##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 Form 10-K
 (Mark
One)
 þ
    
    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Fiscal Year Ended December 31, 2008
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
 Commission
File Number: 0-22334
 LodgeNet Interactive Corporation
  Delaware
    
    46-0371161(State of Incorporation)
    
    (IRS Employer Identification Number)
 3900 West Innovation Street, Sioux Falls, South Dakota 57107
 (605) 988  1000  (Registrants telephone number, including area code)
 Securities registered pursuant to Section 12(b) of the Act:
    
    Common Stock, $.01 par value.Registered on the NASDAQ Global Select MarketSecurities registered pursuant to Section 12(g) of the Act:
    
    None.
 o þ
 o þ
 þ o
 þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer   o
(Do not check if a smaller reporting company)
    
    Smaller Reporting Company o
 o þ
 $81,785,472




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##### 



Table of Contents
 Item 1  Business
    
    
    1Overview
    
    
    1Overview of Markets Served
    
    
    3Hospitality
    
    
    3Healthcare
    
    
    9Advertising and Media Services
    
    
    11Competition
    
    
    12Business Strategy
    
    
    15Regulation
    
    
    15Employees
    
    
    16Corporate Information and Web Site Access to SEC Filings
    
    
    16Item 1A  Risk Factors
    
    
    17Item 1B  Unresolved Staff Comments
    
    
    23Item 2  Properties
    
    
    24Item 3  Legal Proceedings
    
    
    24Item 4  Submission of Matters to a Vote of Security Holders
    
    
    24Item 5  Market for Registrants Common Equity, Related Stockholder Matters and Issuer
Purchases of Equity Securities
    
    
    25Issuer Purchases of Equity Securities
    
    
    25Dividends
    
    
    25Stockholder Rights Plan
    
    
    25Item 6  Selected Financial Data
    
    
    29Item 7  Managements Discussion and Analysis of Financial Condition and Results of
Operations
    
    
    32Executive Overview
    
    
    32Hospitality
    
    
    33Healthcare
    
    
    37Advertising
    
    
    38General Operations
    
    
    38Liquidity and Capital Resources
    
    
    40Seasonality
    
    
    43Market Conditions
    
    
    44Results of Operations  Years Ended December 31, 2008 and 2007
    
    
    45Results of Operations  Years Ended December 31, 2007 and 2006
    
    
    49Critical Accounting Policies
    
    
    51Recent Accounting Developments
    
    
    51Item 7A  Quantitative and Qualitative Disclosures About Market Risk
    
    
    52Item 8  Financial Statements and Supplementary Data
    
    
    53Item 9  Changes In and Disagreements with Accountants on Accounting and Financial
Disclosure
    
    
    53Item 9A  Controls and Procedures
    
    
    54Item 9B  Other Information
    
    
    54Item 10  Directors, Executive Officers and Corporate Governance
    
    
    55Item 11  Executive Compensation
    
    
    55Item 12  Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
    
    
    55Item 13  Certain Relationships and Related Transactions, and Director Independence
    
    
    55Item 14  Principal Accountant Fees and Services
    
    
    55Item 15  Exhibits and Financial Statement Schedules
    
    
    56EX-12.1EX-21.1EX-23.1EX-31.1EX-31.2EX-32.1




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PART I
 
 Item 1  Business
 
 Overview
   TM
  (1)
    
    pro-actively managing our Company through the economic downturn by right-sizing our
operations to our revenues and allocating the majority of our cash from operations to
reduce our debt levels, with the goal of maintaining compliance with the covenants of our
Credit Facility, and(2)
    
    driving the growth of our diversified revenue initiatives by increasing the revenue we
generate from the sale of television programming, systems and services to hotels and
healthcare facilities, and by the sale of traveler-targeted advertising and marketing
campaigns to consumer product and service companies.
 1




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Year Ended December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004Selected Operations Data:Total rooms served (1) (6)
    
    
    1,977,015
    
    
    
    1,962,090
    
    
    
    1,052,025
    
    
    
    1,053,806
    
    
    
    1,034,605Total Guest Entertainment rooms (2) (6)
    
    
    1,866,353
    
    
    
    1,860,720
    
    
    
    1,004,937
    
    
    
    1,001,929
    
    
    
    974,798Total Digital rooms (3)
    
    
    1,537,685
    
    
    
    1,471,608
    
    
    
    733,362
    
    
    
    629,085
    
    
    
    508,979Total Cable Television Programming (FTG) rooms (4)
    
    
    1,105,754
    
    
    
    1,068,256
    
    
    
    535,777
    
    
    
    536,984
    
    
    
    525,436Total Advertising and Media Services rooms (5)
    
    
    893,738
    
    
    
    716,219
    
    
    
    
    
    
    
    
    
    
    
    Total Broadband Internet rooms (7)
    
    
    229,003
    
    
    
    218,860
    
    
    
    37,686
    
    
    
    
    
    
    
    Total HD rooms (8)
    
    
    191,491
    
    
    
    84,327
    
    
    
    23,502
    
    
    
    259
    
    
    
    Total revenues
    
    $
    533,879
    
    
    $
    485,588
    
    
    $
    288,213
    
    
    $
    275,771
    
    
    $
    266,441Operating (loss) income
    
    
    (5,071
    )
    
    
    (4,236
    )
    
    
    26,932
    
    
    
    22,693
    
    
    
    12,970Depreciation and amortization (9)
    
    
    124,060
    
    
    
    116,378
    
    
    
    66,311
    
    
    
    69,862
    
    
    
    77,045Share-based compensation
    
    
    2,275
    
    
    
    1,737
    
    
    
    1,677
    
    
    
    288
    
    
    
    198Net (loss) income
    
    $
    (48,418
    )
    
    $
    (65,172
    )
    
    $
    1,841
    
    
    $
    (6,959
    )
    
    $
    (20,781
    )
 
 (1)
    
    Total rooms served include rooms receiving one or more of our services, including rooms
served by international licensees. The increase from 2006 to 2007 is due primarily to the
addition of the On Command room base of approximately 830,000 rooms.(2)
    
    Guest Entertainment rooms are equipped with our interactive television systems.(3)
    
    Digital rooms are equipped with an interactive digital file server system where on-demand
movies, television on-demand programming and music content are stored in a digital format and
are updated and delivered via satellite to our systems within each respective hotel. Digital
rooms are included in total Guest Entertainment rooms and represent 82.4% of the Guest
Entertainment rooms served as of December 31, 2008.(4)
    
    Cable television programming (which we refer to as free-to-guest or FTG) rooms receiving
basic or premium television programming.(5)
    
    Includes rooms receiving satellite-delivered and server-based channels.(6)
    
    Total room count was reduced as a result of Hurricane Katrina by 4,053 rooms in 2006 and
8,195 rooms in 2005.(7)
    
    Represents rooms receiving high-speed Internet service and are included in total rooms
served. The increase from 2006 to 2007 is due to the addition of the StayOnline and On
Command room bases of approximately 137,000 and 12,000 rooms, respectively.(8)
    
    HD rooms are equipped with high-definition video-on-demand capabilities and are included in
total rooms served and in total digital rooms.(9)
    
    Includes amortization of acquired intangibles.
 2




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Overview of Markets Served
 
 HOSPITALITY
  Hospitality Market and Customers
 United States, Canadian and Mexican Market
 Diversified Customer Base.
 International Hotel Markets.
 3




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Hospitality Market Services and Products
 Guest Entertainment
   Ø
    
    on-demand movies;Ø
    
    on-demand television programming;Ø
    
    on-demand digital music programming;Ø
    
    daily subscription sports programming;Ø
    
    access to Internet-sourced content;Ø
    
    on-screen controls that allow the guest more viewing control and flexibility; andØ
    
    interactive guest marketing and merchandising capabilities.
  TM
 SM SM
 4




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Ø
    
    the number of rooms equipped with our interactive television system;Ø
    
    the range of interactive television content and services offered at each hotel;Ø
    
    the popularity, amount and timeliness of content offered, as well as the popularity and
availability of other entertainment alternatives;Ø
    
    the profile of the guest at each property;Ø
    
    the price of the service purchased by the hotel guest;Ø
    
    the occupancy rate at the property; andØ
    
    general economic conditions and consumer sentiment.
  Hotel Contracts.
 5




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Hotel Services and System Sales and Related Services
 Cable Television Programming ®
  Broadband Internet Access System Sales, Service and Support.
  Professional Solutions
 6




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System Sales and Other Services.
 Hospitality Operations and Structure
 Sales and Marketing.
  Installation Operations.
 Service Operations.
  7




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Component Suppliers.
 Programming. ® SM
 Technology, Product Development, and Patents.
  8




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HEALTHCARE
    9




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Healthcare Market and Customers
   Healthcare Market Services and Products
  Ø
    
    LodgeNetRX Interactive Patient Television system, including specialized applications and
services;Ø
    
    professional services  including cable plant design, modification, and installation as
well as television installation services;Ø
    
    DIRECTV satellite equipment sales and programming;Ø
    
    high-speed Internet access; andØ
    
    service agreements covering cable plant, DIRECTV, television and interactive system support.
   Ø
    
    a custom welcome channel;Ø
    
    safety videos;Ø
    
    a hospital information channel;Ø
    
    a relaxation channel;Ø
    
    music channels;Ø
    
    interactive games;Ø
    
    interactive information about the hospital and its services;Ø
    
    patient request application  allows patients to submit common requests through the
television, which are sent directly to the appropriate party, freeing the nursing staff to
better focus on patient care;Ø
    
    patient feedback surveys  designed to capture and build in service recovery so patient
issues can be identified and addressed by the care staff while the patient is still in the
hospital;Ø
    
    other revenue-generating services promotion  such as outpatient pharmacy, home medical
equipment, health clubs, and other outreach/continuum of care services; andØ
    
    meal ordering application  provides information on the diet types, and allows patients
to order meals which are offered based on diagnosis and allergies.
 10




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Sales and Marketing.
 Installation and Service Operations
 Programming
 Technology and Product Development.
 
 ADVERTISING AND MEDIA SERVICES
   1)
    
    Traditional Television Advertising.The THN Superblock consists of a package of 10
well-known cable networks broadcast through THNs private satellite network in 365,000
rooms in upscale hotels. Based on the agreement THN has with these 10 networks, THN has
100% of the national and local commercials available across these networks, which is then
sold to advertisers in a block format. According to a recent Nielsen Media Research
report, THNs average viewership share of ad-supported cable television channels in its
room base was approximately 30%.2)
    
    Video-On-Demand/Interactive Advertising.THN offers two approaches to interactive advertising. Freeviews
is an on-demand advertising program which enables guests to choose from a variety of advertiser-sponsored content within the interactive
television menu, which they can view free of charge. Interactive Channels is a program which allows marketers to promote
their products or brands on an interactive, linear channel located within the standard free television lineup, from which guests can then
telescope into content stored on the interactive television server. Freeviews and Interactive Channel content categories include
target areas such as golf, travel, technology, health, fitness, and music. These programs are also Nielsen rated so we can represent to advertisers
their ad impressions are being delivered. As of December 31, 2008, this program was available in approximately 1,158,000 hotel rooms.
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3)
    
    Promotional Advertising & Marketing. We also recently created a program through which
advertisers have the ability to execute promotions in the hotel environment  from in-room
to front-lobby, bar area, fitness or business center. This includes promotions such as
product sampling, branded key cards and premiums, and event marketing. These programs are
highly customizable, allowing advertisers to specifically target desirable demographics.
 Sales and Marketing.
 Installation and Service Operations
 Programming
 Technology and Product Development.
 
 Competition
 Hospitality
  Ø
    
    other interactive television service providers such as Hospitality Networks, Inc. (a
wholly-owned subsidiary of Cox Communications, Inc.), NXTV, Kool Connect, Guest-Tek and
international providers, such as Acentic, MagiNet and Quadriga;Ø
    
    other providers of basic and premium television programming, such as Charter
Communications, Comcast, Cox Cable, Dish Network, DIRECTV, Time Warner, BulkTV and World
Cinema;Ø
    
    television networks and programmers such as ABC, NBC, CBS, FOX, HBO, and Showtime;Ø
    
    other broadband Internet service providers, such as iBAHN, Wayport, Guest-Tek, Comcast,
Time Warner, Verizon, AT&T and T-Mobile; andØ
    
    companies which offer in-room computers with Internet access or other types of Internet
access systems.
  12




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Ø
    
    the features and benefits of the service offering, and Internet or interactive system;Ø
    
    the quality of the vendors technical support and maintenance services;Ø
    
    the financial terms and conditions of the proposed contract, including commissions to
the hotel or capital cost of the system; andØ
    
    the ability to complete system installation in a timely and efficient manner.
  Ø
    
    the size of our existing customer base;Ø
    
    our history of innovation;Ø
    
    our diverse client base;Ø
    
    our technically-innovative digital platform;Ø
    
    our high definition platform;Ø
    
    our flexible interactive television system;Ø
    
    our content management system; andØ
    
    our field service group, which is the largest technical services group focused on the hospitality industry.
    Healthcare
  Ø
    
    other interactive patient care providers such as GetWell Network, Skylight, and Allen
Technologies;Ø
    
    companies which primarily sell or lease television sets and also offer some interactive
services, which include TVRC and TeleHealth; andØ
    
    other providers of basic and premium television programming, such as Charter
Communications, Comcast, Cox Cable, Dish Network, DIRECTV and Time Warner.
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Ø
    
    our significant experience from thirty years of service in the lodging sector;Ø
    
    the technical reliability of our solution, especially as compared to competitors utilizing IP technologies;Ø
    
    our nationwide service and support organization;Ø
    
    our ability to leverage features from our lodging systems to efficiently customize and
deploy new solutions to healthcare facilities;Ø
    
    our ability to provide our services over existing cable infrastructure; andØ
    
    our access to HD content with Pro:IdiomTM encryption technology.
 Advertising and Media Services
  Ø
    
    Airport Advertising: Place-based OOH media found in airports, represented by companies
such as Viacom, CBS Outdoor, and JC Decaux;Ø
    
    Airline Advertising: Television programming supported with commercials during flight,
tray-top ads and ad-supported in-flight magazines, airline sampling programs, represented
by companies such as IdeaCast and Brand Connections; andØ
    
    Office Advertising: Place-based digital media in office buildings, office elevators,
etc., represented by companies such as Wall Street Journal, Captivate Media and others.
   Ø
    
    significant experience in the hotel space with well established hotel relationships;Ø
    
    ability to leverage the LodgeNet field support and technical infrastructure;Ø
    
    broad array of advertising options including hotel television media, VOD media, and
in-room promotion;Ø
    
    only hotel television media which is Nielsen monitored, rated and guaranteed for advertisers;Ø
    
    ideal environmental factors for ad receptivity  no DVRs, few distractions, comfortable setting;Ø
    
    consumer engagement which is both long and of a high quality;Ø
    
    ability to integrate our marketing programs  combining media with promotion;Ø
    
    sophisticated technology allowing telescoping, where consumers can click from a linear
commercial to an interactive ad menu; andØ
    
    large size of our existing customer base.
  14




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Business Strategy
  (1)
    
    pro-actively managing our Company through the economic downturn by right-sizing our
operations to our revenues and allocating the majority of our cash from operations to
reduce our debt levels, with the goal of maintaining compliance with the covenants of our
Credit Facility, and(2)
    
    driving the growth of our diversified revenue initiatives by increasing the revenue we
generate from the sale of television programming, systems and services to hotels and
healthcare facilities, and by the sale of traveler-targeted advertising and marketing
campaigns to consumer product and service companies.
    
 Regulation
 Cable Television Regulation
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Healthcare Regulation.
 Broadband Internet Access.
  
 Employees
  
 Corporate Information and Web Site Access to SEC Filings
   16




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Item 1A  Risk Factors
 We experienced substantial net losses in 2008 and expect such losses to continue for the
foreseeable future. If we are not profitable in the long-term or do not generate sustained levels
of net free cash flow a non-GAAP measure which we define as cash provided by operating activities
less cash used for investing activities, it could have a harmful effect on our results of
operations, business and the value of our common stock.
 We have substantial debt and significant interest payment requirements related to our acquisitions.
 Ø
    
    we may have difficulty utilizing our credit revolver to fund working capital, capital
expenditures, acquisitions or other purposes;Ø
    
    we will need to use a large portion of our cash flow to repay higher levels of debt than
required under our Credit Facility or pay interest on borrowings, which will reduce the
amount of cash flow available to fund operations, capital expenditures and other
activities;Ø
    
    some of our debt has a variable rate of interest, which exposes us to the risk of increased interest rates;Ø
    
    we are more vulnerable to economic downturns and adverse development in our business; andØ
    
    we may not have the flexibility to respond to changing business and economic conditions,
including increased competition and demand for new products and services.
 Covenant restrictions under our current Credit Facility may limit our ability to operate our
business.
 Ø
    
    borrow money;Ø
    
    pay dividends;Ø
    
    purchase or redeem stock;Ø
    
    repay subordinated indebtedness before its stated maturity date;Ø
    
    make investments and extend credit;Ø
    
    engage in transactions with affiliates;Ø
    
    engage in sale-leaseback transactions;Ø
    
    consummate certain asset sales;Ø
    
    effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all
or substantially all of our assets; andØ
    
    create liens on our assets.
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Diversification activities may not be successful and may divert management attention from our core
business.
  18




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Our revenue is affected by seasonality and dependent on other factors beyond our control, including
current negative economic climate.
 We may not have adequate capital resources to support our business, which could have a harmful
effect on our business and prospects.
 Ø
    
    we may modify our business plan and adjust or delay capital spending necessary to expand
or maintain our customer base or to continue to deploy our digital systems and other
technological advances throughout our installed room base;Ø
    
    we may lose a substantial number of customers if we delay or limit our capital
investments;Ø
    
    we may have insufficient capital to make payments on our outstanding indebtedness as
they become due;Ø
    
    we may have to delay or limit our product development activities; andØ
    
    we may be required to seek additional capital through additional equity or debt
financings, asset sales, collaborative arrangements or other sources, which may not be
available to us on a timely basis, if at all, or may not be available on acceptable terms.
 Opportunities to expand our installed customer room base may be limited, so we may be unable to
grow our revenue.
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We operate in a very competitive business environment and competition could reduce our revenue and
our cash flow.
 Our business could be adversely impacted by conditions affecting the lodging industrys
performance.
 New technologies, including the expansion of digital distribution of content in our markets, may
increase competition and result in a decrease in our revenue.
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If we fail to develop new products and product enhancements, our business and prospects could be
harmed.
 Ø
    
    unanticipated delays;Ø
    
    access to capital;Ø
    
    budget overruns; andØ
    
    technical problems.
   We may have to incur significant capital expenditures in order to adapt to technological change.
 Ø
    
    rapid and significant technological change, including continuing developments in
technology which do not presently have widely accepted standards; andØ
    
    frequent introductions of new services and alternative technologies, including new
technologies for providing high-definition television and providing Internet content.
  Our business could be harmed if we are unable to protect our proprietary technology.
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If our products or services employ technology which infringes the proprietary rights of others, we
may be subject to infringement claims, forced to pay certain fees to license technology or be
required to stop selling our products.
 We are dependent on others for our programming content and increases in our costs or license fees
to obtain such programming could reduce our cash flow and profitability.
 Our revenue may be adversely affected by a reduction or elimination of the time between our receipt
of movies and the movies being made available to the home market.
 The lack of quality programming or a change in available content could reduce our profitability and
cash flows.
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Federal, state, local and foreign legislation and regulation may negatively impact our business and
growth.
 If our hotel customers become dissatisfied with our service, they may elect not to renew or to
terminate service agreements with us and, in that event, our ability to maintain or grow our
revenue would be adversely affected.
 Our data systems could fail or their security could be compromised.
 The price of our common stock declined substantially and the price may be subject to volatility.
 
 Item 1B  Unresolved Staff Comments
   23




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Item 2  Properties
   
 Item 3  Legal Proceedings
    
 Item 4  Submission of Matters to a Vote of Security Holders
   24




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PART II
 
 Item 5  Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
   Quarter Ended
    
    High
    
    Low
    
    Quarter Ended
    
    High
    
    LowMarch 31, 2008
    
    
    17.64
    
    
    
    5.92
    
    
    March 31, 2007
    
    
    30.72
    
    
    
    24.14June 30, 2008
    
    
    7.46
    
    
    
    4.81
    
    
    June 30, 2007
    
    
    38.11
    
    
    
    30.30September 30, 2008
    
    
    4.92
    
    
    
    1.98
    
    
    September 30, 2007
    
    
    35.24
    
    
    
    22.69December 31, 2008
    
    
    2.45
    
    
    
    0.48
    
    
    December 31, 2007
    
    
    28.50
    
    
    
    16.83
  
 Issuer Purchases of Equity Securities
  
 Dividends
  
 Stockholder Rights Plan
   General
   25




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Events Causing Exercisability and Separate Transferability
  (1)
    
    the first public announcement a person or group (other than the Company, any
subsidiary, or a benefit plan of the Company or its subsidiaries), has acquired, or
obtained the right to acquire, except under limited circumstances, beneficial ownership
of 20 percent or more of the outstanding common stock; or(2)
    
    the close of business on the tenth business day (or such later date as the
Companys Board of Directors may determine) after the commencement of, or a public
announcement of, an intention to commence (which tender offer is not terminated within
such ten business days), a tender or exchange offer the consummation of which would
result in a person or group becoming an Acquiring Person (as defined in the following).
  Events Causing Adjustment of the Shares Acquirable Upon Exercise of the Purchase Price
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Redemption of the Rights
  th th
  Ø
    
    the same per share price is offered for all shares, and such price per share is greater
than the highest closing price for the common stock during the 12 month period immediately
preceding the date on which the offer is commenced, represents a reasonable premium above
the average of the closing prices for the five trading days immediately preceding the date
on which the offer is commenced, is at least 80 percent cash (with any non-cash
consideration consisting of common stock of the offeror), and is to be paid upon
consummation of the offer;Ø
    
    if the consideration offered includes shares of common stock of the offeror, the offeror
is a publicly owned United States corporation and its common stock is traded on either the
New York Stock Exchange or The NASDAQ Stock Market (NASDAQ), no further stockholder
approval is required to issue such common stock, no other class of voting stock of the
offeror is outstanding, and the offeror shall permit the Companys investment banking firm
and legal counsel to have access to such offerors books, records, management, accountants
and other advisers for the purpose of permitting such investment banking firm and such
legal counsel to conduct a due diligence review to permit such investment banking firm to
be able to render a fairness opinion with respect to the consideration being offered; the
offer is accompanied by written financing commitments and/or the offeror has on hand cash
or cash equivalents, for the full amount of all financing necessary to consummate the offer
and follow-on merger;Ø
    
    the offer is subject to a non-waivable condition that a minimum of 90 percent of the
outstanding common stock (other than those owned by the offeror) will be tendered and not
withdrawn as of the offers expiration date;Ø
    
    the offer by its terms remains open for at least 60 business days and at least 10
business days after the date of any special meeting of shareholders called under the
redemption provisions, plus 15 business days after any change in price or after any bona
fide alternative offer for a higher consideration is made;Ø
    
    the offer is accompanied by a written opinion of a nationally recognized investment
banking firm stating the price to be paid to holders pursuant to the offer is fair and
including any written presentation of such firm showing the analysis and range of values
underlying such conclusion;
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Ø
    
    on or before the date the offer is commenced, such person makes an irrevocable written
commitment to the Company (1) to acquire, within five business days following completion of
the offer, all shares of common stock not beneficially owned by such person at the same
cash price per share as paid in the offer, (2) not to amend its offer to reduce the price
or otherwise change the terms in a way which is adverse to tendering shareholders, and (3)
if the offer is not consummated, such person will not make another offer for the common
stock within one year if at least 85 percent of the common stock not owned by such person
has not been tendered; andØ
    
    the offer is subject only to the conditions specified in the definition and usual and
customary terms and conditions, and is not subject to any financing, funding or similar
condition, nor to any condition relating to completion of or satisfaction with any due
diligence or similar investigation.
 Amendments
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Item 6  Selected Financial Data
  Year Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Statement of Operations Data:Revenues:Hospitality
    
    $
    519,922
    
    
    $
    474,473
    
    
    $
    285,770
    
    
    $
    275,568
    
    
    $
    266,205Other
    
    
    13,957
    
    
    
    11,115
    
    
    
    2,443
    
    
    
    203
    
    
    
    236Total revenues
    
    
    533,879
    
    
    
    485,588
    
    
    
    288,213
    
    
    
    275,771
    
    
    
    266,441Direct costs (exclusive of operating expenses and
depreciation and amortization)
    
    
    289,700
    
    
    
    253,163
    
    
    
    131,953
    
    
    
    123,228
    
    
    
    119,193Operating expenses (1)
    
    
    249,250
    
    
    
    236,661
    
    
    
    129,328
    
    
    
    129,850
    
    
    
    134,278(Loss) income from operations
    
    
    (5,071
    )
    
    
    (4,236
    )
    
    
    26,932
    
    
    
    22,693
    
    
    
    12,970Gain on extinguishment of debt
    
    
    1,446
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Loss on early retirement of debt (2)
    
    
    (448
    )
    
    
    (22,195
    )
    
    
    (227
    )
    
    
    (272
    )
    
    
    (810
    )Interest expense
    
    
    (42,551
    )
    
    
    (40,950
    )
    
    
    (25,730
    )
    
    
    (29,351
    )
    
    
    (31,891
    )Other (expense) income, net
    
    
    (945
    )
    
    
    1,526
    
    
    
    1,165
    
    
    
    421
    
    
    
    (629
    )(Loss) income before income taxes
    
    
    (47,569
    )
    
    
    (65,855
    )
    
    
    2,140
    
    
    
    (6,509
    )
    
    
    (20,360
    )(Provision) benefit for income taxes (3)
    
    
    (849
    )
    
    
    683
    
    
    
    (299
    )
    
    
    (450
    )
    
    
    (421
    )Net (loss) income
    
    $
    (48,418
    )
    
    $
    (65,172
    )
    
    $
    1,841
    
    
    $
    (6,959
    )
    
    $
    (20,781
    )Net (loss) income per common share (basic and diluted)
    
    $
    (2.16
    )
    
    $
    (3.00
    )
    
    $
    0.10
    
    
    $
    (0.39
    )
    
    $
    (1.36
    )Other Data:Capital expenditures (4)
    
    $
    64,407
    
    
    $
    79,097
    
    
    $
    48,268
    
    
    $
    51,855
    
    
    $
    54,917Average cost per room  new installation
    
    $
    389
    
    
    $
    399
    
    
    $
    354
    
    
    $
    340
    
    
    $
    364Depreciation and amortization (5)
    
    $
    124,060
    
    
    $
    116,378
    
    
    $
    66,311
    
    
    $
    69,862
    
    
    $
    77,045Impairment losses
    
    $
    11,212
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    Restructuring and reorganization
    
    $
    5,047
    
    
    $
    11,158
    
    
    $
    
    
    
    $
    
    
    
    $
    Share-based compensation
    
    $
    2,275
    
    
    $
    1,737
    
    
    $
    1,677
    
    
    $
    288
    
    
    $
    198Non-Financial Operating Data:Total rooms served (6) (9)
    
    
    1,977,015
    
    
    
    1,962,090
    
    
    
    1,052,025
    
    
    
    1,053,806
    
    
    
    1,034,605Guest Entertainment rooms served (7) (9)
    
    
    1,866,353
    
    
    
    1,860,720
    
    
    
    1,004,937
    
    
    
    1,001,929
    
    
    
    974,798Rooms with Digital services (8)
    
    
    1,537,685
    
    
    
    1,471,608
    
    
    
    733,362
    
    
    
    629,085
    
    
    
    508,979Rooms with HD services (10)
    
    
    191,491
    
    
    
    84,327
    
    
    
    23,502
    
    
    
    259
    
    
    
    Cable Television Programming (FTG) Rooms (11)
    
    
    1,105,754
    
    
    
    1,068,256
    
    
    
    535,777
    
    
    
    536,984
    
    
    
    525,436Advertising and Media Services rooms (12)
    
    
    893,738
    
    
    
    716,219
    
    
    
    
    
    
    
    
    
    
    
    Total Broadband Internet Rooms (13)
    
    
    229,003
    
    
    
    218,860
    
    
    
    37,686
    
    
    
    
    
    
    
    Average monthly revenue per Guest Entertainment room:Movie revenue
    
    $
    15.20
    
    
    $
    16.62
    
    
    $
    17.27
    
    
    $
    17.00
    
    
    $
    17.39Other interactive service revenue
    
    
    1.18
    
    
    
    1.42
    
    
    
    1.50
    
    
    
    1.60
    
    
    
    1.79Total
    
    $
    16.38
    
    
    $
    18.04
    
    
    $
    18.77
    
    
    $
    18.60
    
    
    $
    19.18
  29




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##### Table of Contents



As of December 31,2008
    
    2007
    
    2006
    
    2005
    
    2004Balance Sheet Data:Cash and cash equivalents
    
    $
    10,800
    
    
    $
    25,569
    
    
    $
    22,795
    
    
    $
    20,742
    
    
    $
    24,995Total assets
    
    $
    589,786
    
    
    $
    693,823
    
    
    $
    263,209
    
    
    $
    263,072
    
    
    $
    283,036Total debt
    
    $
    588,520
    
    
    $
    624,594
    
    
    $
    270,169
    
    
    $
    292,000
    
    
    $
    312,291Total stockholders deficiency
    
    $
    (128,748
    )
    
    $
    (48,242
    )
    
    $
    (58,122
    )
    
    $
    (70,233
    )
    
    $
    (72,118
    )Year Ended December 31,2008
    
    
    2007
    
    
    2006
    
    
    2005
    
    
    2004Statement of Cash Flows Data:Cash provided by operating activities
    
    $
    89,853
    
    
    $
    58,869
    
    
    $
    72,301
    
    
    $
    64,285
    
    
    $
    60,614Property and equipment additions
    
    
    (64,407
    )
    
    
    (79,097
    )
    
    
    (48,268
    )
    
    
    (51,855
    )
    
    
    (54,917
    )25,446
    
    
    
    (20,228)
    
    
    
    24,033
    
    
    
    12,430
    
    
    
    5,697Cash used for acquisition and other activities, net
    
    
    
    
    
    
    (354,177
    )
    
    
    (2,336
    )
    
    
    400
    
    
    
    567$
    25,446
    
    
    $
    (374,405
    )
    
    
    $21,697
    
    
    $
    12,830
    
    
    $
    6,264
 
 (1)
    
    Operating expense for 2008 included integration expenses of $1.1 million, restructuring
expenses of $3.2 million and reorganization expenses of $1.9 million. Operating expenses for
2007 included integration expenses of $5.6 million and restructuring expenses of $11.2
million. Integration expenses are defined as incremental costs associated with activities to
combine or merge an operation that is not being closed, exited, or disposed of. Since we will
realize certain future benefits, these costs are accounted for within our system operations
expenses and SG&A expenses as components of continuing operations.(2)
    
    During 2007, we redeemed 199,990 notes of our 9.50% Senior Notes due June 15, 2013, and as a
result of the early redemption we recognized a loss of $22.2 million, representing call and
tender premiums and related expenses including the write off unamortized debt issuance costs.(3)
    
    The (provision) benefit for income taxes consists of current federal income, state franchise
taxes, and foreign taxes.(4)
    
    Presented as cash used for property and equipment additions as reported in the Statement of
Cash Flows.(5)
    
    Includes amortization of acquired intangibles.(6)
    
    Total rooms served include rooms receiving one or more of our services, including rooms
served by international licensees. The increase from 2006 to 2007 is due to the addition of
the On Command room base of approximately 830,000 rooms.(7)
    
    Guest Entertainment rooms are equipped with our interactive television systems.(8)
    
    Digital rooms are equipped with an interactive digital file server system where on-demand
movies, television on-demand programming and music content are stored in a digital format and
are updated and delivered via satellite to our systems within each respective hotel. Digital
rooms are included in total Guest Entertainment rooms and represent 82.4% of the Guest
Entertainment rooms served as of December 31, 2008.(9)
    
    Total room count was reduced as a result of Hurricane Katrina by 4,053 rooms in 2006 and
8,195 rooms in 2005.(10)
    
    HD rooms are equipped with high-definition video-on-demand capabilities and are included in
total rooms served and in total digital rooms.(11)
    
    Cable television programming (FTG) rooms receive basic or premium television programming.(12)
    
    Includes rooms receiving satellite-delivered and server-based channels.(13)
    
    Represents rooms receiving high-speed Internet service and are included in total rooms
served. The increase from 2006 to 2007 is due to the addition of the StayOnline and On
Command room bases of approximately 137,000 and 12,000 rooms, respectively.  30




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##### Table of Contents



Special Note Regarding Forward-Looking Statements
 Certain statements in this report or document incorporated herein by reference constitute
forward-looking statements. When used in this report, the words intends, expects,
anticipates, estimates, believes, goal, no assurance and similar expressions, and
statements which are made in the future tense or refer to future events or developments, including,
without limitation, those related to net losses, repayment of debt and covenant compliance, are
intended to identify such forward-looking statements. Such forward-looking statements are subject
to risks, uncertainties, and other factors that could cause the actual results, performance or
achievements to be materially different from any future results, performance, or achievements
expressed or implied by such forward-looking statements. In addition to the risks and uncertainties
discussed in Item 1A of our most recent Annual Report on Form 10-K for the year ended December 31,
2008 and filed by March 16, 2009, in any prospectus supplement or any report or document
incorporated herein by reference, such factors include, among others, the following:
 Ø
    
    the effects of economic conditions, including general financial conditions (including
those represented recently by liquidity crises, government bailouts and assistance plans,
bank failures and recessionary threats and developments);Ø
    
    the economic condition of the lodging industry, which can be particularly affected by
the financial conditions referenced above, as well as by high gas prices, levels of
unemployment, consumer confidence, acts or threats of terrorism and public health issues;Ø
    
    decreases in hotel occupancy, whether related to economic conditions or other causes;Ø
    
    competition from providers of similar services and from alternative sources;Ø
    
    changes in demand for our products and services, programming costs, availability,
timeliness, and quality;Ø
    
    technological developments by competitors;Ø
    
    developmental costs, difficulties, and delays;Ø
    
    relationships with clients and property owners;Ø
    
    the availability of capital to finance growth;Ø
    
    the impact of covenants contained in our credit agreement, compliance with which could
adversely affect capital available for other business purposes, and the violation of which
would constitute an event of defaults;Ø
    
    the impact of government regulations;Ø
    
    potential effects of litigation;Ø
    
    risks of expansion into new markets;Ø
    
    risks related to the security of our data systems; andØ
    
    other factors detailed, from time to time, in our filings with the SEC.
 With respect to any acquisition, we are subject to risks that integration costs will exceed
expectations, that synergies we anticipate will not be realized, or will take longer than
anticipated to realize, that our management and management systems will encounter difficulties in
dealing with a bigger, more diversified enterprise, and that the financial results we expect from
the acquisition will not be realized.
  31




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##### Table of Contents



Item 7  Managements Discussion and Analysis of Financial Condition and Results of Operations
 The following discussion should be read in conjunction with our Consolidated Financial Statements,
including the notes thereto, appearing elsewhere herein.
 
 Executive Overview
       32




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##### Table of Contents



Hospitality
 Guest Entertainment (includes purchases for on-demand movies, network-based video games, music and
music videos, and television on-demand programming).
  Ø
    
    The number of rooms on our network.We can increase revenue over time by increasing the
number of rooms served by our interactive television systems. Our ability to expand our
room base is dependent on a number of factors, including newly constructed hotel properties
and the attractiveness of our technology, service and support to hotels currently operating
without an interactive television system.Ø
    
    The popularity, timeliness and amount of content offered at the hotel.
 Our revenues vary, to a certain degree, with the number, timeliness and popularity of movie content
available for viewing. Historically, a decrease in the availability of popular movie
content has adversely impacted revenue. Although not completely within our control, we
seek to program and promote the most popular available movie content and other content to
maximize revenue and profitability.Ø
    
    The price of the service purchased by the hotel guest.Generally, we control the prices
charged for our products and services and manage pricing in an effort to maximize revenue
and overall profitability. We establish pricing based on such things as the demographics
of the property served, the popularity of the content and overall general economic
conditions. Our technology enables us to measure the popularity of our content and make
decisions to best position such content and optimize revenue from such content.Ø
    
    The occupancy rate at the property.Our revenue also varies depending on hotel
occupancy rates, which are subject to a number of factors, including seasonality, general
economic conditions and world events, such as terrorist threats or public health issues.
Occupancy rates for the properties we serve are typically higher during the second and
third quarters due to seasonal travel patterns. We target higher occupancy properties in
diverse demographic and geographic locations in an effort to mitigate occupancy-related
risks.
  33




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##### Table of Contents



Ø
    
    The availability of alternative programming.We compete directly for customers with a
variety of other interactive service providers, including other interactive television
service providers, cable television companies, direct broadcast satellite companies,
television networks and programmers, Internet service providers and portals, companies
offering web sites which provide on-demand movies, rental companies which provide
videocassettes and DVDs which can be viewed in properly equipped hotel rooms or on other
portable viewing devices, and hotels which offer in-room laptops with Internet access or
other types of Internet access systems. We also compete, in varying degrees, with other
leisure-time activities such as movie theaters, the Internet, radio, print media, personal
computers and other alternative sources of entertainment and information.Ø
    
    Consumer Sentiment.The willingness of guests to purchase our entertainment services is
also impacted by the general economic environment and its impact on consumer sentiment.
Historically, such impacts were not generally material to our revenue results; however,
during the last two quarter of 2008, the deteriorating economic conditions did have a
significant, negative impact on our revenue levels. As economic conditions improve in the
future, guest purchase activity may increase to levels previously experienced by the
Company.
  Ø
    
    license fees paid to major motion picture studios, which are variable and based on a
percent of guest-generated revenue, for non-exclusive distribution rights of recently
released major motion pictures;Ø
    
    commissions paid to our hotel customers, which are also variable and based on a percent
of guest-generated revenue;Ø
    
    license fees, which are based on a percent of guest-generated revenue, for television
on-demand, music, music videos, video games and sports programming; andØ
    
    one-time license fees paid for independent films, most of which are non-rated and
intended for mature audiences.
 Hotel Services (includes revenue from hotels for services such as television channels and recurring
broadband Internet service and support to the hotels).
 Ø
    
    Cable Television Programming. We offer a wide variety of satellite-delivered cable
television programming paid for by the hotel and provided to guests at no charge. The
cable television programming is delivered via satellite, pursuant to an agreement with
DIRECTV, and distributed to approximately 59% of our guest rooms over the internal hotel
network, and typically includes premium channels such as HBO, Showtime and The Disney
Channel, which broadcast major motion pictures and specialty programming, as well as
non-premium channels, such as CNN and ESPN. With the launch of the high-definition
configuration of our interactive television system, we also began offering high-definition
cable television programming to the extent available from broadcast sources and DIRECTV.Ø
    
    Broadband Internet Access, Service and Support.We also design, install and operate
wired and wireless broadband Internet access systems at hotel properties. These systems
control access to the Internet, allow hotels to charge or provide the access as a guest
amenity, and provide bandwidth management tools. Post installation, we generate recurring
revenue through the ongoing maintenance, service and call center support services to hotel
properties installed by us and also to hotel properties installed by other providers.
While this is a highly competitive area, we believe we have important advantages as a
result of our existing hotel customer relationships, our nationwide field service network,
and a 24-hour call center to support calls from hotel customers.
 System Sales and Related Services.
  34




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##### Table of Contents



Key Metrics:
 Special Note Regarding the Use of Non-GAAP Financial Information
   Rooms Served
  2008
    
    2007
    
    2006Total rooms served (1)
    
    
    1,977,015
    
    
    
    1,962,090
    
    
    
    1,052,025Total Guest Entertainment rooms (2)
    
    
    1,866,353
    
    
    
    1,860,720
    
    
    
    1,004,937Total Cable Television Programming (FTG) rooms (3)
    
    
    1,105,754
    
    
    
    1,068,256
    
    
    
    535,777Total Advertising and Media Services rooms (4)
    
    
    893,738
    
    
    
    716,219
    
    
    
    Total Broadband Internet rooms (5)
    
    
    229,003
    
    
    
    218,860
    
    
    
    37,686Net new Guest Entertainment rooms (6)
    
    
    4,199
    
    
    
    30,228
    
    
    
    3,008
 
 (1)
    
    Total rooms served include rooms receiving one or more of our services, including rooms
served by international licensees. The increase from 2006 to 2007 is due to the addition of
the On Command room base of approximately 830,000 rooms.(2)
    
    Guest Entertainment rooms are equipped with our interactive television systems.(3)
    
    Cable television programming (FTG) rooms receive basic or premium television programming.(4)
    
    Includes rooms receiving satellite-delivered and server-based channels.(5)
    
    Represents rooms receiving high-speed Internet service and are included in total rooms served.(6)
    
    Amounts shown are net of de-installations during the period. The gross number of new rooms
installed was 63,664, 71,430 and 65,993 for 2008, 2007 and 2006, respectively.  35




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##### Table of Contents



High Definition Room Growth
  2008
    
    2007
    
    2006Net new HDTV rooms (1)
    
    
    105,099
    
    
    
    60,825
    
    
    
    20,947Total HDTV rooms installed (1)
    
    
    191,491
    
    
    
    84,327
    
    
    
    23,502HDTV rooms as a percent of total Guest Entertainment rooms
    
    
    17.3
    %
    
    
    7.9
    %
    
    
    4.4
    %
 
 (1)
    
    HDTV rooms, including new installations and major upgrades, are equipped with high-definition
capabilities. Capital Investment Per VOD Room
  2008
    
    2007
    
    2006Average cost per room  new installation
    
    $
    389
    
    
    $
    399
    
    
    $
    354Average cost per room  conversion
    
    $
    295
    
    
    $
    309
    
    
    $
    252Average cost per HD room  new installation
    
    $
    398
    
    
    $
    460
    
    
    $
    438Average cost per HD room  conversion
    
    $
    320
    
    
    $
    329
    
    
    $
    289
  Average Revenue Per Room
   36




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##### Table of Contents



2008
    
    
    2007
    
    
    2006Average monthly revenue per room:Hospitality
Guest Entertainment
    
    $
    16.38
    
    
    $
    18.04
    
    
    $
    18.77Hotel Services
    
    
    5.44
    
    
    
    4.68
    
    
    
    4.38System Sales and Related Services
    
    
    1.51
    
    
    
    1.22
    
    
    
    0.56Total Hospitality Revenue per room
    
    $
    23.33
    
    
    $
    23.94
    
    
    $
    23.71
  Direct Costs
  2008
    
    
    2007
    
    
    2006Percent
    
    
    
    
    
    
    Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenue
    
    
    Amount
    
    
    Revenue
    
    
    Amount
    
    
    RevenueDirect costs per room:HospitalityGuest Entertainment
    
    $
    6.39
    
    
    
    26.7
    %
    
    $
    7.10
    
    
    
    28.7
    %
    
    $
    7.24
    
    
    
    30.3
    %Hotel Services
    
    
    4.99
    
    
    
    20.8
    %
    
    
    4.49
    
    
    
    18.0
    %
    
    
    3.27
    
    
    
    13.7
    %System Sales and Related Services
    
    
    1.13
    
    
    
    4.7
    %
    
    
    0.89
    
    
    
    3.9
    %
    
    
    0.34
    
    
    
    1.4
    %Total Hospitality Direct Costs per room
    
    $
    12.51
    
    
    
    52.2
    %
    
    $
    12.48
    
    
    
    50.6
    %
    
    $
    10.85
    
    
    
    45.4
    %
 
 Healthcare
  Ø
    
    Revenue generated from the sale of the interactive system hardware, software license and
installation services;Ø
    
    revenue from the sale and installation of DIRECTV satellite equipment and related
programming;Ø
    
    revenue from recurring support agreements for interactive content, software maintenance
and technical field service support including service agreements that cover cable plant,
DIRECTV satellite equipment and interactive systems; andØ
    
    revenue generated from cable plant design, modification, and installation as well as
television installation services.
 Sales and Installation
   37




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##### Table of Contents



As of December 31,2008
    
    2007Systems sold
    
    
    41
    
    
    
    29Beds sold
    
    
    9,587
    
    
    
    6,866Systems installed
    
    
    28
    
    
    
    20Beds installed
    
    
    6,247
    
    
    
    4,134
  
 Advertising
  
 General Operations
 Total Operating Expenses
  2008
    
    
    2007
    
    
    2006System operations expenses (1)
    
    $
    2.60
    
    
    $
    2.71
    
    
    $
    2.92SG&A expenses (2)
    
    
    2.34
    
    
    
    2.77
    
    
    
    2.41Depreciation and amortization (D&A)
    
    
    5.05
    
    
    
    5.56
    
    
    
    5.50Amortization of acquired intangibles
    
    
    0.52
    
    
    
    0.50
    
    
    
    Impairment charge
    
    
    0.50
    
    
    
    
    
    
    
    Restructuring charge
    
    
    0.22
    
    
    
    0.64
    
    
    
    Other operating income (3)
    
    
    (0.04
    )
    
    
    (0.04
    )
    
    
    (0.10
    )$
    11.19
    
    
    $
    12.14
    
    
    $
    10.73System operations as a percent of total revenue
    
    
    10.8
    %
    
    
    11.1
    %
    
    
    12.2
    %SG&A as a percent of total revenue
    
    
    9.7
    %
    
    
    11.5
    %
    
    
    10.1
    %D&A as a percent of total revenue
    
    
    21.1
    %
    
    
    22.2
    %
    
    
    23.0
    %Total operating expenses as a percent of total revenue
    
    
    46.7
    %
    
    
    48.7
    %
    
    
    44.9
    %
 
 (1)
    
    System operations expenses include $82,000 and $1,613,000 for 2008 and 2007, respectively,
directly related to integration activities.(2)
    
    SG&A expenses include $1.0 million and $4.0 million for 2008 and 2007, respectively, directly
related to integration activities.  38




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##### Table of Contents



(3)
    
    Other operating income includes net proceeds received from insurance related to business
interruption and property damage claims associated with Hurricane Katrina and recoveries
related to early contract terminations. Net Free Cash Flow
   2008
    
    
    2007
    
    
    2006Cash provided by operating activities (1)
    
    $
    89,853
    
    
    $
    58,869
    
    
    $
    72,301Property and equipment additions
    
    
    (64,407
    )
    
    
    (79,097
    )
    
    
    (48,268
    )25,446
    
    
    
    (20,228
    )
    
    
    24,033Cash used for acquisitions and other activities (2)
    
    
    
    
    
    
    (354,177
    )
    
    
    (2,336
    )$
    25,446
    
    
    $
    (374,405
    )
    
    $
    21,697
 
 (1)
    
    Cash provided by operating activities for the year ended December 31, 2008 included $9.5
million of cash used for integration, restructuring and reorganization related activities.
December 31, 2007, included $38.2 million of cash used for acquisition refinancing,
restructuring and integration including $18.6 million for the redemption of our 9.5% Senior
Notes.(2)
    
    Cash used for acquisition activities related to the acquisitions of On Command, THN and
StayOnline.  2008
    
    
    2007
    
    
    2006Expansion capital investment (1)
    
    $
    22,896
    
    
    $
    24,668
    
    
    $
    22,291Renewal investment (2)
    
    
    18,919
    
    
    
    25,772
    
    
    
    13,317Corporate capital and minor extensions (3)
    
    
    22,592
    
    
    
    28,657
    
    
    
    12,660$
    64,407
    
    
    $
    79,097
    
    
    $
    48,268
 
 (1)
    
    Capital investment to install newly contracted rooms with our digital or HDTV system.(2)
    
    Capital investment to convert rooms to our digital or HDTV system in exchange for long-term
contract extensions.(3)
    
    Capital investment for corporate infrastructure including computers, equipment, software
development, minor system upgrades and system components. 39




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##### Table of Contents



Liquidity and Capital Resources
      40




---



##### Table of Contents



2008
    
    2007
    
    2006Actual consolidated leverage ratio (1) (3)
    
    
    4.30
    
    
    
    4.39
    
    
    
    2.86Maximum per covenant
    
    
    4.50
    
    
    
    5.00
    
    
    
    3.50Actual consolidated interest coverage ratio (2) (3)
    
    
    3.22
    
    
    
    3.47
    
    
    
    3.85Minimum per covenant
    
    
    2.50
    
    
    
    2.25
    
    
    
    2.75
 
 (1)
    
    Our maximum consolidated leverage ratio is the total amount of all indebtedness of the Company, determined on a  consolidated basis in accordance with GAAP, divided by operating
income exclusive of depreciation and amortization and adjusted (plus or minus) for certain other miscellaneous cash items, non-cash items and
non-recurring items as defined by the terms of the bank Credit Facility.(2)
    
    Our minimum consolidated interest coverage ratio is a function of operating income exclusive
of depreciation and amortization and adjusted (plus or minus) for certain other miscellaneous cash items, non-cash items and
non-recurring items divided by interest expense as defined by the terms of the bank Credit Facility.(3)
    
    Maximum consolidated leverage ratio and minimum consolidated interest coverage ratios are
defined terms of the bank Credit Facility and are presented here to demonstrate compliance
with the covenants in our Credit Facility, as noncompliance with such covenants could have a
material adverse effect on us.   Q3 2010Q1 2009
    
    Q3 2009
    
    Q1 2010
    
    to maturityMaximum consolidated leverage ratio
    
    
    4.25
    
    
    
    4.00
    
    
    
    3.75
    
    
    
    3.50Minimum consolidated interest
coverage ratio
    
    
    2.75
    
    
    
    2.75
    
    
    
    3.00
    
    
    
    3.00
  41




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##### Table of Contents



9.50% Senior Notes 3⁄4
  42




---



##### Table of Contents



Payments due by periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsContractual
obligations:Long-term
debt(s)
    
    $
    588,520
    
    
    $
    7,597
    
    
    $
    14,119
    
    
    $
    12,731
    
    
    $
    554,073Interest on
bank term
loan (1)
    
    
    105,583
    
    
    
    20,549
    
    
    
    40,440
    
    
    
    39,563
    
    
    
    5,031Interest on
derivative
instruments
    
    
    86,182
    
    
    
    18,487
    
    
    
    31,882
    
    
    
    31,882
    
    
    
    3,931Operating
lease
payments
    
    
    6,384
    
    
    
    2,950
    
    
    
    2,666
    
    
    
    588
    
    
    
    180Purchase
obligations
(2)
    
    
    7,159
    
    
    
    7,159
    
    
    
    
    
    
    
    
    
    
    
    Nintendo
minimum
royalty (3)
    
    
    18,550
    
    
    
    4,200
    
    
    
    8,400
    
    
    
    5,950
    
    
    
    Minimum
royalties
and
commissions
(4)
    
    
    5,190
    
    
    
    2,589
    
    
    
    2,552
    
    
    
    49
    
    
    
    Total
contractual obligations
    
    $
    817,568
    
    
    $
    63,531
    
    
    $
    100,059
    
    
    $
    90,763
    
    
    $
    563,215
 Amount of commitment expiration per periodLess than
    
    
    2  3
    
    
    4  5
    
    
    OverTotal
    
    
    1 year
    
    
    years
    
    
    years
    
    
    5 yearsOther commercial commitments:Standby letters of credit
    
    $
    478
    
    
    $
    478
    
    
    $
    
    
    
    $
    
    
    
    $
    
 
 (1)(2)
    
    Interest payments are estimates based on current LIBOR and scheduled debt amortization.
Consists of open purchase orders primarily for the procurement of system components.(3)
    
    Nintendo video game royalties pursuant to a non-exclusive license agreement with Nintendo,
which expires in May 2013. Under the terms of the agreement, we pay a monthly royalty equal
to a percent of revenue generated from the sale of Nintendo video game services, subject to a
monthly minimum. See Note 10 to the Consolidated Financial Statements.(4)
    
    In connection with our programming related agreements, we may guarantee minimum royalties for
specific periods or by individual programming content. See Note 10 to the Consolidated
Financial Statements. 
 Seasonality
   43




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##### Table of Contents



Market Conditions
    44




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##### Table of Contents



Results of Operations  Years Ended December 31, 2008 and 2007
 Revenue Analysis.
 2008
    
    
    2007Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesRevenues:HospitalityGuest Entertainment
    
    $
    364,956
    
    
    
    68.4
    %
    
    $
    355,021
    
    
    
    73.1
    %Hotel Services
    
    
    121,177
    
    
    
    22.7
    %
    
    
    93,943
    
    
    
    19.3
    %System Sales and Related Services
    
    
    33,789
    
    
    
    6.3
    %
    
    
    25,509
    
    
    
    5.3
    %Total Hospitality
    
    
    519,922
    
    
    
    97.4
    %
    
    
    474,473
    
    
    
    97.7
    %Other
    
    
    13,957
    
    
    
    2.6
    %
    
    
    11,115
    
    
    
    2.3
    %$
    533,879
    
    
    
    100.0
    %
    
    $
    485,588
    
    
    
    100.0
    %
 Hospitality
   2008
    
    
    2007Average monthly revenue per room:Movie revenue
    
    $
    15.20
    
    
    $
    16.62Other interactive service revenue
    
    
    1.18
    
    
    
    1.42Total per Guest Entertainment room
    
    $
    16.38
    
    
    $
    18.04
   45




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##### Table of Contents



2008
    
    
    2007Average monthly revenue per room:Cable television programming
    
    $
    4.91
    
    
    $
    4.21Broadband
    
    
    0.53
    
    
    
    0.47Total Hotel Services per room
    
    $
    5.44
    
    
    $
    4.68
   Other
  Direct Costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
  2008
    
    
    2007
    
    
    ChangeDirect costs as a percent of revenue
(exclusive of operating expenses and depreciation
and amortization discussed separately below):
    
    
    54.3
    %
    
    
    52.1
    %
    
    
    2.2
    %Change drivers:HospitalityGuest Entertainment
    
    
    
    
    
    
    
    
    
    
    (2.0
    )%Hotel Services
    
    
    
    
    
    
    
    
    
    
    2.8
    %System Sales and Related Services
    
    
    
    
    
    
    
    
    
    
    0.9
    %Other
    
    
    
    
    
    
    
    
    
    
    0.5
    %2.2
    %
  46




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##### Table of Contents



Operating Expenses.
 2008
    
    
    2007Percent
    
    
    
    
    
    
    Percentof Total
    
    
    
    
    
    
    of TotalAmount
    
    
    Revenues
    
    
    Amount
    
    
    RevenuesOperating expenses:System operations (1)
    
    $
    57,853
    
    
    
    10.8
    %
    
    $
    54,114
    
    
    
    11.1
    %Selling, general and administrative (2)
    
    
    52,042
    
    
    
    9.7
    %
    
    
    55,878
    
    
    
    11.5
    %Depreciation and amortization
    
    
    112,511
    
    
    
    21.1
    %
    
    
    107,834
    
    
    
    22.2
    %Amortization of acquired intangibles
    
    
    11,549
    
    
    
    2.2
    %
    
    
    8,544
    
    
    
    1.8
    %Impairment charge
    
    
    11,212
    
    
    
    2.1
    %
    
    
    
    
    
    
    Restructuring charge (3)
    
    
    5,047
    
    
    
    1.0
    %
    
    
    11,158
    
    
    
    2.3
    %Other operating income (4)
    
    
    (964
    )
    
    
    (0.2
    )%
    
    
    (867
    )
    
    
    (0.2
    )%Total operating expenses
    
    $
    249,250
    
    
    
    46.7
    %
    
    $
    236,661
    
    
    
    48.7
    %
 
 (1)
    
    System operations expenses include $82,000 and $1,613,000 for 2008 and 2007, respectively,
directly related to integration activities.(2)
    
    SG&A expenses include $1.0 million and $4.0 million for 2008 and 2007, respectively, directly
related to integration activities.(3)
    
    Restructuring or exit costs are defined as costs associated with the closing, disposal or
exit of certain duplicate facilities or operations including termination benefits and costs to
consolidate facilities or relocate employees. The Company will not realize future benefits
from these costs. Includes $1.9 million of severance costs related to the 2008 cost
reorganization and cost reduction initiative.(4)
    
    Other operating income for 2008 includes net proceeds received from insurance related to
business interruption and property damage claims associated with Hurricane Katrina. Other
operating income for 2007 includes recoveries related to early contract terminations.      47




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##### Table of Contents



Operating Loss.
 Interest Expense.
 Investment Losses.
 Gain on Extinguishment of Debt.
 Loss on Early Retirement of Debt.
 Other (Expense) Income.
 Taxes.
 Net Loss.
 48




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##### Table of Contents



Results of Operations  Years Ended December 31, 2007 and 2006
 Revenue Analysis.
   Direct costs (exclusive of operating expenses and depreciation and amortization discussed
separately below).
 Operating Expenses.
  49




---



##### Table of Contents



Operating Loss (Income).
 Interest Expense.
 Loss on Early Retirement of Debt.
 Other Income.
 Taxes.
 Net (Loss) Income.
  50




---



##### Table of Contents



Critical Accounting Policies
  Ø
    
    Revenue Recognition  footnote #2Ø
    
    Goodwill and Intangibles  footnote #7Ø
    
    Restructuring  footnote #15
 
 Recent Accounting Developments
     51




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##### Table of Contents



Item 7A  Quantitative and Qualitative Disclosures About Market Risk
   52




---



##### Table of Contents



Interest.
 Carrying
    
    
    Fair
    
    
    Weighted AverageAmount
    
    
    Value
    
    
    Interest RateBank Credit Facility:Bank term loan
    
    $
    585,323
    
    
    $
    292,661
    
    
    
    3.46
    %Capital leases
    
    
    3,197
    
    
    
    3,197
    
    
    
    8.14
    %$
    588,520
    
    
    $
    295,858
    
    
    
    3.49
    %
   Economic Condition.
 Foreign Currency Transactions.
 
 Item 8  Financial Statements and Supplementary Data
  
 Item 9  Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
   53




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##### Table of Contents



Item 9A  Controls and Procedures
 Evaluation of Disclosure Controls and Procedures.
 Managements report on internal control over financial reporting
  Internal Control  Integrated Framework
  Changes in Internal Control over Financial Reporting.
 
 Item 9B  Other Information
   54




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##### Table of Contents



PART III
 
 Item 10  Directors, Executive Officers and Corporate Governance
     
 Item 11  Executive Compensation
  
 Item 12  Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters
  
 Item 13  Certain Relationships and Related Transactions, and Director Independence
  
 Item 14  Principal Accountant Fees and Services
   55




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##### Table of Contents



PART IV
 
 Item 15  Exhibits and Financial Statement Schedules
 Consolidated Financial Statements and Schedules
 
 Exhibits
  Exhibit No.
 3.1
    
    Certificate of Incorporation of LodgeNet (1)3.2
    
    Restated By-Laws of the Registrant (2)3.3
    
    Amendment No. 1 to Restated Certificate of Incorporation of LodgeNet (3)3.4
    
    Certificate of Ownership and Merger merging LodgeNet Interactive Corporation into LodgeNet
Entertainment Corporation (4)4.3
    
    Rights Agreement dated as of February 28, 2008 between LodgeNet Interactive Corporation and
Computershare Investor Services, LLC. (5)10.1
    
    LodgeNet Interactive Corporation Stock Option Plan (as amended and restated effective May 9,
2001) (6)10.2
    
    1993 Plan Form of Stock Option Agreement for Non-Employee Directors (7)10.3
    
    1993 Plan Form of Incentive Stock Option Agreement for Key Employees (7)10.4
    
    Master Services Agreement between Hilton Hotels Corporation and LodgeNet Interactive
Corporation dated October 9, 2000  (8)10.5
    
    Amendment To Master Services Agreement dated August 2, 2002 by and between Hilton Hotels
Corporation and LodgeNet Interactive Corporation (9)10.6
    
    Hilton LodgeNet Agreement dated August 2, 2002 by and between Hilton Hotels Corporation and
LodgeNet Interactive Corporation (10)10.7
    
    LodgeNet Interactive Corporation 2003 Stock Option and Incentive Plan (11)10.8
    
    2003 Plan Form of Stock Option Agreement for Non-Employee Directors (12)10.9
    
    2003 Plan Form of Incentive Stock Option Agreement for Key Employees (13)10.10
    
    Form of Restricted Stock Agreement for Time-based Vesting (14)10.11
    
    Form of Restricted Stock Agreement for Performance-Based Vesting (15)
  56




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##### Table of Contents



10.16
    
    $675,000,000 Credit Agreement dated as of April 4, 2007 among LodgeNet Entertainment
Corporation, as Borrower, Credit Suisse Securities (USA) LLC as Syndication Agent, U.S. Bank
National Association as Documentation Agent, and Bear Stearns Corporate Lending Inc. as
Administrative Agent. (16)10.17
    
    Second Amended and Restated Employment Agreement dated as of January 29, 2008 between
LodgeNet Interactive Corporation and Scott C. Petersen. (17)10.18
    
    Executive Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive
Corporation and David M. Bankers. (18)10.19
    
    Executive Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive
Corporation and James G. Naro. (19)10.20
    
    Executive Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive
Corporation and Steven R. Pofahl. (20)10.21
    
    Executive Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive
Corporation and Gary H. Ritondaro. (21)10.22
    
    Executive Employment Agreement dated as of February 4, 2008 between LodgeNet Interactive
Corporation and Derek S. White. (22)10.23
    
    Executive Employment Agreement dated as of August 27, 2008 between LodgeNet Interactive
Corporation and Scott E. Young. (23)12.1
    
    Statement Regarding Computation of Ratios21.1
    
    Subsidiaries of the Company23.1
    
    Consent of Independent Registered Public Accounting Firm31.1
    
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer31.2
    
    Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer32.1
    
    Section 1350 Certifications
 
 
    
    Confidential Treatment has been requested with respect to certain portions of this agreement.(1)
    
    Incorporated by Reference to LodgeNets Amendment No. 1 to Registration Statement on Form
S-1, as filed with the Securities and Exchange Commission, September 24, 1993. (File No.
033-67676).(2)
    
    Incorporated by Reference to Exhibit 3.2 to LodgeNets Current Report on Form 8-K dated
November 17, 2008.(3)
    
    Incorporated by Reference to Exhibit 10.37 to LodgeNets Quarterly Report on Form 10-Q for
the quarter ended September 30, 2001.(4)
    
    Incorporated by Reference to Exhibit 3.1 to LodgeNets Current Report on Form 8-K as filed
with the Securities and Exchange Commission on January 15, 2008.  
 57




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##### Table of Contents



(5)
    
    Incorporated by Reference to Exhibit 4.6 to LodgeNets Annual Report on Form 10-K as filed
with the Securities and Exchange Commission on March 14, 2008.(6)
    
    Incorporated by Reference to Exhibit 99.1 to LodgeNets Registration Statement on Form
S-8 as filed with the Securities and Exchange Commission on March 27, 2002.(7)
    
    Incorporated by Reference to Exhibit 10.13 and 10.14 to LodgeNets Annual Report on Form 10-K
for the year ended December 31, 1993.(8)
    
    Incorporated by Reference to Exhibit 10.32 to LodgeNets Quarterly Report on Form 10-Q for
the quarter ended September 30, 2000.(9)
    
    Incorporated by Reference to Exhibit 10.2 to LodgeNets Current Report on Form 8-K as filed
with the Securities and Exchange Commission on August 15, 2002.(10)
    
    Incorporated by Reference to Exhibit 10.1 to LodgeNets Current Report on Form 8-K as filed
with the Securities and Exchange Commission on August 15, 2002.(11)
    
    Incorporated by Reference to Annex 2 of LodgeNets Definitive Proxy Statement dated March 30,
2006.(12)
    
    Incorporated by Reference to Exhibit 10.26 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2003.(13)
    
    Incorporated by Reference to Exhibit 10.27 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2003.(14)
    
    Incorporated by Reference to Exhibit 10.25 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2005.(15)
    
    Incorporated by Reference to Exhibit 10.26 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2005.(16)
    
    Incorporated by Reference to Exhibit 10.1 to LodgeNets Current Report on Form 8-K dated
April 4, 2007.(17)
    
    Incorporated by Reference to Exhibit 10.17 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(18)
    
    Incorporated by Reference to Exhibit 10.18 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(19)
    
    Incorporated by Reference to Exhibit 10.19 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(20)
    
    Incorporated by Reference to Exhibit 10.20 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(21)
    
    Incorporated by Reference to Exhibit 10.21 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(22)
    
    Incorporated by Reference to Exhibit 10.22 to LodgeNets Annual Report on Form 10-K for the
year ended December 31, 2007.(23)
    
    Incorporated by Reference to Exhibit 10.1 to LodgeNets Current Report on Form 8-K as filed
with the Securities Exchange Commission on September 2, 2008.  58




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##### Table of Contents



Signatures
  LodgeNet Interactive CorporationBy:

/s/ Scott C. PetersenScott C. Petersen,President, Chief Executive Officer and



Chairman of the Board of Directors  Signature
    
    Title
    
    Date/s/ Scott C. Petersen
 Scott
C. Petersen
    
    President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer)
    
    March 12, 2009/s/ Gary H. Ritondaro
 Gary
H. Ritondaro
    
    Senior Vice President
Chief Financial Officer
(Principal Financial & Accounting Officer)
    
    March 12, 2009/s/ R. Douglas Bradbury
 R.
Douglas Bradbury
    
    Director
    
    March 12, 2009/s/ R. F. Leyendecker
 R.
F. Leyendecker
    
    Director
    
    March 12, 2009/s/ Vikki I. Pachera
 Vikki
I. Pachera
    
    Director
    
    March 12, 2009/s/ Scott H. Shlecter
 Scott
H. Shlecter
    
    Director
    
    March 12, 2009/s/ John E. Haire
 John
E. Haire
    
    Director
    
    March 12, 2009/s/ Martin L. Abbott
 Martin
L. Abbott
    
    Director
    
    March 12, 2009/s/ J. Scott Kirby
 J.
Scott Kirby
    
    Director
    
    March 12, 2009
  59




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##### Table of Contents



INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
 LodgeNet Interactive Corporation and Subsidiaries
 Index to Consolidated Financial Statements
 PageReport of Independent Registered Public Accounting Firm
    
    F - 2Consolidated Balance Sheets as of December 31, 2008 and 2007
    
    F - 3Consolidated Statements of Operations  Three Years Ended December 31, 2008, 2007 and 2006
    
    F - 4Consolidated Statements of Stockholders Deficiency and Comprehensive Income (Loss) 
Three Years Ended December 31, 2008, 2007 and 2006
    
    F - 5Consolidated Statements of Cash Flows  Three Years Ended December 31, 2008, 2007 and 2006
    
    F - 6Notes to Consolidated Financial Statements
    
    F - 7Index to Financial SchedulesSchedule II  Valuation and Qualifying Accounts
    
    F - 32
  F - 1




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##### Table of Contents



Report of Independent Registered Public Accounting Firm
  Internal Control  Integrated Framework
    
  F - 2




---



##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Balance Sheets
  December 31,
    
    
    December 31,2008
    
    
    2007AssetsCurrent assets:Cash and cash equivalents
    
    $
    10,800
    
    
    $
    25,569Accounts receivable, net
    
    
    63,620
    
    
    
    73,580Other current assets
    
    
    9,107
    
    
    
    11,359Total current assets
    
    
    83,527
    
    
    
    110,508Property and equipment, net
    
    
    273,830
    
    
    
    323,963Debt issuance costs, net
    
    
    9,117
    
    
    
    11,374Intangible assets, net
    
    
    115,134
    
    
    
    126,530Goodwill
    
    
    100,081
    
    
    
    111,293Other assets
    
    
    8,097
    
    
    
    10,155Total assets
    
    $
    589,786
    
    
    $
    693,823Liabilities and Stockholders DeficiencyCurrent liabilities:Accounts payable
    
    $
    45,737
    
    
    $
    50,559Current maturities of long-term debt
    
    
    7,597
    
    
    
    7,398Accrued expenses
    
    
    23,870
    
    
    
    30,118Deferred revenue
    
    
    17,168
    
    
    
    14,354Total current liabilities
    
    
    94,372
    
    
    
    102,429Long-term debt
    
    
    580,923
    
    
    
    617,196Other long-term liabilities
    
    
    43,239
    
    
    
    22,440Total liabilities
    
    
    718,534
    
    
    
    742,065Commitments and contingenciesStockholders deficiency:Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued or outstanding
    
    
    
    
    
    
    Common stock, $.01 par value, 50,000,000 shares authorized;
23,014,164 and 22,969,775 shares outstanding at December 31,
2008 and December 31, 2007, respectively
    
    
    230
    
    
    
    230Treasury stock, at cost: 530,000 and 60,000 shares at December 31,
2008 and December 31, 2007, respectively
    
    
    (5,737
    )
    
    
    (1,075
    )Additional paid-in capital
    
    
    332,649
    
    
    
    330,405Accumulated deficit
    
    
    (416,056
    )
    
    
    (367,638
    )Accumulated other comprehensive loss
    
    
    (39,834
    )
    
    
    (10,164
    )Total stockholders deficiency
    
    
    (128,748
    )
    
    
    (48,242
    )Total liabilities and stockholders deficiency
    
    $
    589,786
    
    
    $
    693,823
   F - 3




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##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries
Consolidated Statements of Operations
 Years Ended December 31,2008
    
    
    2007
    
    
    2006Revenues:Hospitality
    
    $
    519,922
    
    
    $
    474,473
    
    
    $
    285,770Other
    
    
    13,957
    
    
    
    11,115
    
    
    
    2,443Total revenues
    
    
    533,879
    
    
    
    485,588
    
    
    
    288,213Direct Costs and Operating Expenses:Direct costs (exclusive of operating expenses and
depreciation and amortization shown separately below):Hospitality
    
    
    278,776
    
    
    
    245,609
    
    
    
    130,719Other
    
    
    10,924
    
    
    
    7,554
    
    
    
    1,234Operating expenses:System operations
    
    
    57,853
    
    
    
    54,114
    
    
    
    35,223Selling, general and administrative
    
    
    52,042
    
    
    
    55,878
    
    
    
    28,999Depreciation and amortization
    
    
    124,060
    
    
    
    116,378
    
    
    
    66,311Impairment charge
    
    
    11,212
    
    
    
    
    
    
    
    Restructuring charge
    
    
    5,047
    
    
    
    11,158
    
    
    
    Other operating income
    
    
    (964
    )
    
    
    (867
    )
    
    
    (1,205
    )Total direct costs and operating expenses
    
    
    538,950
    
    
    
    489,824
    
    
    
    261,281(Loss) income from operations
    
    
    (5,071
    )
    
    
    (4,236
    )
    
    
    26,932Other Income and (Expenses):Interest expense
    
    
    (42,551
    )
    
    
    (40,950
    )
    
    
    (25,730
    )Gain on extinguishment of debt
    
    
    1,446
    
    
    
    
    
    
    
    Loss on early retirement of debt
    
    
    (448
    )
    
    
    (22,195
    )
    
    
    (227
    )Other (expense) income
    
    
    (945
    )
    
    
    1,526
    
    
    
    1,165(Loss) income before income taxes
    
    
    (47,569
    )
    
    
    (65,855
    )
    
    
    2,140(Provision) benefit for income taxes
    
    
    (849
    )
    
    
    683
    
    
    
    (299
    )Net (loss) income
    
    $
    (48,418
    )
    
    $
    (65,172
    )
    
    $
    1,841Net (loss) income per common share (basic)
    
    $
    (2.16
    )
    
    $
    (3.00
    )
    
    $
    0.10Net (loss) income per common share (diluted)
    
    $
    (2.16
    )
    
    $
    (3.00
    )
    
    $
    0.10Weighted average shares outstanding (basic)
    
    
    22,372,475
    
    
    
    21,758,066
    
    
    
    18,332,824Weighted average shares outstanding (diluted)
    
    
    22,372,475
    
    
    
    21,758,066
    
    
    
    18,840,917
   F - 4




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##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Stockholders Deficiency and Comprehensive Income (Loss)
  AccumulatedAdditional
    
    
    
    
    
    
    OtherCommon Stock
    
    
    Treasury Stock
    
    
    Paid-in
    
    
    Accumulated
    
    
    ComprehensiveShares
    
    
    Amount
    
    
    Shares
    
    
    Amount
    
    
    Capital
    
    
    Deficit
    
    
    Income/(Loss)
    
    
    TotalBalance, December 31, 2005
    
    
    18,165,643
    
    
    $
    182
    
    
    
    
    
    
    $
    
    
    
    $
    232,327
    
    
    $
    (304,307
    )
    
    $
    1,565
    
    
    $
    (70,233
    )Common stock option exercises
    
    
    587,721
    
    
    
    6
    
    
    
    
    
    
    
    
    
    
    
    8,382
    
    
    
    
    
    
    
    
    
    
    
    8,388Warrants exercised (Note 13)
    
    
    196,570
    
    
    
    2
    
    
    
    
    
    
    
    
    
    
    
    (2
    )
    
    
    
    
    
    
    
    
    
    
    Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    700
    
    
    
    
    
    
    
    
    
    
    
    700Restricted stock
    
    
    134,800
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    976
    
    
    
    
    
    
    
    
    
    
    
    977Comprehensive income:Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,841
    
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    49Unrealized gain on
interest rate swap
agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,046Balance, December 31, 2006
    
    
    19,084,734
    
    
    $
    191
    
    
    
    
    
    
    $
    
    
    
    $
    242,383
    
    
    $
    (302,466
    )
    
    $
    1,770
    
    
    $
    (58,122
    )Common stock option exercises
    
    
    818,454
    
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    12,949
    
    
    
    
    
    
    
    
    
    
    
    12,957Stock issuance
    
    
    3,050,000
    
    
    
    31
    
    
    
    
    
    
    
    
    
    
    
    73,382
    
    
    
    
    
    
    
    
    
    
    
    73,413Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    60,000
    
    
    
    (1,075
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,075
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    506
    
    
    
    
    
    
    
    
    
    
    
    506Restricted stock
    
    
    16,587
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,185
    
    
    
    
    
    
    
    
    
    
    
    1,185Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (65,172
    )
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,963Unrealized loss on
interest rate swap
agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (16,897
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (77,106
    )Balance, December 31, 2007
    
    
    22,969,775
    
    
    $
    230
    
    
    
    60,000
    
    
    $
    (1,075
    )
    
    $
    330,405
    
    
    $
    (367,638
    )
    
    $
    (10,164
    )
    
    $
    (48,242
    )Common stock option exercises
    
    
    100
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    
    
    
    
    1Purchase of treasury stock
    
    
    
    
    
    
    
    
    
    
    470,000
    
    
    
    (4,662
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,662
    )Share-based compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,185
    
    
    
    
    
    
    
    
    
    
    
    1,185Restricted stock
    
    
    44,289
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,090
    
    
    
    
    
    
    
    
    
    
    
    1,090Other
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32
    )
    
    
    
    
    
    
    
    
    
    
    (32
    )Comprehensive loss:Net loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48,418
    )
    
    
    Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,196
    )Unrealized loss on
interest rate swap
agreements
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (23,474
    )Comprehensive loss
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (78,088
    )Balance, December 31, 2008
    
    
    23,014,164
    
    
    $
    230
    
    
    
    530,000
    
    
    $
    (5,737
    )
    
    $
    332,649
    
    
    $
    (416,056
    )
    
    $
    (39,834
    )
    
    $
    (128,748
    )
   F - 5




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##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries
 
 Consolidated Statements of Cash Flows
  Years Ended December 31,2008
    
    
    2007
    
    
    2006Operating activities:Net (loss) income
    
    $
    (48,418
    )
    
    $
    (65,172
    )
    
    $
    1,841Adjustments to reconcile net (loss) income to net cash provided
by operating activities:Depreciation and amortization
    
    
    124,060
    
    
    
    116,378
    
    
    
    66,311Gain on extinguishment of debt
    
    
    (1,446
    )
    
    
    
    
    
    
    Impairment charge
    
    
    11,212
    
    
    
    
    
    
    
    Loss on early retirement of debt
    
    
    448
    
    
    
    3,583
    
    
    
    227Share-based compensation
    
    
    2,275
    
    
    
    1,737
    
    
    
    1,677Gain due to insurance proceeds
    
    
    (815
    )
    
    
    
    
    
    
    (817
    )Insurance proceeds related to business interruption
    
    
    815
    
    
    
    
    
    
    
    526Other, net
    
    
    576
    
    
    
    188
    
    
    
    (238
    )Change in operating assets and liabilities:Accounts receivable, net
    
    
    9,030
    
    
    
    (7,861
    )
    
    
    (3,332
    )Other current assets
    
    
    2,030
    
    
    
    (2,496
    )
    
    
    (2,070
    )Accounts payable
    
    
    (5,454
    )
    
    
    6,052
    
    
    
    3,126Accrued expenses and deferred revenue
    
    
    (5,720
    )
    
    
    8,332
    
    
    
    7,795Other
    
    
    1,260
    
    
    
    (1,872
    )
    
    
    (2,745
    )Net cash provided by operating activities
    
    
    89,853
    
    
    
    58,869
    
    
    
    72,301Investing activities:Property and equipment additions
    
    
    (64,407
    )
    
    
    (79,097
    )
    
    
    (48,268
    )Insurance proceeds related to property damage
    
    
    
    
    
    
    
    
    
    
    291Acquisition of StayOnline, Inc.
    
    
    
    
    
    
    (14,311
    )
    
    
    (1,174
    )Acquisition of THN (20% minority interest)
    
    
    
    
    
    
    (5,000
    )
    
    
    Acquisition of On Command Corporation, net of cash acquired
    
    
    
    
    
    
    (335,517
    )
    
    
    (1,691
    )Other investing activities
    
    
    
    
    
    
    651
    
    
    
    238Net cash used for investing activities
    
    
    (64,407
    )
    
    
    (433,274
    )
    
    
    (50,604
    )Financing activities:Proceeds from long-term debt
    
    
    
    
    
    
    625,000
    
    
    
    Repayment of long-term debt
    
    
    (33,760
    )
    
    
    (271,241
    )
    
    
    (21,500
    )Payment of capital lease obligations
    
    
    (1,365
    )
    
    
    (1,712
    )
    
    
    (1,380
    )Borrowings on revolving credit facility
    
    
    30,000
    
    
    
    
    
    
    
    Repayments of revolving credit facility
    
    
    (30,000
    )
    
    
    
    
    
    
    Debt issuance costs
    
    
    
    
    
    
    (12,738
    )
    
    
    Contribution from minority interest holder to subsidiary
    
    
    
    
    
    
    300
    
    
    
    Purchase of treasury stock
    
    
    (4,662
    )
    
    
    (1,075
    )
    
    
    Proceeds from issuance of common stock, net of offering costs
    
    
    
    
    
    
    23,290
    
    
    
    Exercise of stock options
    
    
    
    
    
    
    17,120
    
    
    
    4,179Change in other long-term liability
    
    
    
    
    
    
    (2,225
    )
    
    
    (930
    )Net cash (used for) provided by financing activities
    
    
    (39,787
    )
    
    
    376,719
    
    
    
    (19,631
    )Effect of exchange rates on cash
    
    
    (428
    )
    
    
    460
    
    
    
    (13
    )(Decrease) increase in cash and cash equivalents
    
    
    (14,769
    )
    
    
    2,774
    
    
    
    2,053Cash and cash equivalents at beginning of period
    
    
    25,569
    
    
    
    22,795
    
    
    
    20,742Cash and cash equivalents at end of period
    
    $
    10,800
    
    
    $
    25,569
    
    
    $
    22,795
 
  F - 6




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##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries
 
 Notes to Consolidated Financial Statements
 Note 1  The Company
    Note 2  Summary of Significant Accounting Policies
 Revenue Recognition 
 Ø
    
    Guest Entertainment Services.Our primary source of revenue is from providing
in-room, interactive television services to the lodging industry, which the hotel guest
typically purchases on a per-view, hourly or daily basis. These services include on-demand
movies, on-demand games, music and music video, Internet on television and television
on-demand. We recognize revenue from the sale of these guest entertainment services in the
period in which such services are sold to the hotel guest and when collection is reasonably
assured. Persuasive evidence of a purchase exists through a guest buy transaction recorded on
our system. No future performance obligations exist with respect to these types of services
once they have been provided to the hotel guest. The prices related to our products or
services are fixed or determinable prior to delivery of the products or services.Ø
    
    Television Programming Services.We generate revenue from the sale of basic and
premium television programming to individual hotels. In contrast to Guest Entertainment
services, where the hotel guest is charged directly for the service, we charge the hotel for
our television programming services. We recognize revenue from the sale of television
programming services in the period in which such services are sold and when collection is
reasonably assured. We establish the prices charged to each hotel and no future performance
obligations exist on programming which has been provided to the hotel. Persuasive evidence of
an arrangement exists through our long-term contract with each hotel. We also have advance
billings from one month to three months for certain basic and premium programming services
where the revenue is deferred and recognized in the periods services are provided.Ø
    
    Broadband System Sales.We provide broadband through the sale and installation of
equipment. Revenue from the sale and installation of this equipment is recognized when the
equipment is installed. The delivery and installation of the equipment are concurrent. In
addition, this equipment, which can be acquired from other manufacturers or retailers, has
stand-alone value to the customer. The software used within these systems can also be supplied
by other vendors unrelated to us. Equipment prices are
fixed and determinable prior to delivery and are based on objective and reliable sales evidence
from a stand-alone basis.
  F - 7




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##### Table of Contents



Ø
    
    Broadband Service and Support.We provide ongoing maintenance, service and call center support
services to hotel properties installed by us and also to hotel properties installed by other
providers. In addition, we provide, in some cases, the hotel property with the portal to
access the Internet. We receive monthly service fees from such hotel properties for our
maintenance services and Internet access. We recognize the service fee ratably over the term of
the contract. The prices for these services are fixed and determinable prior to delivery of the
service. The fair value of these services is known due to objective and reliable evidence from
contracts and stand-alone sales. Under the service agreement, which includes maintenance and
Internet access, we recognize revenue ratably over the term of the maintenance and service
contract, typically three years.Ø
    
    System Sales and Support to Travel Centers.We also market and sell our interactive
systems to travel centers. We generate revenue from three sources: 1) the sale of the
interactive system, which includes equipment, operating software and a one-year parts and labor
warranty, 2) optional extended service and maintenance agreements, which include future
unspecified software upgrades when and if they become available, and 3) programming. The
interactive system price includes a non-exclusive, non-transferable right to use the initial
software package. Currently, revenue from the sale of our interactive system and the extended
service and maintenance agreement is recognized ratably over the three-year maintenance period,
which includes the original one-year warranty and the two-year extension, after the equipment
is delivered.
The contracted interactive system and extended service and maintenance elements are not
separable during this start-up phase due to insufficient vendor specific objective evidence
(VSOE). The prices of the interactive system and extended service and maintenance
agreement are fixed and determinable prior to delivery. Management expects VSOE to be
established after at least eighteen months of market history and meaningful renewal
activity for maintenance services. Once VSOE has been established, the entire selling price
of the interactive system will be recognized upon delivery. Programming revenue from this
arrangement is recognized on a recurring basis over the term of the related contract.Ø
    
    Hotel System Sales and Support.We also market and sell our guest entertainment
interactive systems to hotels, along with recurring support for interactive content, software
maintenance and technical field service for a fixed fee. Revenue from the sale and
installation of the interactive system, including the operating software, is deferred and
recognized over the term of the contract, generally five years, due to inseparable proprietary
software elements. The multiple elements are not separable because the proprietary software is
required to operate the system and we do not license or sell the software separately under this
business model. The interactive system prices are fixed and determinable prior to delivery.
Revenue from this arrangement, which includes equipment, operating software, interactive
content, and maintenance services, is recognized ratably over the term of the related contract.Ø
    
    Master Antenna Television (MATV) Services.We generate revenues from the
installation of master antenna wiring and related infrastructure. Revenues are recognized upon
completion of the MATV installation.
Prices of the services are fixed and determinable prior to delivery. MATV equipment and
services are not proprietary and can be supplied by other vendors.Ø
    
    Satellite System Sales.We also generate revenues from the sale and installation of
DIRECTV satellite systems. Revenues are recognized upon installation of the satellite system.
Prices for these services are fixed and determinable prior to delivery. DIRECTV equipment and
installation services are not proprietary and can be supplied by vendors other than us.Ø
    
    Other.We also generate revenue from the sale of miscellaneous system equipment,
such as television remotes or other media devices, and service parts and labor. These sales
are not made under multiple element arrangements and we recognize the revenue when the
equipment is delivered or
service (repair or installation) has been performed. No future performance obligation exists on
an equipment sale or on a repair service which has been provided.
  F - 8




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##### Table of Contents



Ø
    
    Healthcare System Sales and Support.We provide our interactive television infrastructure and
content to the healthcare industry. We generate revenue from two sources: 1) the sale and
installation of system equipment and 2) support agreements with the facility to provide
software maintenance, programming and system maintenance for one year. Historically, revenue
from the sale and installation of our interactive system was recognized ratably over the
one-year maintenance period after the equipment is installed. The contracted system hardware,
installation and maintenance elements were not separable during this start-up phase due to
insufficient vendor specific objective evidence (VSOE) of fair value. The package price of the
interactive system and related maintenance is fixed and determinable prior to delivery. Upon
completion of the initial year, the support arrangement, which includes interactive content,
software maintenance, and system services, is renewable and is recognized ratably over the term
of the related contract. The hospital is under no obligation to contract with us for the
support arrangement. They may contract with other providers and utilize the equipment and
software installed by us. In the fourth quarter of 2007, we attained 100% renewal activity for
maintenance services, therefore establishing VSOE of the fair value of maintenance services.
Effective in the fourth quarter of 2007, the entire selling price of the interactive system is
recognized upon installation using the residual method.Ø
    
    Advertising and Media Services.We generate revenue from the sale of
advertising-based media services within our hospitality media and connectivity businesses
through our wholly-owned subsidiary, The Hotel Networks, and server based channels within our
interactive room base. The Hotel Networks, which was acquired in the On Command transaction
(See Note 3), delivers targeted advertising to more than 365,000 hotel rooms on 10 popular
satellite-delivered channels such as MSNBC, CNBC, FOX News and The Weather Channel. In addition
to the satellite platform, we generate revenue from server based channels, which we have
operating in approximately 620,000 of our rooms today, and other interactive and location-based
applications, which can be delivered by our interactive television platform. Advertising
revenue is recognized, net of agency commissions, when advertisements are broadcast or ratably
over a contracted advertising period and when collection is reasonably assured. We establish
the prices charged to each advertiser and no future performance obligations exist on
advertising which has been broadcast. Persuasive evidence of an arrangement exists through our
contracts with each advertiser.
 Principles of Consolidation 
 Foreign Currency Translation 
 Use of Estimates 
 Long-Lived Assets 
 Property and Equipment 
  F - 9




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##### Table of Contents



YearsBuildings
    
    
    30Hotel systems:Installed system costs
    
    
    27Customer acquisition costs
    
    
    57System components
    
    
    57Software costs
    
    
    35Other equipment
    
    
    310
 Allowance for System Removal 
 Allowance for Excess or Obsolete System Components 
 Goodwill and Other Intangibles Assets 
  YearsHotel contracts and relationships
    
    
    1020Tradenames
    
    
    7Acquired technologies and patents
    
    
    5Content agreements and relationships
    
    
    4
  F - 10




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##### Table of Contents



Software Development 
 Concentration of Credit Risks and Customer Data 
 Significant Vendors 
 Allowance for Doubtful Accounts 
 Derivative Financial Instruments 
 Income Taxes 
  F - 11




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##### Table of Contents



Comprehensive Income (Loss) 
 2008
    
    
    2007
    
    
    2006Net (loss) income
    
    $
    (48,418
    )
    
    $
    (65,172
    )
    
    $
    1,841Foreign currency
translation adjustment
    
    
    (6,196
    )
    
    
    4,963
    
    
    
    49Unrealized (loss) gain on
interest rate swap agreements
    
    
    (23,474
    )
    
    
    (16,897
    )
    
    
    156Comprehensive (loss) income
    
    $
    (78,088
    )
    
    $
    (77,106
    )
    
    $
    2,046
  Unrealized Gain(Loss) on
    
    
    Foreign
    
    
    AccumulatedInterest Rate
    
    
    Currency
    
    
    OtherSwap
    
    
    Translation
    
    
    ComprehensiveAgreements
    
    
    Adjustment
    
    
    Income (Loss)Balance, December 31, 2005
    
    $
    (156
    )
    
    $
    1,721
    
    
    $
    1,565Change during period
    
    
    156
    
    
    
    49
    
    
    
    205Balance, December 31, 2006
    
    
    
    
    
    
    1,770
    
    
    
    1,770Change during period
    
    
    (16,897
    )
    
    
    4,963
    
    
    
    (11,934
    )Balance, December 31, 2007
    
    
    (16,897
    )
    
    
    6,733
    
    
    
    (10,164
    )Change during period
    
    
    (23,474
    )
    
    
    (6,196
    )
    
    
    (29,670
    )Balance, December 31, 2008
    
    $
    (40,371
    )
    
    $
    537
    
    
    $
    (39,834
    )
 Treasury Stock 
 Earnings Per Share Computation 
  F - 12




---



##### Table of Contents



2008
    
    
    2007
    
    
    2006Average shares outstanding  basic
    
    
    22,372,475
    
    
    
    21,758,066
    
    
    
    18,332,824Dilutive effect of stock options, non-
vested shares and warrants
    
    
    
    
    
    
    
    
    
    
    508,093Average shares outstanding  diluted
    
    
    22,372,475
    
    
    
    21,758,066
    
    
    
    18,840,917Antidilutive securities excluded
from calculation
    
    
    1,502,350
    
    
    
    300,600
    
    
    
    295,100
  2008
    
    2007
    
    2006Potential dilutive common shares
    
    
    1,710,718
    
    
    
    1,355,631
    
    
    
    2,056,754
 Share-based Compensation 
 Statements of Cash Flows 
 Effect of Recently Issued Accounting Standards 
  F - 13




---



##### Table of Contents



F - 14




---



##### Table of Contents



Note 3  Investments and Business Combinations
     December 31,2008
    
    2007Pro FormaTotal revenue
    
    $
    533,879
    
    
    $
    547,707Net loss
    
    $
    (48,418
    )
    
    $
    (77,062
    )Net loss per share
    
    $
    (2.16
    )
    
    $
    (3.42
    )
  Note 4  Fair Value of Financial Instruments
  2008
    
    2007Carrying
    
    Fair
    
    Carrying
    
    FairAmount
    
    Value
    
    Amount
    
    ValueInterest rate swaps  liability position
    
    $
    40,371
    
    
    $
    40,371
    
    
    $
    16,897
    
    
    $
    16,897Long-term debt
    
    $
    (588,520
    )
    
    $
    (295,858
    )
    
    $
    (624,594
    )
    
    $
    (599,718
    )
    F - 15




---



##### Table of Contents



Total
    
    Quoted Prices inFair Value
    
    Active Markets for
    
    Significant Other
    
    SignificantMeasurement
    
    Identical Asset
    
    Observable Inputs
    
    Unobservable InputsDecember 31, 2008
    
    (Level 1)
    
    (Level 2)
    
    (Level 3)Interest rate swaps 
liability position
    
    $
    40,371
    
    
    $
    
    
    
    $
    40,371
    
    
    $
    
  Note 5  Property and Equipment, Net
  2008
    
    
    2007Land, building and equipment
    
    $
    111,870
    
    
    $
    105,247Hotel systems:Installed system costs
    
    
    636,986
    
    
    
    646,095Customer acquisition costs
    
    
    58,995
    
    
    
    55,080System components
    
    
    31,409
    
    
    
    24,966Software costs
    
    
    35,522
    
    
    
    33,783Total
    
    
    874,782
    
    
    
    865,171Less  depreciation and amortization
    
    
    (600,952
    )
    
    
    (541,208
    )Property and equipment, net
    
    $
    273,830
    
    
    $
    323,963
  Note 6 3⁄4 Debt Issuance Costs
   F - 16




---



##### Table of Contents



2008
    
    
    2007Debt issuance costs
    
    $
    12,291
    
    
    $
    12,739Accumulated amortization
    
    
    (3,174
    )
    
    
    (1,365
    )$
    9,117
    
    
    $
    11,374
 Note 7  Goodwill and Other Intangible Assets
    Hospitality
    
    
    Other
    
    
    TotalBalance as of December 31, 2006
    
    $
    
    
    
    $
    
    
    
    $
    StayOnline acquisition
    
    
    9,595
    
    
    
    
    
    
    
    9,595On Command acquisition
    
    
    83,019
    
    
    
    15,404
    
    
    
    98,423THN acquisition (20% minority interest)
    
    
    
    
    
    
    3,275
    
    
    
    3,275Balance as of December 31, 2007
    
    
    92,614
    
    
    
    18,679
    
    
    
    111,293Impairment charge
    
    
    
    
    
    
    (11,212
    )
    
    
    (11,212
    )Balance as of December 31, 2008
    
    $
    92,614
    
    
    $
    7,467
    
    
    $
    100,081
    F - 17




---



##### Table of Contents



2008
    
    
    2007Carrying
    
    
    Accumulated
    
    
    Carrying
    
    
    AccumulatedAmount
    
    
    Amortization
    
    
    Amount
    
    
    AmortizationAssets subject to amortization:Acquired contracts and relationships
    
    $
    120,315
    
    
    $
    (11,274
    )
    
    $
    120,315
    
    
    $
    (4,884
    )Other acquired intangibles
    
    
    12,984
    
    
    
    (11,079
    )
    
    
    12,984
    
    
    
    (8,263
    )Tradenames
    
    
    3,042
    
    
    
    (1,079
    )
    
    
    2,955
    
    
    
    (225
    )Acquired patents
    
    
    5,100
    
    
    
    (2,875
    )
    
    
    5,032
    
    
    
    (1,384
    )$
    141,441
    
    
    $
    (26,307
    )
    
    $
    141,286
    
    
    $
    (14,756
    )
  Note 8  Accrued Expenses
  2008
    
    
    2007Property, sales and other taxes
    
    $
    8,876
    
    
    $
    8,405Compensation
    
    
    7,406
    
    
    
    11,485Interest
    
    
    109
    
    
    
    Programming related
    
    
    1,751
    
    
    
    1,785Restructuring and reorganization
    
    
    2,436
    
    
    
    5,774Other
    
    
    3,292
    
    
    
    2,669$
    23,870
    
    
    $
    30,118
 Note 9  Long-term Debt and Credit Facilities
  2008
    
    
    2007Bank Credit Facility:Bank term loan
    
    $
    585,323
    
    
    $
    621,875Revolving credit facility
    
    
    
    
    
    
    9.50% senior notes
    
    
    
    
    
    
    10Capital leases
    
    
    3,197
    
    
    
    2,709588,520
    
    
    
    624,594Less current maturities
    
    
    (7,597
    )
    
    
    (7,398
    )$
    580,923
    
    
    $
    617,196
  F - 18




---



##### Table of Contents



Bank Credit Facility 3⁄4
     F - 19




---



##### Table of Contents



9.50% Senior Notes 3⁄4
 Capital Leases
  2009
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    ThereafterLong-term debt
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    6,250
    
    
    $
    554,073Capital leases
    
    
    1,520
    
    
    
    1,102
    
    
    
    661
    
    
    
    242
    
    
    
    
    
    
    
    7,770
    
    
    
    7,352
    
    
    
    6,911
    
    
    
    6,492
    
    
    
    6,250
    
    
    
    554,073Less amount
representing
interest on
capital leases
    
    
    (173
    )
    
    
    (101
    )
    
    
    (43
    )
    
    
    (11
    )
    
    
    
    
    
    
    $
    7,597
    
    
    $
    7,251
    
    
    $
    6,868
    
    
    $
    6,481
    
    
    $
    6,250
    
    
    $
    554,073
   Ø             borrow money;Ø             pay dividends;Ø             purchase or redeem stock;Ø             repay subordinated indebtedness before its stated maturity date;Ø             make investments and extend credit;Ø             engage in transactions with affiliates;Ø             engage in sale-leaseback transactions;Ø             consummate certain asset sales;Ø             effect a consolidation or merger, or sell, transfer, lease or otherwise dispose of all
or substantially all of our assets; andØ             create liens on our assets.
   F - 20




---



##### Table of Contents



Note 10  Commitments and Contingencies
 Programming Agreements SM
 Minimum Guarantees
  Operating Leases  
 Legal Proceedings
    F - 21




---



##### Table of Contents



Note 11  Stockholders Equity
 Preferred Stock 
 Common Stock 
 Share Repurchase Program 
 Stockholder Rights Plan 
 Note 12  Stock Option Plans
     F - 22




---



##### Table of Contents



Years Ended December 31,2008
    
    
    2007
    
    
    2006Compensation Cost:Stock options
    
    $
    1,185
    
    
    $
    506
    
    
    $
    700Non-vested (restricted) shares
    
    
    1,090
    
    
    
    1,231
    
    
    
    977Total share-based compensation expense
    
    $
    2,275
    
    
    $
    1,737
    
    
    $
    1,677
  Stock Option Valuation and Expense Information under SFAS No. 123R
        F - 23




---



##### Table of Contents



Years Ended December 31,2008
    
    2007
    
    2006Weighted average fair value of options granted
    
    $
    5.32
    
    
    $
    16.40
    
    
    $
    12.23Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Weighted average risk-free interest
    
    
    4.4
    %
    
    
    4.5
    %
    
    
    4.4
    %Weighted average expected volatility
    
    
    45.4
    %
    
    
    49.6
    %
    
    
    53.5
    %Weighted average expected life  employee
    
    5.25 years
    
    6.25 years
    
    
    N/AWeighted average expected life  officers
    
    5.75 years
    
    6.25 years
    
    
    N/AWeighted average expected life  non-employee director
    
    8.00 years
    
    
    N/A
    
    
    8.47 years
  WeightedWeighted
    
    
    AverageAverage
    
    
    Remaining
    
    
    AggregateExercise
    
    
    Term
    
    
    IntrinsicOptions
    
    
    Price
    
    
    in years
    
    
    ValueOutstanding, December 31, 2005
    
    
    2,492,075
    
    
    $
    16.33Granted
    
    
    25,000
    
    
    
    19.09Exercised
    
    
    (587,721
    )
    
    
    14.28Forfeited/canceled
    
    
    (56,400
    )
    
    
    21.79Outstanding, December 31, 2006
    
    
    1,872,954
    
    
    
    16.85Granted
    
    
    127,500
    
    
    
    30.51Exercised
    
    
    (818,454
    )
    
    
    15.96Forfeited/canceled
    
    
    (16,550
    )
    
    
    17.78Outstanding, December 31, 2007
    
    
    1,165,450
    
    
    
    18.96Granted
    
    
    371,500
    
    
    
    11.32Exercised
    
    
    (100
    )
    
    
    10.24Forfeited/canceled
    
    
    (34,500
    )
    
    
    11.85Outstanding, December 31, 2008
    
    
    1,502,350
    
    
    $
    17.23
    
    
    
    5.5
    
    
    $
    Options exercisable, December 31, 2008
    
    
    1,076,100
    
    
    $
    17.73
    
    
    
    4.1
    
    
    $
    
    Non-Vested Shares (Restricted Stock)
   F - 24




---



##### Table of Contents



Years Ended December 31,2008
    
    
    2007
    
    
    2006Compensation cost  non-vested shares:Time-based vesting
    
    $
    595
    
    
    $
    753
    
    
    $
    530Performance-based vesting
    
    
    495
    
    
    
    478
    
    
    
    447Total share-based compensation expense  non-vested shares
    
    $
    1,090
    
    
    $
    1,231
    
    
    $
    977
  Year EndedDecember 31, 2008Time Based
    
    
    Performance BasedWeighted
    
    
    
    
    
    
    WeightedAverage
    
    
    
    
    
    
    AverageNon-vested
    
    
    Grant-date
    
    
    Non-vested
    
    
    Grant-dateShares
    
    
    Fair Value
    
    
    Shares
    
    
    Fair ValueOutstanding, beginning of period
    
    
    79,323
    
    
    $
    20.76
    
    
    
    101,608
    
    
    $
    15.10Granted
    
    
    61,000
    
    
    
    10.06
    
    
    
    
    
    
    
    Vested
    
    
    (47,063
    )
    
    
    15.78
    
    
    
    
    
    
    
    Forfeited/canceled
    
    
    (1,176
    )
    
    
    31.10
    
    
    
    (2,574
    )
    
    
    31.10Outstanding, end of period
    
    
    92,084
    
    
    $
    16.08
    
    
    
    99,034
    
    
    $
    14.68
 F - 25




---



##### Table of Contents



Unrecognized Compensation Expense
  Weighted averageDecember 31,
    
    
    recognition period2008
    
    
    (months)Unrecognized compensation cost:Stock options, net of expected forfeitures
    
    $
    2,472
    
    
    
    31.7Non-vested shares  time based vesting
    
    
    594
    
    
    
    18.6Non-vested shares  performance based vesting
    
    
    
    
    
    
    Total unrecognized compensation cost
    
    $
    3,066
 Note 13  Warrants
   Note 14  Employee Benefit Plans
  Note 15  Restructuring
    F - 26




---



##### Table of Contents



12/31/07
    
    
    Charges to
    
    
    Cash
    
    
    12/31/08Balance
    
    
    Expense
    
    
    Payments
    
    
    BalanceSeverance and other benefit related costs
    
    $
    5,289
    
    
    $
    3,277
    
    
    $
    (6,570
    )
    
    $
    1,996Cost of closing redundant acquired facilities
    
    
    485
    
    
    
    1,587
    
    
    
    (1,632
    )
    
    
    440Other
    
    
    
    
    
    
    183
    
    
    
    (183
    )
    
    
    Total
    
    $
    5,774
    
    
    $
    5,047
    
    
    $
    (8,385
    )
    
    $
    2,436
 Note 16  Income Taxes
  2008
    
    
    2007
    
    
    2006Domestic
    
    $
    (48,578
    )
    
    $
    (67,692
    )
    
    $
    1,159Foreign
    
    
    1,009
    
    
    
    1,837
    
    
    
    981Total
    
    $
    (47,569
    )
    
    $
    (65,855
    )
    
    $
    2,140
  2008
    
    
    2007
    
    
    2006Federal income tax (benefit) expense computed at
statutory rate (35%)
    
    $
    (16,652
    )
    
    $
    (23,049
    )
    
    $
    749State income taxes, net of federal benefit
    
    
    466
    
    
    
    403
    
    
    
    441Impairment charge
    
    
    3,924
    
    
    
    
    
    
    
    Other non-deductible items
    
    
    124
    
    
    
    345
    
    
    
    134Other
    
    
    
    
    
    
    (58
    )
    
    
    Net change to valuation allowance, excluding
change due to acquisitions
    
    
    12,987
    
    
    
    21,676
    
    
    
    (1,025
    )Provision (benefit) for income taxes
    
    $
    849
    
    
    $
    (683
    )
    
    $
    299
  2008
    
    
    2007
    
    
    2006Current:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    642
    
    
    
    622
    
    
    
    224Foreign
    
    
    207
    
    
    
    (1,305
    )
    
    
    75849
    
    
    
    (683
    )
    
    
    299Deferred:Federal
    
    $
    
    
    
    $
    
    
    
    $
    State
    
    
    
    
    
    
    
    
    
    
    Foreign
    
    
    
    
    
    
    
    
    
    
    Total income tax expense (benefit)
    
    $
    849
    
    
    $
    (683
    )
    
    $
    299
 F - 27




---



##### Table of Contents



2008
    
    
    2007
    
    
    2006Deferred tax assets:Tax net operating loss and tax credit carryforwards
    
    $
    204,466
    
    
    $
    216,134
    
    
    $
    64,096Capital loss carryforwards
    
    
    
    
    
    
    1,469
    
    
    
    1,431Reserves and accruals
    
    
    2,854
    
    
    
    1,579
    
    
    
    1,588Net deferred revenue
    
    
    5,753
    
    
    
    4,636
    
    
    
    3,371Book over tax depreciation/amortization
    
    
    
    
    
    
    
    
    
    
    21,692Other tax assets
    
    
    9,457
    
    
    
    8,292
    
    
    
    Valuation allowance
    
    
    (201,104
    )
    
    
    (197,232
    )
    
    
    (92,178
    )Total deferred tax assets
    
    
    21,426
    
    
    
    34,878
    
    
    
    Deferred tax liabilities:Tax over book depreciation/amortization
    
    
    (21,426
    )
    
    
    (34,878
    )
    
    
    Total deferred tax liabilities
    
    
    (21,426
    )
    
    
    (34,878
    )
    
    
    Net deferred tax liability
    
    $
    
    
    
    $
    
    
    
    $
    
      F  - 28




---



##### Table of Contents



Beginning
    
    
    
    
    
    
    
    
    
    EndingBalance
    
    Additions
    
    Deductions
    
    BalanceYear Ended December 31, 2007:Uncertain Tax Benefit
    
    $
    1,305
    
    
    $
    677
    
    
    $
    (1,305
    )
    
    $
    677Year Ended December 31, 2008:Uncertain Tax Benefit
    
    $
    677
    
    
    $
    
    
    
    $
    (96
    )
    
    $
    581
   Note 17  Segment Information
   F  - 29




---



##### Table of Contents



2008
    
    
    2007
    
    
    2006Total revenue:Hospitality
    
    $
    519,922
    
    
    $
    474,473
    
    
    $
    285,770Other
    
    
    13,957
    
    
    
    11,115
    
    
    
    2,443Total
    
    $
    533,879
    
    
    $
    485,588
    
    
    $
    288,213(Loss) income before income taxes:Hospitality
    
    $
    167,104
    
    
    $
    155,464
    
    
    $
    111,744Other
    
    
    (2,455
    )
    
    
    (1,412
    )
    
    
    498Operating profit
    
    
    164,649
    
    
    
    154,052
    
    
    
    112,242Corporate
    
    
    (30,365
    )
    
    
    (31,619
    )
    
    
    (20,204
    )Depreciation and amortization
    
    
    (124,060
    )
    
    
    (116,378
    )
    
    
    (66,311
    )Impairment charge
    
    
    (11,212
    )
    
    
    
    
    
    
    Restructuring charge
    
    
    (5,047
    )
    
    
    (11,158
    )
    
    
    Other operating income
    
    
    964
    
    
    
    867
    
    
    
    1,205Interest expense
    
    
    (42,551
    )
    
    
    (40,950
    )
    
    
    (25,730
    )Gain on extinguishment of debt
    
    
    1,446
    
    
    
    
    
    
    
    Loss on early retirement of debt
    
    
    (448
    )
    
    
    (22,195
    )
    
    
    (227
    )Other (expense) income
    
    
    (945
    )
    
    
    1,526
    
    
    
    1,165(Loss) income before income taxes
    
    $
    (47,569
    )
    
    $
    (65,855
    )
    
    $
    2,140Capital expenditures:Hospitality
    
    $
    53,422
    
    
    $
    70,142
    
    
    $
    43,147Other
    
    
    376
    
    
    
    85
    
    
    
    137Corporate
    
    
    10,609
    
    
    
    8,870
    
    
    
    4,984Total
    
    $
    64,407
    
    
    $
    79,097
    
    
    $
    48,268Total assets:Hospitality
    
    $
    542,862
    
    
    $
    656,521
    
    
    $
    239,241Other
    
    
    12,508
    
    
    
    6,458
    
    
    
    503Corporate
    
    
    34,416
    
    
    
    30,844
    
    
    
    23,465Total
    
    $
    589,786
    
    
    $
    693,823
    
    
    $
    263,209
  2008
    
    
    2007
    
    
    2006United States
    
    $
    497,860
    
    
    $
    454,063
    
    
    $
    275,190Canada
    
    
    31,327
    
    
    
    27,794
    
    
    
    12,310Mexico
    
    
    2,973
    
    
    
    2,472
    
    
    
    Other
    
    
    1,719
    
    
    
    1,259
    
    
    
    713Total
    
    $
    533,879
    
    
    $
    485,588
    
    
    $
    288,213
  2008
    
    
    2007
    
    
    2006United States
    
    $
    254,077
    
    
    $
    293,048
    
    
    $
    177,979Canada
    
    
    14,791
    
    
    
    24,093
    
    
    
    7,791Mexico
    
    
    4,962
    
    
    
    6,822
    
    
    
    Total
    
    $
    273,830
    
    
    $
    323,963
    
    
    $
    185,770
 F  - 30




---



##### Table of Contents



Note 18  Write-Off of Debt Issuance Costs
   Note 19  Selected Quarterly Financial Data (Unaudited)
  Quarter
    
    Quarter
    
    Quarter
    
    QuarterEnded
    
    Ended
    
    Ended
    
    EndedMarch 31,
    
    June 30,
    
    September 30,
    
    December
    31,2007Revenues
    
    $
    75,285
    
    
    $
    134,914
    
    
    $
    142,631
    
    
    $
    132,758Net loss
    
    
    (28
    )
    
    
    (34,032
    )
    
    
    (11,410
    )
    
    
    (19,702
    )Per common share
(basic and
diluted)
    
    $
    (0.00
    )
    
    $
    (1.52
    )
    
    $
    (0.50
    )
    
    $
    (0.87
    )2008Revenues
    
    $
    139,787
    
    
    $
    137,347
    
    
    $
    135,320
    
    
    $
    121,425Net loss
    
    
    (13,011
    )
    
    
    (7,461
    )
    
    
    (6,278
    )
    
    
    (21,668
    )Per common share
(basic and
diluted)
    
    $
    (0.58
    )
    
    $
    (0.33
    )
    
    $
    (0.28
    )
    
    $
    (0.97
    )
 Note 20  Market Conditions
  F  - 31




---



##### Table of Contents



LodgeNet Interactive Corporation and Subsidiaries
Schedule II  Valuation and Qualifying Accounts
 Additions
    
    
    
    
    
    AdditionsBalance
    
    Charged to
    
    Additions
    
    Related to
    
    
    
    
    
    BalanceBeginning
    
    Costs and
    
    Related to
    
    Other
    
    
    
    
    
    End ofDescription
    
    of Period
    
    Expenses
    
    Acquisition
    
    Accounts
    
    Deductions
    
    PeriodAllowances deducted
from related
balance sheet
accounts:Year Ended
December 31,
2006:Allowance for
Excess or
Obsolete
System
Components
    
    $
    700
    
    
    $
    946
    
    
    $
    
    
    
    $
    
    
    
    $
    1,186
    
    
    $
    460Allowance for
Doubtful
Accounts
    
    
    300
    
    
    
    (154
    )
    
    
    
    
    
    
    
    
    
    
    (29
    )
    
    
    175Allowance for
System
Removal
    
    
    840
    
    
    
    2,155
    
    
    
    
    
    
    
    
    
    
    
    2,175
    
    
    
    820Deferred Tax
Valuation
Allowance
    
    
    93,202
    
    
    
    
    
    
    
    
    
    
    
    2,362
    
    
    
    3,386
    
    
    
    92,178Year Ended
December 31,
2007:Allowance for
Excess or
Obsolete
System
Components
    
    $
    460
    
    
    $
    1,405
    
    
    $
    
    
    
    $
    
    
    
    $
    1,190
    
    
    $
    675Allowance for
Doubtful
Accounts
    
    
    175
    
    
    
    392
    
    
    
    
    
    
    
    
    
    
    
    135
    
    
    
    432Allowance for
System
Removal
    
    
    820
    
    
    
    2,115
    
    
    
    
    
    
    
    
    
    
    
    2,513
    
    
    
    422Deferred Tax
Valuation
Allowance
    
    
    92,178
    
    
    
    
    
    
    
    64,755
    
    
    
    40,637
    
    
    
    338
    
    
    
    197,232Year Ended
December 31,
2008:Allowance for
Excess or
Obsolete
System
Components
    
    $
    675
    
    
    $
    513
    
    
    $
    
    
    
    $
    
    
    
    $
    620
    
    
    $
    568Allowance for
Doubtful
Accounts
    
    
    432
    
    
    
    844
    
    
    
    
    
    
    
    
    
    
    
    723
    
    
    
    553Allowance for
System
Removal
    
    
    422
    
    
    
    3,157
    
    
    
    
    
    
    
    
    
    
    
    2,314
    
    
    
    1,265Deferred Tax
Valuation
Allowance
    
    
    197,232
    
    
    
    
    
    
    
    
    
    
    
    18,308
    
    
    
    14,436
    
    
    
    201,104
 F  - 32