                 | Payment of license rights liability                                             |                                             |                                       |        |                          |        |         |        |        |       |         | (5,294  | )     
|                                                 | Payment of capital lease obligations                                            |                                             |                                       | (707    | )                        |        |         | (498    | )      |       |         | (453    | )     
|                                                 | Borrowings under revolving credit facility                                      |                                             |                                       | 40,000  |                          |        |         | 27,000  |        |       |         | 23,000  |       
|                                                 | Repayments of revolving credit facility                                         |                                             |                                       | (6,000  | )                        |        |         | (61,000 | )      |       |         | (10,500 | )     
|                                                 | Debt issuance costs                                                             |                                             |                                       | (269    | )                        |        |         | (5,829  | )      |       |         |        |       
|                                                 | Exercise of stock options                                                       |                                             |                                       | 1,031   |                          |        |         | 794     |        |       |         | 2,328   |       
|                                                 | Disgorged profits                                                               |                                             |                                       |        |                          |        |         |        |        |       |         | 2,468   |       
|                                                 |                                                                                 |                                             |                                       |         |                          |        |         |         |        |      
|Net cash provided by financing activities        |                                                                                 |                                             | 26,513                                |         |                          |        | 29,039  |         |        |       | 11,510  |        
|                                                 |                                                                                 |                                             |                                       |         |                          |        |         |         |       
|Effect of exchange rates on cash                 |                                                                                 |                                             | 5                                     |         |                          |        | (52     | )       |        |       | (27     | )      
|                                                 |                                                                                 |                                             |                                       |         |                          |        |         |         |       
|(Decrease) increase in cash and cash equivalents |                                                                                 |                                             | (421                                  | )       |                          |        | (2,531  | )       |        |       | 2,415   |        
|Cash and cash equivalents at beginning of period |                                                                                 |                                             | 1,528                                 |         |                          |        | 4,059   |         |        |       | 1,644   |        
|                                                 |                                                                                 |                                             |                                       |         |                          |        |         |         |        |      
|Cash and cash equivalents at end of period       |                                                                                 | $                                           | 1,107                                 |         |                          | $      | 1,528   |         |        | $     | 4,059   |        
|                                                 |                                                                                 |                                             |                                       |         |                          |        |         |         |       

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

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|LodgeNet Entertainment Corporation |  | F-7 |  | Form 10-K 2002





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LodgeNet Entertainment Corporation and Subsidiaries

Notes to Consolidated Financial Statements

Note 1  The Company

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. LodgeNet interactive services include digital 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.

The Companys operating performance and outlook are strongly influenced by such
factors as hotel occupancy levels and economic conditions in the lodging
industry, the number of lodging rooms equipped with the Companys interactive
systems, hotel guest demographics, the number and type of product offerings,
the popularity and availability of programming, and competitive factors.

The rapid growth of the Companys business has and is expected to continue to
require capital resources in excess of operating cash flows. The Company
believes that its operating cash flows and borrowings available under its
revolving credit facility will be sufficient to fund the Companys growth
plans. However, if operating cash flows are significantly below the amount
anticipated in its current business plan, the Company would cover the 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.

Note 2  Summary of Significant Accounting Policies

Principles of ConsolidationThe consolidated financial statements include the
accounts of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation. Investments
in affiliates in which the Company had significant influence, but not effective
control generally represented by common stock ownership of at least 20% but not
more than 50%, have been accounted for using the equity method of accounting
for an investment.

Foreign Currency TranslationThe assets and liabilities of the Companys
Canadian subsidiary were translated at year-end exchange rates. Income
statement items were translated at average exchange rates during the periods.

Use of EstimatesThe preparation of financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements, and the reported amounts
of revenues, expenses and costs during the reporting periods. Actual results
could differ from those estimates.

Long-Lived AssetsThe Company reviews the carrying value of long-lived assets
such as property and equipment and intangible assets whenever events or
circumstances indicate that the carrying value of an asset may not be
recoverable from the estimated future cash flows expected to result from its
use and eventual disposition. In cases where undiscounted expected future cash
flows are less than the carrying value, an impairment loss is recognized to
reduce the carrying value of the asset to its estimated fair value.

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|LodgeNet Entertainment Corporation |  | F-8 |  | Form 10-K 2002





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Property and Equipment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 operations as incurred. Depreciation
of Guest Pay and free-to-guest systems begins 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.
Depreciation and amortization is computed using the straight-line method over
the following useful lives:

|                   |                   |  |        |       | 
|------------------ | ----------------- |  | ------ | ----- | 
|                   |                   |  | Years  |      
|                   |                   |  |        |      
|Buildings          |                   |  | 30     |      
|Guest Pay systems: |                   |  |        |      
|                   | System components |  |        | 5 - 7 | 
|                   | In-room equipment |  |        | 2 - 5 | 
|Other equipment    |                   |  | 3 - 10 |      

Software DevelopmentThe Company has capitalized certain costs of developing
software for its Guest Pay systems in accordance with AICPA Statement of
Position 98-1, Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use. Capitalized costs are reported at the lower of
unamortized cost or net realizable value, and are amortized over the systems
estimated useful life, not to exceed five years. Guest Pay system development
costs capitalized were $2,705,000, $1,152,000 and $2,818,000 during the years
ended December 31, 2002, 2001 and 2000, respectively, and amortization of such
costs was $1,896,000, $1,529,000 and $1,445,000, respectively. The Company
charged $814,000, $842,000, and $507,000 to operations for each of the years
presented related to research and development activities.

Revenue RecognitionThe Companys revenue from the sale of interactive
television services is recognized in the period the services are provided. In
addition, the Company generates nominal revenue from the sale of system
equipment and service parts and labor, which is recognized when the equipment
is delivered or the service has been provided. Deferred revenue consists of
advance billings for certain interactive television services that are
recognized in the periods that services are provided.

The Companys Guest Pay revenue consists of services that are purchased by
guests on a per-view, hourly, or daily basis and include on-demand movies,
music and music videos, network-based video games, Internet on television,
high-speed Internet access services, and television on-demand programs. 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 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.

Concentration of Credit Risks and Customer DataThe Company derives virtually
all of its revenue from entities in the lodging industry; however, no
individual customer accounted for 10% or more of total revenue in any period
presented in the accompanying consolidated statements of operations. The
allowance for doubtful accounts was $300,000 at December 31, 2002 and $500,000
at December 31, 2001. The provision for doubtful accounts was $754,000 in
2002, which included $471,000 of uncollectible receivables from the termination
of InnMedia, $148,000 in 2001, and $340,000 in 2000.

Derivative Financial InstrumentsThe Company has entered into interest rate
swap arrangements to manage certain exposures to fluctuations in interest
rates. The Company does not utilize these instruments for speculative or
trading purposes. The interest rate swaps effectively change the underlying
debt from a variable rate to a fixed interest rate for the term of the swaps.
Net amounts paid or received are reflected as adjustments to interest expense.

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|LodgeNet Entertainment Corporation |  | F-9 |  | Form 10-K 2002





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Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standard (SFAS) No. 133, Accounting for Derivative Instruments
and Hedging Activities. SFAS No. 133 establishes accounting and reporting
standards requiring that every derivative instrument (including certain
derivative instruments embedded in other contracts) be recorded in the balance
sheet as either an asset or liability measured at its fair value. The
statement requires that changes in the derivatives fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivatives gains and losses
to offset related results on the hedged item and requires that a company must
formally document, designate and assess the effectiveness of transactions that
receive hedge accounting.

In March 2002, the Company entered into a $50 million interest rate swap
agreement, which expires in March 2006. In addition, the Company had existing
interest rate swap agreements on $100 million of long-term debt, of which $50
million expire in March 2003 and $50 million expire in December 2005. The
Company is required by its bank credit facility to have in place a minimum of
$100 million swap agreements that convert variable rate interest debt into
fixed interest rate loans. The swap agreements have been designated as, and
meet the criteria for, cash flow hedges and are not considered speculative in
nature.

Income TaxesThe Company accounts for income taxes under the liability
method, in accordance with the requirements of Statement of Financial
Accounting Standards (SFAS) No. 109, Accounting for Income Taxes. Deferred
income tax assets and liabilities are computed annually for differences between
the financial statement and tax basis of assets and liabilities. Measurement
is based on enacted tax rates applicable to the periods in which such
differences are expected to reverse.

Comprehensive LossThe Company follows SFAS No. 130, Reporting Comprehensive
Income, which requires companies to report all changes in equity during a
period, except those resulting from investments by owners and distributions to
owners, in a financial statement for the period in which they are recognized.
Total comprehensive loss is disclosed in the consolidated statement of
stockholders equity (deficiency) and includes net loss and other comprehensive
income (loss), which is comprised of unrealized gains (losses) on marketable
securities available for sale, unrealized gains (losses) on derivative
instruments and foreign currency translation adjustments. Accumulated balances
for each component of other comprehensive income (loss) were as follows:

|                           |                      |   |                |         |   |             |         |        |             |   |        |               |   |   |         |         |  
|-------------------------- | -------------------- | - | -------------- | ------- | - | ----------- | ------- | ------ | ----------- | - | ------ | ------------- | - | - | ------- | ------- | -
|                           |                      |   | Unrealized     |         |   | Unrealized  |         |        | Foreign     |   |        | Accumulated   |  
|                           |                      |   | Gain (Loss) on |         |   | Loss on     |         |        | Currency    |   |        | Other         |  
|                           |                      |   | Marketable     |         |   | Derivative  |         |        | Translation |   |        | Comprehensive |  
|                           |                      |   | Securities     |         |   | Instruments |         |        | Adjustment  |   |        | Income (Loss) |  
|                           |                      |   |                |         |   |             |         |        |             |   |        |               |  
|Balance, December 31, 1999 |                      | $ | 18,128         |         |   | $           |        |        |             | $ | (806   | )             |   | $ | 17,322  |        
|                           | Change during period |   |                | (18,128 | ) |             |         |       |             |   |        | (424          | ) |   |         | (18,552 | )
|                           |                      |   |                |         |   |             |         |        |             |   |        |              
|Balance, December 31, 2000 |                      |   |               |         |   |             |        |        |             |   | (1,230 | )             |   |   | (1,230  | )      
|                           | Change during period |   |                |        |   |             |         | (5,369 | )           |   |        | (693          | ) |   |         | (6,062  | )
|                           |                      |   |                |         |   |             |         |        |             |   |        |              
|Balance, December 31, 2001 |                      |   |               |         |   |             | (5,369  | )      |             |   | (1,923 | )             |   |   | (7,292  | )      
|                           | Change during period |   |                |        |   |             |         | (6,073 | )           |   |        | 89            |   |   |         | (5,984  | )
|                           |                      |   |                |         |   |             |         |        |             |   |        |              
|Balance, December 31, 2002 |                      | $ |               |         |   | $           | (11,442 | )      |             | $ | (1,834 | )             |   | $ | (13,276 | )      
|                           |                      |   |                |         |   |             |         |        |             |   |        |              

Earnings 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 form
diluted earnings per share.

The loss per common share for the three years ended December 31, 2002, 2001 and
2000, is based on 12,378,678, 12,248,301 and 12,145,109 weight average shares
outstanding during the respective periods. Weighted average options on
2,286,886, 2,261,948, and 1,912,991 shares of common stock and warrants on
2,059,000, 2,004,000, and 823,000 shares of common stock were not included in
computing diluted EPS because their effects were antidilutive for each of the
years presented.

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|LodgeNet Entertainment Corporation |  | F-10 |  | Form 10-K 2002





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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 is 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 years ended December 31 (in thousands of dollars, except per share
amounts):

|                                                                                                              |             |   |         |       |   |      |         |       |      |   |         |       |  
|------------------------------------------------------------------------------------------------------------- | ----------- | - | ------- | ----- | - | ---- | ------- | ----- | ---- | - | ------- | ----- | -
|                                                                                                              |             |   | 2002    |       |   | 2001 |         |       | 2000 |  
|                                                                                                              |             |   |         |       |   |      |         |       |      |  
|Net loss, as reported                                                                                         |             | $ | (29,126 | )     |   | $    | (26,408 | )     |      | $ | (39,014 | )    
|Add: stock based employee compensation expense
determined under fair value method, net
of related tax
effects |             |   | (3,188  | )     |   |      | (4,357  | )     |      |   | (8,578  | )    
|                                                                                                              |             |   |         |       |   |      |         |       |     
|Net loss, pro forma                                                                                           |             | $ | (32,314 | )     |   | $    | (30,765 | )     |      | $ | (47,592 | )    
|                                                                                                              |             |   |         |       |   |      |         |       |     
|Loss per share (basic and diluted)                                                                            |             |   |         |       |   |      |         |       |      |   |         |      
|                                                                                                              | As reported |   | $       | (2.35 | ) |      | $       | (2.16 | )    |   | $       | (3.21 | )
|                                                                                                              | Pro forma   |   |         | (2.61 | ) |      |         | (2.51 | )    |   |         | (3.92 | )

Note 12 to the consolidated financial statements contains the significant
assumptions used in determining the underlying fair value of options.

Statements of Cash FlowsCash equivalents are comprised of demand deposits
and temporary investments in highly liquid securities having original
maturities of 90 days or less at the date of purchase. Cash paid for interest
was $33,059,000, $32,076,000, and $27,879,000 during the years ended December
31, 2002, 2001, and 2000, respectively. Equipment acquired under capital lease
arrangements totaled $2,208,000, $1,100,000, and $957,000 during the years
ended December 31, 2002, 2001, and 2000, respectively. During 2000, the
Company issued 2.1 million stock purchase warrants valued at $21,848,000 to
Hilton Hotels Corporation (Hilton) (see Note 13) to acquire rights to deliver
interactive television services in Hilton hotels. During 2002 and 2001, the
Company issued 48,042 and 48,156 stock purchase warrants valued at $343,000 and
$534,000, respectively to Hilton to acquire additional rights.

Effect of Recently Issued Accounting StandardsIn June 2001, the Financial
Accounting Standards Board (FASB) issued SFAS No. 142, Goodwill and Other
Intangible Assets which eliminates the current requirement to amortize
goodwill and indefinite-lived intangible assets, addresses the amortization of
intangible assets with a defined life and addresses the impairment testing and
recognition for goodwill and intangible assets. Effective January 1, 2002, the
Company adopted the provisions of this statement, which had no impact on its
consolidated financial statements.

In June 2001, the FASB issued SFAS No. 143, Accounting for Obligations
Associated with the Retirement of Long-Lived Assets. SFAS No. 143 primarily
establishes accounting standards for the recognition and measurement of an
asset retirement obligation and its associated asset retirement costs. The
provisions of SFAS No. 143 will be effective for fiscal years beginning after
June 15, 2002. The Company has determined the adoption of this statement will
not impact its consolidated financial statements.

In October 2001, the Financial Accounting Standards Board issued SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. SFAS No. 144
supercedes SFAS 121, Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of. SFAS No. 144 primarily addresses
significant issues relating to the implementation of SFAS No. 121 and develops
a single accounting model for long-lived assets to be disposed of, whether
previously held and used or newly acquired. Effective January 1, 2002, the
Company adopted the provisions of SFAS No. 144, which had no impact on its
consolidated financial statements.

In November 2001, the FASB Emerging Issues Task Force issued EITF 01-9,
Accounting for Consideration Given by a Vendor to a Customer or a Reseller of
the Vendors Products. The EITF concluded that certain consideration

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|LodgeNet Entertainment Corporation |  | F-11 |  | Form 10-K 2002





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from a vendor to a customer is to be reported as a reduction of revenue.
Effective January 1, 2002, the Company adopted the provisions of EITF 01-9,
which had no impact on its consolidated financial statements.

In April 2002, the Financial Accounting Standards Board issued SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. Under SFAS No. 145, gains and losses on
extinguishments of debt will no longer be classified as extraordinary items as
previously required under SFAS No. 4. Extraordinary treatment will be required
for certain extinguishments as provided in APB Opinion No. 30. Effective
January 1, 2002, the Company adopted the provisions of SFAS No. 145. In
connection with the adoption, the Company reclassified the $2.1 million of
other expense  loss on early retirement of its 1999 bank credit facility,
which was recorded in the third quarter of 2001 as an extraordinary item, as a
separate line below operating income in the Companys consolidated statement of
operations.

In June 2002, the Financial Accounting Standards Board issued SFAS No. 146,
Accounting for Costs Associated with Exit or Disposal Activities",which
addresses financial accounting and reporting for costs associated with exit or
disposal activities and supersedes EITF Issue 94-3, Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring). SFAS No. 146 requires
that a liability for a cost associated with an exit or disposal activity be
recognized when the liability is incurred. A liability for an exit cost as
defined in EITF 94-3 is recognized at the date of an entitys commitment to an
exit plan. SFAS No. 146 also establishes that the liability should initially be
measured and recorded at fair value. The Company will adopt the provisions of
SFAS No. 146 for exit or disposal activities that are initiated after December
31, 2002. Adoption of this standard will not have an impact on the Companys
consolidated financial statements.

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 will be effective for fiscal
years beginning after December 15, 2002. The Company does not believe the
adoption of the EITF will have an impact on its 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 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
amendments to SFAS No. 123, which provide for additional transition methods,
are effective for periods beginning after December 15, 2002, although earlier
application is permitted. Certain disclosure amendments are required for
financial statements for fiscal years ending after December 15, 2002, and have
been reflected in these consolidated financial statements. The remaining
amendments to the disclosure requirements are required for financial reports
containing condensed financial statements for interim periods beginning after
December 15, 2002. The Company adopted the disclosure provisions of this
statement and had no impact to the consolidated financial statements.

In January 2003, FASB Interpretation No. 46, Consolidation of Variable
Interest Entities was released and had no impact on the Companys consolidated
financial statements.

Note 3  Investment Losses

InnMedia LLC During the fourth quarter of 2000, the Company entered into an
arrangement with Hilton Hotels Corporation (Hilton) to form a new broadband,
interactive media company, InnMedia LLC (InnMedia). InnMedia provided hotel
guests new and innovative interactive television content through Internet on
television as well as

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|LodgeNet Entertainment Corporation |  | F-12 |  | Form 10-K 2002





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##### Table of Contents



customized hotel and guest information. Under this arrangement, InnMedia
supplied Internet portal and interactive television content to LodgeNet for
distribution to subscribing hotels using LodgeNets broadband, interactive
system for which it paid LodgeNet a fee for the use of LodgeNets system. The
arrangement included $5 million in financing from LodgeNet and $5 million in
financing from Hilton to fund start-up and near-term operating costs. The
Company had a 47.5% equity interest in InnMedia and accounted for its
investment using the equity method of accounting. For the years ended December
31, 2001 and 2000, the Company recorded equity losses of $2.6 million and $3.0
million, respectively.

InnMedia began delivery of content and services in the third quarter of 2001
under the arrangement described above. In connection with the services
provided, the Company charged InnMedia for system access fees of $866,000,
connectivity costs of $1.2 million, and support and administrative expenses of
$1.4 million for the year ended December 31, 2001. The Company recorded system
access fees within Guest Pay revenue. Guest Pay direct costs and operating
expenses were reduced in conjunction with amounts charged for connectivity and
support and administrative expenses, respectively.

On April 12, 2002, the Company terminated the Distribution and Carriage
Agreement, dated October 9, 2000, and Services Agreement, dated October 9,
2000, with InnMedia. The terminations followed the institution of legal
proceedings by InnMedia against the Company. The agreements were terminated
due to, among other things, InnMedias effective repudiation of the agreements
and InnMedias failure to perform. As a result of the dispute with InnMedia,
the Company charged off $471,000 in uncollectible receivables and continued to
incur the costs associated with the provisioning of InnMedias services,
totaling $914,000 through the end of July 2002. Prior to the terminations, the
Company had charged InnMedia for system access fees of $633,000, connectivity
costs of $793,000, and support and administrative expenses of $355,000 related
to the first quarter of 2002. Amounts charged to InnMedia were recorded within
the Companys statement of operations as previously described above.

Effective July 31, 2002, the Company and InnMedias co-owner, Hilton, mutually
agreed to dissolve InnMedia. InnMedia and the Company mutually released their
claims against each other, and the lawsuit filed by InnMedia against the
Company was dismissed with prejudice on August 7, 2002. During the third
quarter of 2002, the Company contributed $252,000 for its share of
pre-dissolution operating costs and recorded this amount as an equity loss in
the same period. For the year ended December 31, 2002, the Company recorded an
equity loss of $419,000. The Company expects InnMedia to be fully dissolved in
2003 with no additional funding required to cover dissolution expenses.

ResNet Merger/GICC Investment In November 1998, the operations of the
Companys majority-owned subsidiary, ResNet Communications, LLC (ResNet),
were merged with two non-affiliated entities to form Global Interactive
Communications Corporation (GICC). GICCs business consisted of providing
cable television programming and telecommunications services to the
multi-family dwelling unit market. The Company contributed net assets totaling
$31.3 million in exchange for a 30% equity interest in GICC and notes
receivable totaling $10.8 million. The Company accounted for its investment in
GICC using the equity method of accounting and recorded losses of $183,000 and
$4.2 million for the years ended 2001 and 2000, respectively. In the second
quarter of 2001, the Company transferred its equity interest back to GICC and
had no further financing obligation to GICC. GICC filed for bankruptcy
protection in the third quarter of 2001. In 2002, the Company recovered the
full amount of its receivable, which was $316,000 as of December 31, 2001, and
recorded an investment gain of $1.3 million from the $1.7 million in proceeds
derived from the sale of GICCs assets.

1stUp.com/CMGI Marketable Securities In November 1999, the Company sold its
interest in 1stUp.com, a provider of free Internet services, to CMGI, Inc.
(CMGI) in a stock-for-stock exchange. Pursuant to the transaction, the
Company received 234,332 shares of CMGI common stock subject to certain sale
and escrow restrictions. The CMGI marketable securities were classified as
available for sale and recorded at current market value. Net unrealized gains
and losses on marketable securities available for sale are credited or charged
to other comprehensive income. In 2000, market value declines in these
securities resulted in unrealized losses and, in the fourth quarter of 2000,
the Company recorded a charge to the statement of operations of $6.4 million to
consider the market value decline as permanent. During the first half of 2001,
the Company sold the CMGI marketable securities and received proceeds of $1.4
million with no gain recognized.

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-13 |  | Form 10-K 2002





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##### Table of Contents



Note 4  Fair Value of Financial Instruments

Estimated fair values and carrying amounts in the financial statements are as
follows at December 31 (in thousands of dollars):

|                      |                           |  |          |          |   |       |  |          |          |  |  |          |   |  |  |          |  
|--------------------- | ------------------------- |  | -------- | -------- | - | ----- |  | -------- | -------- |  |  | -------- | - |  |  | -------- | -
|                      |                           |  | 2002     |          |   | 2001  | 
|                      |                           |  |          |          |   |       | 
|                      |                           |  | Carrying |          |   | Fair  |  |          | Carrying |  |  | Fair     |  
|                      |                           |  | Amount   |          |   | Value |  |          | Amount   |  |  | Value    |  
|                      |                           |  |          |          |   |       |  |          |          |  |  |          |  
|Assets (Liabilities): |                           |  |          |          |   |       |  |          |          |  |  |          |   |  |  |         
|                      | Interest rate swaps       |  |          | (11,443  | ) |       |  | (11,443  | )        |  |  | (5,369   | ) |  |  | (5,369   | )
|                      | Other long-term liability |  |          | (4,995   | ) |       |  | (4,995   | )        |  |  |         |   |  |  |         |  
|                      | Long-term debt            |  |          | (353,790 | ) |       |  | (347,070 | )        |  |  | (325,831 | ) |  |  | (343,902 | )

Fair values were determined under the following methods: long-term debt -
interest rates currently available to the Company for debt with similar terms
and maturities; other long term liability  present value of future cash flows
using the Companys current interest rates; interest rate swaps  quoted amount
the Company would receive (pay) to terminate the swap agreements, considering
current interest rates. For certain of the Companys financial instruments
including cash and cash equivalents, accounts receivable, and accounts payable,
the carrying amounts approximate fair value due to their short maturities.

Note 5  Property and Equipment

Property and equipment was comprised as follows at December 31 (in thousands of
dollars):

|                                     |                            |       |          |         |         |   |          |         |         | 
|------------------------------------ | -------------------------- | ----- | -------- | ------- | ------- | - | -------- | ------- | ------- | 
|                                     |                            |       |          | 2002    |         |   | 2001     |        
|                                     |                            |       |          |         |         |   |          |        
|Land, building and equipment         |                            | $     | 73,152   |         |         | $ | 68,007   |        
|Free-to-guest systems                |                            |       | 28,160   |         |         |   | 24,798   |        
|Guest Pay systems:                   |                            |       |          |         |         |   |          |        
|                                     | Installed                  |       |          | 397,392 |         |   |          | 356,889 |        
|                                     | Customer acquisition costs |       |          | 49,265  |         |   |          | 42,631  |        
|                                     | System components          |       |          | 28,867  |         |   |          | 27,548  |        
|                                     | Software costs             |       |          | 17,224  |         |   |          | 14,793  |        
|                                     |                            |       |          |         |         |  
|                                     |                            | Total |          |         | 594,060 |   |          |         | 534,666 | 
|Less  Depreciation and amortization |                            |       | (350,404 | )       |         |   | (294,392 | )      
|                                     |                            |       |          |         |         |  
|Property and equipment, net          |                            | $     | 243,656  |         |         | $ | 240,274  |        
|                                     |                            |       |          |         |         |  

Note 6  Debt Issuance Costs

Costs associated with the issuance of debt securities and with obtaining credit
facilities are capitalized and amortized over the term of the related borrowing
or facility. In conjunction with the amendment of the Companys bank credit
facility described in Note 9, the Company capitalized $269,000 of additional
debt issuance costs during the year ended December 31, 2002. In 2001, the
Company capitalized $5,829,000 of debt issuance costs related to its bank
credit facility. Debt issuance costs of $4,766,000, related to the Companys
prior facility, were written off with the unamortized portion resulting in a
loss on early retirement of debt of $2,091,000 during 2001. Amortization of the
debt issuance costs was $2,002,000 in 2002, $1,178,000 in 2001, and $1,589,000
in 2000. The components of the debt issuance costs recorded in the balance
sheets are as follows at December 31 (in thousands of dollars):

|                         |  |      |        |   |      |   |        |  
|------------------------ |  | ---- | ------ | - | ---- | - | ------ | -
|                         |  | 2002 |        |   | 2001 |  
|                         |  |      |        |   |      |  
|Debt issuance costs      |  | $    | 13,851 |   |      | $ | 13,582 |  
|Accumulated amortization |  |      | (6,408 | ) |      |   | (4,406 | )
|                         |  |      |        |   |      |  
|                         |  | $    | 7,443  |   |      | $ | 9,176  |  
|                         |  |      |        |   |      |  

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-14 |  | Form 10-K 2002





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##### Table of Contents



Note 7  Intangible Assets

The Company has intangible assets consisting of an acquired business, certain
acquired technology, patents, trademarks and licensee fees. The Company
accounts for these assets in accordance with SFAS No. 142, Goodwill and Other
Intangible Assets. The intangible assets have been deemed to have definite
useful lives and are amortized over their current estimated useful lives
ranging from three to five years.

In July 2002, the Company expanded its master services agreement with Hilton
Hotels Corporation and acquired the right to provide Internet on television
access and television on-demand programming services to participating hotels
and the right to independently pursue and further develop interactive
television content throughout the Companys entire room base. As
consideration, the Company agreed to pay Hilton $8.0 million over a five-year
period. Approximately $5.8 million has been capitalized within intangible
assets and is being amortized on a straight-line basis over its estimated
useful life of five years.

The Company has the following intangible assets at December 31 (in thousands of
dollars):

|                                |                      |   |          |        |  |              |       |       |          |   |        |              |  |   |       |       | 
|------------------------------- | -------------------- | - | -------- | ------ |  | ------------ | ----- | ----- | -------- | - | ------ | ------------ |  | - | ----- | ----- | 
|                                |                      |   | 2002     |        |  | 2001         |      
|                                |                      |   |          |        |  |              |      
|                                |                      |   | Carrying |        |  | Accumulated  |       |       | Carrying |   |        | Accumulated  | 
|                                |                      |   | Amount   |        |  | Amortization |       |       | Amount   |   |        | Amortization | 
|                                |                      |   |          |        |  |              |       |       |          |   |        |              | 
|Assets subject to
amortization: |                      |   |          |        |  |              |       |       |          |   |        |              |  |   |       |      
|                                | Acquired technology  |   | $        | 14,291 |  |              | $     | 7,892 |          |   | $      | 14,291       |  |   | $     | 5,987 | 
|                                | Acquired intangibles |   |          | 5,774  |  |              |       | 481   |          |   |        |             |  |   |       |      | 
|                                | Other                |   |          | 539    |  |              |       | 189   |          |   |        | 479          |  |   |       | 218   | 
|                                |                      |   |          |        |  |              |       |       |          |   |        |             
|                                |                      | $ | 20,604   |        |  | $            | 8,562 |       |          | $ | 14,770 |              |  | $ | 6,205 |      
|                                |                      |   |          |        |  |              |       |       |          |   |        |             

The Company recorded amortization expense of $2,548,000, $2,451,000 and
$1,836,000 during the years ended December 31, 2002, 2001 and 2000,
respectively. The Company estimates amortization expense for the years ended
December 31, as follows: 2003  $3,164,000; 2004  $3,157,000; 2005 
$3,144,000; 2006  $1,847,000; 2007  $673,000.

Note 8  Accrued Expenses

Accrued expenses were comprised as follows at December 31 (in thousands of
dollars):

|                     |  |      |        |  |      |   |        | 
|-------------------- |  | ---- | ------ |  | ---- | - | ------ | 
|                     |  | 2002 |        |  | 2001 |  
|                     |  |      |        |  |      |  
|Accrued taxes        |  | $    | 3,143  |  |      | $ | 2,821  | 
|Accrued compensation |  |      | 3,699  |  |      |   | 3,267  | 
|Accrued interest     |  |      | 1,956  |  |      |   | 1,978  | 
|Other                |  |      | 4,179  |  |      |   | 2,185  | 
|                     |  |      |        |  |      |  
|                     |  | $    | 12,977 |  |      | $ | 10,251 | 
|                     |  |      |        |  |      |  

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-15 |  | Form 10-K 2002





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##### Table of Contents



Note 9  Long-term Debt and Credit Facilities

Long-term debt was comprised as follows at December 31 (in thousands of
dollars):

|                        |                           |   |         |         |   |      |         |         |  
|----------------------- | ------------------------- | - | ------- | ------- | - | ---- | ------- | ------- | -
|                        |                           |   | 2002    |         |   | 2001 |        
|                        |                           |   |         |         |   |      |        
|Bank Credit Facility:   |                           |   |         |         |   |      |         |        
|                        | Bank term loan            |   | $       | 148,125 |   |      | $       | 149,625 |  
|                        | Revolving credit facility |   |         | 34,000  |   |      |         |        |  
|10.25% senior notes     |                           |   | 150,000 |         |   |      | 150,000 |        
|11.50% senior notes     |                           |   | 18,000  |         |   |      | 24,000  |        
|                        | Less unamortized discount |   |         | (186    | ) |      |         | (333    | )
|Capital leases          |                           |   | 3,050   |         |   |      | 1,697   |        
|Other                   |                           |   | 801     |         |   |      | 842     |        
|                        |                           |   |         |         |   |     
|                        |                           |   | 353,790 |         |   |      | 325,831 |        
|Less current maturities |                           |   | (9,320  | )       |   |      | (8,168  | )      
|                        |                           |   |         |         |   |     
|                        |                           | $ | 344,470 |         |   | $    | 317,663 |        
|                        |                           |   |         |         |   |     

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 June 2006 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 December 31,
2002 was 5.40%. The revolving credit facility matures in June 2006 and loans
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%. The
weighted average interest rate of the revolving credit facility as of December
31, 2002 was 4.78%. Loans under the credit facility are collateralized by a
first priority security interest in all of the Companys assets.

The facility provides for the issuance of letters of credit up to $10 million,
subject to customary terms and conditions. As of December 31, 2002, the
Company had outstanding letters of credit totaling $2.0 million.

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 August
2002, the Company amended its existing bank credit facility. The amendment
modified the covenants for leverage and interest coverage. As of December 31,
2002, the Company was in compliance with all covenants, terms and conditions of
the bank credit facility.

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 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. The 10.25% 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 December 31,
2002, the Company was in compliance with all covenants, terms, and conditions
of the 10.25% Notes.

The 10.25% Notes are redeemable at the option of the Company, in whole or in
part at 102.563% of their principal amount (plus accrued and unpaid interest)
declining to 100% of their principal amount (plus accrued and unpaid interest)
on or after December 15, 2003.

11.50% Senior Notes During 1995, the Company issued $30 million principal
amount of unsecured 11.50% senior notes (the 11.50% Notes). Annual principal
payments of $6 million commenced in July 2001 and continue through July 2005.
Semi-annual interest payments are required. The Company issued a total of
480,000 warrants (see Note 13) to purchase common stock of the Company in
connection with the issuance of the 11.50% Notes and 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. As

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-16 |  | Form 10-K 2002





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##### Table of Contents



part of the refinancing transaction in which the 10.25% Notes were issued, the
holders of the 11.50% Notes adopted the covenants and ranking of the 10.25%
Notes.

Capital Leases As of December 31, 2002, the Company has total capital lease
obligations of $3,050,000. Equipment acquired under capital lease
arrangements totaled $2,208,000, $1,100,000, and $957,000 during the years
ended December 31, 2002, 2001, and 2000, respectively.

Long-term debt has the following scheduled principal maturities for the years
ended December 31 (in thousands of dollars): 2003  $9,320; 2004  $8,448; 2005
 $8,000; 2006  $328,012; 2007  $10.

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

Note 10  Commitments and Contingencies

Programming Agreements The Company, through programming agreements, provides
Guest Pay and free-to-guest programming services to the lodging industry.
These agreements provide that the Company receives monthly revenue for such
services. Such agreements contain various restrictions, including default and
termination procedures, and generally range from five to seven years in
duration. The Company has also entered into agreements with certain networks
and studios that provide their programs for redistribution. Under these
agreements, the Company pays fees that are based on revenue generated, or on
rate schedules based on the number of sites under license by the Company. The
agreements contain various restrictions, including default and termination
procedures, and generally range from three to seven years in duration.

Purchase Commitments The Company has purchase commitments in the ordinary
course of business, none of which are expected to result in losses.

Operating Leases The Company has entered into certain operating leases, which
at December 31, 2002, require future minimum lease payments, as follows: 2003 
$470,000; 2004 $313,000; 2005 $255,000; 2006 $199,000; 2007  $78,000;
2008  $40,000; 2009  $42,000. The leases expire at dates ranging from 2003
to 2009. Rental expense under all operating leases was $591,000, $536,000, and
$474,000 for the years ended December 31, 2002, 2001, and 2000, respectively.

Hilton Agreement Effective July 31, 2002, the Company expanded its master
services agreement with Hilton Hotels Corporation. The Company acquired the
right to provide Internet on television access and television on-demand
programming services to participating hotels and the right to independently
pursue and further develop interactive television content throughout the
Companys entire room base. As consideration, the Company agreed to pay Hilton
$8.0 million over a five-year period.

Legal Proceedings The Company is subject to legal proceedings and claims
arising in the ordinary course of its businesses. As of the date hereof, in
the opinion of management, it is remote that the resolution of such matters
will have a material adverse effect on the Companys financial position or
results of operations.

Note 11  Stockholders Equity

Preferred StockThere are 5,000,000 shares of preferred stock, $.01 par
value, authorized by the Companys certificate of incorporation, of which none
were outstanding at December 31, 2002 and 2001. The Board of Directors may
authorize the issuance of preferred stock, $.01 par value, in one or more
series and with rights and privileges for each issue as determined by the Board
of Directors.

Stockholder Rights PlanOn February 28, 1997, the Board of Directors of the
Company authorized and adopted a Stockholder Rights Plan. Pursuant to the
rights plan, the Board of Directors declared a dividend distribution of one
right for each outstanding share of common stock of the Company to stockholders
of record at the close of business on March 10, 1997.

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-17 |  | Form 10-K 2002





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##### Table of Contents



Initially, the rights are attached to all common stock certificates and no
separate rights certificates will be distributed. The rights will separate
from the common stock and be distributed upon the occasion of (i) a public
announcement that a person, group or entity has acquired or obtained the right
to acquire 15% or more of the common stock of the Company or (ii) ten days
following the commencement of, or an announcement of the intention to make, a
tender or exchange offer which would result in a person, group or entity
becoming the holder of 15% or more of the Companys common stock. The rights
are not exercisable until distributed.

In general, each right, when exercisable, initially entitles the registered
holder to purchase from the Company one-thousandth of a share of a new series
of preferred stock, designated as Series A Participating Preferred Stock, par
value $.01, at a price of $60.00 per share. In certain other events, after the
rights have become exercisable, each right entitles the holder to purchase for
$60.00 an amount of common stock of the Company, or in certain circumstances
securities of the acquirer, having a then-current market value of two times the
exercise price of the right. The rights include anti-dilution provisions in
the event of a stock dividend, split-up or reclassification of the common
stock. The preferred stock purchasable upon exercise of the rights will be
non-redeemable and junior to any other issue of preferred stock the Company
might issue, and will include dividend and liquidation preferences. No
stockholder privileges attach to the rights until exercised.

Note 12  Stock Option Plans

The Company has stock options plans that provide for the granting of up to
3,976,792 non-qualified or incentive stock options on the Companys common
stock. Certain officers, directors and key employees have been granted options
to purchase common stock of the Company under these plans. Stock options
issued under the plans generally have an exercise price equal to the fair
market value on the date of grant. Options become exercisable in accordance
with vesting schedules determined by a committee of the Board of Directors, and
generally expire ten years after the date of grant. Options totaling 2,300
expired as of December 31, 2002, and outstanding options expire beginning in
2003 through 2012. The following is a summary of the stock option activity for
the years ending December 31:

|                             |                            |  |             |          |   |          |          |       | 
|---------------------------- | -------------------------- |  | ----------- | -------- | - | -------- | -------- | ----- | 
|                             |                            |  |             |          |   |          | Weighted |      
|                             |                            |  |             |          |   |          | Average  |      
|                             |                            |  | Options     |          |   | Exercise |         
|                             |                            |  | Outstanding |          |   | Price    |         
|                             |                            |  |             |          |   |          |         
|Balance at December 31, 1999 |                            |  | 1,706,365   |          |   | $        | 9.68     |      
|                             | Options granted            |  |             | 830,624  |   |          |          | 19.73 | 
|                             | Options exercised          |  |             | (241,187 | ) |          |          | 9.67  | 
|                             | Options forfeited/canceled |  |             | (21,800  | ) |          |          | 18.35 | 
|                             |                            |  |             |          |   |          |         
|Balance at December 31, 2000 |                            |  | 2,274,002   |          |   |          | 13.32    |      
|                             | Options granted            |  |             | 482,284  |   |          |          | 16.60 | 
|                             | Options exercised          |  |             | (72,959  | ) |          |          | 10.86 | 
|                             | Options forfeited/canceled |  |             | (86,350  | ) |          |          | 17.87 | 
|                             |                            |  |             |          |   |          |         
|Balance at December 31, 2001 |                            |  | 2,596,977   |          |   |          | 13.80    |      
|                             | Options granted            |  |             | 490,345  |   |          |          | 12.09 | 
|                             | Options exercised          |  |             | (146,151 | ) |          |          | 7.06  | 
|                             | Options forfeited/canceled |  |             | (14,000  | ) |          |          | 18.23 | 
|                             |                            |  |             |          |   |          |         
|Balance at December 31, 2002 |                            |  | 2,927,171   |          |   | $        | 13.83    |      
|                             |                            |  |             |          |   |          |         

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-18 |  | Form 10-K 2002





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##### Table of Contents



The following is a summary of stock options outstanding as of December 31,
2002:

|                 |  |                     |           |  |                     |           |     |       |          |   |        |  |  |       |           |          |  |   |       | 
|---------------- |  | ------------------- | --------- |  | ------------------- | --------- | --- | ----- | -------- | - | ------ |  |  | ----- | --------- | -------- |  | - | ----- | 
|                 |  | Outstanding Options |           |  | Exercisable Options |          
|                 |  |                     |           |  |                     |          
|                 |  |                     |           |  |                     | Weighted  |     |       |          |   |        |  |  |       |           |          |  |   |      
|                 |  |                     |           |  |                     | Average   |     |       | Weighted |   |        |  |  |       |           | Weighted | 
|                 |  |                     |           |  |                     | Remaining |     |       | Average  |   |        |  |  |       |           | Average  | 
|Exercise         |  |                     |           |  |                     | Term      |     |       | Exercise |   |        |  |  |       |           | Exercise | 
|Price Range      |  | Number              |           |  | in Years            |           |     | Price |          |   | Number |  |  | Price |          
|                 |  |                     |           |  |                     |           |     |       |          |   |        |  |  |       |          
|$0.23 to $0.46   |  |                     | 48,303    |  |                     |           | 0.8 |       |          | $ | .23    |  |  |       | 48,303    |          |  | $ | .23   | 
|$2.77 to $3.23   |  |                     | 173,627   |  |                     |           | 0.9 |       |          |   | 2.81   |  |  |       | 173,627   |          |  |   | 2.81  | 
|$6.46 to $9.79   |  |                     | 231,566   |  |                     |           | 4.2 |       |          |   | 8.79   |  |  |       | 209,066   |          |  |   | 8.80  | 
|$10.19 to $13.77 |  |                     | 962,700   |  |                     |           | 6.6 |       |          |   | 10.99  |  |  |       | 610,400   |          |  |   | 11.38 | 
|$14.00 to $15.84 |  |                     | 477,625   |  |                     |           | 7.3 |       |          |   | 15.64  |  |  |       | 255,509   |          |  |   | 15.65 | 
|$16.00 to $17.50 |  |                     | 527,750   |  |                     |           | 8.0 |       |          |   | 16.52  |  |  |       | 199,258   |          |  |   | 16.58 | 
|$18.08 to $24.64 |  |                     | 505,600   |  |                     |           | 7.6 |       |          |   | 22.10  |  |  |       | 364,350   |          |  |   | 21.64 | 
|                 |  |                     |           |  |                     |           |     |       |          |   |        |  |  |       |           |          |  |  
|                 |  |                     | 2,927,171 |  |                     |           | 6.5 |       |          | $ | 13.83  |  |  |       | 1,860,513 |          |  | $ | 13.15 | 
|                 |  |                     |           |  |                     |           |     |       |          |   |        |  |  |       |           |          |  |  

The weighted average fair value of options granted during the year ended
December 31 was as follows:

|                                               |  |      |      |  |      |   |      |      |  |   |       | 
|---------------------------------------------- |  | ---- | ---- |  | ---- | - | ---- | ---- |  | - | ----- | 
|                                               |  | 2002 |      |  | 2001 |   |      | 2000 | 
|                                               |  |      |      |  |      |   |      |      | 
|Weighted average fair
value per option granted |  | $    | 6.50 |  |      | $ | 9.05 |      |  | $ | 10.71 | 
|                                               |  |      |      |  |      |   |      |      | 

The fair value of each option granted was estimated as of the grant date using
the Black-Scholes option valuation model under the following assumptions: (i)
dividend yield  none, (ii) weighted average risk-free interest rate  3.82% in
2002, 4.55% in 2001, and 6.15% in 2000; (iii) weighted average expected life -
5.0 years, and (iv) weighted average expected volatility  59.0% in 2002, 58.8%
in 2001, and 54.6% in 2000.

Note 13  Warrants

In connection with the 1995 issuance of the 11.50% Senior Notes (see Note 9),
the Company issued 480,000 warrants to purchase common stock of the Company.
Each warrant entitles the holder to purchase one share of common stock at an
exercise price of $7.00 per share. The warrants include demand registration
rights and anti-dilution provisions and expire on July 15, 2005. The portion
of the proceeds from the 1995 debt issuance deemed attributable to the warrants
was recorded as additional paid-in capital.

On October 9, 2000, the Company entered into an agreement with Hilton to
provide LodgeNets interactive television services into Hiltons owned, leased
and joint venture hotels in the United States. Under terms of the agreement,
Hilton was issued a warrant granting it the right to purchase up to 2.1 million
shares of LodgeNet common stock over seven years at a price of $20.44 per
share. Warrants in the amount of 1.5 million shares relate to hotels owned or
operated by Hilton and vested immediately. The remaining 600,000 warrant
shares relate to hotels franchised through Hilton and will vest on a per room
basis as LodgeNet obtains contracts for delivery of services to these hotels.
The Company followed EITF 96-18 to account for the warrants issued. The fair
value of the 1.5 million warrant shares was estimated at $21.8 million using
the Black-Scholes valuation method and was recorded as contract acquisition
costs within fixed assets and credited to additional paid-in capital. The
600,000 warrant shares will be measured and similarly accounted for upon
delivery of the related room contracts. During 2002 and 2001, 48,042 and
48,156 of these warrant shares were issued with a fair value of $343,000 and
$534,000, respectively, were recorded as contract acquisition costs within
fixed assets and credited to additional paid-in capital. The costs are
amortized over the contract life.

Note 14  Employee Benefit Plans

The Company sponsors defined contribution plans covering eligible employees.
The plans provide for employer contributions based primarily on the level of
employee participation. Contribution expense for the Company was $667,000,
$743,000, $635,000, and in 2002, 2001, and 2000, respectively.

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-19 |  | Form 10-K 2002





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##### Table of Contents



Note 15  Income Taxes

Loss before income taxes was as follows for the years ended December 31 (in
thousands of dollars):

|         |  |      |         |   |      |   |         |      |  |   |         |  
|-------- |  | ---- | ------- | - | ---- | - | ------- | ---- |  | - | ------- | -
|         |  | 2002 |         |   | 2001 |   |         | 2000 | 
|         |  |      |         |   |      |   |         |      | 
|Domestic |  | $    | (28,080 | ) |      | $ | (25,675 | )    |  | $ | (38,669 | )
|Foreign  |  |      | (496    | ) |      |   | (44     | )    |  |   | (20     | )
|         |  |      |         |   |      |   |         |      | 
|Total    |  | $    | (28,576 | ) |      | $ | (25,719 | )    |  | $ | (38,689 | )
|         |  |      |         |   |      |   |         |      | 

The provisions for income taxes of $550,000 in 2002, $689,000 in 2001, and
$325,000 in 2000, consist of current state taxes. Such amounts differ from
that which would be obtained by applying the statutory federal income tax rate
to loss before income taxes due primarily to changes in the valuation allowance
reflecting changes in net deferred tax assets.

Deferred income taxes reflect the impact of temporary differences between the
amounts of assets and liabilities for financial reporting purposes and amounts
used for income tax purposes. Significant components of the Companys deferred
tax assets and liabilities were as follows at December 31 (in thousands of
dollars):

|                     |                                     |   |         |        |  |      |         |        | 
|-------------------- | ----------------------------------- | - | ------- | ------ |  | ---- | ------- | ------ | 
|                     |                                     |   | 2002    |        |  | 2001 |        
|                     |                                     |   |         |        |  |      |        
|Deferred tax assets: |                                     |   |         |        |  |      |         |       
|                     | Net operating loss carryforwards    |   | $       | 52,465 |  |      | $       | 55,050 | 
|                     | Losses of unconsolidated affiliates |   |         | 55     |  |      |         | 11,291 | 
|                     | Reserves and accruals               |   |         | 1,115  |  |      |         | 2,256  | 
|                     | Deferred credits                    |   |         | 1,146  |  |      |         | 1,054  | 
|                     | Book over tax depreciation          |   |         | 1,705  |  |      |         | 3,875  | 
|                     |                                     |   |         |        |  |     
|Deferred tax assets  |                                     |   | 56,486  |        |  |      | 73,526  |       
|Valuation allowance  |                                     |   | (56,486 | )      |  |      | (73,526 | )     
|                     |                                     |   |         |        |  |      |        
|Net deferred taxes   |                                     | $ |        |        |  | $    |        |       
|                     |                                     |   |         |        |  |     

The Company has net operating loss carryforwards of approximately $153 million
for federal income tax purposes. Such carryforwards expire beginning in 2003
through 2017, and federal tax regulations limit the availability and timing of
usage of carryforwards. Net operating loss carryforwards expiring in the next
five years are as follows: (in thousands of dollars): 2003  $560; 2004 
$1,897; 2005  $3,428; 2006  $3,437; 2007  $3,748. The Company established
the valuation allowance for deferred tax assets after considering its
historical financial performance, existing deferred tax liabilities, and
certain information about future years.

Note 16  Related Party Transactions

The Company has $1.4 million in outstanding advances to a former officer as of
December 31, 2002. The advances were made in 2000 and 2001 under the terms of
a promissory note. Interest is payable monthly at the rate applicable to the
Company under its revolving credit facility. Shares of the Companys stock
held by the former officer and a mortgage on real property collateralize the
note.

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-20 |  | Form 10-K 2002





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##### Table of Contents



Note 17  Segment Information

The Company operates in one business segment, the distribution of entertainment
and information services to the lodging industry. The following table presents
revenues by country based on the location of the customer for the year ended
December 31 (in thousands of dollars):

|              |  |      |         |  |      |   |         |      |  |   |         | 
|------------- |  | ---- | ------- |  | ---- | - | ------- | ---- |  | - | ------- | 
|              |  | 2002 |         |  | 2001 |   |         | 2000 | 
|              |  |      |         |  |      |   |         |      | 
|United States |  | $    | 223,427 |  |      | $ | 203,911 |      |  | $ | 185,721 | 
|Canada        |  |      | 9,655   |  |      |   | 9,951   |      |  |   | 9,800   | 
|Other         |  |      | 1,908   |  |      |   | 3,033   |      |  |   | 1,296   | 
|              |  |      |         |  |      |   |         |      | 
|Total         |  | $    | 234,990 |  |      | $ | 216,895 |      |  | $ | 196,817 | 
|              |  |      |         |  |      |   |         |      | 

Long-lived assets by country based on the location of the asset were as follows
at December 31 (in thousands of dollars):

|              |  |      |         |  |      |   |         | 
|------------- |  | ---- | ------- |  | ---- | - | ------- | 
|              |  | 2002 |         |  | 2001 |  
|              |  |      |         |  |      |  
|United States |  | $    | 232,874 |  |      | $ | 230,387 | 
|Canada        |  |      | 10,782  |  |      |   | 9,887   | 
|              |  |      |         |  |      |  
|Total         |  | $    | 243,656 |  |      | $ | 240,274 | 
|              |  |      |         |  |      |  

Note 18  Selected Quarterly Financial Data (Unaudited)

The following selected quarterly financial data are in thousands of dollars,
except per share data:

|      |                                                          |  |           |        |   |          |   |        |               |  |   |              |   |  |   |         |  
|----- | -------------------------------------------------------- |  | --------- | ------ | - | -------- | - | ------ | ------------- |  | - | ------------ | - |  | - | ------- | -
|      |                                                          |  | Quarter   |        |   | Quarter  |   |        | Quarter       |  |   | Quarter      |  
|      |                                                          |  | Ending    |        |   | Ending   |   |        | Ending        |  |   | Ending       |  
|      |                                                          |  | March 31, |        |   | June 30, |   |        | September 30, |  |   | December 31, |  
|      |                                                          |  |           |        |   |          |   |        |               |  |   |              |  
|2001: |                                                          |  |           |        |   |          |   |        |               |  |   |              |   |  |   |        
|      | Revenues                                                 |  | $         | 51,038 |   |          | $ | 55,098 |               |  | $ | 57,681       |   |  | $ | 53,078  |  
|      | Gross profit (exclusive of other
operating expenses)     |  |           | 30,015 |   |          |   | 31,846 |               |  |   | 32,847       |   |  |   | 30,097  |  
|      | Net loss (1)                                             |  |           | (6,782 | ) |          |   | (4,928 | )             |  |   | (6,762       | ) |  |   | (7,937  | )
|      | Per common share                                         |  | $         | (.56   | ) |          | $ | (.40   | )             |  | $ | (.55         | ) |  | $ | (.65    | )
|2002: |                                                          |  |           |        |   |          |   |        |               |  |   |              |   |  |   |        
|      | Revenues                                                 |  | $         | 55,009 |   |          | $ | 58,700 |               |  | $ | 63,660       |   |  | $ | 57,621  |  
|      | Gross profit (exclusive of other
operating expenses) (2) |  |           | 32,554 |   |          |   | 33,745 |               |  |   | 35,879       |   |  |   | 32,030  |  
|      | Net loss (3)                                             |  |           | (6,665 | ) |          |   | (5,701 | )             |  |   | (5,512       | ) |  |   | (11,248 | )
|      | Per common share                                         |  | $         | (.54   | ) |          | $ | (.46   | )             |  | $ | (.44         | ) |  | $ | (.91    | )

(1)  Net loss for the quarter ended September 30, 2001, includes a $2.1 million
loss on early retirement of debt.

(2)  Gross profit for the quarters ended March 31, 2002, June 30, 2002, and
September 30, 2002, have been changed to reflect reclassifications of operating
expenses and nonrecurring charges.

(3)  Net loss for the quarters ended March 31, 2002, June 30, 2002, September
30, 2002, and December 31, 2002, include nonrecurring charges of $187,000,
$293,000, $335,000, and $1,885,000, respectively, related to the litigation
settlements described in Note 19.

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-21 |  | Form 10-K 2002





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##### Table of Contents



Note 19  Litigation Settlements

During 2002, the Company entered into settlement agreements with Broadcast
Music Inc. (BMI) and the American Society of Composers, Authors and Publishers
(ASCAP), which resolved claims for alleged nonpayment of royalties on
copyrighted musical works performed in major motion pictures. BMI and ASCAP had
asserted that the music, primarily background music, used within major motion
pictures required licensing. BMI and ASCAP sought damages for public
performances of such music from their respective catalogues. As a result of the
settlements, the Company recorded a provision for the litigation settlements of
$2.7 million that is related to pre-2002 reporting periods. This nonrecurring
charge has been reported as a litigation expense in the accompanying statements
of operations. The Company has paid approximately $1.2 million of the
settlement amount with the balance to be paid ratably over the next five
quarters, the first payment scheduled during the first quarter of 2003. In
addition, the Company recorded approximately $420,000 as 2002 operating expense
to accurately reflect music royalty costs directly related to current year
operating activities.

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-22 |  | Form 10-K 2002





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##### Table of Contents



Report of Independent Accountants on Schedule

To the Board of Directors and Stockholders
of LodgeNet Entertainment Corporation

Our audit of the consolidated financial statements referred to in our report
dated February 3, 2003, appearing in the 2002 annual report on Form 10-K also
included an audit of the financial statement schedule listed in Item 15(a) of
this Form 10-K. In our opinion, the financial statement schedule for the year
ended December 31, 2002 presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. The financial statement schedule of LodgeNet
Entertainment Corporation for the years ended December 31, 2001 and 2000, was
audited by other independent accountants who have ceased operations. Those
independent accountants expressed an unqualified opinion on that financial
statement schedule in their report dated February 6, 2002.

/S/ PRICEWATERHOUSECOOPERS LLP

Minneapolis, Minnesota
February 3, 2003

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-23 |  | Form 10-K 2002





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##### Table of Contents



Report of Independent Accountants on Schedule

The following report is a copy of a report previously issued by Arthur Andersen
LLP and has not been reissued by Arthur Andersen LLP. This report applies to
supplemental Schedule II  Valuation and Qualifying Accounts for the years
ended December 31, 2001 and 2000.

To LodgeNet Entertainment Corporation:

We have audited, in accordance with auditing standards generally accepted in
the United States, the consolidated financial statements included in this
annual report on Form 10-K, and have issued our report thereon dated February
6, 2002. Our audit was made for the purpose of forming an opinion on those
financial statements taken as a whole. The following schedule is the
responsibility of the Companys management and is presented for purposes of
complying with the Securities and Exchange Commissions rules and is not part
of the basic financial statements. This schedule has been subjected to the
auditing procedures applied in the audit of the basic financial statements and,
in our opinion, fairly states in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.

Arthur Andersen LLP

Minneapolis, Minnesota
February 6, 2002

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-24 |  | Form 10-K 2002





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##### Table of Contents



LodgeNet Entertainment Corporation and Subsidiaries

Schedule II  Valuation and Qualifying Accounts
(Dollar amounts in thousands)

|                                                         |                               |                                 |  |           |          |  |            |            |     |  |        |   |     |         |  |   |     | 
|-------------------------------------------------------- | ----------------------------- | ------------------------------- |  | --------- | -------- |  | ---------- | ---------- | --- |  | ------ | - | --- | ------- |  | - | --- | 
|                                                         |                               |                                 |  |           |          |  |            | Additions  |     |  |        |   |     |         |  |   |    
|                                                         |                               |                                 |  | Balance   |          |  | Charged to |            |     |  |        |   |     | Balance | 
|                                                         |                               |                                 |  | Beginning |          |  | Costs and  |            |     |  |        |   |     | End of  | 
|Description                                              |                               | of Period                       |  |           | Expenses |  |            | Deductions |     |  | Period |  
|                                                         |                               |                                 |  |           |          |  |            |            |     |  |        |  
|Allowances deducted from related
balance sheet accounts: |                               |                                 |  |           |          |  |            |            |     |  |        |   |     |         |  |  
|                                                         | Year Ended December 31, 2000: |                                 |  |           |          |  |            |            |     |  |        |   |     |         |  |   |    
|                                                         |                               | Allowance for Doubtful Accounts |  | $         | 800      |  |            | $          | 340 |  |        | $ | 340 |         |  | $ | 800 | 
|                                                         | Year Ended December 31, 2001: |                                 |  |           |          |  |            |            |     |  |        |   |     |         |  |   |    
|                                                         |                               | Allowance for Doubtful Accounts |  | $         | 800      |  |            | $          | 148 |  |        | $ | 448 |         |  | $ | 500 | 
|                                                         | Year Ended December 31, 2002: |                                 |  |           |          |  |            |            |     |  |        |   |     |         |  |   |    
|                                                         |                               | Allowance for Doubtful Accounts |  | $         | 500      |  |            | $          | 754 |  |        | $ | 954 |         |  | $ | 300 | 

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-25 |  | Form 10-K 2002