<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 25, 1998

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                      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, 1997
                                       
                                      or
                                       
     [   ]   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

            ------------------------------------------------------
            (Exact name of Registrant as specified in its charter)

            DELAWARE                                   46-0371161

     ------------------------          ---------------------------------------
     (State of Incorporation)          (I.R.S. Employer Identification Number)

         3900 WEST INNOVATION STREET, SIOUX FALLS, SOUTH DAKOTA  57107

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             (Address of Principal Executive Offices)  (Zip Code)
                                       
                                (605)  988-1000

            ------------------------------------------------------
             (Registrant's telephone number, including area code)
                                       
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   .
                                                                   ---     ---
     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.  [    ]

As of March 23, 1998, the aggregate market value of the common stock held by
non-affiliates of the Registrant was approximately $109 million.  The number of
shares of common stock of the Registrant outstanding as of March 23, 1998 was
11,356,358.

DOCUMENTS INCORPORATED BY REFERENCE--Part III of this From 10-K is incorporated
by reference from Registrant's definitive proxy statement for the 1998 Annual
Meeting of Stockholders which will be filed within 120 days of the fiscal year
ended December 31, 1997.


This Report contains a total of 53 pages, excluding exhibits.  The exhibit
index appears on page 29.

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<PAGE>


                              TABLE OF CONTENTS
                              -----------------

<TABLE>
<CAPTION>
                                                                          Page
  <S>          <C>                                                        <C>
               Special Note Regarding Forward-Looking Statements             1

  ITEM 1       BUSINESS                                                      1
               Overview                                                      1
               Business Strategy                                             3
               Strategic Initiatives                                         4
               Markets and Customers                                         5
               Services and Products                                         5
               Operations                                                    7
               Competition                                                  10
               Regulation                                                   11
               Employees                                                    13

  ITEM 2       PROPERTIES                                                   13

  ITEM 3       LEGAL PROCEEDINGS                                            14

  ITEM 4       SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS          14

  ITEM 5       MARKET FOR REGISTRANT'S COMMON EQUITY AND
               RELATED STOCKHOLDER MATTERS                                  15
                  Dividends                                                 15
                  Rights Plan                                               15

  ITEM 6       SELECTED FINANCIAL DATA                                      18
               Special Note Regarding Forward-Looking Statements            20

  ITEM 7       MANAGEMENT'S DISCUSSION AND ANALYSIS OF
               FINANCIAL CONDITION AND RESULTS OF OPERATIONS                20

  ITEM 8       FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA                  27

  ITEM 9       CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
               ACCOUNTING AND FINANCIAL DISCLOSURE                          27

  ITEM 10      DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT               28

  ITEM 11      EXECUTIVE COMPENSATION                                       28

  ITEM 12      SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
               AND MANAGEMENT                                               28

  ITEM 13      CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS               28

  ITEM 14      EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND

               REPORTS ON FORM 8-K                                          29

</TABLE>
------------------------
     As used herein (unless the context otherwise requires) "LodgeNet", "the
Company" and/or "the Registrant" mean LodgeNet Entertainment Corporation and
its wholly-owned subsidiaries.

                                   Page i

<PAGE>

PART I

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",  "BUSINESS STRATEGY", "STRATEGIC INITIATIVES", 
"SERVICES AND PRODUCTS", "OPERATIONS", "COMPETITION" 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" WITHIN THE MEANING OF 
THE SECURITIES ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF 
1934, AS AMENDED. WHEN USED IN THIS ANNUAL REPORT, THE WORDS "EXPECTS," 
"ANTICIPATES," "ESTIMATES," "BELIEVES," "NO ASSURANCE" AND SIMILAR 
EXPRESSIONS ARE INTENDED TO IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.  SUCH 
FORWARD-LOOKING STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND 
OTHER FACTORS, WHICH MAY CAUSE THE COMPANY'S ACTUAL 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 IMPACT OF COMPETITION 
AND CHANGES TO THE COMPETITIVE ENVIRONMENT FOR THE COMPANY'S PRODUCTS AND 
SERVICES, CHANGES IN TECHNOLOGY, RELIANCE ON STRATEGIC PARTNERS, UNCERTAINTY 
OF LITIGATION, CHANGES IN GOVERNMENT REGULATION AND OTHER FACTORS DETAILED, 
FROM TIME TO TIME, IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE 
COMMISSION.  THESE FORWARD-LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF 
THIS 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 1 -- BUSINESS


OVERVIEW

     LodgeNet provides video on-demand, network-based video games, cable 
television programming and other interactive entertainment and information 
services to the lodging and multi-family dwelling unit ("MDU") markets 
utilizing its proprietary broadband local-area-network ("b-LAN"-SM- ) system 
architecture. Through its rapid growth, the Company has become the second 
largest provider of such services to the lodging market (based on total rooms 
served), currently serving over 630,000 rooms in over 4,000 hotel properties 
throughout the United States, Canada, and selected international markets. 
Through its subsidiary, ResNet Communications, L.L.C. ("ResNet"), the Company 
is extending its b-LAN-SM- system architecture and operational expertise into 
the MDU market.

     LodgeNet and ResNet generally operate under exclusive long-term 
contracts in the lodging and MDU markets. The Company's lodging guest pay 
contracts typically have terms of 5 to 7 years and ResNet's MDU contracts 
generally have terms of 8 to 12 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 has experienced substantial growth in the number of guest 
pay rooms served, total revenue and earnings before interest, taxes, 
depreciation and amortization ("EBITDA").  From 1991 through 1997, guest pay 
rooms served increased from 73,415 to 511,851, revenues increased from $19.6 
million to $135.7 million, and EBITDA increased from $2.9 million to $35.7 
million.

     LODGING SERVICES.  The Company provides its services in the lodging 
market to corporate-managed hotel chains such as ITT Sheraton, The 
Ritz-Carlton Company, Harrah's Casino Hotels, Delta Hotels and Resorts, 
Outrigger, La Quinta Inns, Red Roof Inns and Budgetel Inns, as well as many 
individual properties flying the Marriott, Holiday Inn, Hilton, 
Inter-Continental, Prince, Radisson, Westin, Doubletree, Embassy Suites, and 
other flags. The lodging market in the United States comprises approximately 
3.6 million rooms. The Company believes that approximately 1.9 million of 
these rooms are located in the Company's target market of hotels having more 
than 100 rooms. The Company provides its services under exclusive, long-term 
contracts throughout the United States and Canada, and in other select 
countries through licensing arrangements with strategic partners. The average 
remaining life of the Company's existing guest pay contracts is over four 
years, with less than 7% of these contracts due to expire before 1999.

     In the lodging market, the Company's services include Guest 
Scheduled-SM- on-demand movies, network-based Super Nintendo-Registered 
Trademark- video games, PRIMESTAR-Registered Trademark- digital 
satellite-delivered basic and premium cable television programming, and other 
interactive entertainment and information services. On-demand services enable 
a guest to purchase and start a movie on-demand, rather than restricting the 
guest to a predetermined start time. Video games can be started on-demand by 
a hotel guest who is charged an hourly rate for play time. Free-to-guest 
services typically involve a customized package of basic and premium cable 
television programming which the hotel purchases from the Company and 
provides at no charge to guests. Other services, which are typically provided 
at no charge to the guest, include guest surveys, folio review and video 
checkout. The Company is able to offer its 

                                    Page 1

<PAGE>

interactive services by virtue of the high-speed, two-way digital 
communications design of its proprietary b-LAN-SM- system architecture. The 
Company's open-architecture, UNIX-based platform enables the Company to 
upgrade system software to support the introduction of new services or 
integrate new technologies as they become commercially available and 
economically viable.

     The Company believes it is a leader in providing innovative products and 
services to the lodging industry. The Company believes that it was the first 
in the lodging market to install network-based interactive video games, the 
first to install in-room printers for video checkout and other applications, 
and the first to utilize a Video Room Card-SM- (an image-based menu and 
purchasing protocol, utilizing pictures and graphics to replace the simple 
text menus traditionally utilized by its competitors). The Company is 
currently testing an Internet browser (developed in cooperation with Sun 
Microsystems, Inc.) at several hotel properties that enables the hotel guest 
to access and navigate the World Wide Web from any guest room television.  In 
1995, LodgeNet redesigned its interactive system, enabling the Company to 
deliver what it believes is the first cost-effective system for on-demand 
movies and network-based video games to mid-size hotels of 100 to 150 rooms, 
a market segment the Company believes has been historically underserved by 
guest pay providers. The Company believes that the scalability and advanced 
features of its redesigned system for mid-size hotels were principal factors 
in the awarding by La Quinta Inns of its over 30,000-room account, Red Roof 
Inns of its over 27,000-room account and Budgetel Inns of its over 8,000-room 
account to the Company over other competitors. The Company believes that the 
mid-size hotel segment represents a large and attractive market for the 
Company's services that will generate financial returns similar to those 
achieved by the Company in larger full-service hotels. In April 1996, the 
Company entered into an agreement with PRIMESTAR Partners L.P. pursuant to 
which the Company was appointed as the exclusive third-party provider (other 
than the partners in PRIMESTAR and their affiliated distributors) of the 
PRIMESTAR-Registered Trademark- digital direct broadcast satellite ("DBS") 
signal to the lodging industry. This arrangement enables the Company to 
provide free-to-guest, digital satellite-delivered cable television 
programming to a broader segment of the lodging industry than can be 
cost-effectively served with traditional C-band satellite systems.

     MULTI-FAMILY RESIDENTIAL SERVICES. In October 1996, TCI Satellite 
Entertainment, Inc. ("TSAT") agreed to invest up to $40 million in ResNet in 
exchange for up to a 36.99% interest in ResNet and agreed to provide ResNet 
with long-term access to the PRIMESTAR-Registered Trademark- DBS signals for 
the MDU market on a nationwide basis.  Pursuant to a recently announced 
roll-up plan, the partners in PRIMESTAR Partners, L.P. (including TSAT, Time 
Warner Entertainment, Comcast Corporation, Cox Communications, MediaOne, and 
GE Americom) will contribute their PRIMESTAR related assets to a newly formed 
subsidiary of TSAT ("New PRIMESTAR"); and TSAT will be subsequently merged 
with and into New PRIMESTAR with New PRIMESTAR as the surviving corporation 
(hereinafter "PRIMESTAR").  As a result of such transactions, PRIMESTAR will 
succeed to the interest of TSAT in ResNet.  In March 1997, ResNet activated 
its first b-LAN-SM-  -enabled, video on-demand system and, at December 31, 
1997, ResNet's unit base had grown to approximately 26,125 passings in 16 
states through a combination of organic growth and selected acquisitions.

     The Company views the MDU market as attractive due to: (i) the large 
market size; (ii) the portability to this market of the Company's b-LAN-SM- 
system architecture and the operating expertise developed for the lodging 
market; (iii) the favorable regulatory environment available to operators 
such as ResNet who qualify as "private cable" operators under applicable 
federal regulations (including the absence of franchise requirements, 
"must-carry" obligations and rate regulations applicable to traditional 
franchised cable operators); and (iv) the exclusive long-term contracts that 
have customarily been available in the MDU market.

     The Company believes it is well positioned to pursue the large MDU 
private cable market with its proprietary b-LAN-SM- system architecture and 
the ability to offer the DBS signals provided by PRIMESTAR on a nationwide 
basis. The Company believes there are approximately 6 million multi-family 
residential units in the United States that are located in apartment 
complexes having more than 200 units, the Company's primary market, which 
represents a market more than three times as large as the Company's 
traditional lodging market. The Company believes that its proprietary 
b-LAN-SM- system architecture enables ResNet to offer differentiated 
interactive services that allow property owners to better communicate with 
and serve their tenants.  In addition, the Company believes that its 
experience in creating and managing a nationwide installation and field 
service organization will enable ResNet to operate effectively in its markets.

     ResNet's video service agreement with each property owner grants ResNet 
the exclusive right and access on a long-term basis to provide video services 
to tenants of the MDU complex, in return for which the owner receives a 
monthly commission based on revenues.  These agreements generally prohibit 
the property owner from installing or marketing an alternative video system 
and prohibit the owner from allowing tenants to install an antenna, satellite 
or microwave dish on the exterior of the building.

     ResNet's private cable television system has the capacity to deliver 
over 100 channels, although the Company expects that the typical system will 
deliver 35 to 50 channels of basic and premium programming, depending 
principally upon the size of the property, the length of the contract and 
local competitive considerations. ResNet may elect to provide approximately 
10 to 35 additional channels for scheduled pay-per-view, video on-demand and 
other interactive services, such as Internet access. ResNet intends to tailor 
the programming lineup at each multi-family residential complex, based on the 
particular demographic profile of that complex. ResNet's interactive private 
cable television systems are based on the Company's proprietary b-LAN-SM- 
system architecture 

                                   Page 2

<PAGE>

and utilize the PRIMESTAR-Registered Trademark- DBS signal provided by 
nationwide. ResNet's access to PRIMESTAR-Registered Trademark-'s digital 
signal provides it with a more capable and cost-effective system than the 
C-band systems generally used by most satellite master antenna television 
("SMATV") cable operators. ResNet's private cable television system can also 
utilize addressable interdiction technology, enabling ResNet to remotely 
initiate, modify or terminate service, prevent signal theft and respond to 
many other service needs.

     ResNet intends to grow its business by (i) marketing its unique b-LAN-SM- 
system architecture capabilities and the PRIMESTAR-Registered Trademark- DBS 
service to large multi-state MDU property portfolios averaging at least 200 
units per property, (ii) capitalizing on its reputation for quality customer 
service, (iii) considering selected acquisitions of private cable operations 
where the expected return on capital meets ResNet's investment criteria, and 
(iv) focusing its internal sales efforts and selected acquisitions in 20 to 
25 geographic clusters in order to achieve operating efficiencies.

     BACKGROUND.  The Company's predecessor commenced business in 1980 as 
Satellite Movie Company, incorporated as a South Dakota corporation in 
February 1983 and changed its name to LodgeNet Entertainment Corporation in 
September 1991. On October 13, 1993, LodgeNet Entertainment Corporation 
changed its state of incorporation from South Dakota to Delaware by merging 
with and into the Company, its newly-formed Delaware subsidiary, which then 
adopted the LodgeNet name.  Interested persons may access additional 
information concerning the Company and ResNet through the Company's Web Site 
at: HTTP://WWW.LODGENET.COM.

BUSINESS STRATEGY

     The Company's business strategy is to: (i) continue to expand its 
lodging industry base of guest pay and free-to-guest rooms; (ii) expand into 
the MDU private cable television market; (iii) maximize the revenue generated 
per lodging room or residential unit served by exploiting new revenue 
opportunities; (iv) extend the application of the Company's proprietary high 
speed, two-way b-LAN-SM- system architecture and operating expertise to new 
markets; and (v) enhance financial performance by increasing operating 
margins and reducing the average capital invested per new unit installed.

      EXPANDING THE COMPANY'S LODGING INDUSTRY FRANCHISE.  The Company 
believes that there are substantial opportunities for continued domestic 
growth in an estimated pool of over 1.9 million rooms located in hotels 
having more than 100 rooms (from the approximately 3.6 million guest rooms 
industry-wide), of which the Company estimates approximately 500,000 are 
either served by the Company's competitors under contracts due to expire 
before the end of 1998 or are presently unserved by any movie system vendor. 
The Company's marketing plan is to capitalize on the strength of its 
innovative product offerings, deliverable by virtue of the high-speed, 
two-way digital communications design of its scalable b-LAN-SM- system 
architecture, together with its expertise in installation, programming, 
technical support and customer service.

     Internationally, the Company is expanding into selected countries in the 
Far East, South America, Central America and other regions through licensing 
agreements with established partners in these countries. Under these 
agreements, the Company generally sells equipment at cost plus an agreed 
markup and receives a royalty based on gross revenues. The Company believes 
there are additional opportunities to enter into international strategic 
alliances in other regions to exploit further the Company's proprietary 
b-LAN-SM- system architecture and multimedia capabilities.

     EXPANDING INTO THE MULTI-FAMILY RESIDENTIAL MARKET.  The Company 
believes there are substantial opportunities to provide its services in the 
MDU market. The Company believes there are approximately 6 million 
multi-family residential units located in apartment complexes having more 
than 200 units, the Company's primary market. This represents a market that 
is more than three times the size of the Company's target lodging market.

     MAXIMIZING REVENUE PER UNIT.  In addition, to increasing and expanding 
its installed customer base, the Company also seeks to maximize the revenue 
generated by each of its installed guest rooms and apartment units.  In 
furtherance of this strategy,  the Company intends in the lodging market to 
continue to install its interactive Guest Scheduledsm on-demand movie and 
network-based Super Nintendo-Registered Trademark- video game system in all 
new guest pay hotel rooms. From the Company's experience, rooms with this 
system generate significantly more revenue and gross profit than comparable 
rooms having only the scheduled format which allows guests to watch movies 
only at predetermined times. The Company's current installed guest pay base 
of over 527,000 rooms hosts more than 125 million guests each year (based on 
current average hotel occupancy and length-of-stay data).  The Company 
believes there may be significant opportunities to generate revenues from 
third-party providers of content and services who would pay the Company for 
access to its valuable consumer base, as well as from usage fees charged to 
the guests who utilize such services. The Company is currently testing an 
Internet browser (developed in cooperation with Sun Microsystems, Inc.) at 
several hotel properties that enables the hotel guest to access and navigate 
the World Wide Web from any guest room television. The Company is reviewing 
other new services, such as advertiser-supported visitor information for 
specific cities, as well as "advertorials"  and other "push media" strategies 
to deliver targeted product or service information directly to the consumer.  
The Company is evaluating these and other opportunities as well as 
appropriate business models that would enable the Company to maximize the 
return on its investment in these activities.

                                    Page 3

<PAGE>

     EXPANDING INTO NEW MARKETS.  The Company seeks to extend the application 
of its proprietary b-LAN-SM- system architecture, products and services to an 
increasingly broad range of property sizes and types. In addition to the 
mid-size hotel, international lodging and multi-family residential markets, 
other future potential markets may include hospitals, single-family 
residences, cruise ships and educational institutions, among others.

     ENHANCING FINANCIAL PERFORMANCE.  Complementing the Company's growth 
objective is its ongoing goal to enhance financial performance. The Company 
seeks to increase its operating margins by reducing direct and overhead 
expenses, as measured on a percentage of revenue and on a per-installed unit 
basis. As a result of its efforts, the Company has experienced increasing 
EBITDA margins during each of the past four years as it has reduced per-room 
operating costs and leveraged its infrastructure over a larger base of 
installed rooms. Additionally, the Company will continue its program to 
reduce the average capital invested per new unit, thereby increasing its 
return on investment. As a result of engineering efforts to reduce the cost 
of its system, increased installation efficiencies and the ability of the 
Company to negotiate guest pay contracts under which hotels are sharing a 
greater percentage of the cost of installing televisions, the Company's 
average investment per new guest pay room decreased from approximately $535 
in 1993 to approximately $375 in 1997.

STRATEGIC INITIATIVES

     The Company has implemented the following strategic initiatives to 
further its goal of creating a more diversified revenue base.

     EXPANSION INTO THE RESIDENTIAL MARKET. On October 21, 1996, the Company 
and ResNet entered into agreements with TSAT pursuant to which TSAT acquired 
a 4.99% interest in ResNet for $5.4 million (the "Stock Payment") and agreed 
to provide ResNet with long-term access to a DBS signal on a nationwide 
basis. In addition, TSAT agreed to advance ResNet up to $34.6 million to 
purchase certain DBS reception equipment pursuant to a subordinated 
convertible term loan agreement (the "TSAT Convertible Note"). The TSAT 
Convertible Note has a five year term (subject to a one year extension at the 
option of ResNet), is non-recourse to the Company and is payable solely in 
shares of the capital stock or membership interests in ResNet. Subject to 
certain vesting provisions, the TSAT Convertible Note is subject to mandatory 
conversion into up to an additional 32% interest in ResNet at such time as 
conversion is not restricted by Federal Communication Commission ("FCC") 
regulations (as described below). As part of the transaction, TSAT was 
granted an option (the "TSAT Option"), exercisable after three years, to 
acquire an additional 13.00% interest in ResNet for a purchase price equal to 
the fair market value of such interest at the time of exercise. ResNet and 
TSAT also agreed to rights of first refusal on the sale of any interest in 
ResNet and to certain standstill provisions that, among other things, 
prohibit TSAT from acquiring more than 10% of the Company's outstanding 
common stock or participating in any effort to influence or control the 
Company's management or Board of Directors.   Pursuant to a recently 
announced roll-up plan, the partners in PRIMESTAR Partners L.P. (including 
TSAT, Time Warner Entertainment, Comcast Corporation, Cox Communications, 
MediaOne, and GE Americom) will contribute their PRIMESTAR related assets to 
a newly formed subsidiary of TSAT ("New PRIMESTAR") and TSAT will be 
subsequently merged with and into New PRIMESTAR with New PRIMESTAR as the 
surviving corporation (hereinafter, "PRIMESTAR").  As a result of such 
transactions, PRIMESTAR will succeed to the interest of TSAT in ResNet.

      PRIMESTAR AGREEMENT.  In April 1996, the Company and PRIMESTAR entered 
into an agreement appointing the Company as the exclusive third party 
provider (other than the partners in PRIMESTAR and their affiliated 
distributors) of the PRIMESTAR-Registered Trademark- DBS signal to the 
lodging industry. The Company expects that the alliance, bringing together 
PRIMESTAR's digital satellite technology and the Company's programming and 
marketing expertise, will provide the Company with a technologically superior 
and more flexible service, and extend the market for free-to-guest systems to 
a much broader segment of the lodging industry than can be served 
cost-effectively with traditional C-band satellite systems. The Company 
markets the "PRIMESTAR by LodgeNet" service as a complement to its 
interactive guest pay systems and on a stand-alone basis to hotels not served 
by the Company's guest pay system.

     EXPANSION INTO MID-SIZE HOTEL MARKET.  In addition to the large hotel 
market, which traditionally has been the segment subject to the most 
competition for guest pay services, the Company is now targeting mid-size 
hotels of 100 to 150 rooms as part of its marketing strategy. The Company 
believes that this market segment, which the Company estimates contains over 
500,000 rooms, has not been broadly served by the guest pay industry because 
of certain diseconomies of scale resulting from the smaller average property 
size. In 1995, the Company redesigned and modified its high speed, two-way 
b-LAN-SM- system architecture to permit the delivery of on-demand movies and 
network-based Super Nintendo-Registered Trademark- video games more 
cost-effectively to mid-size hotels. The Company believes that its ability to 
deliver this full array of services (in contrast to competing systems that do 
not offer network-based video games and require the guest to take the extra 
step of ordering the movie purchase by telephone) and the scalability of its 
system for mid-size hotels, were significant factors in the awarding by La 
Quinta Inns of its over 30,000-room account, Red Roof Inns of its over 
27,000-room account and Budgetel Inns of its over 8,000-room account to the 
Company over other competitors. The Company believes that the mid-size hotel 
segment represents a large and attractive new market for the Company's 
services and expects that its scalable b-LAN-SM- system architecture will allow 
it to generate financial returns similar to those achieved by the Company in 
larger full-service hotels.

                                   Page 4

<PAGE>

     INTERNET AND OTHER INTERACTIVE SERVICES.  The Company is continuing the 
development and implementation of an Internet browser and other interactive 
services deliverable over the Company's high speed, two-way b-LAN-SM- system to 
the hotel guest via the in-room television.  The Company believes there may 
be significant opportunities to generate revenues from third-party providers 
of content, merchandise and information services who would pay the Company 
for electronic access to its valuable consumer base, as well as from usage 
fees charged to the guests who utilize such services.  The Company has 
installed an interactive in-room shopping service in over 250,000 guest rooms 
that enables the guest to browse though a video version of the well known 
SkyMall-Registered Trademark- catalog featuring quality merchandise from the 
country's leading retailers. The Company is currently testing an Internet 
browser (developed in cooperation with Sun Microsystems, Inc.) at hotel 
properties that enables the hotel guest to access and navigate the World Wide 
Web from any guest room television in the hotel, and the Company intends to 
install and test the Internet browser at additional hotels over the next 
several months.  The Company is reviewing other new services, such as 
advertiser-supported visitor information for specific cities, as well as 
"advertorials"  and other "push media" strategies to deliver targeted product 
or service information directly to the consumer.  The Company is evaluating 
these and other opportunities as well as appropriate business models that 
would enable the Company to maximize the return on its investment in these 
activities.

MARKETS AND CUSTOMERS

     LODGING MARKET.  The lodging market in the United States comprises 
approximately 3.6 million hotel rooms. Guest pay services were introduced in 
the lodging market in the early 1970s and have since become a standard 
amenity offered by many hotels to their guests. Virtually all hotels offer 
free-to-guest services as well. In 1986, certain hotels began offering their 
guests limited interactive services and in 1991, on-demand movies became 
available. Guest pay services are attractive to hotel operators because they 
provide an additional amenity for their guests as well as incremental revenue.

     LARGE HOTEL MARKET.  The Company's primary market for guest pay services 
has been large hotels with over 150 rooms located in metropolitan areas in 
the U.S. and Canada, and the Company estimates that this market segment 
contains approximately 1.3 million rooms. The Company currently provides its 
services to large hotels that are generally part of chains such as ITT 
Sheraton, The Ritz-Carlton Hotel Company, Harrah's Casino Hotels, Delta 
Hotels and Resorts, Outrigger, Holiday Inn, Inter-Continental, Embassy 
Suites, Prince, Radisson, Westin, Hilton and Marriott. No single contract 
represented greater than 10% of the Company's combined guest pay and 
free-to-guest revenues for the twelve months ended December 31, 1997.

     MID-SIZE HOTEL MARKET.  The Company is also now targeting mid-size 
hotels of 100 to 150 rooms as part of its guest pay marketing strategy. The 
Company believes that this market segment, which the Company estimates 
contains over 500,000 rooms, has not been broadly served by the guest pay 
industry because of certain diseconomies of scale resulting from the smaller 
average property size. In 1995, LodgeNet redesigned its interactive system, 
enabling the Company to deliver on-demand movies and network-based video 
games more cost-effectively to mid-size hotels. The Company believes that the 
mid-size hotel segment represents a large and attractive new market for the 
Company's services and expects that its scalable b-LAN-SM- system architecture 
will allow it to generate financial returns similar to those achieved by the 
Company in the large hotel market.

     FREE-TO-GUEST MARKET.  Almost all of the approximately 3.6 million hotel 
rooms in the United States are served by some form of free-to-guest 
television service. Free-to-guest television typically involves a package of 
basic and premium programming which the hotel purchases and provides at no 
charge to its guests. These services can be purchased on a stand-alone basis 
or as part of a package which includes guest pay services. Historically, only 
hotels with more than 100 rooms could generally justify the expense of buying 
or leasing the large C-band satellite dish required to receive 
satellite-delivered, free-to-guest services. Smaller hotels who wanted to 
offer free-to-guest services generally purchased the service from local cable 
operators. The Company's agreement with PRIMESTAR allows LodgeNet to provide 
digital satellite-delivered free-to-guest television programming on a 
cost-effective basis to hotels with as few as 50 rooms.

      MULTI-FAMILY RESIDENTIAL MARKET.  The Company believes that there are 
substantial opportunities for growth in the multi-family residential market. 
The Company believes there are approximately 26,000 apartment complexes 
having more than 200 units, with an aggregate of approximately 6 million 
multi-family residential units, in the 70 largest metropolitan areas in the 
United States. This represents a market that is more than three times the 
size of the Company's target lodging market.  The Company's agreement with 
PRIMESTAR will facilitate the expansion into this market by providing ResNet 
with DBS equipment and access to the PRIMESTAR-Registered Trademark- DBS 
signal nationwide.

SERVICES AND PRODUCTS

     GUEST PAY 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 or per-play basis. The 
high-speed, two-way digital communications design of the Company's 
proprietary b-LAN-SM- system architecture enables the Company to provide 
sophisticated interactive features such as on-demand movies, network-based 
Super Nintendo-Registered Trademark-

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<PAGE>

video games, and a variety of other interactive services, such as folio 
review, video checkout, in-room printers, guest surveying, advertising and 
merchandising services.

     Guest pay services include in-room television viewing of recently 
released major motion pictures and independent films for which a hotel guest 
pays on a per-view basis. The Company's Guest Scheduled-SM- interactive 
video-on-demand service allows a guest to choose from an expanded menu of 
video selections and individually start the selected video at the guest's 
convenience rather than restricting the guest to a predetermined start time. 
It has been the Company's experience that rooms having the on-demand format 
generate significantly greater movie revenues than comparable rooms having 
only the pre-scheduled format. As of December 31, 1997, the Company served 
over 511,000 guest pay rooms, of which nearly 485,000, or approximately 95%, 
featured the Company's interactive on-demand system. The Company's original 
scheduled guest pay service, which is provided in approximately 5% of the 
Company's guest pay rooms, offers guests a choice of up to nine movie titles 
shown at predetermined times, offering a new film approximately every half 
hour. The Company continuously monitors guests' entertainment selections and 
adjusts its programming to respond to viewing patterns. The system also 
enables hotel owners to broadcast informational and promotional messages and 
to monitor room availability.

     The revenue generated from the guest pay service is dependent upon three 
factors at each location: (i) the occupancy rate at the property; (ii) the 
"buy rate" or percentage of occupied rooms that buy movies or video 
games/information services at the property; and (iii) the price of the movie, 
video game or service. For example, a property installed with the Company's 
interactive system with a 70% occupancy rate, a buy rate of 11.4% and an 
$8.95 movie price will generate an average of $21.71 of gross movie revenue 
per installed room per month, plus an average of $3.90 in additional gross 
revenues per month from video games and information services (assuming 30.4 
days per month), resulting in total gross revenue per room per month of 
$25.61. Occupancy rates vary by property based on the property's competitive 
position within its marketplace and over time based on seasonal factors and 
general economic conditions. Buy rates generally reflect the hotel's guest 
mix profile, the popularity of the motion pictures available and the guests' 
other entertainment alternatives. Buy rates also vary over time with general 
economic conditions. Movie price levels are established by the Company and 
are set based on the guest mix profile at each property and overall economic 
conditions. Currently, the Company's movie prices are generally $7.95 or 
$8.95.

     In May 1993, the Company entered into a seven-year non-exclusive license 
agreement with Nintendo to provide hotels with a network-based Super 
Nintendo-Registered Trademark- video game playing system. Pursuant to this 
agreement, Nintendo provides the Company with access to a minimum of ten 
popular Super Nintendo-Registered Trademark- video games, which selection of 
games is updated periodically, and the Company uses its proprietary 
high-speed, two-way b-LAN-SM- system architecture to allow guests to play the 
video games over the hotel's master antenna television system. Hotel guests 
are charged a fee based on the amount of time they play the video games. 
Presently, the Company charges $5.95 or $6.95 per hour of play.  The Company 
had 448,969 rooms, approximately 87% of its guest pay rooms, installed with 
the Super Nintendo-Registered Trademark-system as of December 31, 1997.

     The cost of installation varies depending on the size of the hotel 
property and the configuration of the system being installed. The average 
installed cost of a new on-demand guest pay room with interactive and video 
game services capabilities, including the headend equipment and, in some 
cases, televisions, is approximately $375 to $400 per room. In addition to 
hotel commissions and royalties paid to movie studios, operating costs of the 
guest pay systems include preview tapes, tape duplication, taxes, freight, 
insurance, personal property taxes, maintenance and data line costs. The 
average cost to upgrade a room from the original scheduled guest pay system 
to the on-demand system is approximately $75 to $175 per room, depending on 
the size of the movie library installed in the hotel, whether video games are 
provided and the configuration of the headend computer and system hardware.

     FREE-TO-GUEST SERVICES.  In addition to guest pay services, the Company 
provides television programming for which the hotel, rather than its guests, 
pays the charges. Free-to-guest services allow a hotel to receive one or more 
satellite-distributed programming channels via a satellite earth station, 
which are then distributed to guest rooms over the hotel's existing master 
antenna system.

     Traditionally, this service has required little capital expenditure by 
the Company, since the earth station equipment either was provided 
independently by the hotel or purchased or leased from the Company. For 
free-to-guest services, the hotel pays the Company a fixed monthly charge per 
room for each programming channel selected and provides these channels to its 
guests free of charge. The Company generally charges $2.90 - $3.50 per room 
per month for each premium channel and $.10 - $.95 per room per month for 
each non-premium channel. 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. 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 customizing packages of programming to provide 
only those channels desired by the hotel subscriber, which typically reduces 
the overall cost of the services provided.

     In April 1996, the Company and PRIMESTAR entered into an agreement to 
provide digital satellite-delivered basic and premium television services to 
the lodging industry. The alliance brings together 

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<PAGE>

PRIMESTAR-Registered Trademark-'s digital satellite technology and the 
Company's programming and marketing expertise, will enable the Company to 
offer the lodging industry a technologically superior and more flexible 
service, and will extend the market for free-to-guest services to a much 
broader segment of the lodging industry than can be served cost-effectively 
with traditional C-band satellite systems. Pursuant to the agreement with 
PRIMESTAR, the Company will pay PRIMESTAR a signal carriage fee for providing 
access to the PRIMESTAR-Registered Trademark-signal. The agreement with 
PRIMESTAR may be terminated by either party upon notice if certain cash flow 
targets are not met during any two consecutive years. The Company is 
responsible for the installation and servicing of all equipment required by 
each lodging customer to receive the PRIMESTAR-Registered Trademark- digital 
satellite-delivered signal. Installations began in May 1996 and approximately 
78,000 rooms at 1,116 hotel properties had been installed through December 
31, 1997. The Company intends to sell or lease such equipment to its 
customers and is entitled to retain all revenues associated with the sale, 
lease, installation and service of all such PRIMESTAR-related equipment.

     MULTI-FAMILY RESIDENTIAL SERVICES.  ResNet's multi-family residential 
private cable system has the capacity to deliver over 100 channels, although 
the typical system will deliver approximately 35 to 50 channels of 
programming. ResNet may elect to provide from approximately 10 to 35 
additional channels for scheduled pay-per-view, video on-demand and other 
interactive services, such as Internet access. ResNet designs a specific 
programming lineup for each specific multi-family residential complex, based 
on the particular demographic profile of that complex. These systems include 
basic programming services, such as CNN, ESPN, WTBS, TNT, The Discovery 
Channel and The Weather Channel, premium programming, such as HBO and 
Showtime, plus additional channels which carry local off-air stations, an 
electronic programming guide, a preview channel, and a bulletin board 
channel. Delivery of private cable television services to multi-family 
residential complexes involves technology similar to that used in the 
Company's hotel systems. The hub of each multi-family residential system is a 
headend, which will gather basic and premium cable television programming 
from a variety of sources using a combination of the DBS signal provided by 
PRIMESTAR and off-air antennae and then redistribute these signals throughout 
the apartment complex.

     The Company estimates that the average installed cost per unit passed 
for basic and premium cable television services is approximately $600 to 
$700.  The Company estimates that the average cost per unit passed to add 
scheduled pay-per-view movies to the basic cable system will range from $100 
to $130, depending on the system configuration. The foregoing estimates of 
installation costs are forward-looking in nature and actual costs could vary 
based on the factors discussed elsewhere herein.

     ENTERTAINMENT HARDWARE.  The Company also sells and leases entertainment 
hardware, including satellite earth stations, televisions and off-air signal 
reception and processing equipment, to the lodging industry. The Company 
believes that this service complements its goal of being a full-service 
provider of in-room entertainment and information services to the lodging 
industry.

OPERATIONS

     CONTRACTS.  The Company provides guest pay services under contracts with 
lodging properties that generally run for a term of five to seven years. 
Under these contracts, the Company installs its system into the hotel free of 
charge and retains ownership of all equipment utilized in providing the 
service. Traditionally, the hotel provides and owns the television set; 
however, the Company in some cases provides televisions incorporating the 
Company's integrated guest pay terminal units to hotels which meet certain 
economic criteria. The Company's contracts generally provide that the Company 
will be the exclusive provider of in-room, scheduled pay-per-view or 
on-demand television entertainment services to the hotels, permit the Company 
to set the movie price and allow the Company to terminate the contract if the 
hotel is not meeting the Company's economic criteria. The contracts also 
typically grant the Company a right of first refusal regarding the provision 
of additional video related services to the hotel. The hotels collect movie 
viewing charges from their guests and retain a commission, generally equal to 
10% to 15% of the total guest pay revenue depending upon the size and 
profitability of the system. At the scheduled expiration of a contract, the 
Company generally seeks to extend the contract on substantially similar 
terms. The average remaining life of the Company's current guest pay 
contracts is over four years, with less than 7% of these contracts coming up 
for renewal before 1999.

     The Company typically enters into a separate contract with each hotel 
for the services provided. The terms contained in the contracts with the 
corporate-managed hotels in 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.

     ResNet enters into long-term exclusive right-of-entry contracts with 
property owners and managers to provide cable television services to 
multi-family residential complexes. The lengths of term of such contracts 
generally run longer than those in the lodging industry.  The form of 
agreement to be entered into with each multi-family residential property 
grants ResNet the right to provide cable television programming and other 
video services, such as video on-demand, merchandising, and access to the 
Internet. The property owner or manager typically receives a commission 
generally from 6% to 12% of subscriber revenues, depending upon the 
penetration rate at a particular property.

                                   Page 7


<PAGE>

     TECHNOLOGY, PRODUCT DEVELOPMENT AND PATENTS.  The Company designs and 
develops high quality, interactive, multimedia entertainment and information 
systems. Because such systems utilize an open architecture, UNIX-based 
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 
system incorporates the Company's proprietary and scalable b-LAN-SM- system 
architecture with commercially manufactured, readily available components and 
hardware such as video cassette players, modulators and computers.

     The Company's b-LAN-SM- system architecture utilizes the Company's 
proprietary high-speed, two-way digital communications design to process and 
respond to keystroke commands from the viewer very rapidly. This capability 
enables the Company to provide sophisticated interactive features such as 
network-based Super Nintendo-Registered Trademark- video games and on-demand 
movies, and a variety of other interactive services such as folio review, 
video checkout, in-room printers supporting video checkout and other 
applications, guest surveying, advertising and shopping services. The Company 
has installed an interactive in-room shopping service in  over 250,000 guest 
rooms that enables the guest to browse through a video version of the well 
known SkyMall-Registered Trademark- catalog featuring quality merchandise 
from the country's leading retailers. The Company is currently testing an 
Internet browser (developed in cooperation with Sun Microsystems, Inc.) at 
hotel properties that enables the hotel guest to access and navigate the 
World Wide Web from any guest room television.

     In the lodging industry, the Company's guest pay systems consist of 
equipment located within the guest room connected via a local-area cable 
distribution network to a headend located elsewhere in the hotel. Typical 
in-room equipment includes a terminal unit, a hand-held remote control and a 
video game controller. The in-room terminal unit may be integrated within the 
television set or located behind or on top of the set. Movie programming 
originates from video cassette players located within the headend rack and is 
transmitted to individual rooms over the hotel's master antenna system. Video 
game programs are downloaded into dedicated video game processors also 
located within the headend rack. The guest's keystrokes are transmitted from 
the room to the game processor using the Company's proprietary high-speed 
communications infrastructure and the video signal produced by the game 
processor is transmitted to the guest room over the hotel's master antenna 
system. Both movie and video game starts are controlled automatically by the 
system computer. The system computer also automatically records the purchase 
of a guest pay movie or video game and reports billing data to the hotel's 
accounting system, which automatically posts the charge to the guest's bill.

     Although the Company's products are compatible with all brands of 
televisions, the Company has arrangements with Zenith Electronics 
Corporation, Phillips Electronics and Sony Electronics, Inc., leading 
suppliers of televisions to the lodging industry and other markets, who 
provide the Company with commercial televisions into which the Company can 
integrate its custom-designed circuit boards. The Company is also working 
with other television manufacturers to integrate the Company's systems into 
their commercial television sets. Integration eliminates the need for an 
external terminal unit and costs less than an external unit of comparable 
utility.

     ResNet's private cable television system has the capacity to deliver 
over 100 channels, although ResNet expects that the typical system will 
deliver 35 to 50 channels of basic and premium programming, depending 
principally upon the size of the property, the length of the contract and 
local competitive considerations. ResNet may elect to provide from 
approximately 10 to 35 additional channels for scheduled pay-per-view, video 
on-demand and other interactive services, such as Internet access. ResNet's 
interactive cable television systems utilize the Company's proprietary 
b-LAN-SM- system architecture and the DBS signal provided by PRIMESTAR, off-air 
and/or microwave receiving antennas and headend equipment which process and 
amplify the broadcast and cable television programming signals. The Company 
integrates addressable interdiction jamming technology within its proprietary 
system. Addressable interdiction enables the Company to control subscriber 
access to premium channels and other enhanced services through a computer 
located off-site. This capability eliminates the necessity of having to 
dispatch field personnel to a property to initiate, modify or terminate 
service and eliminates the costs associated with damage or loss of 
traditional set-top converters located in the subscriber's premises.

     LodgeNet designs its systems through its staff of approximately 87 
software and hardware engineers and support personnel (as of December 31, 
1997). Development activities are oriented toward the continued enhancement 
and cost reduction of the Company's system and the further development of 
additional interactive, multimedia, entertainment and information services, 
such as advertising and shopping services.

     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 
owns six 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 multimedia systems.

     The Company uses a number of registered and unregistered trademarks for 
its products and services. The Company has applications for registration 
pending for certain of the 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. 

                                   Page 8

<PAGE>

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 and marketing the Company's 
guest pay, video game and other interactive services to the hotel guest. The 
Company's sales organization consisted of approximately 53 employees as of 
December 31, 1997, including 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.

     The Company markets its services to hotel guests by means of its Video 
Room Card-SM-, on-screen graphics and by in-room tent cards which contain movie 
and video game programming information that are placed near the television 
set and highlight the feature film selections of the month. In-room marketing 
advertisements are designed and produced by the Company's marketing 
department. 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 AND SERVICE OPERATIONS.  The Company believes that high 
quality and consistent systems support and maintenance are essential to 
competitive success in its industry. The Company's installation and service 
organization consists of approximately 232 installation and service personnel 
in approximately 25 locations in the United States and Canada, as of December 
31, 1997. The Company emphasizes the use of Company-employed installation and 
service personnel, 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 
in-house installation and service organization has responsibility for 
approximately 87% of the guest pay hotel rooms served by the Company. Service 
personnel are responsible for systems maintenance and distribution and 
collection of video cassettes. The Company's installation personnel prepare 
site surveys to determine the type of equipment to be installed at each 
particular hotel, install the Company's systems, train the hotel staff to 
operate the systems and perform preliminary quality control tests.

     The Company maintains a toll-free customer support hot line, 
Tech-Connect-SM-, which is monitored 24 hours a day by trained support 
technicians. The on-line diagnostic capability of the Company's system 
enables the Company to identify and resolve a majority of the 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 installation and service personnel to replace 
defective components at the hotel site.

     In the multi-family residential market, ResNet installation supervisors 
oversee and coordinate installation and field service crews comprised of 
in-house personnel and experienced subcontractors. ResNet utilizes component 
assembly resources developed by the Company for the lodging industry.

     PROGRAMMING.  In the lodging market, the Company obtains non-exclusive 
rights to show recently released major motion pictures from motion picture 
studios pursuant to a master agreement with each studio. The license period 
and percentage fee for each movie are negotiated separately, with the studio 
receiving a percentage, generally ranging from 35% to 50%, of the Company's 
gross revenue from the movie. For recently released motion pictures, the 
Company typically obtains rights to exhibit the picture after the film has 
been in theaters, but prior to its release to the home video market or 
exhibition on cable television. Generally, studios make master video tapes of 
their movies available for duplication 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. 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 duplicate the films as necessary to supply copies to its hotel 
sites. 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 multi-year license agreements generally containing automatic 
renewal provisions 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. The Company intends to tailor 
the programming lineup at each multi-family residential complex based on the 
particular demographic profile of that complex. Cable operators and 
multi-channel video programming distributors such as ResNet, with certain 
exceptions, are prohibited from carrying the signal of a commercial 
television broadcast station without the broadcaster's "retransmission" 
consent. ResNet believes it can obtain all necessary retransmission consents 
in its markets. As part of its transaction with PRIMESTAR, ResNet entered 
into a long-term signal availability agreement pursuant to which ResNet was 
granted nationwide access to the PRIMESTAR-Registered Trademark- DBS signal.

     SYSTEMS PRODUCTION GROUP AND EQUIPMENT SUPPLIERS.  The Company contracts 
directly with various electronics firms for the manufacture and assembly of 
its systems hardware, the design of which is controlled by the Company. The 
Company has found these suppliers to be dependable and able to meet delivery 
schedules on time.

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 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 video 
cassette players, modulators and amplifiers, that are available from multiple 
sources.

     The headend electronics are assembled at the Company's facilities for 
testing prior to shipping. The Company samples the room units at the 
supplier's facilities periodically for reliability. Following assembly of 
head-end equipment with a configuration designed specifically for a 
particular customer, the system is shipped to the location, where it is 
installed by Company-employed technicians or Company-trained subcontractors. 
The Company believes that its anticipated growth can be accommodated through 
existing suppliers.

COMPETITION

     LODGING MARKET.  The Company is the second largest provider (by total 
number of rooms served) of interactive and cable television services to the 
lodging industry, currently serving over 630,000 installed hotel rooms in 
over 4,000 hotels. The Company competes on a national scale primarily with On 
Command Corporation ("OCC"), the successor corporation to the merger of 
SpectraVision, Inc. and On Command Video Corporation, and on a regional basis 
with certain other smaller entities. Based upon publicly available 
information, the Company estimates that OCC currently serves approximately 
893,000 hotel rooms. The aforementioned merger combined two of the largest 
providers of cable television services in the lodging industry based on the 
aggregate number of rooms served. The Company historically competed against 
these two companies prior to the merger and believes that it will be able to 
compete in the same manner against the newly combined entity.

     OCC and DirecTV, Inc. ("DirecTV") have entered into an agreement 
pursuant to which OCC will deliver free-to-guest television programming using 
DirecTV's DBS signal. The Company believes that its agreement with PRIMESTAR 
will allow it to provide comparable services to OCC on a competitive basis.

     There are also a number of potential competitors that could use their 
existing infrastructure to provide in-room entertainment services to the 
lodging industry, including franchised cable operators, wireless cable 
operators, telecommunications companies and DBS providers. Some of these 
potential competitors are already providing free-to-guest services to the 
lodging industry and have announced plans to offer guest pay services, 
including video on demand and Internet services.  Some of these companies may 
have substantially greater financial and other resources than the Company.

     Competition with respect to new guest pay 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 payments 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 
proprietary high speed, two-way b-LAN-SM- system architecture that enables the 
Company to deliver a broad range of interactive features and services such as 
on-demand movies and network-based Super Nintendo-Registered Trademark- video 
games; (ii) the flexible design of the Company's system which enables it to 
add enhancements or integrate new technologies as they become commercially 
available and economically viable; (iii) high quality customer support and 
nationwide field service operations; and (iv) an experienced management team 
and professional and well-trained sales organization. The Company believes 
that its success in securing contracts reflects the strong competitive 
position of the Company's products and services.

     Because of the high level of penetration in the large hotel segment of 
the lodging industry already achieved by guest pay providers, most of the 
growth opportunities in this market segment have traditionally involved 
securing contracts to serve hotels that are served by a competing vendor. An 
incumbent provider may have certain information and installation cost 
advantages as compared to outside competitors. These circumstances have led 
to increasing competition for contract renewals, particularly at hotels 
operated by major hotel chains. The Company believes that certain major hotel 
chains have awarded contracts based primarily on the level and nature of 
financial and other incentives offered by the guest pay provider. Even if it 
were able to do so, the Company may not always be willing to match the 
incentives provided by its competitors, some of which have greater access to 
financial and other resources than the Company. Because free-to-guest service 
providers generally have substantially comparable access to the satellite 
delivered programming that comprises the free-to-guest services, competition 
in this segment has been based primarily on price and customer service.

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     While the Company believes that its proprietary b-LAN-SM- 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. In order to broaden its market 
opportunities, the Company redesigned its system to permit the delivery of 
on-demand movies and network-based video games to mid-size hotels of 100 to 
150 rooms, a market segment the Company believes has been historically 
underserved by guest pay providers. There can be no assurance that the 
Company will be successful in this market segment or that competitors will 
not develop a cost-effective system that would allow them to target this 
market segment. Further, 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 
developed for the residential market and not 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. The Company believes that its 
agreement with PRIMESTAR to deliver the PRIMESTAR-Registered Trademark- DBS 
signal to the lodging industry will enable it to compete more effectively in 
the free-to-guest area and to extend this market segment to smaller sized 
properties that historically could not be cost-effectively served with the 
more expensive traditional C-band technology.

     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 on marketing, product development 
and systems installation, each of which could adversely affect the Company's 
financial condition and operating results.

     MULTI-FAMILY RESIDENTIAL MARKET.  The provision of cable television 
services to the MDU market is highly competitive and competition is expected 
to increase. The Company anticipates that the primary competitors in each of 
its markets will include SMATV operators, wireless cable operators, DBS 
providers, as well as local franchised cable operators. The most substantial 
competitor for ResNet in each of its markets is expected to be the local 
franchised cable operator, most of whom have substantially greater resources 
than the Company and ResNet. Many of ResNet's competitors also have brand 
names that may be more recognizable to consumers than those of the Company 
and ResNet, and that may provide such competitors certain competitive 
advantages.

     ResNet's success in this market will depend in large part upon its 
ability to secure a significant number of long-term exclusive right-of-entry 
contracts with property owners or managers. These contracts generally involve 
a revenue sharing arrangement with the property owner or manager. Certain of 
ResNet's competitors have significantly greater financial resources and may 
offer property owners and managers more lucrative financial arrangements than 
ResNet may be able or willing to offer. As residents of the high-quality MDUs 
that are targeted by the Company come to expect a wider selection of cable, 
interactive video and telecommunications services, property owners may be 
inclined to enter into ROE contracts with companies that can offer such a 
selection. Certain companies have begun to market, or have announced plans to 
market, packages of services that are more extensive than those currently 
offered by the Company. Increasing competition among such providers for right 
of entry contracts could result in greater financial incentives being offered 
to property owners, thereby adversely affecting the financial return expected 
to be realized by ResNet from such contracts. The Company believes that 
ResNet's competitive advantages include (i) the broad range of features and 
services made possible by the Company's proprietary b-LAN-SM- system, (ii) the 
Company's experience and capabilities in conducting nationwide installation 
and field service operations and (iii) the availability of the 
PRIMESTAR-Registered Trademark- DBS signal and related equipment provided by 
PRIMESTAR at a lower cost than traditional C-band satellite signals and 
equipment.

REGULATION

     TELECOMMUNICATIONS ACT OF 1996.  The Telecommunications Act of 1996 (the 
"Act") is intended, in part, to promote substantial competition for telephone 
and video services and will alter federal, state and local laws and 
regulations regarding telecommunications providers and services. The Act 
generally removes previous restrictions preventing cable firms, telephone 
companies, long distance carriers and public utilities from entering into 
certain new markets, removes many cross-ownership restrictions and modifies 
rate regulations applicable to franchised cable operators. In particular, the 
Act authorizes local telephone companies to provide video programming 
directly to subscribers in their service areas and eliminates the requirement 
that "private cable" operators serve only buildings "under common ownership, 
management or control," but preserves the requirement that such operations 
not use closed transmission paths to cross public rights-of-way. The Act also 
permits franchised cable operators to offer bulk discounts to multiple 
dwelling units; provided, however, that such discounts may not constitute 
"predatory pricing." Prior to the adoption of the Act, franchised cable 
operators were subject to a uniform rate requirement which generally 
prohibited such bulk discounts. There are numerous rulemakings that have and 
are still being undertaken by the FCC which will interpret and implement the 
provisions of the Act. It is anticipated that the Act will stimulate 
increased competition generally in the telecommunications and cable 
industries which may adversely impact the Company. No assurance can be given 
that changes in current or future laws or regulations 

                                   Page 11

<PAGE>

adopted by the FCC or state or local regulatory authorities would not have a 
material adverse effect on the Company's business.

     It is premature to predict the effect of the Act on the cable and 
telecommunications industries in general or the Company in particular. The 
Company's business may be adversely affected by the entry of additional 
competitors in the multichannel video programming distribution market. In 
part, the Company's competitiveness also will depend upon the outcome of 
various FCC rulemaking proceedings to interpret and implement the provisions 
of the Act. It is not possible at this time to predict the outcome  of those 
rulemaking proceedings or their effect on the Company.

     CABLE TELEVISION REGULATION.  The Communications Act of 1934, as amended 
by the Cable Communications Policy Act of 1984 (the "1984 Cable Act"), the 
Cable Television Consumer Protection and Competition Act of 1992 (the "Cable 
Act"), and the 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 or MDU complex 
or transmits cable signals from microwave transmitters to each separate 
property, and those systems do not use public rights-of-way. Thus, with 
respect to its private cable systems, the Company is not required to comply 
with many of the FCC's 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" ("MVPD"), however, the 
Company is subject to various provisions of the Communications Act of 1934, 
as amended. Laws and regulations applicable to MVPDs generally apply to the 
Company. 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.

     CABLE AND TELEPHONE WIRING.  Although the majority of the states 
currently do not prohibit exclusive right-of-entry contracts, current trends 
at the state and federal levels, if they continue, may render the legality of 
such exclusivity provisions uncertain. Several states have enacted, and 
additional states are expected to enact, mandatory access statutes that 
require MDU owners to grant a cable franchisee access to its buildings in 
order to offer cable services to tenants that want to receive the 
franchisee's service. Although the FCC has declined to adopt a federal 
mandatory access rule, this year the FCC did adopt rules that clarify the way 
in which MDU owners may terminate an incumbent video provider's access to 
buildings where no right to remain exists. The FCC also has initiated 
rulemaking proceedings to consider, among other issues, whether to adopt a 
cap on the length of exclusive contracts between video providers and MDU 
owners and whether to apply cable home wiring rules to all video providers . 
In addition, the FCC has initiated a rulemaking proceeding to determine 
whether to prohibit restrictions against the placement on rental property of 
devices designed for over-the-air reception of television broadcast signals, 
multichannel multipoint distribution services, or DBS services. In a separate 
rulemaking which concluded this year, the FCC declined to harmonize cable and 
telephony home wiring regulations. The regulations that the FCC ultimately 
adopts could affect the Company's continued ability to enter into or enforce 
exclusive contracts, as well as its access to inside wiring used to provide 
telephony and video programming services.

     SIGNAL CARRIAGE.  Private cable operators, with certain exceptions, are 
prohibited from carrying the signal of a commercial television broadcast 
station without the broadcaster's "retransmission" consent. If the cable 
operator and the broadcaster fail to reach an agreement on terms and 
conditions for retransmission, the cable operator is prohibited from carrying 
the broadcaster's signal. Although there can be no assurance, the Company 
believes it has obtained and will continue to obtain all necessary 
retransmission consents in its markets.

     CROSS-OWNERSHIP.  In order to encourage competition in the provision of 
video programming, the Cable Act generally prohibits a franchised cable 
operator not subject to "effective competition" from holding a license for a 
multichannel multipoint service or from offering SMATV service separate and 
apart from any franchised cable service, in any portion of the franchise area 
served by the cable operator's cable system. Under current interpretations of 
FCC rules and regulations implementing the foregoing provisions, TSAT may be 
prevented from acquiring a 5% or greater interest in ResNet and consequently 
would be unable to exercise its conversion rights under the TSAT Convertible 
Loan or the TSAT Option. TSAT is required to convert the TSAT Convertible 
Loan into an equity interest in ResNet at such time as conversion would not 
violate the aforementioned FCC restriction. TSAT has advised the Company that 
it may seek a formal interpretive letter or waiver by the FCC with respect to 
the acquisition of a further interest in ResNet.

     MICROWAVE LICENSING.  Where appropriate the Company's or ResNet's 
systems may use 18 GHz microwave relays to link more than one hotel or MDU 
complex to a single headend without using public rights-of-way. The FCC has 
the power to issue, revoke, modify, and renew licenses within the radio 
frequency spectrum utilized by the Company or ResNet for microwave relays. 
The FCC also may approve changes in the ownership of such licenses. The 
Company and ResNet have obtained all necessary FCC authorizations to operate 
their microwave relays. There 

                                   Page 12

<PAGE>

can be no assurance, however, that the Company and/or ResNet will continue to 
be able to retain or obtain such authorizations in the future or that 
existing authorizations will be renewed.

     CABLE ENTRY INTO TELECOMMUNICATIONS.  The Act declares that no state or 
local laws or regulations may prohibit or have the effect of prohibiting the 
ability of any entity to provide any interstate or intrastate 
telecommunications service. States are authorized to impose "competitively 
neutral" requirements regarding universal service, public safety and welfare, 
service quality, and consumer protection. The Act further provides that the 
cable operators and affiliates providing telecommunications services are not 
required to obtain a separate franchise from the local franchising authority 
for such services. The Act prohibits local franchising authorities from 
requiring cable operators to provide telecommunications services or 
facilities as a condition of a grant of a franchise, franchise renewal, or 
franchise transfer, except that local franchising authorities can seek 
"institutional networks" as part of franchise negotiations. The law also 
provides that, when cable operators provide telecommunications services, 
local franchising authorities may require reasonable, competitively neutral 
compensation for management of the public rights-of-way.

     TELEPHONE COMPANY ENTRY INTO CABLE TELEVISION.  The Act allows telephone 
companies to compete directly with franchised and private cable operators by 
repealing the previous telephone company-cable cross-ownership ban and 
replacing the FCC's video dialtone regulations with an "open video system" 
("OVS") plan by which local exchange carriers can provide cable service in 
their telephone service area. The FCC has adopted regulations prohibiting an 
OVS operator from discriminating among programmers and ensuring that OVS 
rates, terms, and conditions for service are reasonable and 
nondiscriminatory. Further, those regulations prohibit a local exchange 
carrier, OVS operator or its affiliates from occupying more than one-third of 
a system's activated channels when demand for channels exceeds supply, 
although there are no numeric limits. Additional OVS regulations include 
rules governing channel sharing; extending the FCC's sports exclusivity, 
network nonduplication, and syndicated exclusivity regulations; and 
controlling the positioning of programmers on menus and program guides. Local 
franchising authorities may require OVS operators to pay "franchise fees" 
only to the extent that the OVS provides or its affiliates provide cable 
services over the OVS; such fees may not exceed the franchise fees charged to 
cable operators in the area, and the OVS provider may pass through the fees 
as a separate subscriber bill item. OVS operators are subject to local 
franchising authorities' general right-of-way management regulations.

     ELECTRIC UTILITY ENTRY INTO CABLE AND TELECOMMUNICATIONS.  The Act 
provides that registered utility holding companies and subsidiaries may 
provide telecommunications services (including cable television) 
notwithstanding the Public Utility Holding Company Act. Electric utilities 
must establish separate subsidiaries, known as "exempt telecommunications 
companies" and must apply to the FCC for operating authority. Large utility 
holding companies may become significant competitors to both cable television 
and other telecommunications providers.

     COPYRIGHT LICENSING.  Both private and franchise cable systems are 
subject to federal copyright licensing covering carriage of broadcast 
signals. In exchange for making semi-annual payments to a federal copyright 
royalty pool and meeting certain other obligations, cable operators obtain a 
blanket license to retransmit broadcast signals. Bills have been introduced 
in Congress over the past several years that would eliminate or modify the 
cable compulsory license. Without the compulsory license, cable operators 
such as the Company might need to negotiate rights from the copyright owners 
for each program carried on each broadcast station in the channel lineup. 
Such negotiated agreements could increase the cost to cable operators of 
carrying broadcast signals. The Cable Act's retransmission consent provisions 
expressly provide that retransmission consent agreements between the 
television stations and cable operators do not obviate the need for cable 
operators to obtain a copyright license for the programming carried on each 
broadcaster's signal.

     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 and other video programming distributors operate. The Company 
cannot estimate the outcome of these proceedings or their impact upon its 
operations at this time.

EMPLOYEES

     As of December 31, 1997, the Company had 739 employees in the United 
States and Canada. None of these employees is 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.

ITEM 2 -- PROPERTIES

     The Company's National Headquarters and Distribution Center, including 
its principal executive offices, are located on an approximately 23 acre site 
in Sioux Falls, South Dakota. Construction of the approximately $15 million 
facility was completed in December 1997.  The National Headquarters and 
Distribution Center occupies approximately 228,500 square feet including 
approximately 116,500 square feet for executive, administrative and 

                                   Page 13

<PAGE>

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 National Headquarters and Distribution Center 
allowed the Company to consolidate all of its local operations into a single, 
multipurpose facility which is designed to enhance the operational efficiency 
and to facilitate and necessary future expansion needs of the Company.  The 
Company believes that the site of its National Headquarters and Distribution 
Center is sufficient to accommodate its foreseeable local operational space 
requirements. The Company also owns an office building in Sioux Falls 
containing approximately 8,000 square feet which previously served as the 
Company's headquarters and which is not currently used in the Company's 
operations.  Such building is being offered for sale by the Company.

     The Company leases sixteen facilities, in various other locations, from 
unaffiliated third parties. One, located in Dallas, Texas, is an office 
facility for sales and sales-support personnel. The remaining fifteen are 
combination warehouse/office facilities for installation and service 
operations and are located in Atlanta, Georgia; Honolulu, Hawaii; Canton, 
Michigan; Golden, Colorado; Tempe, Arizona; Las Vegas, Nevada; Cleveland, 
Ohio; Buffalo, New York; Los Angeles and San Francisco, California; Tampa, 
Florida; Redmond, WA; Carrollton, Texas; Lombard, Illinois; and Toronto, 
Ontario, Canada. Each of these facilities occupies less than 3,500 square 
feet.

ITEM 3 -- LEGAL PROCEEDINGS

     On February 16, 1995, OCC filed a lawsuit in Federal District Court for 
the Northern District of California asserting patent infringement by the 
Company relating to its on-demand video system.  The complaint requests an 
unspecified amount of damages and injunctive relief.  The Company filed an 
answer and counterclaim to the lawsuit on April 17, 1995, denying the claims, 
asserting affirmative defenses and asserting a counterclaim for declaratory 
relief.  The Company is currently engaged in litigation with respect to this 
matter and trial is expected to begin in August 1998.  Based on the advice of 
special patent counsel and technical experts retained by the Company, as well 
as the Company's independent analysis, the Company believes that the claims 
of infringement are unfounded and that OCC's patent is invalid.  The Company 
has and will continue to vigorously defend itself in this matter.  Patent 
litigation is especially complex, both as to factual allegations and the 
legal interpretation of patent claims, which makes such lawsuits difficult to 
assess with certainty.  While the Company and its patent counsel believe that 
the Company has a number of defenses available which, if properly considered, 
would eliminate or minimize any liability for the Company, an unexpected 
unfavorable resolution, depending  on the amount and timing, could adversely 
affect the Company.  Although the outcome of any litigation cannot be 
predicted with certainty, the Company believes that the ultimate disposition 
of this matter will not have a material adverse effect on the Company's 
financial condition or results of operations.

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

ITEM 4  -- SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     There were no matters submitted to a vote of the Company's security 
holders during the fourth quarter of the Company's fiscal year ended December 
31, 1997.

                                   Page 14


<PAGE>

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 23, 1998 there were outstanding
11,356,358 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.

<TABLE>
<CAPTION>

          Quarter Ended                           High           Low
          -------------                          ------         ------
          <S>                                    <C>            <C>
          March 31, 1996                         $14.25          $9.00
          June 30, 1996                          $15.25         $11.50
          September 30, 1996                     $14.25          $9.75
          December 31, 1996                      $18.00         $11.75
          
          March 31, 1997                         $17.38         $10.50
          June 30, 1997                          $12.00          $8.00
          September 30, 1997                     $13.25          $9.00
          December 31, 1997                      $14.00         $10.50
</TABLE>

     On March 23, 1998, the closing price of the Company's Common Stock, as
reported by NASDAQ NMS was $11.00.  Stockholders are urged to obtain current
market quotations for the Company's Common Stock.  As of  March 23, 1998 there
were 149 stockholders of record of the Company with approximately 88% of the
shares held in "street name".  The Company estimates that as of March 23, 1998
there were more than 2800 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
Revolving Facility (See "Item 7 -- Management's Discussion and Analysis of
Financial Condition and Results of Operations" elsewhere herein) both contain
covenants which restrict and limit payments or distributions in respect of the
Common Stock of the Company.


RIGHTS PLAN

     On February 28, 1997, the Board of Directors of the Company authorized and
adopted a stockholder rights plan ("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.  The Rights Plan
had been under consideration by the Board of Directors for almost a year prior
to its adoption and is in a form recommended by the Company's outside legal
counsel and financial advisors, which form is similar to that adopted by many
other public companies.
     
      Pursuant to the Rights Plan, the Board of Directors declared a dividend
distribution of one "Right" for each outstanding share of common stock, par
value $.01 per share (the "Common Stock") of the Company to stockholders of
record at the close of business on March 10, 1997 (the "Record Date").  In
general, each Right, when exercisable, entitles the registered holder to
purchase from the Company one one-thousandth of a share of a new series of
preferred stock, designated as Series A Participating Preferred Stock, par
value $.01 per share (the "Preferred Stock"), at a price of $60.00 (the
"Purchase Price"), subject to adjustment. The terms of the Rights are set forth
in a Rights Agreement (the "Rights Agreement") between the Company and Harris
Trust and Savings Bank, as "Rights Agent".  The following summary description
of the Rights and the terms of the Rights Agreement does not purport to be
complete and is qualified in its entirety by reference to the Rights Agreement
incorporated by reference as an exhibit hereto.

     Initially, the Rights will be attached to all Common Stock certificates
representing shares then outstanding, and no separate Rights certificates will
be distributed.  The Rights will separate from the Common Stock and a
"Distribution Date" will occur upon the earliest of (i) a public announcement
that a person, entity or group of affiliated or associated persons and/or
entities (an "Acquiring Person") has acquired, or obtained the right to
acquire, beneficial ownership of 15% or more of the outstanding shares of
Common Stock, other than as a result of repurchases of stock by the Company or
certain inadvertent actions by institutional or certain other stockholders, or

                                     Page 15

<PAGE>

(ii) ten days (unless such date is extended by the Board of Directors ) 
following the commencement of (or a public announcement of an intention to 
make) a tender offer or exchange offer which would result in any person, 
entity or group affiliated or associated persons and/or entities becoming an 
Acquiring Person.

     Until the Distribution Date the Rights will be evidenced, with respect to
any of the Common Stock certificates outstanding as of the Record Date, by such
Common Stock certificate together with a Summary of Rights.  The Rights
Agreement provides that, until the Distribution Date, the Rights will be
transferred with and only with Common Stock certificates.  From as soon as
practicable after the Record Date and until the Distribution Date (or earlier
redemption or expiration of the Rights), new Common Stock certificates issued
after the Record Date upon transfer or new issuance of the Common Stock will
contain a notation incorporating the Rights Agreement by reference.  Until the
Distribution Date (or earlier redemption or expiration  of the Rights), the
surrender for transfer of any certificates for Common Stock outstanding as of
the Record Date (with or without the Summary of Rights attached) will also
constitute the transfer of the Rights associated with the Common Stock
represented by such certificate.  As soon as practicable following the
Distribution Date, separate certificates evidencing the Rights ("Rights
Certificates") will be mailed to holders of record of the Common Stock as of
the close of business on the Distribution Date, and the separate Rights
Certificates alone will evidence the Rights.

     The Rights are not exercisable until the Distribution Date.  The Rights
will expire on the earliest of (i) February 28, 2007, (ii) consummation of a
merger transaction with a Person or group who acquired Common Stock pursuant to
a Permitted Offer (as defined below), and is offering in the merger the same
price per share and form of consideration paid in the Permitted Offer, or (iii)
redemption or exchange of the Rights by the Company as described below.

     The number of Rights associated with each share of Common Stock shall be
proportionately adjusted to prevent dilution in the event of a stock dividend
on, or a subdivision, combination or reclassification of, the Common Stock.
The Purchase Price payable, and the number of shares of Preferred Stock or
other securities or property issuable, upon exercise of the Rights are subject
to adjustment from time to time to prevent dilution (i) in the event of a stock
dividend on, or a subdivision, combination or reclassification of the Preferred
Stock, (ii) upon the grant to holders of the Preferred Stock of certain rights
or warrants to subscribe for Preferred Stock, certain convertible securities or
securities having the same or more favorable rights, privileges and preferences
as the Preferred Stock at less than the current market price of the Preferred
Stock, or (iii) upon the distribution to holders of the Preferred Stock of
evidences of indebtedness or assets (excluding regular quarterly cash dividends
out of earning or retained earnings) or of subscription rights or warrants
(other than those referred to above).  With certain exceptions, no adjustments
in the Purchase Price will be required until cumulative adjustments require an
adjustment of at least 1% in such Purchase Price.

     In the event that, after the first date of public announcement by the
Company or an Acquiring Person that an Acquiring Person has become such, the
Company is involved in a merger or other business combination transaction
(whether or not the Company is the surviving corporation) or 50% or more of the
Company's assets or earning power are sold (in one transaction or a series of
transactions), proper provision shall be made so that each holder of a Right
(other than an Acquiring Person) shall thereafter have the right to receive,
upon the exercise thereof at the then current Purchase Price, that number of
share of common stock of either the Company, in the event that it is the
surviving corporation of a merger or consolidation, or the acquiring company
(or, in the event there is more than one acquiring company, the acquiring
company receiving the greatest portion of the assets or earning power
transferred) which at the time of such transaction would have a market value of
two times the Purchase Price (such right being called the "Merger Right").  In
the event that a Person becomes the beneficial owner of 15% or more of the
outstanding shares of Common Stock (unless pursuant to a tender offer or
exchange offer for all outstanding shares of Common Stock at a price and on
terms determined prior to the date of the first acceptance of payment for any
of such shares by at least a majority of the members of the Board of Directors
who are not officers of the Company and are not Acquiring Persons or Affiliates
or Associates thereof to be both adequate and otherwise in the best interests
of the Company and its stockholders (a "Permitted Offer")), then proper
provision shall be made so that each holder of a Right will for a 60-day period
(subject to extension under certain circumstances) thereafter have the right to
receive upon exercise that number of shares of Common Stock (or, at the
election of the Company, which election may be obligatory if sufficient
authorized shares of Common  Stock are not available, a combination of Common
Stock, property, other securities (e.g., Preferred Stock) and/or a reduction in
the exercise price of the Right) having a market value of two times the
Purchase Price (such right being called the "Subscription Right").   The holder
of a Right will continue to have the Merger Right whether or not such holder
exercises the Subscription Right.  Notwithstanding the foregoing, upon the
occurrence of any of the vents giving rise to the exercisability of the Merger
Right or the Subscription Right, any Rights that are or were at any time after
the Distribution Date owned by an Acquiring Person shall immediately become
null and void.

     At any time prior to the earlier to occur of (i) a Person becoming an
Acquiring Person or (ii) the expiration of the Rights, the Company may redeem
the Rights in whole, but not in part, at a price of $.01 per Right (the
"Redemption Price"), which redemption shall be effective upon the action of the
Board of Directors.  Additionally, the Company may thereafter redeem the then
outstanding Rights in whole, but not in part, at the Redemption Price (i) if
such redemption is incidental to a merger or other business combination
transaction or series of transactions involving the Company but not involving
an Acquiring Person or certain related Persons or (ii) following an event
giving rise to, and the expiration of the exercise period for, the Subscription
Right if and for as long as the 

                                 Page 16

<PAGE>

Acquiring Person triggering the Subscription Right beneficially owns 
securities representing less than 15% of the outstanding shares of Common 
Stock and at the time of redemption there are no other Acquiring Persons.  
The redemption of Rights described in the preceding sentence shall be 
effective only as of such time when the Subscription Right is not 
exercisable, and in any event, only after ten business days' prior notice. 
Upon the effective date of the redemption of the Rights, the right to 
exercise the Rights will terminate and the only right of the holders of 
Rights will be to receive the Redemption Price.

     Subject to applicable law,  the Board of Directors, at its option, may at
any time after a Person becomes an Acquiring Person (but not after the
acquisition by such Person of 50% or more of the outstanding Common Stock),
exchange all or part of the then outstanding and exercisable Rights (except for
Rights which have become void) for shares of Common Stock at a rate of one
share of Common Stock per Right or, alternatively, for substitute consideration
consisting of cash, securities of the Company or other assets (or any
combination thereof).

     The Preferred Stock purchasable upon exercise of the Rights will be
nonredeemable and junior to any other series of preferred stock the Company may
issue (unless otherwise provided in the terms of such stock).  If issued, each
share of Preferred Stock will have a preferential quarterly dividend in an
amount equal to 1,000 times the dividend, if any, declared on each share of
Common Stock, but in no event less than $25.00.  In the event of liquidation,
the holders of shares of Preferred Stock will receive a preferred liquidation
payment equal to the greater of $1,000.00 or 1,000 times the payment made per
share of Common Stock.  Each share of Preferred Stock will have 1,000 votes,
voting together with the shares of Common Stock.  The rights of the Preferred
Stock as to dividends, liquidation and voting, and in the event of mergers and
consolidations, are protected by customary antidilution provisions.  Fractional
shares of Preferred Stock will be issuable; however, (i) the Company may elect
to distribute depositary receipts in lieu of such fractional share and (ii) in
lieu of fractional shares other than fractions that are multiples of one one-
thousandth of a share, an adjustment in cash will be made based on the market
price of the Preferred Stock on the last trading date prior to the date of
exercise.

     Until a Right is exercised, the holder thereof, as such, will have no
rights as a stockholder of the Company, including, without limitation, the
right to vote or to receive dividends.  The Company and the Rights Agent retain
broad authority to amend the Rights Agreement;  however, following any
Distribution Date any amendment may not adversely affect the interests of
holders of Rights.

                              Page 17

<PAGE>

ITEM 6 -- SELECTED FINANCIAL DATA

     The following is a summary of Selected Financial Data.  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 for per share and per room amounts.

<TABLE>
<CAPTION>

                                                                                YEAR ENDED DECEMBER 31,
                                                           -------------------------------------------------------------------
                                                            1993           1994           1995           1996           1997
                                                           -------        -------        -------        -------     ----------
<S>                                                        <C>            <C>            <C>            <C>         <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
   Guest Pay                                               $21,471        $29,927        $50,758        $84,504     $  116,276
   Free-to-guest                                             7,478          8,397          8,060          8,645          8,496
   Other                                                     2,363          2,070          4,395          4,572         10,938
                                                           -------        -------        -------        -------     ----------


      Total revenues                                        31,312         40,394         63,213         97,721        135,710
Direct costs                                                14,848         18,181         28,910         44,379         58,512
                                                           -------        -------        -------        -------     ----------

Gross profit                                                16,464         22,213         34,303         53,342         77,198
Operating expenses                                          16,425         24,573         36,741         58,428         85,262
                                                           -------        -------        -------        -------     ----------

Operating income (loss)                                         39         (2,360)        (2,438)        (5,086)        (8,064)
Interest expense                                             2,096            966          4,522          8,243         17,001
                                                           -------        -------        -------        -------     ----------
Loss before income taxes, extraordinary loss 
 and cumulative effect of accounting change                 (2,057)        (3,326)        (6,960)       (13,329)       (26,065)
Provision for income taxes                                      --             --             66             28            344
                                                           -------        -------        -------        -------     ----------
Loss before extraordinary loss and cumulative 
 effect of accounting change                                (2,057)        (3,326)        (7,026)       (13,357)       (25,409)
Extraordinary loss (1)                                          --          1,324             --          3,253             --
Cumulative effect of accounting change (2)
                                                                --             --             --             --            210
                                                           -------        -------        -------        -------     ----------
Net loss                                                    (2,057)        (4,650)        (7,026)       (16,610)       (25,619)
Cumulative preferred dividends                               1,557             --             --             --             --
                                                           -------        -------        -------        -------     ----------
Net loss attributable to Common Stock                      $(3,614)       $(4,650)       $(7,026)      $(16,610)      $(25,619)
                                                           -------        -------        -------        -------     ----------
                                                           -------        -------        -------        -------     ----------
OTHER DATA:
EBITDA (3)                                                  $7,215         $9,301        $15,898        $24,729      $  35,696
EBITDA margin (3)                                             23.0%          23.0%          25.1%          25.3%          26.3%
Capital expenditures                                       $14,311        $43,521        $51,497        $85,258     $  105,483
Depreciation and amortization                                7,176         11,661         18,336         29,815         43,760
Annualized EBITDA (4)                                        7,990         11,250         18,246         27,290         39,090
Ratio of earnings to fixed charges (5)                          --             --             --             --             --
Ratio of long-term debt to
 annualized EBITDA (4)                                         .75x          2.49x          3.15x          6.57x          4.67x
Ratio of EBITDA to interest expense (3)                       3.44x          9.63x          3.52x          3.00x          2.10x

OPERATING DATA:
Guest Pay rooms served (6)
   On-demand                                                59,169        119,680        209,487        358,842        484,070
   Scheduled                                                77,650         65,351         58,720         41,403         27,781
                                                           -------        -------        -------        -------     ----------
      Total Guest Pay rooms                                136,819        185,031        268,207        400,245        511,851
                                                           -------        -------        -------        -------     ----------
                                                           -------        -------        -------        -------     ----------

Rooms with Super Nintendo-Registered Trademark- 
 game systems (6)                                              225         69,806        163,879        322,903        448,969
Free-to-guest rooms served (6)                             191,893        220,534        249,779        294,882        341,030
Total rooms served (6) (7)                                 267,171        314,184        388,088        516,348        606,827
Average monthly revenue per Guest Pay room:
   Movie revenue                                            $14.68         $15.03         $17.08         $18.38       $  17.86
   Video game/information services                             .39           1.01           2.21           2.93           3.28
                                                           -------        -------        -------        -------     ----------
      Total                                                 $15.07         $16.04         $19.29         $21.31       $  21.14
                                                           -------        -------        -------        -------     ----------
                                                           -------        -------        -------        -------     ----------
</TABLE>

                                       Page 18

<PAGE>

<TABLE>
<CAPTION>

                                                                                   AS OF DECEMBER 31,
                                                                ----------------------------------------------------
                                                                 1993            1994           1995           1996          1997
                                                                -------        -------       --------       --------       --------
<S>                                                             <C>            <C>           <C>            <C>            <C>
BALANCE SHEET DATA:
       Cash and cash equivalents                                $12,256        $ 4,302       $  2,252       $ 86,177       $  1,021
       Total assets                                              64,300         88,265        125,507        279,768        260,294
       Long-term debt                                             6,000         28,000         57,497        179,233        182,691
       Total stockholders' equity                                52,665         47,942         42,726         75,552         49,579

</TABLE>
___________

(1)  In 1994 -- loss on early termination of the Company's bank credit facility
     of $1.3 million.  In 1996 -- loss on early redemption of 9.95% and 10.35%
     Senior Notes of $3.3 million.  See "Management's Discussion and Analysis
     of Financial Condition and Results of Operations" included elsewhere
     herein.

(2)  Represents a charge for the effect of adopting EITF Issue 97-13 related to
     accounting for certain business reengineering costs.

(3)  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. Rather, it is included herein because EBITDA 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 and the
     Company's ability to service its long-term debt and to fund the Company's
     continuing growth.

(4)  "Annualized EBITDA" represents the sum of the quarterly EBITDA for the two
     most recently completed fiscal quarters multiplied by two.

(5)  Earnings is defined as net loss before income taxes, extraordinary items
     and fixed charges, except where capitalized. Fixed charges is defined as
     the portion of rental expense under operating leases representing
     interest, and interest, including amortization of debt expense, whether
     expensed or capitalized. Earnings were insufficient to cover fixed charges
     for the years ended December 31 by the amounts indicated:  1993 --
     $(2,057); 1994 -- $(3,326); 1995 -- $(6,960); 1996 -- $(13,329); and 1997
     $(25,065).

(6)  At end of year.

(7)  Total rooms served include those rooms receiving one or more of the
     Company's services.



                                     Page 19

<PAGE>


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",  "BUSINESS STRATEGY", "STRATEGIC INITIATIVES", "SERVICES
AND PRODUCTS", "OPERATIONS", "COMPETITION" 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" WITHIN THE MEANING OF THE SECURITIES
ACT OF 1933, AS AMENDED, AND THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED.
WHEN USED IN THIS ANNUAL REPORT, THE WORDS "EXPECTS," "ANTICIPATES,"
"ESTIMATES," "BELIEVES," "NO ASSURANCE" AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS.  SUCH FORWARD-LOOKING STATEMENTS
INVOLVE KNOWN AND UNKNOWN RISKS, UNCERTAINTIES AND OTHER FACTORS, WHICH MAY
CAUSE THE COMPANY'S ACTUAL 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 IMPACT OF COMPETITION AND CHANGES TO
THE COMPETITIVE ENVIRONMENT FOR THE COMPANY'S PRODUCTS AND SERVICES, CHANGES IN
TECHNOLOGY, RELIANCE ON STRATEGIC PARTNERS, UNCERTAINTY OF LITIGATION, CHANGES
IN GOVERNMENT REGULATION AND OTHER FACTORS DETAILED, FROM TIME TO TIME, IN THE
COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION.  THESE FORWARD-
LOOKING STATEMENTS SPEAK ONLY AS OF THE DATE OF THIS 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, AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE CONSOLIDATED FINANCIAL
STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE
HEREIN.

OVERVIEW

     The Company provides video on-demand, network-based video games, cable
television programming and other interactive entertainment and information
services to the lodging and multi-family residential unit markets utilizing its
proprietary B-LAN-SM- system architecture.

 LODGING SERVICES

     GUEST PAY SERVICES.  The Company's Guest Pay services include Guest 
Scheduled-SM-on-demand movies, network-based Super Nintendo-Registered 
Trademark-video games and other interactive entertainment and information 
services for which the hotel guest pays on a per-view or per-play basis.  The 
growth that the Company has experienced has principally resulted from its 
rapid expansion of guest pay-per-view services, which the Company began 
installing in 1986.  In May 1992, the Company introduced and began installing 
its on-demand guest pay service.  It has been the Company's experience that 
rooms featuring the "on-demand" guest pay service generate significantly more 
revenue and gross profit per room than comparable rooms having only the 
scheduled format.  The following table sets forth information in regard to 
guest pay rooms installed as of December 31:

<TABLE>
<CAPTION>
                            1995                     1996                          1997 
                   --------------------     -------------------          ----------------------
                     Rooms         %         Rooms          %             Rooms             %
                   -------       -----      -------      ------          -------          -----
<S>                <C>           <C>        <C>           <C>            <C>              <C>
Scheduled           58,720        21.9       41,403        10.3           27,781            5.4
On-demand          209,487        78.1      358,842        89.7          484,070           94.6
                   -------       -----      -------      ------          -------          -----
   Total           268,207       100.0      400,245       100.0          511,851          100.0
                   -------       -----      -------      ------          -------          -----
                   -------       -----      -------      ------          -------          -----
</TABLE>

     The Company's guest pay revenues depend on a number of factors, including
the number of rooms equipped with the Company's systems, guest pay buy rates,
hotel occupancy rates, hotel guest demographics, the popularity, selection and
pricing of the Company's program offerings and the length of time programming
is available to the Company prior to its release to the home video and cable
television markets.  The primary direct costs of providing guest pay services
are (i) license fees paid to studios for non-exclusive distribution rights to
recently-released major motion pictures, (ii) nominal one-time license fees
paid for independent films, (iii) license fees for video games and other
services, and (iv) the commission retained by the hotel.  Guest pay operating
expenses include costs of system maintenance and support, in-room marketing,
video tape duplication and distribution, data retrieval, insurance and personal
property taxes.

     The Company also provides video games and interactive multimedia
entertainment and information services through its guest pay systems.  Services
include folio review, video check-out and guest satisfaction surveys.  In 1993,
the Company entered into a seven-year non-exclusive license agreement with
Nintendo of America, Inc. ("Nintendo") to provide hotels with a network-based
Super Nintendo-Registered Trademark-video game playing system.  The following
table sets forth the number of guest pay rooms with game systems installed as
of December 31:

<TABLE>
                                              1995           1996           1997
                                            -------        -------        -------
<S>                                         <C>            <C>            <C>

Super Nintendo-Registered Trademark- 
 game systems rooms                         163,879        322,903        448,969

</TABLE>


                                   Page 20

<PAGE>

     FREE-TO-GUEST SERVICES.  In addition to guest pay services, the Company
provides cable television programming for which the hotel, rather than its
guests, pays the charges.  Free-to-guest services include the satellite
delivery of various programming channels through a satellite earth station,
which generally is owned or leased by the hotel.  The hotel pays the Company a
fixed monthly charge per room for each programming channel provided.  Such
monthly charges range generally from $2.90 - $3.50 per room per month for
premium channels and from $.10 - $.95 per room per month for non-premium
channels.  The Company obtains its free-to-guest programming pursuant to
multi-year agreements with the programmers and pays a fixed monthly fee per
room, which ranges generally from 75% to 85% of revenues for such services,
depending on incentive programs in effect from time to time from the
programming networks.  In April 1996, the Company entered into an agreement
with PRIMESTAR pursuant to which the Company was appointed as the exclusive
third-party provider (other than partners in PRIMESTAR and their affiliated
distributors) of the PRIMESTAR-Registered Trademark- DBS (digital direct
broadcast satellite) signal to the lodging industry. Pursuant to this
agreement, the Company will pay a fee to PRIMESTAR for access to the PRIMESTAR
signal, which will enable the Company to provide free-to-guest digital
satellite programming to a broader segment of the lodging industry than can be
cost-effectively served with traditional C-band satellite systems.  The
following table sets forth the number of free-to-guest rooms served as of
December 31:

<TABLE>
<CAPTION>
                                               1995           1996           1997
                                              -------        -------        -------
<S>                                           <C>            <C>            <C>
At hotels with Guest Pay services             129,898        178,779        246,054
At hotels with only free-to-guest services    119,881        116,103         94,976
                                              -------        -------        -------
    Total rooms with free-to-guest services   249,779        294,882        341,030
                                              -------        -------        -------
                                              -------        -------        -------
</TABLE>

RESIDENTIAL SERVICES

     In January 1996, the Company formed ResNet for the purpose of extending 
the Company's proprietary b-LAN-SM- system architecture and operational 
expertise into the Multi-family Residential Unit ("MDU") market.  In October 
1996, TSAT, an affiliate of TCI, agreed to invest up to $40 million in ResNet 
in exchange for up to a 36.99% interest in ResNet and agreed to provide 
ResNet with long-term access to DBS signals for the MDU market on a 
nationwide basis.

     The Company believes that the MDU business has financial and technological
requirements similar to those of the Company's lodging industry business.
ResNet began installations of its first systems during the quarter ended
September 30, 1996.  The following table sets forth the number of residential
units passed as of December 31:

<TABLE>
<CAPTION>
                                 1996           1997
                                -------        ------
<S>                             <C>            <C>
Residential units passed         3,087         26,125
</TABLE>

RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1997 AND 1996

REVENUE ANALYSIS

     The Company's total revenue for 1997 increased 38.9%, or $38.0 million, in
comparison to 1996.  The following table sets forth the components of the
Company's revenue (in thousands) for the years ended December 31:

<TABLE>
<CAPTION>
                                1996                  1997
                      -----------------------  ---------------------
                                     Percent               Percent
                                     of Total              of Total
                        Amount       Revenues    Amount    Revenues
                      ---------      --------  ---------   --------
<S>                   <C>            <C>       <C>         <C>
Guest Pay              $84,504          86.5   $116,276       85.7
Free-to-guest            8,645           8.8      8,496        6.3
Other                    4,572           4.7     10,938        8.0
                      ---------      --------  ---------   --------
   Total               $97,721         100.0   $135,710      100.0
                      ---------      --------  ---------   --------
                      ---------      --------  ---------   --------

</TABLE>



                                    Page 21

<PAGE>

     GUEST PAY SERVICES.  Guest Pay revenues increased 37.6%, or $31.8 million,
in 1997 as compared to 1996. This increase is attributable to a 38.7% increase
in the average number of installed guest pay rooms, all of which were installed
with the Company's on-demand technology, partially offset by a .8% decrease in
average monthly revenue per guest pay room.  The following table sets forth
information with respect to guest pay rooms for the years ended December 31:

<TABLE>
<CAPTION>
                                                 1996           1997
                                               --------       --------
<S>                                            <C>            <C>
Average monthly revenue per room:
   Movie revenue                               $  18.38       $  17.86
   Video game and other service revenue            2.93           3.28
                                               --------       --------
      Total per Guest Pay room                 $  21.31       $  21.14
                                               --------       --------
                                               --------       --------
For all Guest Pay rooms:
   Movie buy rates                                 10.7%          10.3%
   Average movie price                            $8.26        $  8.40
   Average hotel occupancy rate                    69.4%          68.6%

For on-demand Guest Pay rooms:
   Movie buy rates                                 11.4%          10.6%
   Average movie price                            $8.28        $  8.42
   Average hotel occupancy rate                    70.0%          69.0%

</TABLE>

     Average movie revenue per room, for all guest pay rooms, decreased 2.8%
from the prior year due to the combination of lower average buy rates and lower
average hotel occupancy.  These factors were partially offset by increased
average movie prices and by the comparative increase in the proportion of
on-demand rooms.  It has been the Company's experience that buy rates are
higher in rooms featuring the on-demand service than in those rooms with the
scheduled service.  The comparative decrease in buy rates, for both all and
on-demand Guest Pay rooms, is attributed to a relatively less popular selection
of newly-released major motion pictures in 1997 as compared to 1996.  The
slight increase in average movie prices for both all and on-demand rooms
between the comparative periods is the result of price increases implemented at
certain hotels during 1997.  The Company's movie prices were generally $7.95 or
$8.95 during the periods.

     Average video game and other service revenue per room, for all guest pay 
rooms, increased 11.9% from the prior year, primarily as a result of an 
increase in the number of rooms with information and other services 
installed. Average monthly video game revenue per room was $2.25 and $2.26 
during 1997 and 1996, respectively.

     FREE-TO-GUEST SERVICES.  Free-to-guest revenues decreased 1.7%, or 
$149,000, in 1997 as compared to 1996.  This decrease is the result of the 
combination of an 18.2% decrease in the number of rooms receiving only 
free-to-guest services from 1996 (although total rooms receiving 
free-to-guest services increased by 15.6%), offset by increasing revenue per 
room resulting from additional programming services taken by hotels, as well 
as programming price increases.

     OTHER.  Revenue from other sources includes cable television revenue 
generated by the residential services segment, revenue from international 
license arrangements, and revenue from the sale of televisions, system 
equipment, and service parts and labor.   The increase in 1997 from the prior 
year of $6.4 million, or 139%, is primarily due to increased cable television 
revenue generated by the residential services segment of $2.4 million; 
increased television sales of $1.5 million; increased sales of system 
equipment of $864,000; increased service parts and labor of $450,000 and 
increased revenue earned under international license arrangements of $318,000.

 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:

<TABLE>
<CAPTION>
                                      1996          1997
                                  -----------    ------------
<S>                              <C>            <C>
Direct costs:
   Guest Pay                      $  33,981      $  45,632
   Free-to-guest                      6,784          5,663
   Other                              3,614          7,217
                                  -----------    ------------
                                  $  44,379      $  58,512
                                  -----------    ------------
                                  -----------    ------------
Gross profit margin:
   Guest Pay                           59.8%          60.8%
   Free-to-guest                       21.5%          33.3%
   Other                               21.0%          34.0%
   Composite                           54.6%          56.9%
</TABLE>


                            Page 22

<PAGE>

     Guest Pay direct costs increased 34.3% to $45.6 million in 1997 from 
$34.0 million in the prior year. Since guest pay direct costs (primarily 
studio and other license fees, video game license fees and the commission 
retained by the hotel) are primarily based on related revenue, such direct 
costs generally vary directly with revenue. As a percentage of guest pay 
revenue, such costs decreased from 40.2% in 1996 to 39.2% in 1997. The 
relative decrease in guest pay direct costs as a percentage of revenue in 
1997 as compared to the prior year is primarily the result of lower 
movie-related costs due to proportionately lower revenue from newly-released 
motion pictures.

     Free-to-guest direct costs decreased 16.5% to $5.7 million in 1997 from 
$6.8 million in the prior year. As a percentage of free-to-guest revenue, 
free-to-guest direct costs decreased to 66.7% in 1997 from 78.5% in the prior 
year. This decrease is due to incentive discounts earned from programming 
networks, partially offset by higher costs for both premium and non-premium 
programming.

     Direct costs associated with other revenue increased 99.7% to $7.2 
million from $3.6 million in the prior year. As a percentage of related 
revenues, such direct costs decreased to 66.0% in 1997 from 79.0% in 1996, 
reflecting the effect of (i) increased cable television revenue generated by 
the residential services segment, (ii) increased system equipment sales and 
revenue from service parts and labor, and (iii) increased revenue generated 
under international license arrangements, all of which earn higher margins 
than the other sources of other revenue.

     The Company's overall gross profit increased 44.7% in 1997 to $77.2 
million on a 38.9% increase in revenues compared to 1996. The Company's 
overall gross profit margin was 56.9% in 1997 and 54.6% for the prior year.

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

<TABLE>
<CAPTION>

                                                                  1996                         1997
                                                           --------------------         --------------------
                                                                       Percent                       Percent
                                                                       of Total                      of Total
                                                          Amount       Revenues         Amount       Revenues
                                                        ----------    ----------      ---------      --------
<S>                                                     <C>            <C>            <C>            <C>
Operating expenses:
   Guest Pay operations                                 $  15,032       15.4%         $  20,785       15.3%
   Selling, general and administrative                     13,581       13.9%            20,717       15.3%
   Depreciation and amortization                           29,815       30.5%            43,760       32.2%
                                                        ----------    ----------      ---------      --------
      Total operating expenses                          $  58,428       59.8%         $  85,262       62.8%
                                                        ----------    ----------      ---------      --------
                                                        ----------    ----------      ---------      --------
</TABLE>

     Guest Pay operations expenses consist of costs directly related to the 
operation of systems at the hotel sites as well as at residential sites 
operated by the residential services segment.  Excluding the expenses 
incurred to operate the systems at residential sites, which were $1.4 million 
in 1997 and none in 1996, expenses related to Guest Pay operations increased 
28.9%, or $4.3 million, in 1997 from $15.0 million in the previous year.  
This increase is primarily attributable to the 38.7% increase in average 
installed Guest Pay rooms in 1997 as compared to 1996, partially offset by 
lower average operating and service expenses incurred on a per room basis.  
Per average installed guest pay room, such expenses were $3.52 per month in 
1997 as compared to $3.79 per month in 1996.

     Selling, general and administrative expenses increased 52.5%, or 7.1 
million, in 1997 from $13.6 million in the prior year.  This increase 
reflects the effect of a material increase in legal expenses, an increase in 
the number of development and administrative personnel, increased 
facilities-related expenses, and an increase of $1.8 million of expenses 
related to the residential services segment.  As a percentage of revenue, 
selling, general and administrative expenses represented 15.3% of total 
revenue in 1997 as compared to 13.9% in the year earlier period.

     Depreciation and amortization expenses increased 46.8% to $43.8 million 
in 1997 from $29.8 million in the prior year. This increase is primarily 
attributable to the increase in the number of installed guest pay and game 
service equipped rooms previously discussed, as well as the associated 
software costs and other capitalized costs such as service vans, equipment 
and computers that are related to the increased number of rooms in service 
since the prior year.  Additionally, increases in administrative and facility 
related assets, as well as an increase of $1.0 million related to the 
residential services segment, have contributed to the increased depreciation 
and amortization.

     OPERATING LOSS.  The Company's operating loss, as a result of the 
factors previously discussed, increased to $8.1 million in 1997 from $5.1 
million in 1996.

     INTEREST EXPENSE.  Interest expense, net of interest income, increased 
to $17.0 million in 1997 from $8.2 million in 1996 due to increases in 
long-term debt to fund the Company's continuing expansion of its businesses.  
The average principal amount of long-term debt outstanding during 1997 was 
approximately $179.7 million (at a weighted average interest rate of 
approximately 10.5%) as compared to an average principal amount outstanding 
of approximately $65.4 million (at a weighted average interest rate of 
approximately 10.0%) during 1996. The weighted average amount outstanding 
under the revolving credit facility was approximately $250,000 during 1997 as 
compared to approximately $9.4 million during 1996.

                                            Page 23

<PAGE>

     CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.  As a result of the 
issuance of EITF Issue 97-13 related to accounting for certain business 
reengineering costs, the Company recorded a charge of $210,000 to write-off 
previously capitalized costs, in accordance with the new accounting 
pronouncement.

     NET LOSS.  For the reasons previously discussed, the Company's net loss 
increased to $25.6 million in 1997 from a net loss of $16.6 million in the 
prior year.

      EBITDA.  As a result of increasing revenues from guest pay services, 
and the other factors previously discussed, EBITDA ("Earnings Before 
Interest, Income Taxes and Depreciation and Amortization") increased 44.3% to 
$35.7 million in 1997 as compared to $24.7 million in 1996.  EBITDA as a 
percentage of total revenue increased to 26.3% in 1997 as compared to 25.3% 
in 1996. 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. Rather, it is included herein because EBITDA 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 and the Company's ability to service its 
long-term debt and to fund the Company's continuing growth.

RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1996 AND 1995

 REVENUE ANALYSIS

     The Company's total revenue for 1996 increased 54.6%, or $34.5 million, in
comparison to 1995. The following table sets forth the components of the
Company's revenue (in thousands) for the years ended December 31:

<TABLE>
<CAPTION>


                                                                   1995                          1996
                                                         -------------------------    ------------------------
                                                                       Percent                       Percent
                                                                       of Total                      of Total
                                                         Amount        Revenues         Amount       Revenues
                                                        -----------    ----------      ----------    ----------
<S>                                                     <C>             <C>            <C>            <C>
Guest Pay                                               $  50,758           80.3        $  84,504       86.5
Free-to-guest                                               8,060           12.7            8,645        8.8
Other                                                       4,395            7.0            4,572        4.7
                                                        -----------    ----------      ----------    ----------
   Total                                                $  63,213          100.0        $  97,721       100.0
                                                        -----------    ----------      ----------    ----------
                                                        -----------    ----------      ----------    ----------
</TABLE>

     GUEST PAY SERVICES.  Guest Pay revenues increased 66.5%, or $33.7 million,
in 1996 as compared to 1995. This increase is attributable to (i) a 50.7%
increase in the average number of installed guest pay rooms, all of which were
installed with the Company's on-demand technology, and (ii) a 10.5% increase in
average monthly revenue per guest pay room.  The following table sets forth
information with respect to guest pay rooms for the years ended December 31:

<TABLE>
<CAPTION>
                                                              1995          1996
                                                            ---------     ---------
<S>                                                         <C>           <C>
Average monthly revenue per room:
   Movie revenue                                            $  17.08       $  18.38
   Video game and other service revenue                         2.21           2.93
                                                            ---------     ---------
      Total per Guest Pay room                              $  19.29       $  21.31
                                                            ---------     ---------
                                                            ---------     ---------

For all Guest Pay rooms:
   Movie buy rates                                              10.1%          10.7%
   Average movie price                                       $  8.28        $  8.26
   Average hotel occupancy rate                                 69.0%          69.4%

For on-demand Guest Pay rooms:
   Movie buy rates                                              11.2%          11.4%
   Average movie price                                       $  8.34        $  8.28
   Average hotel occupancy rate                                 69.7%          70.0%
</TABLE>

     Average movie revenue per room, for all guest pay rooms, was favorably 
impacted by a combination of higher average buy rates and higher average 
occupancies, all in comparison to the comparable period in the previous year, 
and by the comparative increase in the proportion of on-demand rooms. It has 
been the Company's experience that buy rates are higher in rooms featuring 
the on-demand service than in those rooms with the scheduled service. The 
comparative increase in buy rates, for both all and on-demand guest pay 
rooms, is attributed to a relatively more popular selection of newly-released 
major motion pictures in 1996 as compared to 1995. The slight decrease in 
average movie prices for both all and on-demand rooms between the comparative 
periods is the result of an increase in the proportion of limited service 
hotel rooms in the installed room base, in which rooms movie prices are 
generally $7.95. The Company's movie prices were generally $7.95 or $8.95 
during the periods.

                                  Page 24
<PAGE>

     Average video game and other service revenue per room, for all guest pay 
rooms, increased primarily as a result of the increase in the number of rooms 
with video game services installed.  On a per-room basis, average monthly 
video game revenues were $2.26 and $1.70 during the years ended December 31, 
1996 and 1995, respectively.

     FREE-TO-GUEST SERVICES.  Free-to-guest revenues increased 7.3%, or 
$585,000, in 1996 as compared to 1995. This increase resulted from increased 
programming services taken by hotels and increased programming prices, 
partially offset by a 3.2% decrease in the number of rooms receiving only 
free-to-guest services.

     OTHER.  Revenue from other sources, such as the sale of televisions, 
system equipment, service parts and labor, and miscellaneous free-to-guest 
programming materials, increased by $177,000, or 4.0% in 1996 as compared to 
1995, all of which increase was attributable to sales of systems and 
equipment to foreign 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:

<TABLE>
<CAPTION>

                            1995            1996
                        -----------    ------------
<S>                     <C>            <C>
Direct costs:
   Guest Pay            $  19,053      $  33,981
   Free-to-guest            6,117          6,784
   Other                    3,740          3,614
                        -----------    ------------
                          $28,910      $  44,379
                        -----------    ------------
                        -----------    ------------

Gross profit margin:
   Guest Pay                 62.5%          59.8%
   Free-to-guest             24.1%          21.5%
   Other                     14.9%          21.0%
   Composite                 54.3%          54.6%
</TABLE>


     Guest Pay direct costs increased 78.3%, or $14.9 million, in 1996 as 
compared to the prior year. Since guest pay direct costs (primarily studio 
and other license fees, video game license fees and the commission retained 
by the hotel) are primarily based on related revenue, such direct costs 
generally vary directly with revenue. As a percentage of guest pay revenue, 
such costs increased from 37.5% in 1995 to 40.2% in 1996. The relative 
increase in guest pay direct costs (as a percentage of revenue), in 1996 as 
compared to the prior year, reflects higher movie-related costs due to 
proportionately higher revenue from newly-released motion pictures and 
substantially increased video game revenue in the guest pay revenue mix, 
which increases were mitigated by a slight decrease in hotel commissions.

     Free-to-guest direct costs increased 10.9% to $6.8 million in 1996 from 
$6.1 million in the prior year. As a percentage of free-to-guest revenue, 
free-to-guest direct costs increased to 78.5% in 1996 from 75.9% in the prior 
year, primarily reflecting the effect of price increases paid for certain 
programming services.

     Direct costs associated with other revenue decreased 3.4%, or $126,000, 
in 1996 as compared to the prior year. As a percentage of related revenues, 
such direct costs decreased to 79.0% of other revenue in 1996 versus 85.1% in 
1995, reflecting the effect of increased system and equipment sales, which 
have slightly higher margins than the other sources of other revenue.

     The Company's overall gross profit increased 55.5%, or $19.0 million, to 
$53.3 million in 1996 on a 54.6% increase in revenues in comparison to the 
prior year. The Company's overall gross profit margin was 54.6% in 1996 and 
54.3% for the prior year.

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

<TABLE>
<CAPTION>

                                                                   1995                          1996
                                                         -------------------------    ------------------------
                                                                       Percent                       Percent
                                                                       of Total                      of Total
                                                         Amount        Revenues         Amount       Revenues
                                                        -----------    ----------      ----------    ----------
<S>                                                     <C>              <C>           <C>             <C>
Operating expenses:
   Guest Pay operations                                  $  9,767          15.5%       $  15,032        15.4%
    Selling , general and administrative                    8,638          13.7%          13,581        13.9%
    Depreciation and amortization                          18,336          29.0%          29,815        30.5%
                                                        -----------    ----------      ----------    ----------
      Total operating expenses                          $  36,741          58.1%       $  58,428        59.8%
                                                        -----------    ----------      ----------    ----------
                                                        -----------    ----------      ----------    ----------
</TABLE>

                                  Page 25
<PAGE>

     Guest Pay operations expenses increased 53.9%, or $5.3 million, in 1996 
from $9.8 million in the previous year.  Such increase is primarily 
attributable to the 50.7% increase in average installed Guest Pay rooms in 
1996 as compared to 1995.  Per average installed guest pay room, such 
expenses averaged $3.79 per month in 1996 as compared to $3.71 per month in 
1995, primarily reflecting increased marketing, service and support costs and 
property taxes.

     Selling, general and administrative expenses increased 57.2%, or $4.9 
million, in 1996 from $8.6 million in the prior year. This increase reflects 
the effect of substantially increased legal expenses, an increase in the 
number of development, sales and administrative personnel and increased 
facilities-related expenses. As a percentage of revenue, selling, general and 
administrative expenses represented 13.9% of total revenue in 1996 as 
compared to 13.7% in the year earlier period.

     Depreciation and amortization expenses increased 62.6% to $29.8 million 
in 1996 from $18.3 million in the prior year. This increase is directly 
attributable to the increases in the number of installed guest pay and game 
service equipped rooms previously discussed, as well as the associated 
software costs and other capitalized costs such as service vans, equipment 
and computers that are related to the increased number of rooms in service 
since the prior year.

     OPERATING LOSS.  The Company's operating loss, as a result of the 
factors previously discussed, increased to $5.1 million in 1996 from $2.4 
million in 1995.

     INTEREST EXPENSE.  Interest expense increased to $8.2 million in 1996 
from $4.5 million in 1995 due to increases in long-term debt to fund the 
Company's continuing expansion of its businesses. Long-term debt increased 
from $57.5 million at December 31, 1995 to $179.2 million at December 31, 
1996, reflecting the Company's issuance of $150 million principal amount of 
10.25% Senior Notes during 1996. The average principal amount of long-term 
debt (excluding amounts outstanding under the revolving credit facility) 
outstanding during 1996 was approximately $65.4 million (at a weighted 
average interest rate of approximately 10.0%) as compared to an average 
principal amount outstanding of approximately $40.6 million (at a weighted 
average interest rate of approximately 10.3%) during 1995. The weighted 
average amount outstanding under the revolving credit facility was 
approximately $9.4 million during 1996 as compared to approximately $2.1 
million in 1995.

     EXTRAORDINARY LOSS.  As a result of the early redemption of its 9.95% and
10.35% Senior Notes, the Company incurred a make-whole premium of approximately
$2.8 million, and wrote off unamortized debt issuance costs related to the
notes of approximately $0.4 million.

     NET LOSS.  For the reasons previously discussed, the Company's net loss
increased to $16.6 million in 1996 from a net loss of $7.0 million in the prior
year.

      EBITDA.  As a result of increasing revenues from guest pay services, 
and the other factors previously discussed, EBITDA ("Earnings Before 
Interest, Income Taxes and Depreciation and Amortization") increased 55.5% to 
$24.7 million in 1996 as compared to $15.9 million in 1995. EBITDA as a 
percentage of total revenue increased to 25.3% in 1996 as compared to 25.1% 
in 1995.  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. Rather, it is included herein because EBITDA 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 and the Company's ability to service its 
long-term debt and to fund the Company's continuing growth.

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

     Historically, the Company has incurred operating and net losses due in 
large part to the depreciation, amortization and interest expenses related to 
the capital required to expand its lodging and residential businesses. The 
growth of the Company's business requires substantial indebtedness to finance 
expansion of its lodging and multi-family residential businesses. The Company 
expects that losses will increase as the Company implements its expansion 
strategy. Historically, cash flow from operations has not been sufficient to 
fund the cost of expanding the Company's business and to service existing 
indebtedness. Capital expenditures were approximately $105.5 million during 
1997, and net cash provided by operating activities was approximately $16.7 
million.

     Depending on the rate of growth of its lodging and residential businesses
and other factors, the Company expects to incur capital expenditures of between
approximately $75 to $85 million in 1998 and substantial amounts thereafter.
The actual amount and timing of the Company's capital expenditures will vary
(and such variations could 

                                  Page 26

<PAGE>

be material) depending upon the number of new contracts for services entered 
into by the Company, the costs of installations and other factors.  This a 
forward-looking statement and there can be no assurance in this regard. In 
addition, the Company's Revolving Credit Facility limits the amount of the 
Company's annual capital expenditures to a certain base amount plus the 
amounts of certain additional financing.

     The Company believes that its operating cash flows and borrowings
permitted under the Revolving Credit Facility will be sufficient to fund the
Company's cash requirements for 12 to 18 months; and, the Company may increase
the Revolving Credit Facility from its present $100 to $175 million, subject to
certain conditions.  However, this is a forward-looking statement and there can
be no assurance in this regard.  ResNet, under its various agreements with
TSAT, may call upon TSAT to contribute up to $34.6 million of additional
capital to ResNet, which proceeds must be used for the purchase of satellite
receiving equipment.  For additional information concerning the terms of the
Company's long-term debt and Revolving Credit Facility, please see Notes 7 and
8 to the Company's Consolidated Financial Statements included in this report.

     The Company believes that it has various sources of financing available 
in addition to borrowings under the Revolving Credit Facility, including 
additional amounts of long-term indebtedness. However, if the Company's plans 
or assumptions change, if its assumptions prove to be inaccurate or if the 
Company experiences unanticipated costs or competitive pressures, the Company 
may be required to seek additional capital sooner than currently anticipated. 
There can be no assurance that the Company will be able to obtain financing, 
or, if such financing is available, that the Company will be able to obtain 
it on acceptable terms. Failure to obtain additional financing, if needed, 
could result in the delay or abandonment of some or all of the Company's 
expansion plans.

      ResNet is currently at a stage of development during which it will 
consume, through operating losses and capital expenditures for installations, 
substantially more capital than it is capable of generating. The Company is 
currently assessing alternative strategies to reduce the negative financial 
impact of the operating losses and capital requirements of ResNet during its 
growth phase.

YEAR 2000 INFORMATION

     The Company has undertaken a comprehensive review of its computer systems
and software in regard to "year 2000" issues.  Based on its review, the Company
does not anticipate any material costs or expenses, or any material adverse
effect on its operations, financial condition, products or services, or
competitive position as a result of such issues.  The Company is cooperating
with its customers and suppliers to assess the extent, if any, of year 2000
issues pertaining to such third party computer systems.

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.

     None.

                                  Page 27

<PAGE>

PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     Except as hereinafter noted, 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.

                                  Page 28

<PAGE>

PART IV

ITEM 14  -- 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, 1996 included herein.

(b)  None.

(c)  EXHIBITS -- Following is a list of Exhibits filed with this report.
Exhibits 10.1 and 10.2 constitute management contracts.  Exhibits 10.3, 10.7,
10.8, 10.9, 10.10, 10.11, and 10.12 constitute compensatory plans.

EXHIBIT NO.

<TABLE>
<CAPTION>

<S>  <C>
 3.1  Certificate of Incorporation of the Company (1)

 3.2  By-Laws of the Registrant(1)

 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 (8)

 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  (8)
      
 4.3   Form of Senior Notes (included in Exhibit 4.2)
      
10.1  Form of Employment Agreement between the Company and each of Tim C. Flynn
      and Scott C. Petersen (1)
      
10.2  Form of Agreement between the Company and each of David M. Bankers, John
      M. O'Haugherty, Douglas D. Truckenmiller and Steven D. Truckenmiller (1)
      
10.3  LodgeNet Entertainment Corporation Stock Option Plan  (as amended and
      restated effective August 15, 1996)(8)

10.6  License Agreement dated May 2, 1993 between Nintendo of America, Inc. and
      LodgeNet Entertainment Corporation (2)
      
10.7  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)
      
10.8  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)
      
10.9  Stock Option Agreement dated as of December 31, 1992 between the Company
      and John M. O'Haugherty (2)
      
10.10 Stock Option Agreement dated as of December 31, 1992 between the
      Company and David M. Bankers (2)
      
10.11 Form of Stock Option Agreement for Non-Employee Directors (3)
      
10.12 Form of Incentive Stock Option Agreement for Key Employees (3)
      
10.13 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)

10.14 Amendment to Securities Purchase Agreement, dated as of December 19,
      1996  (8)

10.15 Form of Executive Severance Agreement between the Company and each of
      Tim C. Flynn, Scott C. Petersen, Jeffrey T. Weisner, John M. O'Haugherty,
      David M. Bankers, Douglas D. Truckenmiller, Steven D. Truckenmiller and
      Eric R. Jacobsen; all dated of July 25, 1995 (5)

10.16 Video Services Agreement by and among GE Capital-ResCom L.P. and
      ResNet Communications, Inc. and LodgeNet Entertainment Corporation dated
      as of February 9, 1996 (6)+
</TABLE>
                                  Page 29
<PAGE>

<TABLE>
<CAPTION>

<S>   <C>
10.17 Amended and Restated Loan Agreement by and among LodgeNet
      Entertainment Corporation, the Banks Signatory thereto, National
      Westminster Bank Plc, as Agent for such Banks, and National Westminster
      bank of Canada, as an Issuing bank, dated December 19, 1996  (8)

10.18 Equipment Sales Agreement between ResNet Communications, Inc. and TCI
      Satellite Entertainment, Inc., dated as of October 21, 1996 (7)

10.19 Subordinated Convertible Term Loan Agreement between ResNet
      Communications, Inc. and TCI Satellite Entertainment, Inc., dated as of
      October 21, 1996 (7)

10.20 Option Agreement between ResNet Communications, Inc. and TCI
      Satellite Entertainment, Inc., dated as of October 21, 1996 (7)

10.21 Standstill Agreement between LodgeNet Entertainment Corporation and
      TCI Satellite Entertainment, Inc., dated as of October 21, 1996 (7)

10.22 Stockholders' Agreement between LodgeNet Entertainment Corporation
      and TCI Satellite Entertainment, Inc., dated as of October 21, 1996 (7)

10.23 Subscription Agreement between ResNet Communications, Inc. and TCI
      Satellite Entertainment, Inc., dated as of October 21, 1996 (7)

10.24 First Amendment, dated October 17, 1996, to License Agreement between
      Nintendo of America, Inc. and LodgeNet Entertainment Corporation  (8)

12.1  Statement of computation of ratios

21.1  Subsidiaries of the Company

23.1  Consent of Independent Public Accountants

27.1  Financial Data Schedule, Year end December 31, 1997

27.2  Financial Data Schedule, Quarterly and Year end, 1996

27.3  Financial Data Schedule, Quarterly 1997
</TABLE>

---------------------
+    Confidential Treatment has been requested with respect to certain portions
     of these agreements.

<TABLE>
<CAPTION>

<S> <C>
(1)  Incorporated by Reference to the Company's Amendment No. 1 to Registration
     Statement on Form S-1, as filed with the Securities and Exchange
     Commission, September 24, 1993.

(2)  Incorporated by Reference to the company's Amendment No. 2 to Registration
     Statement on Form S-1, as filed with the Securities and Exchange
     Commission, October 13, 1993.

(3)  Incorporated by Reference to the Annual Report on Form 10-K for the year
     ended December 31, 1993, as filed with the Securities and Exchange
     Commission, March 25, 1994.

(4)  Incorporated by Reference to the Quarterly Report on Form 10-Q for the
     quarter ended June 30, 1995, as filed with the Securities and Exchange
     Commission, August 14, 1995.

(5)  Incorporated by Reference to the 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 Annual Report on Form 10-K for the year
     ended December 31, 1995, as filed with the Securities and Exchange
     Commission, April 1, 1996.

(7)  Incorporated by Reference to TCI Satellite Entertainment, Inc.'s Amendment
     No. 1 to Registration Statement on Form 10 as filed with the Securities
     and Exchange Commission, October 29, 1996.

(8)  Incorporated by Reference to the Annual Report on Form 10-K for the year
     ended December 31, 1996, as filed with the Securities and Exchange
     Commission, March 17, 1997.
</TABLE>

                                  Page 30
<PAGE>


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 24, 1998.

                              LodgeNet Entertainment Corporation


                         By:       /S/ TIM C. FLYNN
                             ------------------------------
                              Tim C. Flynn, President and
                              Chief Executive Officer

                                  Page 31
<PAGE>


SIGNATURES

     Pursuant to the requirements of the Securities and Exchange Act of 1934,
this report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>

     Signature                Title                            Date
     ---------                -----                            ----

<S>                      <C>                                 <C>
/S/ TIM C. FLYNN          President, Chief Executive         March 24, 1998
----------------------    Officer and Director (Principal
Tim C. Flynn                  Executive Officer)


/S/ SCOTT C. PETERSEN     Executive Vice President,          March 24, 1998
----------------------    Chief Operating Officer,
Scott C. Petersen                and Director


/S/ JEFFREY T. WEISNER     Vice President - Finance,         March 24, 1998
----------------------      (Principal Financial
Jeffrey T. Weisner          and Accounting Officer)


/S/ DAVID AUSTAD                   Director                  March 24, 1998
----------------------
David Austad


/S/ LAWRENCE FLINN, JR.            Director                  March 24, 1998
----------------------
Lawrence Flinn, Jr.


/S/ RICHARD R. HYLLAND             Director                  March 24, 1998
----------------------
Richard R. Hylland


/S/ R. F. LEYENDECKER              Director                  March 24, 1998
----------------------
R. F. Leyendecker
</TABLE>
                                  Page 32
<PAGE>


                    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

                 LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                    INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                                                Page

<S>                                                                                             <C>
Report of Independent Public Accountants....................................................... F - 2
Consolidated Balance Sheets as of December 31, 1996 and 1997................................... F - 3
Consolidated Statements of Operations -- Three Years Ended December 31, 1997................... F - 4
Consolidated Statements of Stockholders' Equity -- Three Years Ended December 31, 1997......... F - 5
Consolidated Statements of Cash Flows -- Three Years Ended December 31, 1997................... F - 6
Notes to Consolidated Financial Statements..................................................... F - 7

                            INDEX TO FINANCIAL SCHEDULES

Report of Independent Public Accountants on Schedule.......................................... F - 18
Schedule II -- Valuation and Qualifying Accounts.............................................. F - 19
</TABLE>

                                  Page F-1
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


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, 1996 and 1997, and the related consolidated statements of 
operations, stockholders' equity and cash flows for each of the three years 
in the period ended December 31, 1997.  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 generally accepted auditing 
standards.  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, 1996 and 1997, 
and the results of their operations and their cash flows for each of the 
three years in the period ended December 31, 1997, in conformity with 
generally accepted accounting principles.

                                   ARTHUR ANDERSEN LLP

Minneapolis, Minnesota
February 25, 1998

                                  Page F-2


<PAGE>

                  LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                            CONSOLIDATED BALANCE SHEETS
                           (Dollar amounts in thousands)
<TABLE>
<CAPTION>
                                                                            December 31,
                                                                   --------------------------
                                                                         1996           1997
                                                                   -----------    -----------
<S>                                                                 <C>           <C>
                               Assets
Current assets:
   Cash and cash equivalents                                         $  86,177     $    1,021
   Accounts receivable, net of allowance for doubtful accounts          18,428         21,835
   Prepaid expenses and other                                            1,935          3,457
                                                                   -----------    -----------
      Total current assets                                             106,540         26,313

Property and equipment, net of accumulated depreciation                164,157        218,948
Debt issuance costs, net of accumulated amortization                     8,509          7,641
Other assets, net                                                          562          7,392
                                                                   -----------    -----------
                                                                    $  279,768     $  260,294
                                                                   -----------    -----------
                                                                   -----------    -----------

                  Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable                                                  $  16,775      $  17,930
   Current maturities of long-term debt                                    425            705
   Accrued expenses                                                      4,596          7,010
                                                                   -----------    -----------
      Total current liabilities                                         21,796         25,645

Deferred revenue                                                         2,956          2,069
Long-term debt                                                         179,233        182,691
Minority interest in consolidated subsidiary                               231            310
                                                                   -----------    -----------
   Total liabilities                                                   204,216        210,715
                                                                   -----------    -----------
Commitments and contingencies (Note 9)                                      --             --

Stockholders' equity:
   Common stock, $.01 par value, 20,000,000 shares authorized;
    11,125,369 and 11,322,058 shares outstanding at December 31,
    1996 and 1997, respectively                                            111            113
   Additional paid-in capital                                          120,539        120,792
   Accumulated deficit                                                 (45,098)       (71,326)
                                                                   -----------    -----------
      Total stockholders' equity                                        75,552         49,579
                                                                   -----------    -----------
                                                                    $  279,768     $  260,294
                                                                   -----------    -----------
                                                                   -----------    -----------
</TABLE>

       The accompanying notes are an integral part of these consolidated balance
       sheets.

                                      Page F-3

<PAGE>


                  LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF OPERATIONS
               (Dollar amounts, except per share amounts, in thousands)
<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                                         ----------------------------------------
                                                               1995           1996          1997
                                                         ----------     ----------    -----------
<S>                                                       <C>            <C>           <C>
Revenues:                                                
   Guest Pay                                               $ 50,758      $  84,504     $  116,276
   Free-to-guest                                              8,060          8,645          8,496
   Other                                                      4,395          4,572         10,938
                                                         ----------     ----------    -----------
      Total revenues                                         63,213         97,721        135,710
                                                         ----------     ----------    -----------
Direct costs:                                            
   Guest Pay                                                 19,053         33,981         45,632
   Free-to-guest                                              6,117          6,784          5,663
   Other                                                      3,740          3,614          7,217
                                                         ----------     ----------    -----------
      Total direct costs                                     28,910         44,379         58,512
                                                         ----------     ----------    -----------
Gross profit                                                 34,303         53,342         77,198
                                                         ----------     ----------    -----------
Operating expenses:                                      
   Guest Pay operations                                       9,767         15,032         20,785
   Selling, general and administrative                        8,638         13,581         20,717
   Depreciation and amortization                             18,336         29,815         43,760
                                                         ----------     ----------    -----------
      Total operating expenses                               36,741         58,428         85,262
                                                         ----------     ----------    -----------
Operating loss                                               (2,438)        (5,086)        (8,064)
Interest expense, net                                         4,522          8,243         17,001
                                                         ----------     ----------    -----------
Loss before income taxes, extraordinary loss, and        
 cumulative effect of change in accounting principle         (6,960)       (13,329)       (25,065)
Provision for income taxes                                       66             28            344
                                                         ----------     ----------    -----------
Loss before extraordinary loss and cumulative effect of  
 change in accounting principle                              (7,026)       (13,357)       (25,409)
Extraordinary loss (Note 13)                                     --          3,253             --
Cumulative effect of change in accounting principle      
 (Note 3)                                                        --             --            210
                                                         ----------     ----------    -----------
Net loss                                                   $ (7,026)     $ (16,610)    $  (25,619)
                                                         ----------     ----------    -----------
                                                         ----------     ----------    -----------
Per common share (basic and diluted):                    
   Loss before extraordinary loss and cumulative         
    effect of change in accounting principle               $  (0.96)     $   (1.40)    $    (2.25)
   Extraordinary loss                                            --          (0.34)            --
   Cumulative effect of change in accounting principle           --             --          (0.02)
                                                         ----------     ----------    -----------
   Net loss                                                $  (0.96)     $   (1.74)    $    (2.27)
                                                         ----------     ----------    -----------
                                                         ----------     ----------    -----------
Weighted average shares outstanding (basic and diluted)   7,337,147      9,570,779     11,271,064
                                                         ----------     ----------    -----------
                                                         ----------     ----------    -----------
</TABLE>

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

                                   Page F-4


<PAGE>

                   LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                       (Dollar amounts in thousands)
<TABLE>
<CAPTION>
                                                    Common Stock       Additional
                                             ----------------------       Paid-in   Accumulated
                                                  Shares     Amount       Capital        Deficit        Total
                                             -----------    -------    ----------   ------------   ----------
<S>                                           <C>            <C>       <C>           <C>            <C>
Balance, December 31, 1994                     7,278,748      $  73     $  69,492    $  (21,623)    $  47,942
   Common stock option activity                   73,365          1            62             --           63
   Warrants issued                                    --         --         1,680             --        1,680
   Net loss                                           --         --            --        (7,026)      (7,026)
   Foreign currency translation adjustment            --         --            --             67           67
                                             -----------    -------    ----------   ------------   ----------
Balance, December 31, 1995                     7,352,113         74        71,234       (28,582)       42,726
   Issuance of common stock                    3,680,000         36        44,599             --       44,635
   Common stock option activity                   93,256          1            34             --           35
   Net loss                                           --         --            --       (16,610)     (16,610)
   Change of interest in subsidiary                   --         --         4,672             --        4,672
   Foreign currency translation adjustment            --         --            --             94           94
                                             -----------    -------    ----------   ------------   ----------
Balance, December 31, 1996                    11,125,369        111       120,539       (45,098)       75,552
   Common stock option activity                  196,689          2           332             --          334
   Net loss                                           --         --            --       (25,619)     (25,619)
   Change of interest in subsidiary                   --         --          (79)             --         (79)
   Foreign currency translation adjustment            --         --            --          (609)        (609)
                                             -----------    -------    ----------   ------------   ----------
Balance, December 31, 1997                    11,322,058     $  113    $  120,792    $  (71,326)    $  49,579
                                             -----------    -------    ----------   ------------   ----------
                                             -----------    -------    ----------   ------------   ----------
</TABLE>

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


                                  Page F-5

<PAGE>
                LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                       (Dollar amounts in thousands)
<TABLE>
<CAPTION>
                                                                 Years Ended December 31,
                                                       -----------------------------------------
                                                            1995          1996           1997
                                                       ----------    -----------    -----------
<S>                                                    <C>            <C>            <C>
Operating activities:
   Net loss                                             $  (7,026)    $  (16,610)    $  (25,619)
   Adjustments to reconcile net loss to net cash 
   provided by operating activities:
      Depreciation and amortization                        18,336         29,815         43,760
      Non-cash portion of extraordinary loss                   --            434             --
      Minority interest                                        --            (16)            16
      Change in operating assets and liabilities:
         Accounts receivable                               (3,541)        (6,278)        (3,288)
         Prepaid expenses and other                          (447)          (473)        (1,138)
         Accounts payable                                   6,205          1,864          1,053
         Accrued expenses and deferred revenue              1,857          1,433          1,524
         Other                                                 --           (607)           345
                                                       ----------    -----------    -----------
Net cash provided by operating activities                  15,384          9,562         16,653
                                                       ----------    -----------    -----------
Investing activities:
   Property and equipment additions                       (51,497)       (85,258)       (97,396)
   Purchase of cable television operations                     --             --         (8,087)
   Proceeds from sale of interest in subsidiary                --          5,396             --
                                                       ----------    -----------    -----------
Net cash used for investing activities                    (51,497)       (79,862)      (105,483)
                                                       ----------    -----------    -----------
Financing activities:
   Proceeds from long-term debt                            33,630        151,514          1,106
   Debt issuance costs                                     (1,348)        (7,969)          (141)
   Stock issuance costs                                        --           (477)            --
   Repayment of long-term debt                                (89)       (33,607)          (583)
   Borrowings under revolving credit facility              10,000         55,958          3,000
   Repayments of revolving credit facility                (10,000)       (55,958)            --
   Proceeds from issuance of common stock                      --         44,635             --
   Proceeds from issuance of warrants to purchase
      common stock                                          1,680             --             --
   Stock option activity                                       63             35            334
                                                       ----------    -----------    -----------
Net cash provided by financing activities                  33,936        154,131          3,716
                                                       ----------    -----------    -----------
Effect of exchange rates on cash                              127             94            (42)
                                                       ----------    -----------    -----------
Increase (decrease) in cash and cash equivalents           (2,050)        83,925        (85,156)
Cash and cash equivalents at beginning of period            4,302          2,252         86,177
                                                       ----------    -----------    -----------
Cash and cash equivalents at end of period               $  2,252      $  86,177       $  1,021
                                                       ----------    -----------    -----------
                                                       ----------    -----------    -----------
Supplemental cash flow information:
   Cash paid for interest                                $  3,341       $  7,870        $17,828
                                                       ----------    -----------    -----------
                                                       ----------    -----------    -----------
</TABLE>

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

                             Page F-6

<PAGE>

            LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY

     LodgeNet Entertainment Corporation ("LodgeNet" or the "Company") and its 
wholly-owned Canadian subsidiary assemble, install and operate guest pay 
movie systems and provide satellite-delivered, free-to-guest programming, 
interactive games and multimedia entertainment, and guest information systems 
to the lodging industry, primarily in the United States and Canada.  ResNet 
Communications, Inc., a wholly-owned subsidiary of the Company, is the 
majority owner of ResNet Communications, LLC (collectively "ResNet").  ResNet 
installs and operates private cable television systems in multi-family 
residential properties nationwide.

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

     The rapid growth of  the Company's businesses has and is expected to 
continue to require capital resources in excess of operating cash flows.  
While the Company's working capital, operating cash flows and its revolving 
credit facility are expected to be sufficient to fund its growth for 1998, 
the Company will likely, depending on its rate of growth, require additional 
growth capital in subsequent years.

NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements 
include the accounts of the Company, its wholly-owned Canadian subsidiary, 
and ResNet.  All significant inter-company accounts and transactions have 
been eliminated in consolidation.

     USE OF ESTIMATES -- The preparation of financial statements in 
conformity with generally accepted accounting principles requires management 
to make estimates and assumptions about certain matters and items.  These 
estimates and assumptions 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.  The ultimate outcome of the 
matters and items may be different from the estimates and assumptions.

     FAIR VALUE OF FINANCIAL INSTRUMENTS -- The carrying amounts for items 
comprising current assets and current liabilities approximate fair value due 
to the short period to maturity of these items.  The fair value of long-term 
debt instruments is estimated by reference to current yields to maturity on 
similar instruments or quotes where available.  The fair value of the 
warrants issued during 1995 was estimated using option valuation techniques.

     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.

     CASH AND CASH EQUIVALENTS -- Cash and cash equivalents are comprised of 
demand deposits and temporary investments in highly liquid securities having 
original maturities of 90 days or less.

     PROPERTY AND EQUIPMENT -- Property and equipment is stated at cost, 
including certain payroll costs related to the installation of new systems. 
Maintenance costs, which do not significantly extend the useful lives of the 
respective assets, and repairs are charged to operations as incurred. 
Depreciation of guest pay and free-to-guest systems begins when such systems 
are installed and activated.  Depreciation on other equipment begins when 
such equipment is placed in service. The Company attributes no salvage value 
to any equipment.  Depreciation and amortization are computed using the 
straight-line method over the following useful lives:

<TABLE>
<CAPTION>
                                                Years
                                              ---------
         <S>                                   <C>
         Buildings                             19 - 30
         Guest Pay systems:
          System components                     5 - 7
          In-room equipment                     3 - 5
         Cable television equipment             3 - 10
         Free-to-guest systems                  5
         Other equipment                        3 - 10
</TABLE>

                                    Page F-7

<PAGE>

     PRODUCT DEVELOPMENT -- The Company has capitalized certain costs of 
developing software for its guest pay and residential systems.  The 
capitalization of these costs begins when a system's technological and 
commercial feasibility has been established and ends when such systems are 
available for use in guest pay or residential properties.  Capitalized costs 
are reported at the lower of unamortized costs or net realizable value, and 
are amortized over the system's estimated useful life.  Guest pay system 
development costs capitalized were $1,480,000, $1,616,000 and $2,100,000 
during the years ended December 31, 1995, 1996 and 1997, respectively.  
Amortization of such costs was $455,000, $599,000 and $797,000 for the years 
ended December 31, 1995, 1996 and 1997, respectively.  The Company charged 
$129,000, $216,000, and $410,000 to operations during the years ended 
December 31, 1995, 1996 and 1997, respectively, related to research and 
development activities.

     REVENUE RECOGNITION -- Revenues and related costs are recognized when 
the services are rendered.  The Company has obtained certain programming 
agreements which provide for the receipt of low-cost programming in the 
earlier years of such agreements.  The Company's policy is to record the 
costs of such programming on a straight-line basis.  During the year, the 
Company entered into a new long term agreement with a major programming 
source, superseding a previous programming agreement.  As a result, the 
recognition of approximately $1.2 million of previously deferred programming 
cost reductions was accelerated.  At December 31, 1995, 1996 and 1997 the 
Company had recorded deferred cost reductions relating to such agreements of 
$1,579,000, $1,835,000 and $450,000, respectively.

     CONCENTRATION OF CREDIT RISKS AND CUSTOMER DATA -- The Company has 
derived virtually all of its revenue from entities in the lodging industry, 
however, no individual customer accounted for as much as 10% of total revenue 
in any period presented in the accompanying consolidated statements of 
operations.  The allowance for doubtful accounts was $785,000 and $800,000 at 
December 31, 1996 and 1997, respectively.  The provision for doubtful 
accounts was $343,000 in 1995, $922,000 in 1996, and $820,000 in 1997.

     INCOME TAXES -- The Company accounts for income taxes under the 
liability method, in accordance with the requirements of Statement of 
Financial Accounting Standards 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.
     
     LOSS PER SHARE COMPUTATION -- Effective in the fourth quarter of 1997, 
the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 
128, "Earnings Per Share".  SFAS No. 128 changes the manner in which earnings 
per share ("EPS") are calculated and presented.  The new standard 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.  The loss per share 
amounts for 1996 and 1995 have been restated to give effect to the adoption 
of SFAS No. 128.  The effect of the restatement was to increase the loss per 
share by $.01 in 1996 and 1995.  Weighted average options on 1,121,366; 
1,458,839; and 1,597,331 shares of common stock were not included in 
computing diluted EPS because their effects were antidilutive for the years 
ended December 31, 1995, 1996, and 1997, respectively.

     STOCK-BASED COMPENSATION -- The Company measures compensation costs 
associated with its stock option plans in accordance with the provisions of 
Accounting Principles Board Opinion No. 25, as permitted by Statement of 
Financial Accounting Standards No. 123.  The effect of fair value based 
measurement of such costs on net loss and net loss per share, in accordance 
with Statement of Financial Accounting Standards No. 123, is disclosed on a 
pro forma basis in Note 11.

     RECLASSIFICATIONS -- Certain items in the consolidated financial 
statements have been reclassified to conform to 1997 classifications.  Such 
reclassifications had no effect on previously reported net loss or 
stockholders' equity.

NOTE 3 -- CHANGE IN ACCOUNTING PRINCIPLE

     Effective in the fourth quarter of 1997, the Company adopted the 
provisions of Issue No. 97-13, "Accounting for Costs Incurred in Connection 
with a Consulting Contract or an Internal Project That Combines Business 
Process Reengineering and Information Technology Transformation" issued by 
the Emerging Issues Task Force of the Financial Accounting Standards Board.  
This new pronouncement requires that certain costs associated with business 
process reengineering activities should be expensed as incurred rather than 
capitalized.  As a result, the Company recorded a $210,000 charge in the 1997 
Consolidated Statement of Operations, reflected as a cumulative effect of a 
change in accounting principle, to write-off business process reengineering 
costs that had been previously capitalized.

                                   Page F-8

<PAGE>

NOTE 4 -- PROPERTY AND EQUIPMENT, NET

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

<TABLE>
<CAPTION>
                                                  December 31,
                                             -----------------------
                                               1996           1997
                                             --------      ---------
 <S>                                         <C>           <C>
 Land, building and equipment                $ 15,914      $  40,051
 Free-to-guest equipment                        7,369         11,855
 Cable television equipment                     5,291         13,877
 Guest pay systems:
   Installed                                  173,607        220,778
   System components                           23,290         30,720
   Software costs                               6,266          8,053
 Building construction in progress              2,528             --
                                             --------      ---------
   Total                                      234,265        325,334
 Less - depreciation and amortization         (70,108)      (106,386)
                                             --------      ---------
 Property and equipment, net                 $164,157      $ 218,948
                                             --------      ---------
                                             --------      ---------
</TABLE>

NOTE 5 -- 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.  The Company capitalized $1,348,000, $7,969,000, and 
$140,000 of debt issuance costs during the years ended December 31, 1995, 
1996 and 1997, respectively.  Amortization of such costs was $260,000 in 
1995; $564,000 in 1996, and $1,008,000 in 1997.  The 1996 amortization 
excludes $434,000 recorded as an extraordinary loss resulting from the early 
redemption of the Company's 9.95% and 10.35% Senior Notes (see Note 13).  The 
components of the debt issuance costs recorded in the balance sheets are as 
follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                                December 31,
                                           ----------------------
                                            1996           1997
                                           -------       --------
     <S>                                   <C>           <C>
     Debt issuance costs                   $8,820        $ 8,960
     Accumulated amortization                (311)        (1,319)
                                           -------       --------
                                           $8,509        $ 7,641
                                           -------       --------
                                           -------       --------
</TABLE>

NOTE 6 -- ACCRUED EXPENSES

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

<TABLE>
<CAPTION>
                                                December 31,
                                           ----------------------
                                            1996           1997
                                           -------       --------
     <S>                                   <C>             <C>
     Accrued taxes                         $  523          $  949
     Accrued compensation                   1,953           2,552
     Accrued interest                       2,120           2,274
     Other                                     --           1,235
                                           -------       --------
                                           $4,596          $7,010
                                           -------       --------
                                           -------       --------
</TABLE>

                                   Page F-9
<PAGE>

NOTE 7 -- LONG-TERM DEBT

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

<TABLE>
<CAPTION>
                                                       December 31,
                                                 -------------------------
                                                   1996            1997
                                                 ---------      ----------
 <S>                                              <C>            <C>
 Revolving Credit Facility                        $     --       $  3,000
 Unsecured Senior Notes due December 15, 2006
   10.25% interest payable semi-annually           150,000        150,000
 Unsecured Senior Notes due July 15, 2005:
   11.5% interest payable semi-annually             30,000         30,000
   Less - unamortized discount                      (1,384)        (1,169)
 Capital leases                                      1,042          1,565
                                                 ---------      ----------
                                                   179,658        183,396
 Less current maturities                              (425)          (705)
                                                 ---------      ----------
                                                  $179,233       $182,691
                                                 ---------      ----------
                                                 ---------      ----------
</TABLE>

     Long-term debt has the following scheduled principal maturities for the 
years ended December 31 (in thousands of dollars):  1998 -- $705; 1999 -- 
$543; 2000 -- $270; 2001 -- $6,047; 2002 -- $9,000; thereafter -- $166,831.

     10.25% SENIOR NOTES -- On December 19, 1996, the Company issued $150 
million of unsecured 10.25% Senior Notes (the "Notes") in a private offering. 
The proceeds of the Notes, which were issued at par, after placement fees and 
offering expenses, were approximately $143.2 million.  Approximately $31.7 
million of such proceeds were used to redeem the outstanding principal 
amounts of the 9.95% and 10.35% Senior Notes, $24.5 million and $4.4 million, 
respectively, plus a make-whole premium, resulting from their early 
redemption, of approximately $2.8 million.  Approximately $20.4 million of 
the proceeds was used to prepay all outstanding amounts under the Company's 
revolving credit facility.  The remaining proceeds of approximately $91.1 
million, were invested in highly liquid, interest-bearing securities pending 
their use for funding capital expenditures to expand the Company's 
businesses, including approximately $15 million to construct and equip the 
Company's new administrative and production facility in Sioux Falls, South 
Dakota.

     The Notes were issued initially to qualified institutional buyers or 
other accredited investors pursuant to a registration rights agreement.  
During 1997, the Notes were registered under the Securities Act of 1933 and 
all the private Notes were exchanged for registered Notes.  The registered 
Notes contain terms and conditions identical to those of the private Notes.

     The Notes are unsecured, rank PARI PASSU in right of payment with future 
unsubordinated unsecured indebtedness and rank senior in right of payment to 
all subordinated indebtedness of the Company.  The Notes contain covenants 
which, among other matters, require the Company to maintain a consolidated 
leverage ratio (as defined in the indenture) of not more than 5.75 to 1 
through December 15, 1999 and not more than 5.25 to 1 thereafter.  The 
covenants restrict the ability of the Company to incur additional 
indebtedness, create liens, pay dividends or make certain distributions in 
respect of its common stock; redeem capital stock; issue or sell stock of 
subsidiaries in certain circumstances; effect certain business combinations; 
and effect certain transactions with affiliates or stockholders.

     The Notes are redeemable at the option of the Company, in whole or in 
part, on or after December 15, 2001, initially at 105.125% of their principal 
amount (plus accrued and unpaid interest) declining ratably to 100% of their 
principal amount (plus accrued and unpaid interest) on or after December 15, 
2003.  In addition, at any time prior to December 15, 1999, the Company may 
redeem up to 35% of the aggregate principal amount of the Notes with the 
proceeds of one or more public equity offerings.

     11.5% SENIOR NOTES -- During 1995, the Company issued $30 million 
principal amount of 11.5% Senior Subordinated Notes due July 15, 2005 (the 
"Subordinated Notes") to three insurance companies in two separate private 
placements. Mandatory annual principal payments of $6 million commence July 
15, 2001.  Proceeds from the issuance of the Subordinated Notes, net of 
original issue discount and issuance-related expenses, were approximately 
$27.3 million and were used (i) to repay previous borrowings and (ii) to 
provide funding for capital expenditures to expand the Company's guest pay 
services business. The Company issued a total of 480,000 warrants (see Note 
12) to purchase common stock of the Company in connection with the issuance 
of the Subordinated Notes and the value of the warrants, $1.68 million, was 
recorded in stockholders' equity and shown as a discount on the Subordinated 
Notes.  As part of the refinancing transaction in which the 10.25% Senior 
Notes were issued, the holders of  the Subordinated Notes adopted the 
covenants and ranking of the 10.25% Senior Notes.

     At December 31, 1996 and 1997, the estimated fair value of the 11.5% 
Senior Notes was approximately $29.2 and $31.0 million, respectively.  The 
estimated fair value of the 10.25% Senior Notes was $150.0 and $155.3 million 
at December 31, 1996 and 1997, respectively.

                                   Page F-10
<PAGE>

NOTE 8 -- REVOLVING CREDIT FACILITY

     On December 19, 1996 the Company amended and restated its revolving 
credit facility with National Westminster Bank Plc, as Agent ("NatWest"), to 
provide for an increase in the total lending commitments under the facility 
from $60 million to $100 million.  The amended facility is secured by (i) a 
first priority security interest in all of the Company's and certain of its 
subsidiaries tangible and intangible assets, and (ii) a guarantee by ResNet 
of all amounts advanced to it by the Company.  Amounts outstanding under the 
amended facility bear interest at either (i) LIBOR (London Inter Bank Offered 
Rate) plus from 1.25% to 2.00% or (ii) the greater of (a) the NatWest Prime 
Rate plus from .25% to 1.00% or (b) the federal funds rate plus from .75% to 
1.50%; depending on the Company's total leverage, as defined in the 
agreement. At December 31, 1997, the interest rate on amounts outstanding 
under the facility was 9.50%.

     The commitment under the amended facility may be increased to $175 
million, subject to the consent of NatWest, but is subject to a scheduled 
reduction of 15% beginning in December 1998 and annually thereafter as 
follows: December 1999 - 20%; December 2000 -20%; December 2001 - 20%; and 
December 2002 - 25%. The amended facility provides for the issuance of 
Letters of Credit, subject to customary terms and conditions; and includes 
terms and conditions which require the maintenance of certain financial 
ratios, limit the incurrence of additional indebtedness, limit the incurrence 
of certain liens, limit certain payments or distributions in respect of the 
Common Stock, and provide for acceleration of principal repayment in certain 
circumstances.  As of December 31, 1997, the Company had outstanding Standby 
Letters of Credit of $1.2 million and the Company was in compliance with all 
covenants, terms and conditions of the amended facility.

NOTE 9 -- COMMITMENTS AND CONTINGENCIES

     PROGRAMMING AGREEMENTS -- The Company, through programming agreements, 
provides guest pay and free-to-guest programming services to the lodging and 
multi-family residential unit industries.  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 which provide their 
programs for redistribution.  Under these agreements, the Company pays fees 
which 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 five years in duration.

     SIGNAL CARRIAGE AGREEMENT -- The Company and PRIMESTAR Partners, L.P. 
have entered into a Signal Carriage Agreement (the "Agreement") under which, 
in exchange for exclusive distribution of satellite-delivered free-to-guest 
programming to the lodging industry, the Company agreed to share certain 
operating cash flows, as defined in the agreement, with PRIMESTAR Partners, 
L.P.  Under the cash flow sharing arrangement, which is measured on an annual 
basis, the Company receives the first $1.8 million of cash flows, PRIMESTAR 
Partners, L.P. receives the next $1.8 million and all amounts thereafter are 
shared evenly.  The Agreement has an initial term of 15 years and includes 
various restrictions, including default and termination provisions.

     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, 1997 require future minimum lease payments, as 
follows (in thousands of dollars):  1998 --  $246; 1999 --  $222; 2000 -- 
$200; 2001 --$179; 2002 and thereafter -- $41.

     LITIGATION -- On February 16, 1995, On Command Corporation ("OCC") filed 
a lawsuit in Federal District Court for the Northern District of California 
asserting patent infringement by the Company relating to its on-demand video 
system. The complaint requests an unspecified amount of damages and 
injunctive relief.  The Company filed an answer and counterclaim to the 
lawsuit on April 17, 1995, denying the claims, asserting affirmative defenses 
and asserting a counterclaim for declaratory relief.  The Company is 
currently engaged in litigation with respect to this matter and trial is 
expected to begin in August 1998.  Based on the advice of  special patent 
counsel and technical experts retained by the Company, as well as the 
Company's independent analysis, the Company believes that the claims of 
infringement are unfounded and that OCC's patent is invalid.  The Company has 
and will continue to vigorously defend itself in this matter.  Patent 
litigation is especially complex, both as to the factual allegations and the 
legal interpretation of patent claim language, which makes such lawsuits 
difficult to assess with certainty.  While the Company and its patent counsel 
believe that the Company has a number of defenses available which, if 
properly considered, would eliminate or minimize any liability for the 
Company, an unexpected unfavorable resolution, depending on the amount and 
timing, could adversely affect the Company.  Although the outcome of any 
litigation cannot be predicted with certainty, the Company believes that the 
ultimate disposition of this matter will not have a material adverse effect 
on the Company's financial position or results of operations.

                                   Page F-11
<PAGE>

     The Company is subject to other litigation arising in the ordinary 
course of its businesses.  As of the date hereof, in the opinion of 
management, the resolution of such other litigation will not have a material 
adverse effect on the Company's financial position or results of operations.

NOTE 10 -- 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, 1996 and 1997.  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.

     COMMON STOCK -- On May 23, 1996, the Company sold 3,200,000 shares of 
common stock at $13.00 per share in a public offering.  On June 10, 1996 the 
Company sold an additional 480,000 shares of common stock, representing the 
underwriters' exercise of their over-allotment option in accordance with the 
underwriting agreement.  Net proceeds from these issuances, after 
underwriters' commissions and other offering-related expenses, were 
approximately $44.6 million.  Such proceeds were used to repay borrowings 
under the Company's revolving credit facility, approximately $25.9 million, 
and to provide capital for the expansion of the Company's lodging and 
residential businesses.

     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.

     Initially, the rights will be 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.

                                   Page F-12
<PAGE>

NOTE 11 -- STOCK OPTION PLANS

     The Company has stock options plans which provide for the granting of up 
to 1,926,792 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.  Options 
become exercisable in accordance with vesting schedules determined by a 
committee of the Board of Directors, and generally expire ten years after 
date of grant.  No options had expired as of December 31, 1997 and 
outstanding options expire beginning in 2001 through 2007.  The following is 
a summary of the stock option activity for the years ending December 31:

<TABLE>
<CAPTION>
                                           1996                       1997
                                  ------------------------    ----------------------
                                                  Weighted                  Weighted
                                   Number         Average       Number      Average
                                     of           Exercise        of        Exercise
                                   Shares           Price       Shares        Price
                                  ---------       ---------   ---------    ---------
<S>                               <C>              <C>        <C>           <C>
Beginning of year                 1,318,426          $4.21    1,451,670       $5.79
Granted                             239,000         $12.66      253,068      $14.99
Exercised                           (93,256)         $0.62     (191,325)      $1.08
Forfeited or canceled               (12,500)         $8.51       (7,000)      $9.06
                                  ----------                  ----------
End of year                       1,451,670          $5.79    1,506,413       $7.91
                                  ----------                  ----------
                                  ----------                  ----------
Exercisable at end of year          907,671          $2.66      971,871       $5.12
                                  ----------                  ----------
                                  ----------                  ----------
</TABLE>

The following is a summary of stock options outstanding as of December 31,
1997:

<TABLE>
<CAPTION>
                                    Outstanding options             Exercisable Options
                            -------------------------------------  ----------------------
                                          Weighted
                                           Average    Weighted                 Weighted
                                          Remaining    Average                  Average
  Exercise                                   Term      Exercise                 Exercise
 Price Range                  Number       in Years      Price     Number        Price
---------------             -----------    ---------   ---------  --------     ----------
<S>                         <C>            <C>          <C>        <C>         <C>
 $0.23 to $0.46               340,892         5.8        $0.34     340,892       $0.34
 $2.77 to $3.23               237,022         5.6        $2.89     237,022       $2.89
 $7.00 to $9.55               250,499         7.3        $8.49     163,332       $8.75
$10.78 to $13.29              451,000         8.1       $11.87     208,750      $11.67
$14.25 to $16.71              227,000         8.7       $16.03      21,875      $14.38
                            ---------                              --------
                            1,506,413         7.2        $7.91     971,871       $5.12
                            ---------                              --------
                            ---------                              --------
</TABLE>

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

<TABLE>
<CAPTION>
                                          1996           1997
                                        --------       --------
<S>                                     <C>            <C>
Weighted average fair
   value per option granted             $  6.01        $  7.13
                                        --------       --------
                                        --------       --------
</TABLE>

     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 - 6.4% in 1996, 6.22% in 1997; (iii) weighted average expected 
life - 5.0 years, and (iv) weighted average expected volatility - 44.0% in 
1996 and 44.5% in 1997.

                                   Page F-13

<PAGE>

     The Company accounts for its stock option compensation plans in 
accordance with the provisions of Accounting Principles Board Opinion No. 25. 
Accordingly, because the Company's stock option plans are fixed plans and 
options are issued at fair market value, no compensation cost has been 
charged to operations for any period presented.  Had compensation cost been 
determined in accordance with Statement of Financial Accounting Standards No. 
123, net loss and loss per share would have increased, and the effect of such 
increases, reflected on those items on a pro forma basis, would have been as 
follows (in thousands of dollars, except per share amounts):

<TABLE>
<CAPTION>
                              Year Ended December 31,
                             ------------------------
                                1996           1997
                             ----------     ---------
<S>                          <C>            <C>
Net loss
  As reported                $(16,610)      $(25,619)
  Pro forma                   (18,047)       (27,423)

Loss per share
  As reported                $  (1.74)      $  (2.27)
  Pro forma                     (1.88)         (2.42)

</TABLE>

NOTE 12 -- WARRANTS

     In connection with the Company's initial public offering in 1993, the 
Company issued warrants to purchase 75,000 shares of common stock of the 
Company to the underwriters.  The exercise price of such warrants is $16.20 
and the warrants expire on October 14, 1998.

     In connection with the 1995 issuance of the 11.5% Senior Notes (see Note 
7), the Company issued a total of 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 such warrants 
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.

NOTE 13 -- EXTRAORDINARY LOSS

     Concurrently with the issuance of its 10.25% Senior Notes in 1996, the 
Company redeemed its 9.95% and 10.35% Senior Notes due August 15, 2003.  As a 
consequence of the early redemption of the 9.95% and 10.35% Senior Notes, the 
Company incurred a make-whole premium of $2,819,000 and wrote off related, 
unamortized debt issuance costs of $434,000.

NOTE 14 -- SALE OF EQUITY INTEREST IN SUBSIDIARY

     On October 21, 1996, the Company and its subsidiary, ResNet, entered 
into agreements with TCI Satellite Entertainment, Inc. ("TCI Satellite") 
under which ResNet sold a 4.99% equity interest in ResNet to TCI Satellite in 
exchange for $5.4 million in cash. The proceeds related to the change in 
equity interest were in excess of the Company's carrying value for its 
investment, and such excess, approximately $4.7 million after transaction 
expenses, was reflected as a credit to paid-in capital.  Pursuant to a signal 
carriage agreement, TCI Satellite has agreed to provide ResNet with 
nationwide access to certain satellite programming signals.

     In addition to the aforementioned cash investment, TCI Satellite agreed 
to advance up to $34.6 million to ResNet during the five year period ending 
October 21, 2001, under a convertible note agreement (the "Convertible 
Note"). Use of the proceeds of the Convertible Note is limited to the 
purchase of satellite receiving equipment from TCI Satellite.  Amounts 
outstanding under the Convertible Note are periodically convertible into 
additional equity interests in ResNet.  Such conversions are mandatory, 
subject only to regulatory limitations on the size of the equity interest 
that TCI Satellite may hold in ResNet.   Without regard to the amount 
outstanding under the Convertible Note, and in addition to its 4.99% interest 
previously described, TCI Satellite will convert its interest in the 
Convertible Note into an additional 32.0% equity interest in ResNet, subject 
to the regulatory limitations described above.  Under these conversion 
features, TCI Satellite obtained the right effective October 21, 1997 to 
acquire an additional 1.30% equity interest in ResNet.  Future conversion 
rights into additional equity interests in ResNet are as follows: at October 
21, 1998--8.51%, at October 21, 1999--11.09% and at October 21, 2000--11.10%.

     The Convertible Note matures on October 21, 2001, subject to a one-year 
extension at the election of ResNet.  On the maturity date, if regulatory 
restrictions have prohibited the aforementioned conversions, ResNet shall 
issue a warrant enabling TCI Satellite to purchase the defined additional 
equity interests in ResNet for the unconverted amount of the Convertible 
Note.  Upon issuance of the warrant, borrowings and unpaid interest under the 
Note shall be cancelled and deemed repaid in full.  The warrant, if and when 
issued, will expire June 4, 2007.

     The Convertible Note is unsecured, is not subject to prepayment, has no 
recourse to the Company, and is subordinated to all present and future 
borrowings by the Company to the extent that the proceeds thereof are 

                                   Page F-14

<PAGE>

advanced to ResNet.  Further, the Convertible Note is subordinated to 
inter-company loans or advances to ResNet by the Company.  Interest accrues 
(generally at TCI Satellite's average borrowing rate) on amounts outstanding 
under the Convertible Note, but such interest is not paid in cash and does 
not increase the equity interest into which the Convertible Note will be 
mandatorily converted.  Such interest accrues only until maturity or such 
time as the balance of outstanding principal and accrued interest is $34.6 
million, whichever is sooner. The Company, ResNet and TCI Satellite have 
agreed that all amounts advanced by the Company to ResNet shall be in 
accordance with an inter-company promissory note, which shall bear interest.

     In connection with the aforementioned agreements, the Company has 
granted TCI Satellite an option to acquire an additional 13.00% equity 
interest in ResNet, first exercisable 60 days following October 21, 1999.  
Such option is to be exercised in exchange for an additional cash investment 
in ResNet based on ResNet's then fair market value.  Such option will expire, 
subject to certain limitations, coincident with the maturity of the 
Convertible Note.

     LIQUIDATION PREFERENCE -- The Company, ResNet and TCI Satellite have 
agreed that in the event of a sale of ResNet, or a sale of substantially all 
of the assets of ResNet, that (i) repayment of any inter-company loans or 
advances by the Company to ResNet shall have preference to any other 
distribution, (ii) that after repayment of such advances, that TCI Satellite 
shall be entitled to a preferential return of its aggregate investment in 
ResNet and (iii) that after the repayment of amounts in accordance with items 
(i) and (ii), that any further distribution shall be determined on a 
per-share basis.

     On June 4, 1997, ResNet Communications, Inc. was converted to a Delaware 
limited liability corporation, ResNet Communications, L.L.C.

NOTE 15 -- INCOME TAXES

     The provisions for income taxes consisted of  state income taxes.  The 
Company and its subsidiaries file separate federal income tax returns.  At 
December 31, 1997, the Company had net operating loss carry-forwards in 
excess of $74 million for federal income tax purposes.  Such carry-forwards 
expire beginning in 2001 through 2012, and federal tax regulations limit the 
availability and timing of usage of carry-forwards.  Significant components 
of the Company's deferred tax liabilities and assets were as follows at (in 
thousands of dollars):

<TABLE>
<CAPTION>
                                                    December 31, 
                                              ------------------------
                                                 1996           1997
                                              ---------      ---------
<S>                                           <C>            <C>
Deferred tax liabilities:
  Tax over book depreciation                  $ (9,899)      $ (5,207)
                                              ---------      ---------
Deferred tax assets:
  Net operating loss carry-forwards             18,502         25,283
  Deferred programming                             624            153
  Other                                          1,135          1,081
                                              ---------      ---------
                                                20,261         26,517
                                              ---------      ---------
Net deferred tax assets                         10,362         21,310
Valuation allowance                            (10,362)       (21,310)
                                              ---------      ---------
Net deferred taxes                            $     --       $     --
                                              ---------      ---------
                                              ---------      ---------
</TABLE>

     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.

                                   Page F-15

<PAGE>

NOTE 16 -- SEGMENT INFORMATION

     The Company's operations have been classified into two business 
segments: lodging and residential.  The lodging segment utilizes interactive 
systems designed, assembled and operated by the Company to provide guest room 
entertainment, information and convenience services to the lodging industry. 
The residential segment uses systems designed, built and operated by the 
Company to provide cable television programming and other entertainment 
services to multifamily residences.

     The Company's operations, prior to 1996, consisted only of lodging 
operations.  Summarized financial information by business segment for 1996 
and 1997 is included in the table below (in thousands of dollars):

<TABLE>
<CAPTION>

                      1996        1997                             1996        1997
                    ---------  ---------                         --------   --------
<S>                 <C>         <C>         <C>                  <C>        <C>
Revenue:                                    Total Assets:
-------------                               ----------------
  Lodging            $97,389    $133,010       Lodging           $143,820   $170,638
  Residential            332       2,700       Residential          5,548     21,425
                    ---------  ---------       Corporate          130,400     68,231
                                                                 --------   --------
                     $97,721    $135,710                         $279,768   $260,294
                    ---------  ---------                         --------   --------
                    ---------  ---------                         --------   --------

Operating                                   Depreciation and
Loss:                                       Amortization:
-------------                               ------------------
  Lodging             $9,839     $18,029       Lodging            $24,346    $33,172
  Residential           (179)     (3,601)      Residential            328      1,546
  Corporate          (14,746)    (22,492)      Corporate            5,141      9,042
                    ---------  ---------                         --------   --------
                     $(5,086)    $(8,064)                         $29,815    $43,760
                    ---------  ---------                         --------   --------
                    ---------  ---------                         --------   --------

Capital
Expenditures:
--------------
   Lodging           $59,597     $60,096
   Residental          5,518      16,762
   Corporate          20,143      28,625
                    ---------  ---------
                     $85,258    $105,483
                    ---------  ---------
                    ---------  ---------

</TABLE>

                                   Page F-16

<PAGE>


NOTE 17 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

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

<TABLE>
Caption
                                                          Quarter        Quarter         Quarter        Quarter
                                                          Ending          Ending         Ending          Ending
                                                          March 31,      June 30,     September 30,   December 31,
                                                        -----------    ----------     -------------   ------------
<S>                                                     <C>            <C>            <C>            <C> 
For 1996:
   Total revenue                                        $  20,368      $  23,202      $  27,116      $  27,035
   Gross profit                                            11,254         12,780         14,425         14,883
   Loss before extraordinary loss                          (2,873)        (3,395)        (1,857)        (5,232)
   Net loss                                                (2,873)        (3,395)        (1,857)        (8,485)
   Per common share (basic and
      diluted (1):
      Loss before extraordinary loss                    $   (0.39)      $  (0.39)      $  (0.17)       $  (.47)
      Net loss (2)                                          (0.39)         (0.39)         (0.17)          (.77)

For 1997:
   Total revenue                                        $  29,656      $  33,132      $  36,692      $  36,230
   Gross profit                                            16,839         18,794         20,961         20,604
   Loss before cumulative effect of
      change in accounting principle                       (6,679)        (5,756)        (5,050)        (7,924)
   Net loss                                                (6,679)        (5,756)        (5,050)        (8,134)
   Per common share (basic and
      diluted) (1):
      Loss before cumulative effect
      of change in accounting principle                 $   (0.60)      $  (0.51)      $  (0.45)       $  (.70)
      Net loss (3)                                          (0.60)         (0.51)         (0.45)          (.71)
</TABLE>
---------------------
(1)  Per share amounts are computed independently for each of the quarters
     presented.  Therefore, the sum of such amounts will not equal the total
     for the year.

(2)  The results of the quarter ended December 31, 1996 included an
     extraordinary loss of approximately $3.3 million relating to the early
     retirement of debt (see Note 13).

(3)  The results of the quarter ended December 31, 1997 include a $210,000
     charge for the effect of adopting EITF Issue 97-13 related to accounting
     for certain business reengineering costs (see Note 3).


                                   Page F-17


<PAGE>


                  REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE


To LodgeNet Entertainment Corporation:

     We have audited, in accordance with generally accepted auditing standards,
the consolidated financial statements included in this annual report on Form 10-
K, and have issued our report thereon dated February 25, 1998.  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 25, 1998


                                   Page F-18


<PAGE>


                   LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                    SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
                            (Dollar amounts in thousands)


<TABLE>
<CAPTION>
        Column A                                        Column B       Column C       Column D        Column E
------------------------------------                   -----------    ---------      ---------       ---------
                                                                      Additions
                                                                      Charged 
                                                        Balance           to                          Balance
                                                        Beginning     Costs and       Deductions       End of
      Description                                       of Period     Expenses         (Note 1)        Period
------------------------------------                    ----------    -----------     ----------      ---------
<S>                                                     <C>           <C>             <C>             <C> 
 Allowances deducted from related
    balance sheet accounts:

   Year Ended December 31, 1995:
       Allowance for Doubtful Accounts                     $  228         $  343         $  161         $  410

   Year Ended December 31, 1996:
       Allowance for Doubtful Accounts                     $  410         $  922         $  547         $  785

   Year Ended December 31, 1997:
       Allowance for Doubtful Accounts                     $  785         $  820         $  805         $  800
</TABLE>
----------------
(1)  All deductions from reserves were for the purposes for which such reserves
     were created.


                                                    Page F-19