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                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                    FORM 10-K

                                   (Mark One)

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[X]       ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES EXCHANGE ACT OF 1934
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                   FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998

                                       or

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[ ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
          SECURITIES AND EXCHANGE ACT OF 1934

Commission File Number: 0-22334

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

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

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

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

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

Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, $.01 
                                                            PAR VALUE.

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

        Indicate by check mark if disclosure of delinquent filers pursuant to
        Item 405 of Regulation S-K is not contained herein, and will not be
        contained to the best of Registrant's knowledge, in definitive proxy or
        information statements incorporated by reference in Part III of the Form
        10-K or any amendment to this Form 10-K. [ ]

As of March 9, 1999, the aggregate market value of the common stock held by
non-affiliates of the Registrant was approximately $87.3 million. The number of
shares of common stock of the Registrant outstanding as of March 9, 1999 was
11,942,387 shares.

DOCUMENTS INCORPORATED BY REFERENCE - Part III of this Form 10-K is incorporated
by reference from Registrant's definitive proxy statement for the 1999 Annual
Meeting of Stockholders, which will be filed within 120 days of the fiscal year
ended December 31, 1998.

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This Report contains a total of 56 pages, excluding exhibits. The Exhibit 
index appears on page 27.


<PAGE>

                            TABLE OF CONTENTS

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

Item 1 - Business ............................................................   1

         Overview ............................................................   1
         Business Strategy ...................................................   2
         ResNet Transaction ..................................................   3
         Markets and Customers ...............................................   3
         Services and Products ...............................................   4
         Operations ..........................................................   5
         Competition .........................................................   8
         Regulation ..........................................................   9
         Employees ...........................................................  10

Item 2 - Properties ..........................................................  10

Item 3 - Legal Proceedings ...................................................  10

Item 4 - Submission of Matters to a Vote of Security Holders .................  10

Item 5 - Market for Registrant's Common Equity and Related Stockholder 
         Matters .............................................................  11

         Dividends ...........................................................  11
         Stockholder Rights Plan .............................................  11

Item 6 - Selected Financial Data .............................................  15

Special Note Regarding Forward-Looking Statements ............................  17

Item 7 - Management's Discussion and Analysis of Financial 
         Condition and Results of Operations .................................  17

Item 8 - Financial Statements and Supplementary Data .........................  26

Item 9 - Changes In and Disagreements with Accountants on 
         Accounting and Financial Disclosure .................................  26

Item 10 - Directors and Officers of the Registrant ...........................  26

Item 11 - Executive Compensation .............................................  26

Item 12 - Security Ownership of Certain Beneficial Owners and Management .....  26

Item 13 - Certain Relationships and Related Transactions .....................  27

Item 14 - Exhibits, Financial Statement Schedules and Reports on Form 8-K ....  27
</TABLE>
----------

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


LodgeNet Entertainment Corporation     i                          Form 10-K 1998
<PAGE>

                                     PART I

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        Certain statements in this Annual Report on Form 10-K, including,
without limitation, statements in Item 1, including certain statements under the
headings "Overview", "Business Strategy", "Strategic Initiatives", "Services and
Products", "Operations", "Competition" and "Regulation", in Item 3 under the
heading "Legal Proceedings", and in Item 7 under the heading "Management's
Discussion and Analysis of Financial Condition and Results of Operations,"
constitute "forward-looking statements" within the meaning of the Securities Act
of 1933, as amended, and the Securities Exchange Act of 1934, as amended. When
used in this Annual Report, the words "expects," "anticipates," "estimates,"
"believes," "no assurance" and similar expressions and statements which are made
in the future tense, are intended to identify such forward-looking statements.
Such forward-looking statements involve known and unknown risks, uncertainties
and other factors, which may cause the Company's actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. In
addition to the risks and uncertainties discussed in the foregoing sections,
such factors include, among others, the following: the impact of competition and
changes to the competitive environment for the Company's products and services,
changes in technology, reliance on strategic partners, uncertainty of
litigation, changes in government regulation and other factors detailed, from
time to time, in the Company's filings with the Securities and Exchange
Commission. These forward-looking statements speak only as of the date of this
Annual Report. The Company expressly disclaims any obligation or undertaking to
release publicly any updates or revisions to any forward-looking statements
contained herein to reflect any change in the Company's expectations with regard
thereto or any change in events, conditions or circumstances on which any such
statement is based.

ITEM 1 - BUSINESS

OVERVIEW

        LodgeNet is a specialized communications company which provides video
on-demand, network-based Nintendo-Registered Trademark- video games, cable
television programming and other interactive entertainment and information
services to the lodging industry. The Company is the second largest provider of
these services to the lodging industry and currently serves over 4,500 hotel
properties throughout the United States and Canada. From 1992 through 1998, the
number of guest pay rooms the Company serves has grown at a compound annual rate
of 34.0%, from 73,415 to 596,806, and the Company currently serves over 596,000
Guest Pay rooms. During the same period, the Company's revenues and EBITDA
("Earnings Before Interest, Taxes, Depreciation, and Amortization") have grown
at compound annual rates of 38.0% and 55.2%, respectively, to $166.4 million and
$48.6 million in 1998.

        The Company provides both Guest Pay and free-to-guest services to its
clients. Guest pay services are purchased by guests on a per-view or hourly
basis and include Guest Scheduled-SM- on-demand movies and network-based
Nintendo video games. Guest pay packages may also include additional services,
such as satellite-delivered basic and premium cable television programming, and
other interactive entertainment and information services that are paid for by
the hotel and provided to guests at no charge. Free-to-guest services typically
involve a customized package of basic and premium cable television programming.
Hotels purchase free-to-guest services from the Company and provide the services
to their guests at no charge. The Company provides its services to various
corporate-managed hotel chains such as Sheraton, Ritz-Carlton, Harrah's Casino
Hotels, Delta Hotels and Resorts, Outrigger, La Quinta Inns, and Red Roof Inns,
as well as many individual properties flying the Marriott, Holiday Inn, Hilton,
Inter-Continental, Prince, Radisson, Westin, Doubletree, Embassy Suites, Wingate
and other flags.

        The Company provides its services throughout the United States and
Canada, and in other select countries through licensing arrangements with
strategic partners. The Company's contracts are exclusive and typically have
initial, non-cancelable terms of 5 to 7 years. The exclusive nature of these
contracts allows the Company to estimate (based on certain operating
assumptions) future revenues, cash flows and rates of return related to the
contracts prior to making a capital investment decision. The average remaining
life of the Company's existing guest pay contracts is over four years, with less
than 8% of these contracts due to expire before 2000.


LodgeNet Entertainment Corporation     1                          Form 10-K 1998
<PAGE>

        The Company offers its interactive services by utilizing the two-way
digital communications design of its proprietary b-LAN-Registered Trademark-
system architecture. The design of this open-architecture, UNIX-based platform
enables the Company to upgrade system software to support the introduction of
new services and integrate new technologies as they become commercially
available and economically viable. The Company believes the flexibility of its
b-LAN system architecture has enabled it to provide innovative and creative
solutions to the lodging industry, including:

        -       achieving the industry's highest percentage of installed guest
                pay rooms offering on-demand movies (as compared to scheduled
                movies that can only be watched at predetermined times),

        -       being the first in its industry to install and widely deploy
                network-based video games,

        -       being the first in its industry to utilize an image-based menu
                and purchasing protocol using on-screen graphics to market
                movies and video games, rather than using simple text menus
                traditionally used by its competitors,

        -       installing and testing an Internet browser that enables hotel
                guests to access and navigate the Internet from their guest room
                television, and

        -       integrating and testing technology that is expected to allow the
                Company to cost-effectively provide plug-and-play, high-speed
                Internet access (at up to 50 times the speed of conventional
                modems) to hotel guest rooms and meeting spaces.

        The lodging market in the United States comprises approximately 3.6
million rooms. Due to certain economies of scale, guest pay service providers
have traditionally targeted only large hotels with over 150 rooms, which
represent a total of approximately 1.3 million rooms. In 1995, the Company
redesigned its b-LAN system, enabling it to cost-effectively deliver on-demand
movies and network-based video games to mid-size hotels of 75 to 150 rooms. As
the mid-size hotel market has been historically under-served by guest pay
providers, it represents a large (approximately 1.2 million rooms) and
attractive market for the Company's services that generates financial returns
that meet or exceed those achieved in larger hotels. Since 1995, the Company has
added more than 170,000 rooms to its room base from mid-sized hotels.

        The Company's predecessor commenced business in 1980 as Satellite Movie
Company, incorporated as a South Dakota corporation in February 1983 and changed
its name to LodgeNet Entertainment Corporation in September 1991. On October 13,
1993, LodgeNet Entertainment Corporation changed its state of incorporation from
South Dakota to Delaware by merging with and into the Company, its newly-formed
Delaware subsidiary, which then adopted the LodgeNet name. The Company's
principal executive offices are located at 3900 West Innovation Street, Sioux
Falls, South Dakota 57107, (605) 988-1000.

BUSINESS STRATEGY

        CONTINUE TO SELECTIVELY EXPAND THE COMPANY'S ROOM BASE. Within the
Company's target market of hotels with 75 or more rooms, the Company believes
substantial opportunity exists for continued, selective growth in its room base.
The Company estimates that more than 400,000 rooms are presently not served by
any guest pay vendor and fit its target economic profile. The Company also
estimates that its competitors serve another 200,000 rooms under contracts due
to expire before 2001. The Company believes that the cost-effective and flexible
design of its scaleable b-LAN system, together with its expertise in
installation, programming, technical support and customer service, will allow
the Company to continue to expand its room base. Based on these strengths, the
Company has increased its selectivity and is seeking higher rates of return on
new contracts. Internationally, the Company intends to continue to expand into
selected countries in Asia and Latin America and other regions through licensing
agreements with established entities in these countries. Under these agreements,
the Company does not provide any capital investment, it licenses its b-LAN
system architecture and multimedia capabilities, sells equipment at cost plus an
agreed markup and receives a royalty based on gross revenues.

        MAXIMIZE REVENUE PER GUEST PAY ROOM. The Company seeks to maximize the
revenue generated by each of its installed guest pay rooms. To achieve this
strategy, the Company intends to continue to install its interactive Guest
Scheduled on-demand movie system and network-based Nintendo video game system in
all new guest pay hotel rooms. From the Company's experience, rooms with these
features generate significantly more revenue and gross profit than comparable
rooms having only the scheduled format, which allows guests to watch movies only
at predetermined times. In addition, beginning in the second quarter of 1999,
the Company intends to install the Nintendo N64 game platform in all new guest
pay rooms and upgrade selected existing guest pay rooms. The Company believes
that this platform, which will offer guests network-based access to the most
popular and advanced Nintendo video games, will generate more per room revenue
than the current Nintendo system.


LodgeNet Entertainment Corporation     2                          Form 10-K 1998
<PAGE>

        To take advantage of the growth in the Internet, since mid-1997, the
Company has been developing and testing an Internet browser service that enables
a hotel guest to access and navigate the World Wide Web through the guest room
television over the Company's b-LAN system architecture. During this time, the
Company has been testing hardware platforms available from various vendors,
seeking content relationships with a wide variety of Internet sites and has been
enhancing its proprietary communications software. During the first six months
of 1999, the Company intends to expand the test of the Internet browser service.
The Company believes there may be significant opportunities to generate revenues
from usage fees charged to the guests who utilize the service as well as from
third-party providers of content, merchandise and information services who would
pay the Company for electronic access to its valuable consumer base.

        In October 1998, the Company acquired the Connect Group Corporation. As
a result of this acquisition, the Company acquired technology that it is
integrating into its system which will allow hotel guests with laptop computers
to connect to the Internet (without changing their system configurations) at
access speeds up to 50 times faster than conventional modems, while bypassing
the hotel's PBX system. The Company believes that the acquired technology is
superior to and more cost efficient than other systems currently being offered
in the lodging market. The Company further believes that this "managed
connectivity" service may represent a significant opportunity to generate
revenues from usage fees charged to guests who utilize the service or from
hotels which want to provide the service as an amenity to their guests. The
Company believes that high speed Internet services will attractively complement
its existing service offerings.

        The Company's current installed guest pay base of over 596,000 rooms
hosts more than 150 million guests each year (based on current average occupancy
and length-of-stay data). The Company believes such guests represent a
demographic profile which a variety of advertisers may find to be highly
desirable. For example, since November 1998, the Company has installed an
interactive in-room shopping service in over 375,000 guest rooms that enables
the guest to browse through a video version of the SkyMall-Registered Trademark-
catalog featuring quality merchandise from some of the country's leading
retailers for which the Company is paid a fixed, monthly access fee. The Company
is seeking other advertising-based arrangements, such as advertiser-supported
visitor information services for specific cities, as well as other advertising
strategies to deliver targeted product or service information directly to the
consumer. The Company will evaluate these and other opportunities as well as
appropriate business models that would enable the Company to increase the
revenue generated per guest pay room.

        INCREASE OPERATING MARGINS. Complementing the Company's growth objective
is its ongoing goal of increasing operating margins by reducing direct and
overhead expenses, as measured on a percentage of revenue and on a per-installed
unit basis. The EBITDA margin from the Company's lodging business has increased
from 14.4% in 1992 to 30.5% in 1998. The Company achieved this result through
reduced per-room operating costs as it leveraged its infrastructure over a
larger base of installed rooms.

RESNET TRANSACTION

        In January 1996, the Company formed ResNet Communications, Inc. ("ResNet
Inc.") to extend its b-LAN system architecture and operational expertise into
the multi-family dwelling unit ("MDU") market. Through ResNet Inc.'s majority
owned subsidiary, ResNet Communications, LLC ("ResNet LLC"), the Company
provided cable television and other interactive services to the MDU market. In
July 1998, the Company decided to merge the ResNet business into a larger, and,
it believes, more cost-effective operating entity. On November 30, 1998 (the
"Closing Date"), the Company transferred the ResNet business, consisting of net
assets totaling $31.3 million, to Global Interactive Communications Corporation
("GICC") in exchange for (i) a 30% equity interest in GICC, and (ii) notes
receivable totaling $10.8 million. In addition to its ownership of the ResNet
business, GICC holds certain cable and telephone system assets contributed by
Shared Technologies Corporation, a Delaware corporation ("STC"), and Interactive
Cable Systems, Inc., a California corporation ("ICS").

        Beginning with the Closing Date, the Company will account for its 
investment in GICC on the equity method of accounting for an investment. As a 
result of this accounting treatment, and because the Company expects that 
there is a high probability that GICC will operate at a loss for the 
foreseeable future as it pursues its business plan, the Company expects to 
recognize continuing losses in connection with its investment in GICC, which 
losses will be reflected as "equity in losses of unconsolidated affiliates" 
in the Company's operating statements. As of the date of this Report, there 
is no public market for the securities of GICC, and there can be no assurance 
as to when any such market may develop. The financial and operating 
performance of GICC, the market acceptance for its securities and general 
market conditions, among other factors, are not subject to the Company's 
control and may each affect the value of the Company's investment in GICC.

        On the Closing Date, ResNet Inc., STC and ICS entered into a
Stockholders Agreement providing among other things, for: (i) limitations on the
transfer of the GICC Common Stock; (ii) preemptive rights; (iii) rights of first
offer by other stockholders in the event of a sale of the GICC Common Stock by
any stockholder; (iv) tag-along-rights by other stockholders to participate in
an offer from a third party to any stockholder to purchase the GICC Common
Stock; (v) registration rights; (vi) approval rights for 


LodgeNet Entertainment Corporation     3                          Form 10-K 1998
<PAGE>

sale of material assets; and (vii) the right to designate one director by a 
stockholder as long as a certain level of ownership of GICC is maintained. 
The Company has no continuing obligation to make any additional investments 
into GICC.

MARKETS AND CUSTOMERS

        LARGE HOTEL MARKET. Historically, the Company's primary market for guest
pay services has been large hotels with over 150 rooms located in metropolitan
areas in the U.S. and Canada, and the Company estimates that this market segment
contains approximately 1.3 million rooms. The Company currently provides its
services to large hotels that are generally part of chains such as Sheraton,
Ritz-Carlton, Harrah's Casino Hotels, Delta Hotels and Resorts, Outrigger,
Holiday Inn, Inter-Continental, Embassy Suites, Prince, Radisson, Westin, Hilton
and Marriott. No single contract represented greater than 10% of the Company's
combined guest pay and free-to-guest revenues for the year ended December 31,
1998.

         MID-SIZE HOTEL MARKET. In 1995, LodgeNet redesigned its interactive
system, enabling the Company to deliver on-demand movies and network-based video
games more cost-effectively to mid-size hotels. Since 1995, the Company has also
been targeting mid-size hotels of 75 to 150 rooms as part of its guest pay
marketing strategy. Since 1995, the Company has added more than 170,000 rooms to
its room base for mid-size hotels. The Company believes that this market
segment, which the Company estimates contains approximately 1.2 million rooms,
has not been broadly served by the guest pay industry because smaller average
property sizes lack economies of scale. The mid-size hotel segment represents a
large and attractive market for the Company's services that generates financial
returns that meet or exceed those achieved in larger hotels.

         FREE-TO-GUEST MARKET. Almost all of the approximately 3.6 million hotel
rooms in the United States are served by some form of free-to-guest television
service. Free-to-guest television typically involves a package of basic and
premium programming which the hotel purchases and provides at no charge to its
guests. These services can be purchased on a stand-alone basis or as part of a
package which includes guest pay services.

SERVICES AND PRODUCTS

        GUEST PAY SERVICES. The Company's primary source of revenue is 
providing in-room, interactive television services to the lodging industry, 
for which the hotel guest pays on a per-view or per-play basis. The 
high-speed, two-way digital communications design of the Company's 
proprietary b-LAN system architecture enables the Company to provide 
sophisticated interactive features such as on-demand movies and network-based 
Nintendo video games. Guest pay packages also include a variety of other 
interactive services, such as satellite-delivered basic and premium cable 
television programming, folio review, video checkout, guest satisfaction 
survey, advertising and merchandising services that are paid for by the hotel 
and provided to guests free of charge.

        Guest pay services include in-room television viewing of recently
released major motion pictures and independent films for which a hotel guest
pays on a per-view basis. The Company's Guest Scheduled interactive video
on-demand system allows guests to choose from an expanded menu of video
selections and individually start the selected video at their convenience rather
than restricting them to a predetermined start time. It has been the Company's
experience that rooms having the on-demand format generate significantly greater
movie revenues than comparable rooms having only the pre-scheduled format. As of
December 31, 1998, the Company served over 596,000 guest pay rooms, of which
approximately 582,000, or 97.5%, featured the Company's interactive on-demand
system. The Company's original scheduled guest pay service, which is provided in
less than 3% of the Company's guest pay rooms, offers guests a choice of up to
nine movie titles shown at predetermined times, offering a new film
approximately every half hour. The Company continuously monitors guests'
entertainment selections and adjusts its programming to respond to viewing
patterns. The system also enables hotel owners to broadcast informational and
promotional messages.

        In May 1993, the Company entered into a non-exclusive license 
agreement with Nintendo to provide hotels with a network-based Nintendo video 
game playing system. In May 1998, this agreement was revised and extended for 
ten years. Pursuant to this extended agreement, Nintendo of America, Inc. 
will provide the Company with access to its new Nintendo N64 video games. As 
with the Nintendo video game playing system, the Company will use its 
proprietary high-speed b-LAN system architecture to allow guests to play the 
video games over the hotel's master antenna television system. The Company 
anticipates that it will begin deploying the Nintendo N64 video game platform 
in the second quarter of 1999. Hotel guests are charged a fee based on the 
amount of time they play the video games. Presently, the Company generally 
charges $6.95 per hour of play. The Company had over 546,000 rooms installed 
with the Nintendo video game systems as of December 31, 1998.

        The revenues generated from the guest pay service are dependent upon
three factors at each location: (i) the occupancy rate at the property; (ii) the
"buy rate" or percentage of occupied rooms that buy movies or video
games/information services at the 


LodgeNet Entertainment Corporation     4                          Form 10-K 1998
<PAGE>

property; and (iii) the price of the movie, video game or service. For 
example, a property installed with the Company's interactive system with a 
70% occupancy rate, a buy rate of 10.5% and an $8.95 movie price will 
generate an average of $20.00 of gross movie revenue per installed room per 
month, plus additional gross revenues of $3.60 per month from video games, 
free-to-guest and other services, resulting in total gross revenue per room 
per month of $23.60, assuming an average of 30.4 days in the month. Occupancy 
rates vary (a) by property based on the property's competitive position 
within its marketplace, (b) over time based on seasonal factors, and (c) as a 
result of changes in general economic conditions. Buy rates generally reflect 
the hotel's guest mix profile, the popularity of the motion pictures 
available and the guests' other entertainment alternatives. Buy rates also 
vary over time with general economic conditions. Movie price levels are 
established by the Company and are set based on the guest mix profile at each 
property and overall economic conditions. Movie prices are set by the Company 
on a title by title basis, but are generally $7.95, $8.95 or $9.95. Prices 
may be higher in some locations and for certain highly popular titles.

        The cost of installation varies depending on the size of the hotel
property and the configuration of the system being installed. The average
installed cost of a new on-demand guest pay room with interactive and video game
services capabilities, including the headend equipment and, in some cases,
televisions, is currently approximately $375 to $385 per room. In addition to
hotel commissions and royalties paid to movie studios, operating costs of the
guest pay systems include in-room movie schedules and information cards, preview
tapes or discs, tape duplication, taxes, freight, insurance, personal property
taxes, maintenance and data line costs.

        In exchange for a contract renewal or significant contract extension the
Company typically invests from $75 to $175 per room, depending on the length of
the extended contract period and the upgrade services installed.

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

        For free-to-guest services, the hotel pays the Company a fixed monthly
charge per room for each programming channel selected and provides these
channels to its guests free of charge. Premium channels, such as HBO, Showtime
and The Disney Channel, broadcast major motion pictures and specialty
programming, while non-premium channels, such as CNN, ESPN and WTBS, broadcast
news, sports and informational programs. Premium programming suppliers typically
contract only with cable companies and other large volume subscribers, such as
the Company, and will not generally provide programming directly to individual
hotel properties. The Company successfully competes with local cable television
operators by customizing packages of programming to provide only those channels
desired by the hotel subscriber, which typically reduces the overall cost of the
services provided.

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

OPERATIONS

        CONTRACTS. The Company provides guest pay services under contracts with
lodging properties that generally run for a term of 5 to 7 years. During the
four years ended December 31, 1998, the average initial term of new guest pay
contracts exceeded 6 years. Under these contracts, the Company installs its
system into the hotel free of charge and retains ownership of all equipment
utilized in providing the service. Traditionally, the hotel provides and owns
the television set; however, the Company in some cases provides televisions
incorporating the Company's integrated guest pay terminal units to hotels which
meet certain economic criteria. The Company's contracts generally provide that
the Company will be the exclusive provider of in-room, on-demand television
entertainment services to the hotels, permit the Company to set the movie price
and allow the Company to terminate the contract if the hotel is not meeting the
Company's economic criteria. The contracts also typically grant the Company a
right of first refusal regarding the provision of additional video related
services to the hotel. The hotels collect the viewing charges from their guests
and retain a commission, which varies depending on the size and profitability of
the system and other factors. At the scheduled expiration of a contract, the
Company generally seeks to extend the contract on substantially similar terms.
The average remaining life of the Company's current guest pay contracts is over
four years, with less than 8% of these contracts coming up for renewal before
2000.

        The Company typically enters into a separate contract with each hotel
for the services provided. The terms contained in the contracts with the
corporate-managed hotels in any one chain generally are negotiated by that
chain's corporate management, 


LodgeNet Entertainment Corporation     5                          Form 10-K 1998
<PAGE>

and the hotels subscribe at the direction of corporate management. In the 
case of franchised hotels, the contracts are generally negotiated separately 
with each hotel.

        TECHNOLOGY, PRODUCT DEVELOPMENT AND PATENTS. The Company designs and
develops high quality interactive, multimedia entertainment and information
systems. Because such systems utilize an open architecture, UNIX-based platform
incorporating industry standard interfaces, the Company can upgrade system
software to support the introduction of new services or integrate new
technologies as they become economically viable. The Company's interactive
system incorporates the Company's scaleable proprietary b-LAN system
architecture with commercially manufactured, readily available components and
hardware such as video cassette players, modulators and computers.

        The Company's b-LAN system architecture utilizes the Company's
proprietary, two-way digital communications design to process and respond to
input commands from the viewer very rapidly. This capability enables the Company
to provide sophisticated interactive features such as network-based Nintendo
video games and on-demand movies, and a variety of other interactive services
such as folio review, video checkout, Internet browsing, guest surveying,
advertising and shopping services. The Company has installed an interactive
in-room shopping service in over 375,000 guest rooms that enables the guest to
browse through a video version of the SkyMall catalog featuring quality
merchandise from the country's leading retailers. The Company is currently
testing an Internet browser that enables the hotel guest to access and navigate
the Internet from any guest room television in the hotel, and the Company
intends to install and test the Internet browser at additional hotels over the
next several months. In October 1998, the Company acquired Connect Group
Corporation. As a result of this acquisition, the Company is integrating and
testing technology that will allow hotel guests with laptop computers to connect
to the Internet from guest or meeting rooms. Such access can be up to 50 times
faster than the speed of conventional modems and bypasses the hotel's PBX
system.

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

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

        The Company designs its systems through its staff of 68 software and
hardware engineers and support personnel (as of December 31, 1998). Development
activities are oriented toward the continued enhancement and cost reduction of
the Company's system and the further development of additional interactive,
multimedia entertainment and information services, such as Internet, advertising
and shopping services.

        It is the Company's policy to apply for patents on those product designs
which management believes may be of significance to the Company. The Company
owns six United States patents, cross-licenses other industry-related
technologies and patent rights, and has other applications for patents pending
in the U.S. Patent and Trademark Office dealing with various aspects of the
Company's interactive multimedia systems.

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


LodgeNet Entertainment Corporation     6                          Form 10-K 1998
<PAGE>

        SALES AND MARKETING. The Company focuses its sales and marketing
strategies on acquiring new contracts from hotels, extending and retaining
existing contracts, and marketing the Company's guest pay and other interactive
services to the hotel guest. The Company's sales and marketing organization
consisted of 67 employees as of December 31, 1998, including national account
representatives, who develop relationships with national hotel franchise
organizations and management groups, and regional sales representatives who
maintain relationships primarily with regional hotel management and ownership
organizations. The Company markets its services and products to hotels by
advertising in industry trade publications, attending industry trade shows,
direct marketing and telemarketing. Sales activities are coordinated from the
Company's headquarters.

        The Company markets its services to hotel guests by means of an
image-based menu and purchasing protocol using on-screen graphics and a movie
promotional channel which contains movie and video game programming information
and highlights the feature film selections of the month. In-room marketing
advertisements are designed and produced by the Company's marketing department.
The system also generates a "Welcome Channel", which appears on-screen when the
television is turned on and describes the programming and interactive services
available through the Company's system.

        INSTALLATION AND SERVICE OPERATIONS. The Company believes that high
quality and consistent systems support and maintenance are essential to
competitive success in its industry. The Company's installation and service
organization consists of 269 employees in 28 locations in the United States and
Canada, as of December 31, 1998. The Company emphasizes the use of
Company-employed installation and service personnel, but also uses
Company-trained subcontractors in areas where there is not a sufficient
concentration of Company-served hotels to warrant a Company-employed service
representative. Currently, the Company's in-house installation and service
organization has responsibility for approximately 87% of the guest pay hotel
rooms served by the Company. Service personnel are responsible for systems
maintenance and distribution and collection of video cassettes. The Company's
installation personnel prepare site surveys to determine the type of equipment
to be installed at each particular hotel, install the Company's systems, train
the hotel staff to operate the systems and perform preliminary quality control
tests.

        The Company maintains a toll-free customer support hot line,
TechConnection, which is monitored 24 hours a day by trained support
technicians. The on-line diagnostic capability of the Company's system enables
the Company to identify and resolve a majority of the reported system
malfunctions from the Company's service control center without visiting the
hotel property. When a service visit is required, the modular design of the
Company's systems permits installation and service personnel to replace
defective components at the hotel site.

         PROGRAMMING. The Company obtains non-exclusive rights to show recently
released major motion pictures from motion picture studios pursuant to a master
agreement with each studio. The license period and percentage fee for each movie
are negotiated separately, with the studio receiving a percentage of the
Company's gross revenue from the movie. For recently released motion pictures,
the Company typically obtains rights to exhibit the picture after the film has
been in theaters, but prior to its release to the home video market or
exhibition on cable television. Generally, studios make master video tapes of
their movies available for duplication sufficiently in advance of the release
dates for the lodging industry so that all of the Company's hotels can offer the
movies as of the first date they are available for exhibition. The Company
obtains independent films, most of which are non-rated and intended for mature
audiences, for a one-time flat fee that is nominal in relation to the licensing
fees paid for major motion pictures and which permits the Company to duplicate
the films as necessary to supply copies to its hotel sites. The Company obtains
its selection of Nintendo video games pursuant to a ten year non-exclusive
license agreement with Nintendo entered into in 1998. Under the terms of the
agreement, the Company pays Nintendo a monthly fee based on the number of rooms
offering Nintendo video game services. The Company continuously monitors guests'
entertainment selections and adjusts its programming to respond to viewing
patterns.

        The Company obtains its basic and premium cable television programming
pursuant to multi-year license agreements generally containing automatic renewal
provisions and pays its programming suppliers a fixed, monthly fee for each room
or subscriber receiving the service. Management believes that relations with the
programming suppliers are good and expects to renew these contracts as necessary
on competitive terms.

        SYSTEMS PRODUCTION GROUP AND EQUIPMENT SUPPLIERS. The Company contracts
directly with various electronics firms for the manufacture and assembly of its
systems hardware, the design of which is controlled by the Company. The Company
has found these suppliers to be dependable and able to meet delivery schedules
on time. The Company believes that, in the event of a termination of any of its
sources, with proper notification from the supplier, alternate suppliers could
be located without incurring significant costs or delays. Certain electronic
component parts used within the Company's products are available from a limited
number of suppliers and can be subject to temporary shortages because of general
economic conditions and the demand and supply for such component parts. If the
Company were to experience a shortage of any given electronic part, the Company


LodgeNet Entertainment Corporation     7                          Form 10-K 1998
<PAGE>

believes that alternative parts could be obtained or system design changes 
implemented. In such event, the Company could experience a temporary 
reduction in the rate of new room installations and/or an increase in the 
cost of such installations. All other components of the Company's systems are 
standard commercial products, such as computers, video cassette players, 
modulators and amplifiers, that are available from multiple sources. The 
Company believes its anticipated growth can be accommodated through existing 
suppliers.

        The headend electronics are assembled at the Company's facilities for
testing prior to shipping. The Company samples the room units at the supplier's
facilities periodically for reliability. Following assembly of headend equipment
with a configuration designed specifically for a particular customer, the system
is shipped to the location, where it is installed by Company-employed
technicians or Company-trained subcontractors.

COMPETITION

        The Company is the second largest provider of interactive and cable
television services to the lodging industry, currently serving over 700,000
hotel rooms. The Company's largest competitor is On Command Corporation ("OCC"),
the successor corporation resulting from the 1996 merger of SpectraVision, Inc.
and On Command Video Corporation. Based upon publicly available information, the
Company estimates that OCC currently serves approximately 929,000 hotel rooms.
The Company also competes with Hospitality Networks, SVI, SeaChange, Time
Warner, Cox Cable and TCI.

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

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

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

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

        While the Company believes that its proprietary b-LAN system
architecture is comparable or superior to the systems currently being used by
its competitors in the lodging industry, there can be no assurance that such
competitors will not develop a cost-effective system that is comparable or
superior to the Company's system. In order to broaden its market opportunities,
the Company over time has redesigned its system to permit the delivery of
on-demand movies and network-based video games to 


LodgeNet Entertainment Corporation     8                          Form 10-K 1998
<PAGE>

mid-size hotels of 75 to 150 rooms, a market segment the Company believes has 
been historically under-served by guest pay providers. There can be no 
assurance that competitors will not develop a cost-effective system that 
would allow them to target this market segment. Further, there can be no 
assurance that the Company will continue its current level of success in 
obtaining new contracts from hotels currently served by other vendors or 
previously unserved, or that the Company will be able to retain contracts 
with hotels it serves when those contracts expire.

        Although in the free-to-guest market the local franchised cable operator
in a hotel's market may have a substantial market presence, such operators
typically offer the hotel owner only standard packages of programming developed
for the residential market and not the lodging market, and at a fixed price per
room based on all the channels provided. The Company competes with the
franchised cable operator for free-to-guest contracts by customizing packages of
programming to provide only those channels desired by the hotel, typically
reducing the overall cost per room.

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

REGULATION

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

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

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

        As a "multichannel video programming distributor" ("MVPD"), however, the
Company is subject to various provisions of the Communications Act of 1934, as
amended. Laws and regulations applicable to MVPDs generally apply to the
Company. These include laws and regulations that benefit the Company, such as
provisions that ensure the Company access to programming on fair, reasonable and
nondiscriminatory terms, as well as provisions that subject the Company to
additional requirements, such as the requirement to obtain consent from
broadcasters in order to retransmit their signals over the Company's systems.


LodgeNet Entertainment Corporation     9                          Form 10-K 1998
<PAGE>

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

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

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

EMPLOYEES

        As of December 31, 1998, the Company had 706 employees in the United
States and Canada. None of these employees is covered by a collective bargaining
agreement. The Company has not experienced any significant labor problems and
believes that its relationship with its employees is good.

ITEM 2 - PROPERTIES

        The Company's National Headquarters and Distribution Center, including
its principal executive offices, is located on an approximately 23 acre site in
Sioux Falls, South Dakota. Construction of the approximately $15 million
facility was completed in December 1997. The National Headquarters and
Distribution Center occupies approximately 228,500 square feet including
approximately 126,500 square feet for executive, administrative and support
functions, approximately 60,000 square feet for assembly and distribution
functions, and approximately 42,000 square feet for warehouse space. The opening
of the National Headquarters and Distribution Center allowed the Company to
consolidate all of its local operations into a single, multipurpose facility
which is designed to enhance operational efficiency and to facilitate any
necessary future expansion needs of the Company. The Company believes that the
site of its National Headquarters and Distribution Center is sufficient to
accommodate its foreseeable local operational space requirements.

        The Company leases 19 facilities, in various locations, from
unaffiliated third parties. These facilities are combination warehouse/office
facilities for installation and service operations and are located throughout
the country. Each of these facilities occupies less than 3,500 square feet.

ITEM 3 - LEGAL PROCEEDINGS

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


LodgeNet Entertainment Corporation     10                         Form 10-K 1998
<PAGE>

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

        On September 30, 1998, the Company solicited the consent of the holders
of the Company's 10.25% Senior Notes Due 2006 (the "Notes") to amend the
indenture governing the Notes to

        (1) Permit the Company to (i) cause ResNet Communications, Inc. ("ResNet
            Inc."), a subsidiary of the Company, to contribute the operations of
            its subsidiary, ResNet Communications, L.L.C. ("ResNet LLC") to a
            newly-formed joint venture company, Global Interactive
            Communications Corporation ("GICC"), (ii) to make up to $5 million
            of additional investments in GICC, and (iii) to enter into
            transactions with GICC so long as the transactions are at arm's
            length and in the ordinary course of business, and

        (2) Authorize the Trustee to execute and deliver a supplemental
            indenture and any instrument, agreement or other document, and take
            any other action reasonably requested by the Company, to effect the
            proposed amendments.

        Registered holders of the Notes, of record as of the close of business
on September 30, 1998, who provided their valid consent to the proposed
amendment prior to October 15, 1998, were entitled to an amount equal to $2.50
per $1,000 of principal of such holder's Notes. The holders of 100% of the
Notes, determined as of the record date for the consent solicitation, consented
to the proposed amendments to the indenture.

        There were no other matters submitted to a vote of security holders
during the quarter ended December 31, 1998.

                                     PART II

ITEM 5 - MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

        The Company's Common Stock currently trades on the NASDAQ National
Market System ("NASDAQ NMS") under the symbol "LNET". The Company's Common Stock
began trading on the NASDAQ NMS on October 14,1993 upon the effectiveness of its
initial public offering. As of March 9, 1999 there were outstanding 11,942,387
shares of the Company's Common Stock.

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

<TABLE>
<CAPTION>
          Quarter Ended          High        Low
          ------------------    ------      ------
          <S>                   <C>         <C>
          March 31, 1997        $17.38      $10.50
          June 30, 1997          12.00        8.00
          September 30, 1997     13.25        9.00
          December 31, 1997      14.00       10.50

          March 31, 1998         12.25       10.38
          June 30, 1998          12.50        8.00
          September 30, 1998     10.00        6.50
          December 31, 1998       7.63        5.13
</TABLE>

        On March 9, 1999, the closing price of the Company's Common Stock, as
reported by NASDAQ NMS was $7.3125. Stockholders are urged to obtain current
market quotations for the Company's Common Stock. As of March 9, 1999 there were
164 stockholders of record of the Company with approximately 87% of the shares
held in "street name". The Company estimates that as of March 9, 1999 there were
more than 2,000 stockholders of the Company.

DIVIDENDS

        No dividends have been paid to date on the Common Stock of the Company.
Management of the Company does not intend to pay any cash dividends on Common
Stock of the Company in the foreseeable future, rather, it is expected that the
Company will retain earnings to finance its operations and growth. The terms and
conditions of the Company's 10.25% Senior Notes and of the Company's bank credit
facility (See "Item 7 -- Management's Discussion and Analysis of Financial
Condition and Results of Operations" elsewhere herein) both contain covenants
which restrict and limit payments or distributions in respect of the Common
Stock of the Company.

LodgeNet Entertainment Corporation     11                         Form 10-K 1998
<PAGE>

STOCKHOLDER RIGHTS PLAN

        On February 28, 1997, the Board of Directors of the Company 
authorized and adopted a stockholder rights plan ("Rights Plan"). The Rights 
Plan is intended to maximize stockholder value by providing flexibility to 
the Board of Directors in the event that an offer for the Company is received 
that is either inadequate or not in the best interest of all stockholders. 
The Rights Plan had been under consideration by the Board of Directors for 
almost a year prior to its adoption and is in a form recommended by the 
Company's outside legal counsel and financial advisors, which form is similar 
to that adopted by many other public companies.

        Pursuant to the Rights Plan, the Board of Directors declared a 
dividend distribution of one "Right" for each outstanding share of common 
stock, par value $.01 per share (the "Common Stock") of the Company to 
stockholders of record at the close of business on March 10, 1997 (the 
"Record Date"). In general, each Right, when exercisable, entitles the 
registered holder to purchase from the Company one one-thousandth of a share 
of a new series of preferred stock, designated as Series A Participating 
Preferred Stock, par value $.01 per share (the "Preferred Stock"), at a price 
of $60.00 (the "Purchase Price"), subject to adjustment. The terms of the 
Rights are set forth in a Rights Agreement (the "Rights Agreement") between 
the Company and Harris Trust and Savings Bank, as "Rights Agent". The 
following summary description of the Rights and the terms of the Rights 
Agreement does not purport to be complete and is qualified in its entirety by 
reference to the Rights Agreement incorporated by reference as an exhibit 
hereto.

        Initially, the Rights will be attached to all Common Stock 
certificates representing shares then outstanding, and no separate Rights 
certificates will be distributed. The Rights will separate from the Common 
Stock and a "Distribution Date" will occur upon the earliest of (i) a public 
announcement that a person, entity or group of affiliated or associated 
persons and/or entities (an "Acquiring Person") has acquired, or obtained the 
right to acquire, beneficial ownership of 15% or more of the outstanding 
shares of Common Stock, other than as a result of repurchases of stock by the 
Company or certain inadvertent actions by institutional or certain other 
stockholders, or (ii) ten days (unless such date is extended by the Board of 
Directors) following the commencement of (or a public announcement of an 
intention to make) a tender offer or exchange offer which would result in any 
person, entity or group affiliated or associated persons and/or entities 
becoming an Acquiring Person.

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

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

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


LodgeNet Entertainment Corporation     12                      Form 10-K 1998
<PAGE>

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

        At any time prior to the earlier to occur of (i) a Person becoming an 
Acquiring Person or (ii) the expiration of the Rights, the Company may redeem 
the Rights in whole, but not in part, at a price of $.01 per Right (the 
"Redemption Price"), which redemption shall be effective upon the action of 
the Board of Directors. Additionally, the Company may thereafter redeem the 
then outstanding Rights in whole, but not in part, at the Redemption Price 
(i) if such redemption is incidental to a merger or other business 
combination transaction or series of transactions involving the Company but 
not involving an Acquiring Person or certain related Persons or 
(ii) following an event giving rise to, and the expiration of the exercise 
period for, the Subscription Right if and for as long as the Acquiring Person 
triggering the Subscription Right beneficially owns securities representing 
less than 15% of the outstanding shares of Common Stock and at the time of 
redemption there are no other Acquiring Persons. The redemption of Rights 
described in the preceding sentence shall be effective only as of such time 
when the Subscription Right is not exercisable, and in any event, only after 
ten business days' prior notice. Upon the effective date of the redemption of 
the Rights, the right to exercise the Rights will terminate and the only 
right of the holders of Rights will be to receive the Redemption Price.

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

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


LodgeNet Entertainment Corporation     13                      Form 10-K 1998
<PAGE>

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


LodgeNet Entertainment Corporation     14                      Form 10-K 1998
<PAGE>

ITEM 6 - SELECTED FINANCIAL DATA

        The following is a summary of Selected Financial Data. The data 
should be read in conjunction with the Company's Consolidated Financial 
Statements, the notes thereto, and "Management's Discussion and Analysis of 
Financial Condition and Results of Operations", all included elsewhere 
herein. Dollar amounts are in thousands, except for per share and per room 
amounts.

<TABLE>
<CAPTION>
                                                        YEAR ENDED DECEMBER 31,
                                        --------------------------------------------------------
                                          1994        1995        1996        1997        1998
                                        --------    --------    --------    --------    --------
<S>                                     <C>         <C>         <C>         <C>         <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
   Guest Pay                            $ 29,927    $ 50,758    $ 84,504    $116,276    $146,481
   Free-to-guest                           8,397       8,060       8,645       8,496       7,854
   Other                                   2,070       4,395       4,572      10,938      12,016
                                        --------    --------    --------    --------    --------
      Total revenues                      40,394      63,213      97,721     135,710     166,351
Direct costs                              18,181      28,910      44,379      58,512      74,008
                                        --------    --------    --------    --------    --------
Gross profit                              22,213      34,303      53,342      77,198      92,343
Operating expenses                        24,573      36,741      58,428      85,262     102,282
                                        --------    --------    --------    --------    --------
Operating loss                            (2,360)     (2,438)     (5,086)     (8,064)     (9,939)
Equity in losses of
   unconsolidated affiliates                  --          --          --          --       6,550
Interest expense                             966       4,522       8,243      17,001      23,048
                                        --------    --------    --------    --------    --------
Loss before income taxes,
   extraordinary loss and 
   cumulative effect of                   (3,326)     (6,960)    (13,329)    (25,065)    (39,537)
   accounting change
Provision for income taxes                    --          66          28         344         375
                                        --------    --------    --------    --------    --------
Loss before extraordinary loss
   and cumulative effect of
   accounting change                      (3,326)     (7,026)    (13,357)    (25,409)    (39,912)
Extraordinary loss (1)                     1,324          --       3,253          --          --
Cumulative effect of accounting
   change (2)                                 --          --          --         210          --
                                        --------    --------    --------    --------    --------
Net loss                                $ (4,650)   $ (7,026)   $(16,610)   $(25,619)   $(39,912)
                                        --------    --------    --------    --------    --------
                                        --------    --------    --------    --------    --------

Per common share (basic and diluted):
  Loss before extraordinary
     loss and cumulative
     effect of accounting change        $   (.45)   $   (.96)   $  (1.40)   $  (2.25)   $  (3.45)
  Extraordinary loss                        (.18)         --        (.34)         --          --
  Cumulative effect of 
     accounting change                        --          --          --        (.02)         --
                                        --------    --------    --------    --------    --------
  Net loss                              $   (.63)   $   (.96)   $  (1.74)   $  (2.27)   $  (3.45)
                                        --------    --------    --------    --------    --------
                                        --------    --------    --------    --------    --------


OTHER DATA:
EBITDA (3)                              $  9,301    $ 15,898    $ 24,729    $ 35,696    $ 48,576
EBITDA margin (3)                           23.0%       25.1%       25.3%       26.3%       29.2%
Capital expenditures                    $ 43,521    $ 51,497    $ 84,256    $104,377    $ 69,660
Depreciation and amortization             11,661      18,336      29,815      43,760      55,215
Annualized EBITDA (4)                     11,250      18,246      27,290      39,090      55,536
Ratio of earnings to fixed
   charges (5)                                --          --          --          --          --
Ratio of long-term debt to
   annualized EBITDA (4)                   2.49x       3.15x       6.57x       4.67x       4.72x
Ratio of EBITDA to interest
   expense (3)                             9.63x       3.52x       3.00x       2.10x       2.11x

OPERATING DATA:
Guest Pay rooms served (6)
   On-demand                             119,680     209,487     358,842     484,070     581,893
   Scheduled                              65,351      58,720      41,403      27,781      14,913
                                        --------    --------    --------    --------    --------
      Total Guest Pay rooms              185,031     268,207     400,245     511,851     596,806
                                        --------    --------    --------    --------    --------
                                        --------    --------    --------    --------    --------

Rooms with Nintendo-Registered 
   Trademark- game systems (6)            69,806     163,879     322,903     448,969     546,324

Free-to-guest rooms served (6)           220,534     249,779     294,882     341,030     384,324
Total rooms served (6) (7)               314,184     388,088     516,348     613,407     703,325
Average monthly revenue per
   Guest Pay room:
     Movie revenue                      $  15.03    $  17.08    $  18.38    $  17.86    $  18.44
     Video game/information
       services                             1.01        2.21        2.93        3.28        3.62
                                        --------    --------    --------    --------    --------
      Total                             $  16.04    $  19.29    $  21.31    $  21.14    $  22.06
                                        --------    --------    --------    --------    --------
                                        --------    --------    --------    --------    --------
</TABLE>


LodgeNet Entertainment Corporation     15                      Form 10-K 1998
<PAGE>

<TABLE>
<CAPTION>
                                               AS OF DECEMBER 31,
                               ---------------------------------------------------
                                 1994      1995       1996       1997       1998
                               -------   --------   --------   --------   --------
<S>                            <C>       <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash and cash equivalents      $ 4,302   $  2,252   $ 86,177   $  1,021   $  5,240
Total assets                    88,265    125,507    279,768    260,294    306,030
Long-term debt                  28,000     57,497    179,233    182,691    262,375
Total stockholders' equity      47,942     42,726     75,552     49,579     11,774
</TABLE>

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

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

(3)   EBITDA ("Earnings Before Interest, Taxes, Depreciation and Amortization")
      is not intended to represent an alternative to net income or cash flows 
      from operating, financing or investing activities (as determined in 
      accordance with generally accepted accounting principles) as a measure 
      of performance. Rather, it is included herein because EBITDA is a widely 
      accepted financial indicator used by certain investors and financial 
      analysts to assess and compare companies on the basis of operating 
      performance. Management believes that EBITDA provides an important 
      additional perspective on the Company's operating results and the 
      Company's ability to service its long-term debt and to fund the 
      Company's continuing growth. EBITDA has been presented excluding equity 
      in losses of unconsolidated affiliates and the restructuring charge for
      the ResNet merger in 1998.

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

(5)   Earnings is defined as net loss before income taxes, extraordinary items
      and fixed charges, except where capitalized. Fixed charges is defined as
      the portion of rental expense under operating leases representing
      interest, and interest, including amortization of debt expense, whether
      expensed or capitalized. Earnings were insufficient to cover fixed
      charges for the years ended December 31 by the amounts indicated: 
      1994 -- $(3,326); 1995 -- $(6,960); 1996 -- $(13,329); 1997 -- 
      $(25,065); and 1998 -- $(38,799).

(6)   At end of year.

(7)   Total rooms served include those rooms receiving one or more of the
      Company's services, including rooms served by international licensees.


LodgeNet Entertainment Corporation     16                      Form 10-K 1998
<PAGE>

SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS

        Certain statements in this Annual Report on Form 10-K, including, 
without limitation, statements in Item 1, including certain statements under 
the headings "Overview", "Business Strategy", "Strategic Initiatives", 
"Services and Products", "Operations", "Competition" and "Regulation", in 
Item 3 under the heading "Legal Proceedings", and in Item 7 under the heading 
"Management's Discussion and Analysis of Financial Condition and Results of 
Operations," constitute "forward-looking statements" within the meaning of 
the Securities Act of 1933, as amended, and the Securities Exchange Act of 
1934, as amended. When used in this Annual Report, the words "expects," 
"anticipates," "estimates," "believes," "no assurance" and similar 
expressions and statements which are made in the future tense, are intended 
to identify such forward-looking statements. Such forward-looking statements 
involve known and unknown risks, uncertainties and other factors, which may 
cause the Company's actual results, performance or achievements to be 
materially different from any future results, performance or achievements 
expressed or implied by such forward-looking statements. In addition to the 
risks and uncertainties discussed in the foregoing sections, such factors 
include, among others, the following: the impact of competition and changes 
to the competitive environment for the Company's products and services, 
changes in technology, reliance on strategic partners, uncertainty of 
litigation, changes in government regulation and other factors detailed, from 
time to time, in the Company's filings with the Securities and Exchange 
Commission. These forward-looking statements speak only as of the date of 
this Annual Report. The Company expressly disclaims any obligation or 
undertaking to release publicly any updates or revisions to any 
forward-looking statements contained herein to reflect any change in the 
Company's expectations with regard thereto or any change in events, 
conditions or circumstances on which any such statement is based.

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

        THE FOLLOWING DISCUSSION SHOULD BE READ IN CONJUNCTION WITH, AND IS 
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, THE CONSOLIDATED FINANCIAL 
STATEMENTS OF THE COMPANY, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE 
HEREIN.

                                    OVERVIEW

        LodgeNet is a specialized communications company which provides video 
on-demand, network-based video games, cable television programming and other 
interactive entertainment and information services to the lodging market 
utilizing its proprietary b-LAN system architecture.

LODGING SERVICES

        GUEST PAY SERVICES. Guest Pay services are purchased by guests on a 
per-view or hourly basis and include Guest Scheduled on-demand movies and 
network-based Nintendo video games. Guest Pay packages may also include 
additional services such as satellite-delivered basic and premium cable 
television programming, and other interactive entertainment and information 
services that are paid for by the hotel and provided to guests at no charge. 
The growth that the Company has experienced has principally resulted from its 
rapid expansion of guest pay services, which the Company began installing in 
1986. In May 1992, the Company introduced and began installing its on-demand 
Guest Pay service. It has been the Company's experience that rooms featuring 
the "on-demand" Guest Pay service generate significantly more revenue and 
gross profit per room than comparable rooms having only the scheduled format. 
The following table sets forth information in regard to Guest Pay rooms 
installed as of December 31:

<TABLE>
<CAPTION>
                       1996                  1997                 1998
                -----------------     -----------------     -----------------
                 Rooms        %        Rooms        %        Rooms        %
                -------     -----     -------     -----     -------     -----
<S>             <C>         <C>       <C>         <C>       <C>         <C>
Scheduled        41,403      10.3      27,781       5.4      14,913       2.5
On-demand       358,842      89.7     484,070      94.6     581,893      97.5
                -------     -----     -------     -----     -------     -----
   Total        400,245     100.0     511,851     100.0     596,806     100.0
                -------     -----     -------     -----     -------     -----
                -------     -----     -------     -----     -------     -----
</TABLE>

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


LodgeNet Entertainment Corporation     17                      Form 10-K 1998
<PAGE>

        The Company provides video games and interactive multimedia 
entertainment and information services including folio review, video 
check-out, guest satisfaction survey, advertising, and merchandising services 
through its guest pay systems. In 1993, the Company entered into a seven-year 
non-exclusive license agreement with Nintendo of America, Inc. ("Nintendo") 
to provide hotels with a network-based Super Nintendo-Registered Trademark- 
video game playing system. During 1998, the Company entered into a new ten 
year non-exclusive license agreement with Nintendo to become the first 
provider of Nintendo 64 ("N64-Registered Trademark-") video games to the 
lodging industry. The Company anticipates the rollout of the N64 game 
technology to begin during the second quarter of 1999. The following table 
sets forth the number of guest pay rooms with game systems installed as of 
December 31:

<TABLE>
<CAPTION>
                                            1996         1997         1998
                                          -------      -------      -------
<S>                                       <C>          <C>          <C>
Super Nintendo-Registered Trademark- 
   game systems rooms                     322,903      448,969      546,324
</TABLE>

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

<TABLE>
<CAPTION>
                                                1996       1997       1998
                                               -------    -------    -------
<S>                                            <C>        <C>        <C>
At hotels with Guest Pay services              178,779    246,054    288,979
At hotels with only free-to-guest services     116,103     94,976     95,345
                                               -------    -------    -------
    Total rooms with free-to-guest services    294,882    341,030    384,324
                                               -------    -------    -------
                                               -------    -------    -------
</TABLE>

RESIDENTIAL SERVICES

        In January 1996, the Company formed ResNet for the purpose of 
extending the Company's proprietary b-LAN system architecture and operational 
expertise into the multi-family dwelling unit ("MDU") market. In October 
1996, TCI Satellite Entertainment, Inc. (since succeeded by PRIMESTAR MDU, 
Inc. ("PRIMESTAR MDU")), agreed to invest up to $40 million in cash and 
satellite receiving equipment in ResNet in exchange for up to a 36.99% 
interest in ResNet and agreed to provide ResNet with long-term PRIMESTAR DBS 
signals for the MDU market on a nationwide basis.

        Effective November 30, 1998, the ResNet business was merged with two 
non-affiliated entities to form a new entity, Global Interactive 
Communications Corporation ("GICC"). The Company has a 30% equity interest in 
GICC, whose business will consist of providing cable television programming 
and telecommunications services to the MDU market. The agreement between 
ResNet and PRIMESTAR MDU mentioned in the preceding paragraph was terminated 
in conjunction with the ResNet merger transaction.

        The Company will account for its investment in GICC on the equity 
method of accounting  for an investment. As a result of this accounting 
treatment, and because the Company expects that there is a high probability 
that GICC will operate at a loss for the foreseeable future as it pursues its 
business plan, the Company expects to recognize continuing losses in 
connection with its investment in GICC, which losses will be reflected as 
"equity in losses of unconsolidated affiliates" in the Company's operating 
statements.

        As of the date of this report, there is no public market for the 
securities of GICC, and there can be no assurance as to when any such market 
may develop. The financial and operating performance of GICC, the market 
acceptance for its securities and general market conditions, among other 
factors, are not subject to the Company's control and may each affect the 
value of the Company's investment in GICC. The Company has no continuing 
obligation to make any additional investments into GICC.

LodgeNet Entertainment Corporation     18                      Form 10-K 1998
<PAGE>

RESULTS OF OPERATIONS -- YEARS ENDED DECEMBER 31, 1998 AND 1997

REVENUE ANALYSIS

        The Company's total revenue for 1998 increased 22.6%, or $30.6 
million, in comparison to 1997. The following table sets forth the components 
of the Company's revenue (in thousands) for the years ended December 31:

<TABLE>
<CAPTION>
                                1997                        1998
                       ----------------------      ----------------------
                                      Percent                     Percent
                                     of Total                    of Total
                        Amount       Revenues       Amount       Revenues
                       --------      --------      --------      --------
<S>                    <C>           <C>           <C>           <C>
Guest Pay              $116,276         85.7       $146,481         88.1
Free-to-guest             8,496          6.3          7,854          4.7
Other                    10,938          8.0         12,016          7.2
                       --------      --------      --------      --------
   Total               $135,710        100.0       $166,351        100.0
                       --------      --------      --------      --------
                       --------      --------      --------      --------
</TABLE>

        GUEST PAY SERVICES. Guest Pay revenues increased 26.0%, or $30.2 
million, in 1998 as compared to 1997. This increase is attributable to a 
20.7% increase in the average number of installed Guest Pay rooms, all of 
which were installed with the Company's on-demand technology, and to a 4.4% 
increase in average monthly revenue per Guest Pay room. The following table 
sets forth information with respect to Guest Pay rooms for the years ended 
December 31:

<TABLE>
<CAPTION>
                                                1997        1998
                                               ------      ------
<S>                                            <C>         <C>
Average monthly revenue per room:
   Movie revenue                               $17.86      $18.44
   Video game and other service revenue          3.28        3.62
                                               ------      ------
      Total per Guest Pay room                 $21.14      $22.06
                                               ------      ------
                                               ------      ------
</TABLE>

        Average movie revenue per room, for all Guest Pay rooms, increased 
3.2% from the prior year due to the combination of higher average buy rates 
and higher average movie prices, partially offset by a decline in hotel 
occupancy rates.

        Average video game and other service revenue per room, for all Guest 
Pay rooms, increased 10.4% from the prior year, primarily as a result of an 
increase in the number of rooms with information and other services 
installed, partially offset by a decrease in average monthly video game 
revenue per room.

        FREE-TO-GUEST SERVICES. Free-to-guest revenues decreased 7.6%, or 
$642,000, in 1998 as compared to 1997. The decrease is primarily the result 
of a 6.5% decrease in the average number of rooms at hotels receiving only 
free-to-guest services during the period (although total rooms receiving 
free-to-guest services increased 12.7%).

        OTHER. Revenue from other sources includes cable television revenue 
generated by the residential services segment (which was $5,376,000 in 1998 
compared to $2,700,000 in 1997), revenue from international license 
arrangements, and revenue from the sale of televisions, system equipment, and 
service parts and labor. The increase in 1998 from the prior year of $1.1 
million, or 9.9%, is primarily due to increased cable television revenue 
generated by the residential services segment of $2.7 million, partially 
offset by decreased television sales of $1.3 million and decreased sales of 
system equipment.

LodgeNet Entertainment Corporation     19                      Form 10-K 1998
<PAGE>

EXPENSE ANALYSIS

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

<TABLE>
<CAPTION>
                             1997         1998
                           --------     --------
<S>                        <C>          <C>
Direct costs:
   Guest Pay               $ 45,632     $ 60,538
   Free-to-guest              5,663        6,373
   Other                      7,217        7,097
                           --------     --------
                           $ 58,512     $ 74,008
                           --------     --------
                           --------     --------

Gross profit margin:
   Guest Pay                  60.8%        58.7%
   Free-to-guest              33.3%        18.9%
   Other                      34.0%        40.9%
   Composite                  56.9%        55.5%
</TABLE>

        Guest Pay direct costs increased 32.7% to $60.5 million in 1998 from
$45.6 million in the prior year. Since Guest Pay direct costs (primarily studio
and other license fees, video game license fees and the commission retained by
the hotel) are primarily based on related revenue, such direct costs generally
vary directly with revenue. As a percentage of Guest Pay revenue, such costs
increased from 39.2% in 1997 to 41.3% in 1998. The relative increase in Guest
Pay direct costs as a percentage of revenue in 1998 as compared to the prior
year is primarily the result of (i) an increase in the percentage of revenue
from cable television services which generally earns a lower profit margin than
on-demand services and (ii) higher video game costs (which are incurred based on
the number of rooms receiving video game services rather than the number of game
buys).

        Free-to-guest direct costs increased 12.5% to $6.4 million in 1998 from
$5.7 million in the prior year. As a percentage of free-to-guest revenue,
free-to-guest direct costs increased to 81.1% in 1998 from 66.7% in the prior
year. The relative increase in free-to-guest direct costs as a percentage of
revenue is due to increased signal carriage fees owed to PRIMESTAR under the
agreement previously described and decreased incentive discounts realized from
programming networks.

        Direct costs associated with other revenue decreased 1.7% to $7.1
million from $7.2 million in the prior year. As a percentage of related
revenues, such direct costs decreased to 59.1% in 1998 from 66.0% in 1997,
reflecting the effect of (i) increased cable television revenue generated by the
residential services segment which generally earns a higher profit margin than
the other sources of other revenue, and (ii) decreased sales of televisions
which generally earn a lower profit margin than the other sources of other
revenue.

        The Company's overall gross profit increased 19.6% in 1998 to $92.3
million on a 22.6% increase in revenues compared to 1997. The Company's overall
gross profit margin was 55.5% in 1998 and 56.9% for the prior year.

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

<TABLE>
<CAPTION>
                                               1997                      1998
                                       ---------------------     ---------------------
                                                    Percent                   Percent
                                                    of Total                  of Total
                                        Amount      Revenues      Amount      Revenues
                                       --------     --------     --------     --------
<S>                                    <C>          <C>          <C>          <C>
Operating expenses:
   Guest Pay operations                $ 20,785       15.3%      $ 25,167       15.1%
   Selling, general and                  20,717       15.3%        18,600       11.2%
      administrative
   Restructuring charge                      --          --         3,300        2.0%
   Depreciation and amortization         43,760       32.2%        55,215       33.2%
                                       --------     --------     --------     --------
      Total operating expenses         $ 85,262       62.8%      $102,282       61.5%
                                       --------     --------     --------     --------
                                       --------     --------     --------     --------
</TABLE>

        Guest Pay operations expenses consist of costs directly related to 
the operation of systems at the hotel sites as well as at residential sites 
serviced by the residential services segment. Excluding the expenses incurred 
to operate the systems at residential


LodgeNet Entertainment Corporation     20                       Form 10-K 1998
<PAGE>


sites, which were $2.9 million in 1998 and $1.4 million in 1997, expenses 
related to Guest Pay operations increased 14.8%, or $2.9 million, in 1998 
from $19.4 million in the previous year. This increase is primarily 
attributable to the 20.7% increase in average installed Guest Pay rooms in 
1998 as compared to 1997, partially offset by lower average operating and 
service expenses incurred on a per room basis. Per average installed Guest 
Pay room, such expenses were $3.35 per month in 1998 as compared to $3.52 per 
month in 1997.

        Selling, general and administrative expenses (including $2.2 million and
$1.8 million of expenses incurred by the residential services segment in 1998
and 1997, respectively) decreased 10.2%, or $2.1 million, in 1998 from $20.7
million in 1997. This decrease is primarily due to reduced legal expenses of
$1.5 million resulting from the resolution of the Company's patent litigation
matters. As a percentage of revenue, general and administrative expenses
represented 11.2% of total revenue in 1998 as compared to 15.3% in 1997.

        The $3.3 million restructuring charge recorded in 1998 represents costs
incurred related to the Company's merger of its ResNet business as previously
described. Such costs include professional services fees, employee costs, and
the write-off of certain capitalized software development costs.

        Depreciation and amortization expenses increased 26.2% to $55.2 million
in 1998 from $43.8 million in the prior year. This increase is primarily
attributable to the increase in the number of installed Guest Pay and game
service equipped rooms previously described, as well as the associated software
costs and other capitalized costs such as service vans, equipment and computers
that are related to the increased number of rooms in service since the prior
year. Additionally, increases in administrative and facility related assets, as
well as an increase of $2.1 million related to the residential services segment
($3.6 million in 1998 compared to $1.5 million in 1997), have contributed to the
increased depreciation and amortization.

        OPERATING LOSS.  The Company's operating loss, as a result of the 
factors previously described, increased to $9.9 million in 1998 from $8.1 
million in 1997. Excluding the results of ResNet, the Company's operating 
loss was $807,000 in 1998 and $5.0 million in 1997.

        EQUITY IN LOSSES OF UNCONSOLIDATED AFFILIATES.  The Company obtained 
equity interests in two entities during 1998. First, the Company acquired a 
10% interest in Across Media Networks, LLC ("AMN"), a company engaged in the 
creation and distribution of digitally produced on-screen content for 
television and the Internet. The Company has applied the equity method of 
accounting for this investment to reflect the fact that the Company has had 
certain financing obligations to AMN. Losses of $5.8 million related to this 
investment were recorded in 1998. Second, as previously described, the merger 
of ResNet with two other entities effective November 30, 1998 to form GICC 
resulted in the Company obtaining a 30% equity interest in GICC. The 
Company's portion of GICC's 1998 loss was $738,000.

        INTEREST EXPENSE.  Interest expense, net of interest income, 
increased to $23.0 million in 1998 from $17.0 million in 1997 due to 
increases in long-term debt to fund the Company's continuing expansion of its 
business. The average principal amount of long-term debt outstanding during 
1998 was approximately $236.4 million (at a weighted average interest rate of 
approximately 9.9%) as compared to an average principal amount outstanding of 
approximately $183.4 million (at a weighted average interest rate of 
approximately 10.3%) during 1997.

        CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.  As a result of 
the issuance of EITF Issue 97-13 related to accounting for certain business 
reengineering costs, the Company recorded a charge of $210,000 in 1997 to 
write-off previously capitalized costs, in accordance with the new accounting 
pronouncement.

        NET LOSS.  For the reasons previously described, the Company's net 
loss increased to $39.9 million in 1998 from a net loss of $25.6 million in 
the prior year.

        EBITDA.  As a result of increasing revenues from guest pay services, 
and the other factors previously described, EBITDA ("Earnings Before 
Interest, Income Taxes and Depreciation and Amortization") excluding the 
restructuring charge related to the ResNet merger and equity in losses of 
unconsolidated affiliates increased 36.1% to $48.6 million in 1998 as 
compared to $35.7 million in 1997. As a percentage of total revenue, EBITDA 
excluding the restructuring charge increased to 29.2% in 1998 as compared to 
26.3% in 1997. Excluding the results of ResNet, EBITDA was $50.8 million in 
1998 and $37.3 million in 1997. As a percentage of revenue, EBITDA was 31.6% 
in 1998 and 28.0% in 1997, excluding the results of ResNet. EBITDA is not 
intended to represent an alternative to net income or cash flows from operating,
financing or investing activities (as determined in accordance with generally 
accepted accounting principles) as a measure of performance. Rather, it is 
included herein because EBITDA is a widely accepted financial indicator used 
by certain investors and financial analysts to assess and compare 


LodgeNet Entertainment Corporation     21                       Form 10-K 1998
<PAGE>

companies on the basis of operating performance. Management believes 
that EBITDA provides an important additional perspective on the Company's 
operating results and the Company's ability to service its long-term debt and 
to fund the Company's continuing growth.

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

REVENUE ANALYSIS

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

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

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

<TABLE>
<CAPTION>
                                                   1996         1997
                                                  -------      -------
<S>                                               <C>          <C>
Average monthly revenue per room: 
   Movie revenue                                  $ 18.38      $ 17.86
   Video game and other service revenue              2.93         3.28
                                                  -------      -------
      Total per Guest Pay room                    $ 21.31      $ 21.14
                                                  -------      -------
                                                  -------      -------
</TABLE>

        Average movie revenue per room, for all Guest Pay rooms, decreased 2.8%
from the prior year due to the combination of lower average buy rates and lower
average hotel occupancy, partially offset by increased average movie prices and
the comparative increase in the proportion of on-demand rooms.

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

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

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


LodgeNet Entertainment Corporation     22                       Form 10-K 1998
<PAGE>

EXPENSE ANALYSIS

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

<TABLE>
<CAPTION>
                             1996         1997
                           --------     --------
<S>                        <C>          <C>
Direct costs:
   Guest Pay               $ 33,981     $ 45,632
   Free-to-guest              6,784        5,663
   Other                      3,614        7,217
                           --------     --------
                           $ 44,379     $ 58,512
                           --------     --------
                           --------     --------

Gross profit margin:
   Guest Pay                  59.8%        60.8%
   Free-to-guest              21.5%        33.3%
   Other                      21.0%        34.0%
   Composite                  54.6%        56.9%
</TABLE>

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

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

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

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

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

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

        Guest Pay operations expenses consist of costs directly related to the
operation of systems at the hotel sites as well as at residential sites serviced
by the residential services segment. Excluding the expenses incurred to operate
the systems at residential sites, which were $1.4 million in 1997 and none in
1996, expenses related to Guest Pay operations increased 28.9%, or $4.3 million,
in 1997 from $15.0 million in the previous year. This increase is primarily
attributable to the 38.7% increase in 


LodgeNet Entertainment Corporation     23                       Form 10-K 1998
<PAGE>

average installed Guest Pay rooms in 1997 as compared to 1996, partially 
offset by lower average operating and service expenses incurred on a per room 
basis. Per average installed guest pay room, such expenses were $3.52 per 
month in 1997 as compared to $3.79 per month in 1996.

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

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

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

        INTEREST EXPENSE.  Interest expense, net of interest income, 
increased to $17.0 million in 1997 from $8.2 million in 1996 due to increases 
in long-term debt to fund the Company's continuing expansion of its 
businesses. The average principal amount of long-term debt outstanding during 
1997 was approximately $183.4 million (at a weighted average interest rate of 
approximately 10.3%) as compared to an average principal amount outstanding 
of approximately $65.4 million (at a weighted average interest rate of 
approximately 10.0%) during 1996.

        CUMULATIVE EFFECT OF CHANGE IN ACCOUNTING PRINCIPLE.  As a result of 
the issuance of EITF Issue 97-13 related to accounting for certain business 
reengineering costs, the Company recorded a charge of $210,000 in 1997 to 
write-off previously capitalized costs, in accordance with the new accounting 
pronouncement.

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

         EBITDA.  As a result of increasing revenues from guest pay services, 
and the other factors previously discussed, EBITDA increased 44.3% to $35.7 
million in 1997 as compared to $24.7 million in 1996. EBITDA as a percentage 
of total revenue increased to 26.3% in 1997 as compared to 25.3% in 1996.

SEASONALITY

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

LIQUIDITY AND CAPITAL RESOURCES

        Historically, the growth of the Company's business has required 
substantial amounts of capital. The Company has incurred operating and net 
losses due in large part to the depreciation, amortization and interest 
expenses related to the capital expenditures required to expand its lodging 
and residential businesses. Historically, cash flow from operations has not 
been sufficient to fund the cost of expanding the Company's business and to 
service existing indebtedness. During 1998, capital expenditures were 
$69.7 million (of which $14.2 million was incurred by ResNet) and net cash 
provided by operating activities was $13.2 million (after the reduction of 
net cash used in operating activities of $5.0 million from ResNet). Capital 
expenditures were $104.4 million during 1997 (of which approximately 
$16.8 million was incurred by ResNet), and net cash provided by operating 
activities was $16.7 million (after the reduction of net cash used in 
operating activities of $3.5 million from ResNet).

        Depending on the rate of growth of its lodging business and other
factors, the Company expects to incur capital expenditures between approximately
$50 to $60 million in 1999. In addition, the Company's cash requirements during
1999 and 2000 are expected to include (i) payments to OCC in connection with the
settlement of the litigation between the Company and


LodgeNet Entertainment Corporation     24                       Form 10-K 1998
<PAGE>

OCC in equal amounts of $5.85 million on each of July 15, 1999 and July 15, 
2000 pursuant to the terms of the multiple cross licenses and (ii) deferred 
purchase payments of up to $1 million in each of 1999 and 2000 in connection 
with the Company's acquisition of Connect Group Corporation. Pursuant to an 
agreement reached with PRIMESTAR, the Company may purchase the 5% equity 
interest in GICC currently held by PRIMESTAR during 1999, at a cash price of 
up to $5.4 million in certain circumstances. The foregoing statements 
regarding capital expenditures and cash requirements are forward-looking 
statements and there can be no assurance in this regard. The actual amount 
and timing of the Company's capital expenditures will vary (and such 
variations could be material) depending upon the number of new contracts for 
services entered into by the Company, the costs of installations and other 
factors.

         On February 25, 1999, the Company amended and restated its existing
bank credit facility. This amended facility consists of a $150 million secured
bank credit facility which combines a $75 million term loan ("Term Loan") and a
$75 million revolving loan facility ("Revolving Loan"). Proceeds under the Term
Loan were used to repay amounts outstanding under the revolving loan facility
that existed prior to the amendment and restatement. Minimum required repayments
of borrowings under the Term Loan for the respective years are (in thousands of
dollars): 2001 -- $15,000; 2002 -- $18,750; 2003 -- $18,750; 2004 -- $22,500.

        As previously described, effective November 30, 1998, the Company
contributed its interest in the ResNet business to GICC. The Company has no
continuing obligation to fund any of GICC's operating and/or investing
activities. During 1998, the Company provided $19.3 million to fund ResNet's
operating and investing activities, all of which funding occurred prior to
November 30, 1998.

        The Company believes that its operating cash flows and borrowings
available under the Revolving Loan will be sufficient to fund the Company's
future growth as contemplated under its current business plan, depending on the
rate of the Company's growth and other factors. However, if the Company's plans
or assumptions change, if its assumptions prove to be inaccurate or if the
Company experiences unanticipated costs or competitive pressures, the Company
may be required to seek additional capital sooner than currently anticipated.
There can be no assurance that the Company will be able to obtain financing, or,
if such financing is available, that the Company will be able to obtain it on
acceptable terms. Failure to obtain additional financing, if needed, could
result in the delay or abandonment of some or all of the Company's expansion
plans.

YEAR 2000 INFORMATION

        The Company is engaged in a comprehensive review of internal computer
systems and software and external business relationships in regard to Year 2000
issues.

        STATE OF READINESS.  The Company has a project team comprised of key 
members from cross-organization departments. The team's objectives are to 
gather information and facilitate research on Year 2000 issues that could 
affect the Company, and to take necessary actions to eliminate or minimize 
the impact of such issues. Internally, the Company has nearly completed its 
efforts to identify the computer hardware and software that is used both at 
its in-house facilities as well as at its hotel properties. Research and 
testing of these systems for Year 2000 compliance is underway. The Company 
expects to substantially complete its research and testing of internal 
computer hardware and software by the end of the second quarter of 1999. 
Correction or replacement of hardware and software containing Year 2000 
issues is in progress and is estimated for completion by the end of the third 
quarter of 1999.

        Externally, the Company is working to identify third party business
relationships that are impacted by the Year 2000 issue. Research and review of
these relationships is underway including contacting the third parties to
solicit information and assurances relating to potential Year 2000 issues and
reviewing responses. The Company expects to complete its review of third party
relationships by the end of the second quarter of 1999, although no assurance
can be given as to the Year 2000 remediation of third parties.

        COSTS ASSOCIATED WITH YEAR 2000 ISSUES.  Incremental costs are 
expected to be comprised primarily of costs to purchase software upgrades and 
hardware. Additionally, external consulting, programming and training costs 
may be incurred. Estimated costs of Year 2000 compliance are not fully 
determined at this time. The Company expects to incur less than $500,000 in 
aggregate out-of-pocket costs in 1998 and 1999 to complete its Year 2000 
compliance program, excluding the cost of internal staffing. As of 
December 31, 1998, the Company has incurred out-of-pocket costs totaling 
$185,000 toward Year 2000 compliance efforts. Such funds have been provided 
from the Company's bank credit facility. Although the Company intends to 
develop and implement, if necessary, appropriate contingency plans to 
mitigate to the extent possible the effects of any Year 2000 noncompliance, 
such plans may not be adequate and the cost of Year 2000 compliance may be 
greater than $500,000.


LodgeNet Entertainment Corporation     25                       Form 10-K 1998
<PAGE>

        RISKS ASSOCIATED WITH YEAR 2000 ISSUES.  The Company is highly 
dependent upon its own information technology systems and those of its 
suppliers and customers. The Company's or a third party's failure to correct 
a material Year 2000 problem could result in a failure of or interruption in 
the Company's business activities and operations. Such interruptions and 
failures could materially and adversely affect the Company's results of 
operations, liquidity and financial condition. The Company's Year 2000 
project is expected to reduce significantly the Company's level of 
uncertainty and the possibility of significant or long-lasting interruptions 
of the Company's business operations; however, the Company believes that it 
is impossible to predict all of the areas in which material problems may 
arise.

        CONTINGENCY PLANS.  The Company has not yet completed specific 
contingency plans for Year 2000 issues. The Company is in the process of 
identifying the most reasonably likely worst-case scenarios, so that it may 
attempt to secure alternate vendors and service providers for these functions 
as well as to develop alternative systems which could be used to process data.

        While the Company anticipates achieving Year 2000 compliance in a timely
manner, there can be no assurance that all processes will be compliant, that
there will be no significant delay or loss of revenues, or that no material
supply sources will be interrupted. However, the Company believes that its
planning and action efforts will help reduce any loss or disruption.

MARKET RISK DISCLOSURES

        The Company's bank credit facility described in Note 9 to the financial
statements as well as in Management's Discussion and Analysis of Financial
Condition and Results of Operations carries interest rate risk. Amounts borrowed
under this facility are subject to interest rates based on the lender's base
rate of either the prime interest rate or the eurodollar rate. Should the
lender's base rate change, the Company's interest expense will increase or
decrease accordingly. As of December 31, 1998, the Company had borrowed
approximately $76.5 million subject to interest rate risk. On this amount, a 1%
increase in the lender's base interest rate would cost the Company $765,000 in
additional gross interest expense on an annual basis.

ITEM 8 - FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

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

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

        None.

                                    PART III

ITEM 10 - DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

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

ITEM 11 - EXECUTIVE COMPENSATION

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

ITEM 12 - SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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


LodgeNet Entertainment Corporation     26                       Form 10-K 1998
<PAGE>

ITEM 13 - CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

                                     PART IV

ITEM 14  -- EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

(a)     CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES -- Reference is made to
        the "Index to Consolidated Financial Statements" of LodgeNet
        Entertainment Corporation, located at page F - 1 of this PART IV, for a
        list of the financial statements and schedules for the year ended
        December 31, 1998 included herein.

(b)     REPORTS ON FORM 8-K -- During the quarter ended December 31, 1998, the
        Company filed one report on Form 8-K, dated December 15, 1998, reporting
        on the transfer of the ResNet business to GICC.

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

EXHIBIT NO.

3.1     Certificate of Incorporation of the Company (1)

3.2     By-Laws of the Registrant (1)

4.1     Registration Rights Agreement dated as of December 16, 1996, between
        LodgeNet Entertainment Corporation and Morgan Stanley & Co.
        Incorporated, NatWest Capital Markets Limited and Montgomery 
        Securities (8)

4.2     Indenture dated as of December 19, 1996, between LodgeNet Entertainment
        Corporation and Marine Midland Bank, as trustee, including the form of
        Senior Note (8)

4.3     Form of Senior Notes (included in Exhibit 4.2)

4.4     First Supplemental Indenture dated October 15, 1998, among LodgeNet
        Entertainment Corporation and Marine Midland Bank, as trustee, to the
        Indenture dated December 19, 1996 (see Exhibit 4.2)

10.1    Form of Employment Agreement between the Company and each of Tim C.
        Flynn and Scott C. Petersen (1)

10.2    Form of Agreement between the Company and each of David M. Bankers, John
        M. O'Haugherty, Douglas D. Truckenmiller and Steven D. Truckenmiller (1)

10.3    LodgeNet Entertainment Corporation Stock Option Plan (as amended and
        restated effective August 15, 1996) (8)

10.6    License Agreement dated May 2, 1993 between Nintendo of America, Inc.
        and LodgeNet Entertainment Corporation (2)

10.7    Stock Option Agreements dated as of February 29, 1988 between the
        Company and Tim C. Flynn, as extended by Extension Agreement dated as of
        July 15, 1991 (2)

10.8    Stock Option Agreements dated as of February 29, 1988 between the
        Company and Scott C. Petersen, as extended by Extension Agreement dated
        as of July 15, 1991 (2)

10.9    Stock Option Agreement dated as of December 31, 1992 between the Company
        and John M. O'Haugherty (2)

10.10   Stock Option Agreement dated as of December 31, 1992 between the Company
        and David M. Bankers (2)


LodgeNet Entertainment Corporation     27                       Form 10-K 1998
<PAGE>

10.11   Form of Stock Option Agreement for Non-Employee Directors (3)

10.12   Form of Incentive Stock Option Agreement for Key Employees (3)

10.13   Securities Purchase Agreement, by and between LodgeNet Entertainment
        Corporation, John Hancock Mutual Life Insurance Company, Allstate Life
        Insurance Company, Connecticut Mutual Life Insurance and CMA Life
        Insurance Company, dated as of August 9, 1995 (4)

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

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

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

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

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

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

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

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

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

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

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

10.25   Exchange Agreement, dated November 30, 1998, among Shared Technologies
        Communications Corporation, Interactive Cable Systems, Inc., ResNet
        Communications, LLC, ResNet Communications, Inc. and Global Interactive
        Technologies Corporation (9)

10.26   Stockholders Agreement dated November 30, 1998, by and among Global
        Interactive Technologies Corporation, Shared Technologies Communications
        Corporation, Interactive Cable Systems, Inc. and ResNet Communications,
        LLC (9)

10.27   Consent and Restructuring Agreement dated November 6, 1998, by and among
        ResNet Communications, LLC, ResNet Communications, Inc., and PrimeStar
        MDU

10.28   Second Amended and Restated Credit Agreement dated as of February 25,
        1999, by and among LodgeNet Entertainment Corporation, National
        Westminster Bank Plc, BankBoston, N.A., Morgan Stanley Senior Funding,
        Inc. and the Lenders Named Therein


LodgeNet Entertainment Corporation     28                       Form 10-K 1998
<PAGE>

10.29   Confidential License Agreement for Use of Nintendo Video Game Systems
        with Hotel Entertainment System, dated May 12, 1998, between LodgeNet
        Entertainment Corporation and Nintendo of America Inc. +

12.1    Statement Regarding Computation of Ratios

21.1    Subsidiaries of the Company (10)

23.1    Consent of Independent Public Accountants

---------

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

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

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

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

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

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

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

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

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

(9)     Incorporated by Reference to the Form 8-K as filed with the Securities
        and Exchange Commission, December 15, 1998.

(10)    Incorporated by Reference to the Annual Report on Form 10-K for the year
        ended December 31, 1997, as filed with the Securities and Exchange
        Commission, March 25, 1998.


LodgeNet Entertainment Corporation     29                       Form 10-K 1998
<PAGE>

                                   SIGNATURES

        Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Sioux
Falls, State of South Dakota, on March 25, 1999.

                                       LodgeNet Entertainment Corporation


                                  By:      /s/ SCOTT C. PETERSEN
                                       ---------------------------------------
                                       Scott C. Petersen, President and
                                       Chief Executive Officer


LodgeNet Entertainment Corporation     30                       Form 10-K 1998
<PAGE>

SIGNATURES

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

        SIGNATURE                      TITLE                   DATE
        ---------                      -----                   ----

/s/ SCOTT C. PETERSEN      President and Chief Executive    March 25, 1999
------------------------   Officer, Director (Principal
Scott C. Petersen          Executive Officer)


/s/ JEFFREY T. WEISNER     Senior Vice President            March 25, 1999
------------------------   Chief Financial Officer
Jeffrey T. Weisner         (Principal Financial
                           Officer)

/s/ RONALD W. PIERCE       Vice President and Corporate     March 25, 1999
------------------------   Controller (Principal
Ronald W. Pierce           Accounting Officer)


/s/ TIM C. FLYNN           Chairman of the Board            March 25, 1999
------------------------   and Director
Tim C. Flynn

/s/ DAVID AUSTAD           Director                         March 25, 1999
------------------------
David Austad


/s/ LAWRENCE FLINN, JR.    Director                         March 25, 1999
------------------------
Lawrence Flinn, Jr.


/s/ RICHARD R. HYLLAND     Director                         March 25, 1999
------------------------
Richard R. Hylland


/s/ R. F. LEYENDECKER      Director                         March 25, 1999
------------------------
R. F. Leyendecker


LodgeNet Entertainment Corporation     31                       Form 10-K 1998
<PAGE>

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

               LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS


<TABLE>
<CAPTION>
                                                                           Page
<S>                                                                        <C>
Report of Independent Public Accountants ................................  F - 2
Consolidated Balance Sheets as of December 31, 1997 and 1998 ............  F - 3
Consolidated Statements of Operations -- 
Three Years Ended December 31, 1998 .....................................  F - 4
Consolidated Statements of Stockholders' Equity -- 
Three Years Ended December 31, 1998 .....................................  F - 5
Consolidated Statements of Cash Flows -- 
Three Years Ended December 31, 1998 .....................................  F - 6
Notes to Consolidated Financial Statements ..............................  F - 7

                          INDEX TO FINANCIAL SCHEDULES

Report of Independent Public Accountants on Schedule ....................  F - 22
Schedule II -- Valuation and Qualifying Accounts ........................  F - 23
</TABLE>


LodgeNet Entertainment Corporation     F - 1                      Form 10-K 1998
<PAGE>

                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To LodgeNet Entertainment Corporation:

        We have audited the accompanying consolidated balance sheets of 
LodgeNet Entertainment Corporation (a Delaware corporation) and Subsidiaries 
as of December 31, 1997 and 1998, and the related consolidated statements of 
operations, stockholders' equity and cash flows for each of the three years 
in the period ended December 31, 1998. These financial statements are the 
responsibility of the Company's management. Our responsibility is to express 
an opinion on these financial statements based on our audits.

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

        In our opinion, the financial statements referred to above present 
fairly, in all material respects, the financial position of LodgeNet 
Entertainment Corporation and Subsidiaries as of December 31, 1997 and 1998, 
and the results of their operations and their cash flows for each of the 
three years in the period ended December 31, 1998, in conformity with 
generally accepted accounting principles.

                               ARTHUR ANDERSEN LLP

Minneapolis, Minnesota 
February 12, 1999 (except 
for Note 9, as to which the
date is February 25, 1999)


LodgeNet Entertainment Corporation     F - 2                      Form 10-K 1998
<PAGE>

               LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS
                          (Dollar amounts in thousands)

<TABLE>
<CAPTION>
                                                                            December 31,
                                                                    --------------------------
                                                                       1997            1998
                                                                    ----------      ----------
<S>                                                                 <C>             <C>
                       Assets
Current assets:
   Cash and cash equivalents                                        $   1,021       $   5,240
   Accounts receivable, net of allowance for doubtful accounts         21,835          27,586
   Prepaid expenses and other                                           3,457           6,086
                                                                    ----------      ----------
      Total current assets                                             26,313          38,912

Property and equipment, net of accumulated depreciation               218,948         209,437
Investments in and advances to unconsolidated affiliates                   --          32,701
Debt issuance costs, net of accumulated amortization                    7,641           6,637
Other assets, net                                                       7,392          18,343
                                                                    ----------      ----------
                                                                    $ 260,294       $ 306,030
                                                                    ----------      ----------
                                                                    ----------      ----------

          Liabilities and Stockholders' Equity
Current liabilities:
   Accounts payable                                                 $  16,792       $  13,705
   Current maturities of long-term debt                                   705           5,718
   Accrued expenses                                                     8,148           9,410
   Deferred revenue                                                     2,069           2,318
                                                                    ----------      ----------
      Total current liabilities                                        27,714          31,151

Long-term debt                                                        182,691         262,375
Minority interest in consolidated subsidiary                              310             730
                                                                    ----------      ----------
   Total liabilities                                                  210,715         294,256
                                                                    ----------      ----------
Commitments and contingencies (Note 10)

Stockholders' equity:
   Common stock, $.01 par value, 20,000,000 shares
      authorized; 11,322,058 and
      11,942,387 shares outstanding at December 31,
      1997 and 1998, respectively                                         113             119
   Additional paid-in capital                                         120,792         123,706
   Accumulated other comprehensive loss                                  (699)         (1,512)
   Accumulated deficit                                                (70,627)       (110,539)
                                                                    ----------      ----------
      Total stockholders' equity                                       49,579          11,774
                                                                    ----------      ----------
                                                                    $ 260,294       $ 306,030
                                                                    ----------      ----------
                                                                    ----------      ----------
</TABLE>





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


LodgeNet Entertainment Corporation     F - 3                      Form 10-K 1998
<PAGE>

               LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF OPERATIONS
            (Dollar amounts, except per share amounts, in thousands)

<TABLE>
<CAPTION>
                                                                            Years Ended December 31,
                                                             ---------------------------------------------------
                                                                 1996               1997               1998
                                                             -------------      -------------      -------------
<S>                                                          <C>                <C>                <C>
Revenues:
   Guest Pay                                                 $     84,504       $    116,276       $    146,481
   Free-to-guest                                                    8,645              8,496              7,854
   Other                                                            4,572             10,938             12,016
                                                             -------------      -------------      -------------
      Total revenues                                               97,721            135,710            166,351
                                                             -------------      -------------      -------------

Direct costs:
   Guest Pay                                                       33,981             45,632             60,538
   Free-to-guest                                                    6,784              5,663              6,373
   Other                                                            3,614              7,217              7,097
                                                             -------------      -------------      -------------
      Total direct costs                                           44,379             58,512             74,008
                                                             -------------      -------------      -------------

Gross profit                                                       53,342             77,198             92,343
                                                             -------------      -------------      -------------

Operating expenses:
   Guest Pay operations                                            15,032             20,785             25,167
   Selling, general and administrative                             13,581             20,717             18,600
   Restructuring charge (Note 3)                                       --                 --              3,300
   Depreciation and amortization                                   29,815             43,760             55,215
                                                             -------------      -------------      -------------
      Total operating expenses                                     58,428             85,262            102,282
                                                             -------------      -------------      -------------

Operating loss                                                     (5,086)            (8,064)            (9,939)
Equity in losses of unconsolidated affiliates                          --                 --              6,550
Interest expense, net                                               8,243             17,001             23,048
                                                             -------------      -------------      -------------
Loss before income taxes, extraordinary loss, and
   cumulative effect of change in accounting principle            (13,329)           (25,065)           (39,537)
Provision for income taxes                                             28                344                375
                                                             -------------      -------------      -------------
Loss before extraordinary loss and cumulative
   effect of change in accounting principle                       (13,357)           (25,409)           (39,912)
Extraordinary loss (Note 15)                                        3,253                 --                 --
Cumulative effect of change in accounting principle
   (Note 16)                                                           --                210                 --
                                                             -------------      -------------      -------------
Net loss                                                     $    (16,610)      $    (25,619)      $    (39,912)
                                                             -------------      -------------      -------------
                                                             -------------      -------------      -------------
Per common share (basic and diluted):
   Loss before extraordinary loss and cumulative
      effect of change in accounting principle               $      (1.40)      $      (2.25)      $      (3.45)
   Extraordinary loss                                               (0.34)                --                 --
   Cumulative effect of change in accounting principle                 --              (0.02)                --
                                                             -------------      -------------      -------------
   Net loss                                                  $      (1.74)      $      (2.27)      $      (3.45)
                                                             -------------      -------------      -------------
                                                             -------------      -------------      -------------

Weighted average shares outstanding (basic and diluted)         9,570,779         11,271,064         11,579,457
                                                             -------------      -------------      -------------
                                                             -------------      -------------      -------------
</TABLE>





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


LodgeNet Entertainment Corporation     F - 4                      Form 10-K 1998
<PAGE>

               LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                          (Dollar amounts in thousands)
<TABLE>
<CAPTION>
                                                                                                      Accumulated
                                              Common Stock           Additional                           Other
                                       -----------------------        Paid-in         Accumulated     Comprehensive
                                         Shares         Amount        Capital           Deficit            Loss            Total
                                       ----------       ------      ------------      ------------    -------------     ------------
<S>                                    <C>              <C>         <C>               <C>             <C>               <C>
Balance, December 31, 1995              7,352,113       $   74      $    71,234       $   (28,398)      $    (184)      $    42,726
   Issuance of common stock             3,680,000           36           44,599                --              --            44,635
   Common stock option activity            93,256            1               34                --              --                35
   Comprehensive loss:
       Net loss                                --           --               --           (16,610)             --           (16,610)
       Foreign currency
          translation adjustment               --           --               --                --              94                94
                                                                                                                        -----------
       Comprehensive loss                                                                                                   (16,516)
   Change of interest in
      subsidiary                               --           --            4,672                --              --             4,672
                                       ----------       ------      ------------      ------------    -------------     ------------
Balance, December 31, 1996             11,125,369          111          120,539           (45,008)            (90)           75,552
   Common stock option activity           196,689            2              332                --              --               334
   Comprehensive loss:
       Net loss                                --           --               --           (25,619)             --           (25,619)
       Foreign currency
          translation adjustment               --           --               --                --            (609)             (609)
                                                                                                                        -----------
       Comprehensive loss                                                                                                   (26,228)
   Change of interest in
      subsidiary                               --           --              (79)               --              --               (79)
                                       ----------       ------      ------------      ------------    -------------     ------------
Balance, December 31, 1997             11,322,058          113          120,792           (70,627)           (699)           49,579
   Issuance of common stock               350,000            3            3,081                --              --             3,084
   Common stock option activity           270,329            3              253                --              --               256
   Comprehensive loss:
       Net loss                                --           --               --           (39,912)             --           (39,912)
       Foreign currency
          translation adjustment               --           --               --                --            (813)             (813)
                                                                                                                        -----------
       Comprehensive loss                                                                                                   (40,725)
   Change of interest in
      subsidiary                               --           --             (420)               --              --              (420)
                                       ----------       ------      ------------      ------------    -------------     ------------
Balance, December 31, 1998             11,942,387       $  119      $   123,706       $  (110,539)      $  (1,512)      $    11,774
                                       ----------       ------      ------------      ------------    -------------     ------------
                                       ----------       ------      ------------      ------------    -------------     ------------
</TABLE>





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


LodgeNet Entertainment Corporation     F - 5                      Form 10-K 1998
<PAGE>

               LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                          (Dollar amounts in thousands)
<TABLE>
<CAPTION>
                                                                   Years Ended December 31,
                                                         ------------------------------------------
                                                            1996            1997            1998
                                                         ----------      ----------      ----------
<S>                                                      <C>             <C>             <C>
Operating activities:
   Net loss                                              $ (16,610)      $ (25,619)      $ (39,912)
   Adjustments to reconcile net loss to net cash
      provided by operating activities:
      Depreciation and amortization                         29,815          43,760          55,215
      Gain on sale of property and equipment                    --              --            (309)
      Non-cash portion of extraordinary loss                   434              --              --
      Non-cash portion of restructuring charge                  --              --             840
      Equity in losses of unconsolidated affiliates             --              --           6,550
      Change in operating assets and liabilities:
         Accounts receivable                                (6,278)         (3,288)         (6,157)
         Prepaid expenses and other                           (473)         (1,138)         (2,659)
         Accounts payable                                    1,864           1,053          (2,770)
         Accrued expenses and deferred revenue               1,433           1,524           1,677
         Other                                                (623)            361             768
                                                         ----------      ----------      ----------
Net cash provided by operating activities                    9,562          16,653          13,243
                                                         ----------      ----------      ----------

Investing activities:
   Property and equipment additions                        (84,256)        (96,290)        (68,733)
   Proceeds from sale of property and equipment                 --              --             412
   Business acquisitions                                        --          (8,087)           (927)
   Investment in unconsolidated affiliates                      --              --          (8,330)
   Proceeds from sale of interest in subsidiary              5,396              --              --
                                                         ----------      ----------      ----------
Net cash used for investing activities                     (78,860)       (104,377)        (77,578)
                                                         ----------      ----------      ----------

Financing activities:
   Proceeds from long-term debt                            150,000              --           1,000
   Repayments of long-term debt                            (33,095)           (583)         (6,148)
   Borrowings under revolving credit facility               55,958           3,000          73,500
   Repayments of revolving credit facility                 (55,958)             --              --
   Debt issuance costs                                      (7,969)           (141)             --
   Proceeds from issuance of common stock                   44,635              --              --
   Stock issuance costs                                       (477)             --              --
   Stock option activity                                        35             334             256
                                                         ----------      ----------      ----------
Net cash provided by financing activities                  153,129           2,610          68,608
                                                         ----------      ----------      ----------

Effect of exchange rates on cash                                94             (42)            (54)
                                                         ----------      ----------      ----------
Increase (decrease) in cash and cash equivalents            83,925         (85,156)          4,219
Cash and cash equivalents at beginning of period             2,252          86,177           1,021
                                                         ----------      ----------      ----------

Cash and cash equivalents at end of period               $  86,177       $   1,021       $   5,240
                                                         ----------      ----------      ----------
                                                         ----------      ----------      ----------
</TABLE>





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


LodgeNet Entertainment Corporation     F - 6                      Form 10-K 1998

<PAGE>

               LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 -- THE COMPANY

        LodgeNet Entertainment Corporation ("LodgeNet" or the "Company") and its
wholly-owned Canadian subsidiary assemble, install and operate guest pay movie
systems and provide cable television programming, network-based video games and
other interactive entertainment and information systems to the lodging industry,
primarily in the United States and Canada. ResNet Communications, Inc. ("ResNet
Inc."), a wholly-owned subsidiary of the Company, was the majority owner of
ResNet Communications, LLC ("ResNet LLC") until November 30, 1998, at which time
ResNet LLC was merged with two other entities to form a new entity (see Note 3).
ResNet LLC installed and operated private cable television systems in
multi-family residential properties nationwide.

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

        The rapid growth of the Company's business has required capital
resources in excess of operating cash flows. While the Company's working
capital, operating cash flows and its revolving credit facility are expected to
be sufficient to fund its growth, the Company may, depending on its rate of
growth, require additional growth capital in subsequent years.


NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

        PRINCIPLES OF CONSOLIDATION -- The consolidated financial statements
include the accounts of the Company, its wholly-owned Canadian subsidiary, and
ResNet Inc. Affiliated companies in which LodgeNet does not have a controlling
interest are accounted for using the equity method. All significant
inter-company accounts and transactions have been eliminated in consolidation.

        FOREIGN CURRENCY TRANSLATION -- The assets and liabilities of the
Company's Canadian subsidiary were translated at year-end exchange rates. Income
statement items were translated at average exchange rates during the periods.

        USE OF ESTIMATES -- The preparation of financial statements in
conformity with generally accepted accounting principles requires management to
make estimates and assumptions about certain matters and items. These estimates
and assumptions affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities, at the date of the financial
statements; and the reported amounts of revenues, expenses and costs during the
reporting periods. The ultimate outcome of the matters and items may be
different from the estimates and assumptions.

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


LodgeNet Entertainment Corporation     F - 7                     Form 10-K 1998
<PAGE>

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

<TABLE>
<CAPTION>
                                        Years
                                        -----
          <S>                           <C>
          Buildings                      30
          Guest Pay systems:
             System components          5 - 7
             In-room equipment          2 - 5
          Free-to-guest systems         5 - 7
          Other equipment               3 - 10
</TABLE>

        SOFTWARE DEVELOPMENT -- The Company has capitalized certain costs of
developing software for its guest pay systems in accordance with AICPA Statement
of Position 98-1, "Accounting for the Costs of Computer Software Developed or
Obtained for Internal Use". Capitalized costs are reported at the lower of
unamortized cost or net realizable value, and are amortized over the system's
estimated useful life, not to exceed five years. Guest pay system development
costs capitalized were $1,616,000, $2,100,000 and $2,405,000 during the years
ended December 31, 1996, 1997 and 1998, respectively. Amortization of such costs
was $599,000, $797,000 and $1,138,000 for the years ended December 31, 1996,
1997 and 1998, respectively. The Company charged $216,000, $410,000, and
$252,000 to operations during the years ended December 31, 1996, 1997 and 1998,
respectively, related to research and development activities.

        REVENUE RECOGNITION -- Revenue and related costs are recognized when
services are rendered. The Company has obtained certain programming agreements
which provide for the receipt of low-cost programming in the earlier years of
such agreements. The Company's policy is to record the costs of such programming
on a straight-line basis. During 1997, the Company entered into a new long term
agreement with a major programming source, superseding a previous programming
agreement. As a result, the recognition of approximately $1.2 million of
previously deferred programming cost reductions was accelerated in 1997. At
December 31, 1996, 1997 and 1998 the Company had recorded deferred cost
reductions relating to such agreements of $1,835,000, $450,000 and $85,000,
respectively.

        CONCENTRATION OF CREDIT RISKS AND CUSTOMER DATA -- The Company has
derived virtually all of its revenue from entities in the lodging industry,
however, no individual customer accounted for 10% or more of total revenue in
any period presented in the accompanying consolidated statements of operations.
The allowance for doubtful accounts was $800,000 at December 31, 1997 and 1998.
The provision for doubtful accounts was $922,000 in 1996, $820,000 in 1997, and
$848,000 in 1998.

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

        COMPREHENSIVE INCOME -- During 1998, the Company adopted SFAS No. 130,
"Reporting Comprehensive Income" which requires companies to report all changes
in equity during a period, except those resulting from investments by owners and
distributions to owners, in a financial statement for the period in which they
are recognized. The Company has chosen to disclose comprehensive income, which
is comprised of net income and foreign currency translation adjustments, in the
consolidated statement of stockholders' equity. Comprehensive income amounts in
prior years' financial statements have been restated to conform to the
requirements of SFAS No. 130.


LodgeNet Entertainment Corporation     F - 8                    Form 10-K 1998
<PAGE>

        LOSS PER SHARE COMPUTATION -- During 1997, the Company adopted SFAS No.
128, "Earnings Per Share". SFAS No. 128 changes the manner in which earnings per
share ("EPS") are calculated and presented. The new standard requires the
computation and disclosure of two EPS amounts, basic and diluted. Basic EPS is
computed based only on the weighted average number of common shares actually
outstanding during the period. Diluted EPS is computed based on the weighted
average number of common shares outstanding plus all potentially dilutive common
shares outstanding during the period. Weighted average options on 1,458,839,
1,597,331, and 1,736,333 shares of common stock were not included in computing
diluted EPS because their effects were antidilutive for the years ended December
31, 1996, 1997, and 1998, respectively.

        STOCK-BASED COMPENSATION -- The Company measures compensation costs
associated with its stock option plans in accordance with the provisions of
Accounting Principles Board Opinion No. 25, as permitted by SFAS No. 123. The
effect of fair value based measurement of such costs on net loss and net loss
per share, in accordance with SFAS No. 123, is disclosed on a pro forma basis in
Note 12.

        STATEMENTS OF CASH FLOWS -- Cash equivalents are comprised of demand
deposits and temporary investments in highly liquid securities having original
maturities of 90 days or less. Cash paid for interest was $7,870,000,
$17,828,000, and $21,633,000 during the years ended December 31, 1996, 1997, and
1998, respectively. Equipment acquired under capital lease arrangements totaled
$1,002,000, $1,106,000, and $885,000 during the years ended December 31, 1996,
1997, and 1998, respectively. During 1998, non-cash activities included the
acquisition of license rights valued at $15,709,000 in exchange for notes
payable issued by the Company (see Note 10) and the issuance of 350,000 common
shares valued at $3,084,000 as part of an acquisition completed during the year
(see Note 4).

        RECLASSIFICATIONS -- Certain items in the consolidated financial
statements have been reclassified to conform to 1998 classifications. Such
reclassifications had no effect on previously reported net loss or stockholders'
equity.

NOTE 3 -- RESNET MERGER

        Effective November 30, 1998, the operations of the Company's
majority-owned subsidiary, ResNet Communications, LLC ("ResNet LLC"), were
merged with two non-affiliated entities to form a new entity, Global Interactive
Communications Corporation ("GICC"). GICC's business will consist of providing
cable television programming and telecommunications services to the multi-family
dwelling unit market. The Company contributed net assets totaling $31.3 million
in exchange for (i) a 30% equity interest in GICC, and (ii) notes receivable
totaling $10.8 million. In addition, the Company advanced GICC $1.5 million
under the terms of a secured note agreement. The notes receivable consist of
four separate instruments as follows:

        SENIOR TERM NOTE - The Company loaned $1.5 million to GICC under this
note. Subject to certain extension and default provisions contained in the
agreement, the note is due May 30, 1999. Interest is charged at a rate of 10%
and is also due May 30, 1999. The note, along with GICC's other senior
indebtedness, is secured by substantially all of the assets of GICC.

        JUNIOR TERM NOTE - The Company loaned $2.9 million to GICC under this
note. Subject to certain extension and default provisions contained in the
agreement, the note is due May 30, 1999. Interest is charged at a rate of 10%
and is also due May 30, 1999. The note ranks consistent with GICC's senior
indebtedness in terms of security.

        CAPITAL ADVANCE NOTE - The Company loaned $3.0 million to GICC under
this note. Beginning in June 1999, four quarterly installments of $750,000 (plus
accrued interest charged at a rate of 10%) are required. The capital advance
note is subordinate to the senior and junior term notes described above.


LodgeNet Entertainment Corporation     F - 9                    Form 10-K 1998
<PAGE>

        CAPITAL LEASE AGREEMENT - GICC acquired equipment valued at $4.9 million
in exchange for a capital lease note. The note requires GICC to make 60 equal
monthly payments of $106,000. The note is secured by the assets subject to the
capital lease agreement.

        In connection with this transaction, the Company incurred $3.3 million
of costs during the fourth quarter including professional services fees,
employee costs, and the write-off of certain capitalized software development
costs. These costs are reported as a restructuring charge in the 1998
consolidated statement of operations. The Company's interest in GICC
approximated its proportionate share of the independently appraised value of
GICC. Accordingly, no gain or loss was recognized as a result of this
transaction. As more fully described in Note 14, the Company may be required to
acquire an additional 5% of GICC in 1999.

NOTE 4 -- ACQUISITION

        In October 1998, the Company completed the acquisition of Connect Group
Corporation ("CGC"), in exchange for initial consideration of approximately 
$4.0 million, including acquisition costs, consisting of $927,000 and 350,000 
shares of LodgeNet common stock. CGC developed technology that the Company 
intends to use to provide high speed Internet access to hotel guests and 
operators. The acquisition has been accounted for as a purchase and the 
excess of the initial consideration over the fair value of CGC's net assets 
of approximately $4.0 million has been recorded as an intangible asset and is 
being amortized on a straight-line basis over 10 years. The pro forma results 
for 1996, 1997 and 1998, assuming the transaction had been made as of the 
beginning of those years, would not be materially different from reported 
results.

        In addition to the approximate $4.0 million of initial consideration,
the purchase agreement contains provisions for additional consideration to be
paid to the selling shareholders contingent on the performance of the acquired
technology in its application to the lodging industry. Depending on the
performance of the technology, as defined in the purchase agreement, the Company
may have to provide additional consideration of up to $1,000,000 on both the
first and second anniversary dates of the transaction.

NOTE 5 -- PROPERTY AND EQUIPMENT, NET

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

<TABLE>
<CAPTION>
                                                     December 31,
                                              -------------------------
                                                  1997           1998
                                              ----------     ----------
          <S>                                 <C>            <C>
          Land, building and equipment        $  40,051      $  48,105
          Free-to-guest equipment                11,855         16,237
          Cable television equipment             13,877             --
          Guest pay systems:
             Installed                          220,778        257,980
             System components                   30,720         24,933
             Software costs                       8,053          8,640
                                              ----------     ----------
                Total                           325,334        355,895
          Less - depreciation and              (106,386)      (146,458)
             amortization
                                              ----------     ----------
          Property and equipment, net         $ 218,948      $ 209,437
                                              ----------     ----------
                                              ----------     ----------
</TABLE>


LodgeNet Entertainment Corporation     F - 10                    Form 10-K 1998
<PAGE>

NOTE 6 -- INVESTMENTS IN AFFILIATES

        The Company obtained equity interests in two entities during 1998.
First, in February 1998, the Company acquired a 10% interest in Across Media
Networks, LLC ("AMN"), a company engaged in the creation and distribution of
digitally produced on-screen content for television and the Internet. The
Company has applied the equity method of accounting for this investment to
reflect the fact that the Company has had certain financing obligations to AMN.
Losses of $5.8 million related to this investment were recorded in 1998. Second,
as previously described, the merger of ResNet with two other entities effective
November 30, 1998 to form GICC resulted in the Company owning 30% of GICC. The
Company's portion of GICC's 1998 loss was $738,000.

        Summarized unaudited financial information of these affiliates follows
(in thousands of dollars). The results of operations includes full year results
for AMN and results for GICC since inception on November 30, 1998.

<TABLE>
<CAPTION>
                                              1998
                                           (Unaudited)
                                           -----------
        <S>                                <C>
        Summary Results of Operations:
        Net sales                           $   2,400
        Gross profit                        $  (1,452)
        Net loss                            $  (7,919)

        Summary Balance Sheet:
        Current assets                      $  15,037
        Non-current assets                     85,796
                                           -----------
        Total assets                        $ 100,833
                                           -----------
                                           -----------

        Current liabilities                 $  24,566
        Non-current liabilities                27,715
        Stockholders' equity                   48,552
                                           -----------
        Total liabilities and               $ 100,833
           stockholders' equity            -----------
                                           -----------
</TABLE>

NOTE 7 -- DEBT ISSUANCE COSTS

        Costs associated with the issuance of debt securities and with obtaining
credit facilities are capitalized and amortized over the term of the related
borrowing or facility. The Company capitalized $7,969,000 and $140,000 of debt
issuance costs during the years ended December 31, 1996 and 1997, respectively.
No debt issuance costs were incurred in 1998. Amortization of such costs was
$564,000 in 1996, $1,008,000 in 1997, and $1,004,000 in 1998. The 1996
amortization excludes $434,000 recorded as an extraordinary loss resulting from
the early redemption of the Company's 9.95% and 10.35% Senior Notes (see Note
15). The components of the debt issuance costs recorded in the balance sheets
are as follows (in thousands of dollars):

<TABLE>
<CAPTION>
                                      December 31,
                                 ----------------------
                                   1997          1998
                                 --------      --------
        <S>                      <C>           <C>
        Debt issuance costs      $ 8,960       $ 8,960
        Accumulated               (1,319)       (2,323)
            amortization         --------      --------
                                 $ 7,641       $ 6,637
                                 --------      --------
                                 --------      --------
</TABLE>


LodgeNet Entertainment Corporation     F - 11                   Form 10-K 1998
<PAGE>

NOTE 8 -- ACCRUED EXPENSES

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

<TABLE>
<CAPTION>
                                        December 31,
                                   ---------------------
                                     1997          1998
                                   -------       -------
        <S>                        <C>           <C>
        Accrued taxes              $ 1,034       $ 1,345
        Accrued compensation         2,567         2,427
        Accrued interest             2,274         3,689
        Other                        2,273         1,949
                                   -------       -------
                                   $ 8,148       $ 9,410
                                   -------       -------
                                   -------       -------
</TABLE>

NOTE 9 -- LONG-TERM DEBT AND CREDIT FACILITIES

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

<TABLE>
<CAPTION>
                                                   December 31,
                                            -------------------------
                                               1997           1998
                                            ----------      ----------
        <S>                                 <C>             <C>
        Revolving Credit Facility           $   3,000       $  76,500
        10.25% Senior Notes                   150,000         150,000
        11.50% Senior Notes                    30,000          30,000
           Less - unamortized discount         (1,169)           (954)
        Capital leases                          1,565           1,326
        Other                                      --          11,221
                                            ----------      ----------
                                              183,396         268,093
        Less current maturities                  (705)         (5,718)
                                            ----------      ----------
                                            $ 182,691       $ 262,375
                                            ----------      ----------
                                            ----------      ----------
</TABLE>

        REVOLVING CREDIT FACILITY -- On February 25, 1999, the Company amended
and restated its bank credit facility, increasing the size of the facility to
$150 million, comprised of a $75 million term loan and a $75 million revolving
credit facility. The $76.5 million outstanding at December 31, 1998 under the
previous revolving credit facility was repaid with proceeds from the term loan.
In addition to the $75 million term loan, the facility provides a $75 million
revolving credit facility, which may be increased at the Company's request to
$100 million, subject to certain limitations. Quarterly repayments on the term
loan begin in February 2001 and are as follows for the respective fiscal years
(in thousands of dollars): 2001 -- $15,000; 2002 -- $18,750; 2003 -- $18,750;
2004 -- $22,500. The revolving credit facility matures in February 2005. Loans
under the amended and restated facility will bear interest at the Company's
option of (1) the bank's prime rate plus a margin of from 1.00% to 1.75%,
depending on leverage as defined, or (2) the eurodollar rate plus a margin of
from 2.00% to 2.75%, depending on leverage as defined. The margins applicable to
the bank's prime rate and/or the eurodollar rate loans are subject to quarterly
adjustment as defined in the agreement. The loans will be secured by a first
priority security interest in all of the Company's assets.

        The facility includes terms and conditions which require the maintenance
of certain financial ratios and place limitations on capital expenditures,
additional indebtedness, liens, investments, guarantees and certain payments or
distributions in respect of the common stock. As of December 31, 1998, the
Company was in compliance with all covenants, terms and conditions of its
previous revolving credit facility. As of the date of closing, the Company was
in compliance with all covenants, terms and conditions of the amended and
restated bank credit facility.

        The amended facility provides for the issuance of letters of credit up
to $12 million, subject to customary terms and conditions. As of December 31,
1998, the Company had outstanding letters of credit totaling $6.5 million under
its previous revolving credit facility.


LodgeNet Entertainment Corporation     F - 12                   Form 10-K 1998
<PAGE>

        10.25% SENIOR NOTES -- In December 1996, the Company issued $150 million
of unsecured 10.25% Senior Notes (the "10.25% Notes"), due December 15, 2006.
The 10.25% Notes are unsecured, rank PARI PASSU in right of payment with future
unsubordinated unsecured indebtedness and rank senior in right of payment to all
subordinated indebtedness of the Company. The 10.25% Notes require semi-annual
interest payments and contain covenants which, among other matters, restrict the
ability of the Company to incur additional indebtedness, create liens, pay
dividends or make certain distributions in respect of its common stock; redeem
capital stock; issue or sell stock of subsidiaries in certain circumstances;
effect certain business combinations; and effect certain transactions with
affiliates or stockholders. As of December 31, 1998, the Company was in
compliance with all covenants, terms, and conditions of the 10.25% Notes.

        The 10.25% Notes are redeemable at the option of the Company, in whole
or in part, on or after December 15, 2001, initially at 105.125% of their
principal amount (plus accrued and unpaid interest) declining ratably to 100% of
their principal amount (plus accrued and unpaid interest) on or after December
15, 2003. In addition, at any time prior to December 15, 1999, the Company may
redeem up to 35% of the aggregate principal amount of the 10.25% Notes with the
proceeds of one or more public equity offerings.

        11.50% SENIOR NOTES -- During 1995, the Company issued $30 million
principal amount of unsecured 11.50% Senior Notes (the "11.50% Notes").
Mandatory annual principal payments of $6 million commence in July 2001
continuing through July 2005. Semi-annual interest payments are required. The
Company issued a total of 480,000 warrants (see Note 13) to purchase common
stock of the Company in connection with the issuance of the 11.50% Notes and the
value of the warrants, $1.68 million, was recorded as additional paid-in capital
and shown as a discount on the 11.50% Notes. As part of the refinancing
transaction in which the 10.25% Notes were issued, the holders of the 11.50%
Notes adopted the covenants and ranking of the 10.25% Notes.

        Long-term debt has the following scheduled principal maturities for 
the years ended December 31 (in thousands of dollars): 1999 -- $5,718; 
2000 -- $5,778; 2001 -- $21,190; 2002 -- $24,797; 2003 -- $25,564; 
thereafter -- $185,046.

        At December 31, 1997 and 1998, the estimated fair value of the Company's
debt was $189.7 million and $268.0 million, respectively, which differs from the
recorded amounts of $183.4 million and $268.1 million, respectively.

NOTE 10 -- COMMITMENTS AND CONTINGENCIES

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

        SIGNAL CARRIAGE AGREEMENT -- The Company and PRIMESTAR Partners, L.P.
(since succeeded by PRIMESTAR, Inc. ("PRIMESTAR") have entered into a Signal
Carriage Agreement (the "Agreement") under which, in exchange for exclusive
distribution of satellite-delivered free-to-guest programming to the lodging
industry, the Company agreed to share certain operating cash flows, as defined
in the agreement, with PRIMESTAR. Under the cash flow sharing arrangement, which
is measured on an annual basis, the Company receives the first $1.8 million of
cash flows, PRIMESTAR receives the next $1.8 million and all amounts thereafter
are shared evenly. The Company paid PRIMESTAR $207,000 under this arrangement
for the year ending December 31, 1997 and has recognized an obligation of
$781,000 for the year ending December 31, 1998. The Agreement has an initial
term of 15 years and includes various restrictions, including default and
termination provisions.


LodgeNet Entertainment Corporation     F - 13                   Form 10-K 1998
<PAGE>

        PURCHASE COMMITMENTS -- The Company has purchase commitments, in the
ordinary course of business, none of which are expected to result in losses.

        OPERATING LEASES -- The Company has entered into certain operating
leases, which at December 31, 1998 require future minimum lease payments, as
follows (in thousands of dollars): 1999 -- $324; 2000 -- $299; 2001 -- $271;
2002 -- $163; 2003 and thereafter -- $67.

        LITIGATION -- Since the first quarter of 1995, the Company has been
engaged in legal proceedings resulting from a lawsuit filed by On Command Video
Corporation ("On Command") asserting patent infringement by the Company relating
to its on-demand video system. During the third quarter of 1998, the Company
entered into an agreement with On Command to settle all matters of pending
litigation between the companies and enter into cross licensing arrangements
regarding the use of each of the companies' patented technologies. The cross
licensing arrangements, in consideration of the relative fair value of the
patents involved, provides for the Company to make cash payments to On Command
totaling approximately $16 million plus interest, payable in three annual
installments which commenced in September 1998. The Company has capitalized the
present value of the obligation to On Command based on the fair value of the
license rights acquired. The fair value of the license rights acquired will be
amortized over the remaining average lives of the underlying patents.

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

NOTE 11 -- STOCKHOLDERS' EQUITY

        PREFERRED STOCK -- There are 5,000,000 shares of preferred stock, 
$.01 par value, authorized by the Company's certificate of incorporation, of 
which none were outstanding at December 31, 1996 and 1997. The Board of 
Directors may authorize the issuance of preferred stock, $.01 par value, in 
one or more series and with rights and privileges for each issue as 
determined by the Board of Directors.

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

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

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


LodgeNet Entertainment Corporation     F - 14                   Form 10-K 1998
<PAGE>

NOTE 12 -- STOCK OPTION PLANS

        The Company has stock options plans which provide for the granting of up
to 2,726,792 non-qualified or incentive stock options on the Company's common
stock. Certain officers, directors and key employees have been granted options
to purchase common stock of the company under these plans. Options become
exercisable in accordance with vesting schedules determined by a committee of
the Board of Directors, and generally expire ten years after date of grant. No
options had expired as of December 31, 1998 and outstanding options expire
beginning in 2001 through 2008. The following is a summary of the stock option
activity for the years ending December 31:

<TABLE>
<CAPTION>
                                                     Weighted
                                                     Average
                                     Options         Exercise
                                   Outstanding        Price
                                   -----------       --------
<S>                                <C>               <C>
Balance at December 31, 1995        1,318,426          $ 4.21
   Options granted                    239,000           12.66
   Options exercised                  (93,256)            .62
   Options forfeited/canceled         (12,500)           8.51
                                    ----------
Balance at December 31, 1996        1,451,670            5.79
   Options granted                    257,832           14.99
   Options exercised                 (196,689)           1.08
   Options forfeited/canceled          (7,000)           9.06
                                    ----------
Balance at December 31, 1997        1,505,813            7.91
   Options granted                    634,656           12.72
   Options exercised                 (270,329)            .81
   Options forfeited/canceled        (107,800)          12.84
                                    ----------
Balance at December 31, 1998        1,762,340         $ 10.45
                                    ----------
                                    ----------
</TABLE>

The following is a summary of stock options outstanding as of December 31, 1998:

<TABLE>
<CAPTION>
                            Outstanding Options         Exercisable Options
                     --------------------------------   --------------------
                                 Weighted
                                  Average    Weighted             Weighted
                                 Remaining    Average              Average
     Exercise                      Term      Exercise             Exercise
   Price Range        Number     in Years     Price     Number     Price
 ----------------    ---------   ---------   --------   -------   --------
<S>                  <C>         <C>         <C>        <C>       <C>
  $0.23 to $0.46        84,819       4.8       $0.23     84,819     $0.23
  $2.77 to $3.23       237,022       4.6       $2.89    237,022     $2.89
  $6.46 to $9.79       300,499       7.1       $8.57    176,499     $8.57
 $10.38 to $13.29      724,000       8.2      $11.41    228,750    $11.38
 $14.00 to $20.00      416,000       8.6      $16.51     73,875    $15.60
                     ---------                          -------
                     1,762,340       7.4      $10.45    800,965     $7.46
                     ---------                          -------
                     ---------                          -------
</TABLE>

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

<TABLE>
<CAPTION>
                                   1996         1997         1998
                                 -------      -------      -------
<S>                              <C>          <C>          <C>
Weighted average fair
   value per option granted      $  6.01      $  7.13      $  4.36
                                 -------      -------      -------
                                 -------      -------      -------
</TABLE>

        The "fair value" of each option granted was estimated as of the grant
date using the Black-Scholes option valuation model under the following
assumptions: (i) dividend yield - none, (ii) weighted average risk-free interest
rate - 6.40% in 1996, 6.22% in 1997, 5.15% in 1998; (iii) weighted average
expected life - 5.0 years, and (iv) weighted average expected volatility - 44.0%
in 1996, 44.5% in 1997, 45.3% in 1998.


LodgeNet Entertainment Corporation     F - 15                   Form 10-K 1998
<PAGE>

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

<TABLE>
<CAPTION>
                         1996           1997           1998
                       --------       --------       --------
<S>                    <C>            <C>            <C>
Net loss
   As reported         $(16,610)      $(25,619)      $(39,912)
   Pro forma            (18,047)       (27,423)       (42,677)

Loss per share
   As reported         $  (1.74)      $  (2.27)      $  (3.45)
   Pro forma              (1.89)         (2.43)         (3.69)
</TABLE>

NOTE 13 -- WARRANTS

        In connection with the 1995 issuance of the 11.5% Senior Notes (see 
Note 9), the Company issued a total of 480,000 warrants to purchase common 
stock of the Company. Each warrant entitles the holder to purchase one share 
of common stock at an exercise price of $7.00 per share. The warrants include 
demand registration rights and anti-dilution provisions, and such warrants 
expire on July 15, 2005. The portion of the proceeds from the 1995 debt 
issuance deemed attributable to the warrants was recorded as additional 
paid-in capital.

NOTE 14 -- SALE OF EQUITY INTEREST IN SUBSIDIARY

        In October 1996, the Company and ResNet Inc. entered into agreements 
with TCI Satellite Entertainment, Inc. (since succeeded by PRIMESTAR MDU, 
Inc. ("PRIMESTAR")) to sell a portion of ResNet Inc. to PRIMESTAR. Under the 
terms of the agreement, a 4.99% equity interest in ResNet Inc. was sold to 
PRIMESTAR in exchange for $5.4 million in cash. The proceeds related to the 
change in equity interest were in excess of the Company's carrying value for 
its investment, and such excess, approximately $4.7 million after transaction 
expenses, was reflected as a credit to paid-in capital.

        In June 1997, ResNet LLC was formed and the agreements previously 
entered into by PRIMESTAR and ResNet Inc. were amended, under substantially 
similar terms, to reflect ResNet LLC as the operating entity of the ResNet 
business.

        Under a convertible note agreement (the "Convertible Note"), 
PRIMESTAR had agreed to advance up to $34.6 million to ResNet LLC during the 
five year period ending October 21, 2001. Use of the proceeds of the 
Convertible Note were limited to the purchase of satellite receiving 
equipment from PRIMESTAR. Amounts outstanding under the Convertible Note were 
periodically convertible into additional equity interests in ResNet LLC. Such 
conversions were mandatory, subject only to regulatory limitations on the 
size of the equity interest that PRIMESTAR could hold in ResNet LLC. Under 
these conversion features, PRIMESTAR had obtained rights to acquire an 
additional 9.81% equity interest (incremental to the 4.99% interest acquired 
in 1996) in ResNet LLC as of November 30, 1998, the date of the ResNet merger 
transaction (see Note 3). Due to the regulatory limitations described above, 
these rights were unable to be exercised. No amounts are due to PRIMESTAR 
under this convertible note agreement at December 31, 1998.

        In connection with the merger transaction described in Note 3, ResNet 
LLC and PRIMESTAR agreed to terminate the convertible note agreement. The 
companies further agreed that if GICC and PRIMESTAR were unable to reach 
agreement by April 1, 1999 with respect to a new agreement for PRIMESTAR to 
furnish GICC with nationwide access to certain satellite programming signals, 
that ResNet LLC would acquire PRIMESTAR's 5% 

LodgeNet Entertainment Corporation     F - 16                   Form 10-K 1998
<PAGE>

equity interest in GICC that was obtained as part of the merger transaction 
for $5.4 million. Consideration for this 5% interest is payable in part by 
satellite receiving equipment held by the Company that was previously 
purchased from PRIMESTAR. Such amount will be valued at the price paid for 
the equipment by the Company. Remaining amounts to equal the $5.4 million 
will be payable in cash by April 9, 1999.

NOTE 15 -- EXTRAORDINARY LOSS

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

NOTE 16 -- CHANGE IN ACCOUNTING PRINCIPLE

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

NOTE 17 -- INCOME TAXES

        The provisions for income taxes consisted of state income taxes. The 
Company and its subsidiaries file separate federal income tax returns. At 
December 31, 1998, the Company had net operating loss carry-forwards in 
excess of $85 million for federal income tax purposes. Such carry-forwards 
expire beginning in 2001 through 2013, and federal tax regulations limit the 
availability and timing of usage of carry-forwards. Significant components of 
the Company's deferred tax liabilities and assets were as follows at (in 
thousands of dollars):

<TABLE>
<CAPTION>
                                                December 31,
                                           -----------------------
                                             1997           1998
                                           --------       --------
<S>                                        <C>            <C>
Deferred tax liabilities:
   Tax over book depreciation              $ (5,207)      $ (2,759)
                                           --------       --------
Deferred tax assets:
   Net operating loss carry-forwards         25,283         28,900
   Reserves and accruals                      1,081          1,769
   Deferred programming                         153             29
                                           --------       --------
                                             26,517         30,698
                                           --------       --------
Net deferred tax assets                      21,310         27,939
Valuation allowance                         (21,310)       (27,939)
                                           --------       --------
Net deferred taxes                         $     --       $    --
                                           --------       --------
                                           --------       --------
</TABLE>

        The Company established the valuation allowance for deferred tax 
assets after considering its historical financial performance, existing 
deferred tax liabilities, and certain information about future years.

NOTE 18 -- RELATED PARTY TRANSACTIONS

        During 1998, the Company advanced $1.9 million to two officers under 
the terms of promissory notes providing for total advances of $2.0 million. 
The notes are payable by the officers at the earlier of (i) demand of the 
Company or, (ii) November 9, 1999. Interest is payable monthly at the rate 
applicable to the Company under its revolving credit facility. The notes are 
secured by shares of the Company's stock held by the officers.


LodgeNet Entertainment Corporation     F - 18                   Form 10-K 1998
<PAGE>

NOTE 19 -- SUBSEQUENT EVENTS

        FINANCING ACTIVITIES - Effective February 25, 1999, the Company 
amended and restated its bank credit facility. See Note 9 for a description 
of the transaction and the terms of the credit facility.

        PRIMESTAR TRANSACTION ANNOUNCEMENT - In January 1999, Hughes 
Electronics Corporation ("Hughes") announced that it reached an agreement 
with PRIMESTAR to acquire PRIMESTAR's digital broadcast satellite (DBS) 
business and plans to combine the business with Hughes' DIRECTV unit. It was 
further announced that over the next approximately two years, PRIMESTAR 
subscribers will be transitioned to DIRECTV service. The Company has 
approximately 200,000 lodging rooms which receive cable television 
programming via the PRIMESTAR DBS technology. Management is actively pursuing 
several options with respect to this matter to ensure that cable television 
service to its lodging customers is not disrupted, and believes that a 
transition solution will be obtained which will avoid a material adverse 
impact to the Company's operations or financial position.


LodgeNet Entertainment Corporation     F - 18                   Form 10-K 1998
<PAGE>

NOTE 20 -- SEGMENT INFORMATION

        During 1998, the Company adopted SFAS No. 131, "Disclosures about 
Segments of an Enterprise and Related Information." Prior to the ResNet 
merger described in Note 3, the Company's operations were classified into two 
business segments, lodging and residential. The lodging segment utilizes 
interactive systems designed, assembled and operated by the Company to 
provide guest room entertainment, information and convenience services to the 
lodging industry. The residential segment used systems designed, built and 
operated by the Company to provide cable television programming and other 
entertainment services to multifamily residences. The Company's operations 
will not include the residential segment subsequent to the ResNet merger.

        The accounting policies of the reportable segments are the same as 
those described in Note 2. The company evaluates performance of its operating 
segments based on operating results before depreciation and amortization, 
excluding any non recurring charges. There were no intersegment sales and 
transfers.

        Summarized financial information concerning the Company's reportable 
segments is shown in the following table (in thousands of dollars). The 
information for 1997 and 1996 has been restated to conform to the 1998 
presentation. The "Other" column includes corporate related items and, as it 
relates to segment profit (loss), income and expense not allocated to 
reportable segments.

<TABLE>
<CAPTION>
                            Lodging     Residential       Other         Total
                           --------     -----------     --------      --------
<S>                        <C>          <C>             <C>           <C>
1996
Revenues                   $ 97,389       $   332       $      -      $ 97,721
Segment profit (loss)        24,552           149        (41,311)      (16,610)
Total assets                274,219         5,548              -       279,767
Capital expenditures         78,738         5,518              -        84,256

1997
Revenues                   $133,010       $ 2,700       $      -      $135,710
Segment profit (loss)        37,407        (2,055)       (60,971)      (25,619)
Total assets                238,869        21,425              -       260,294
Capital expenditures         87,615        16,762              -       104,377

1998
Revenues                   $160,975       $ 5,376       $      -      $166,351
Segment profit (loss)        50,438        (2,237)       (88,113)      (39,912)
Total assets                306,030             -              -       306,030
Capital expenditures         55,458        14,202              -        69,660
</TABLE>

The following table presents the details of the "Other" segment profit (loss):

<TABLE>
<CAPTION>
                                           1996       1997       1998     
                                          -------    -------    -------    
<S>                                       <C>        <C>        <C>        
Restructuring charge                      $     -    $     -    $ 3,300    
Depreciation and amortization              29,815     43,760     55,215    
Interest expense, net                       8,243     17,001     23,048    
Equity in losses of unconsolidated              
   affiliates                                   -          -      6,550    
Extraordinary loss                          3,253          -          -    
Cumulative effect of change in                                             
   accounting principle                         -        210          -    
Total                                     $41,311    $60,971    $88,113    
</TABLE>


LodgeNet Entertainment Corporation     F - 19                   Form 10-K 1998
<PAGE>

The following table presents revenues by country based on the location of the 
customer:

<TABLE>
<CAPTION>
                        1996        1997        1998    
                       -------    --------    --------  
<S>                    <C>        <C>         <C>       
United States          $93,803    $129,484    $157,654  
Canada                   3,918       5,954       7,420  
Other                        -         272       1,277  
                       -------    --------    --------  
Total                  $97,721    $135,710    $166,351  
                       -------    --------    --------  
                       -------    --------    --------  
</TABLE>

The following table presents long-lived assets by country based on the location
of the asset:

<TABLE>
<CAPTION>
                      1996         1997         1998      
                    --------     --------     --------    
<S>                 <C>          <C>          <C>         
United States       $156,235     $209,993     $199,067    
Canada                 7,922        8,955       10,370    
                    --------     --------     --------    
Total               $164,157     $218,948     $209,437    
                    --------     --------     --------    
                    --------     --------     --------    
</TABLE>

No single customer accounted for 10% or more of the Company's consolidated 
revenue in 1996, 1997 or 1998.


LodgeNet Entertainment Corporation     F - 20                   Form 10-K 1998
<PAGE>

NOTE 21 -- SELECTED QUARTERLY FINANCIAL DATA (UNAUDITED)

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

<TABLE>
<CAPTION>
                                            Quarter       Quarter        Quarter         Quarter
                                             Ending        Ending         Ending           Ending
                                            March 31,     June 30,     September 30,    December 31,
                                            ---------     --------     -------------    ------------
<S>                                         <C>           <C>          <C>              <C>
For 1997:
   Total revenue                             $29,656      $ 33,132      $ 36,692          $ 36,230
   Gross profit                               16,839        18,794        20,961            20,604
   Loss before cumulative effect
      of change in accounting principle       (6,679)       (5,756)       (5,050)           (7,924)
   Net loss (2)                               (6,679)       (5,756)       (5,050)           (8,134)
   Per common share (basic and
      diluted (1):
      Loss before cumulative effect
      of change in accounting principle      $ (0.60)     $  (0.51)     $  (0.45)         $   (.70)
      Net loss                                 (0.60)        (0.51)        (0.45)             (.71)

For 1998:
   Total revenue                             $36,347      $ 40,898      $ 45,776          $ 43,330
   Gross profit                               20,267        22,711        25,636            23,729
   Net loss (3)                               (8,635)       (7,548)       (5,457)          (18,272)
   Per common share (basic and
      diluted) (1):
      Net loss                               $ (0.76)     $  (0.65)     $  (0.47)         $  (1.54)
</TABLE>

----------
(1)  Per share amounts are computed independently for each of the quarters
     presented. Therefore, the sum of such amounts will not equal the total for
     the year.

(2)  The results of the quarter ended December 31, 1997 include a $210,000 
     charge for the effect of adopting EITF Issue 97-13 related to accounting 
     for certain business reengineering costs (see Note 16).

(3)  The net loss for the quarter ended December 31, 1998 includes the
     recognition of the $3.3 million restructuring charge related to the ResNet
     transaction which occurred effective November 30, 1998. Additionally, the
     $6.5 million of losses recorded from unconsolidated affiliates were 
     recorded in the fourth quarter. This loss is due to (i) the ResNet 
     transaction which resulted in the Company recording its share of GICC's 
     losses incurred in December, and (ii) a change in circumstances during 
     the fourth quarter related to the Company's investment in AMN which 
     resulted in the Company adopting the equity method, rather than the cost 
     method, of accounting for this investment.


LodgeNet Entertainment Corporation     F - 21                   Form 10-K 1998
<PAGE>

              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE


To LodgeNet Entertainment Corporation:

        We have audited, in accordance with generally accepted auditing 
standards, the consolidated financial statements included in this annual 
report on Form 10-K, and have issued our report thereon dated February 12, 
1999. Our audit was made for the purpose of forming an opinion on those 
financial statements taken as a whole. The following schedule is the 
responsibility of the Company's management and is presented for purposes of 
complying with the Securities and Exchange Commission's rules and is not part 
of the basic financial statements. This schedule has been subjected to the 
auditing procedures applied in the audit of the basic financial statements 
and, in our opinion, fairly states in all material respects the financial 
data required to be set forth therein in relation to the basic financial 
statements taken as a whole.

                                                   ARTHUR ANDERSEN LLP

Minneapolis, Minnesota 
February 12, 1999 (except for Note 9, 
as to which the date is February 25, 1999)


LodgeNet Entertainment Corporation     F - 22                   Form 10-K 1998
<PAGE>

               LODGENET ENTERTAINMENT CORPORATION AND SUBSIDIARIES

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

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

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

Year Ended December 31, 1997:
   Allowance for Doubtful Accounts        $785           $820            $805           $800

Year Ended December 31, 1998:
   Allowance for Doubtful Accounts        $800           $848            $848           $800
</TABLE>

----------
(1)  All deductions from reserves were for the purposes for which such 
     reserves were created except for the 1998 activity, which includes a 
     $45,000 reduction to the reserve resulting from the ResNet merger
     described in Note 3.


LodgeNet Entertainment Corporation     F - 23                   Form 10-K 1998