##### Table of Contents



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UNITED STATES
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



---

For the Fiscal Year Ended December 31, 2003
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. [   ]                                   
|
| |  | Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act). Yes [X] No [   ]                                                                                                                                                                                                                                               
|
| |  | State the aggregate market value of the voting and non-voting common
equity held by non-affiliates computed by reference to the price at which
the common equity was last sold, or the average bid and asked price of
such common equity, as of the last business day of the registrants most
recently completed second fiscal quarter. $92,117,250.                       

The number of shares of common stock of the Registrant outstanding as of March
2, 2004, was 13,074,726 shares.

DOCUMENTS INCORPORATED BY REFERENCE  - Portions of the Registrants definitive
proxy statement for the 2004 Annual Meeting of Stockholders, which will be
filed within 120 days of the fiscal year ended December 31, 2003, are
incorporated by reference in Part III of this Form 10-K.



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This Report contains a total of 68 pages, excluding exhibits. The exhibit
index appears on page 37.





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TABLE OF CONTENTS



|                                                                                                         |                                                                |  |  |  |  |  |  | 
|-------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  |  |  |  |  |  | 
|Item 1 - Business                                                                                       
|                                                                                                         | Overview                                                      
|                                                                                                         | Markets and Customers                                         
|                                                                                                         | Services and Products                                         
|                                                                                                         | Operations                                                    
|                                                                                                         | Competition                                                   
|                                                                                                         | Business Strategy                                             
|                                                                                                         | Regulation                                                    
|                                                                                                         | Employees                                                     
|                                                                                                         | Web Site Access to SEC Filings                                
|Item 2 - Properties                                                                                     
|Item 3 - Legal Proceedings                                                                              
|Item 4 - Submission of Matters to a Vote of Security Holders                                            
|Item 5 - Market for Registrants Common Equity and Related Stockholder Matters                          
|                                                                                                         | Dividends                                                     
|                                                                                                         | Stockholder Rights Plan                                       
|Item 6 - Selected Financial Data                                                                        
|Special Note Regarding Forward-Looking Statements                                                       
|Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations          
|                                                                                                         | Executive Overview                                            
|                                                                                                         | Liquidity and Capital Resources                               
|                                                                                                         | Seasonality                                                   
|                                                                                                         | Business Risks                                                
|                                                                                                         | Results of Operations - Years Ended December 31, 2003 and 2002
|                                                                                                         | Results of Operations  Years Ended December 31, 2002 and 2001
|                                                                                                         | Critical Accounting Policies                                  
|                                                                                                         | Recent Accounting Developments                                
|Item 7A  Quantitative and Qualitative Disclosures About Market Risk                                    
|Item 8 - Financial Statements and Supplementary Data                                                    
|Item 9 - Changes In and Disagreements with Accountants on Accounting and Financial Disclosure           
|Item 9A - Controls and Procedures                                                                       
|Item 10 - Directors and Executive Officers of the Registrant                                            
|Item 11 - Executive Compensation                                                                        
|Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
|Item 13 - Certain Relationships and Related Transactions                                                
|Item 14 - Principal Accountant Fees and Services                                                        
|Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K                               
|Signatures                                                                                              
|INDEX TO CONSOLIDATED FINANCIAL STATEMENTS                                                              
|Report of Independent Auditors                                                                          
|Report of Independent Accountants                                                                       
|Consolidated Balance Sheets                                                                             
|Consolidated Statements of Operations                                                                   
|Consolidated Statements of Stockholders Equity                                                         
|Consolidated Statements of Cash Flows                                                                   
|Notes to Consolidated Financial Statements                                                              
|Report of Independent Accountants on Schedule                                                           
|Schedule II  Valuation and Qualifying Accounts                                                         
|2003 Stock Option Agreement-Non-Employee Directors                                                      
|2003 Stock Option Agreement-Key Employees                                                               
|Second Amendment to Credit Agreement                                                                    
|Third Amendment to Credit Agreement                                                                     
|Amendments of Confidential License Agreement                                                            
|Statement of Computation of Ratios                                                                      
|Subsidiaries of the Company                                                                             
|Consent of Independent Public Accountants                                                               
|Rule 13a-14(a)/15d-14(a) Certifications                                                                 
|Section 1350 Certifications                                                                             



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##### Table of Contents



Table of Contents

|                                                                                                      |                                                                |  |    |    | 
|----------------------------------------------------------------------------------------------------- | -------------------------------------------------------------- |  | -- | -- | 
|Item 1 - Business                                                                                     |                                                                |  | 1  |   
|                                                                                                      | Overview                                                       |  |    | 1  | 
|                                                                                                      | Markets and Customers                                          |  |    | 3  | 
|                                                                                                      | Services and Products                                          |  |    | 3  | 
|                                                                                                      | Operations                                                     |  |    | 4  | 
|                                                                                                      | Competition                                                    |  |    | 7  | 
|                                                                                                      | Business Strategy                                              |  |    | 8  | 
|                                                                                                      | Regulation                                                     |  |    | 9  | 
|                                                                                                      | Employees                                                      |  |    | 10 | 
|                                                                                                      | Web Site Access to SEC Filings                                 |  |    | 10 | 
|Item 2 - Properties                                                                                   |                                                                |  | 10 |   
|Item 3 - Legal Proceedings                                                                            |                                                                |  | 10 |   
|Item 4 - Submission of Matters to a Vote of Security Holders                                          |                                                                |  | 11 |   
|Item 5 - Market for Registrants Common Equity and Related Stockholder Matters                        |                                                                |  | 11 |   
|                                                                                                      | Dividends                                                      |  |    | 11 | 
|                                                                                                      | Stockholder Rights Plan                                        |  |    | 11 | 
|Item 6 - Selected Financial Data                                                                      |                                                                |  | 13 |   
|Special Note Regarding Forward-Looking Statements                                                     |                                                                |  | 15 |   
|Item 7 - Managements Discussion and Analysis of Financial Condition and Results of Operations        |                                                                |  | 15 |   
|                                                                                                      | Executive Overview                                             |  |    | 15 | 
|                                                                                                      | Liquidity and Capital Resources                                |  |    | 19 | 
|                                                                                                      | Seasonality                                                    |  |    | 22 | 
|                                                                                                      | Business Risks                                                 |  |    | 22 | 
|                                                                                                      | Results of Operations  Years Ended December 31, 2003 and 2002 |  |    | 25 | 
|                                                                                                      | Results of Operations  Years Ended December 31, 2002 and 2001 |  |    | 29 | 
|                                                                                                      | Critical Accounting Policies                                   |  |    | 32 | 
|                                                                                                      | Recent Accounting Developments                                 |  |    | 33 | 
|Item 7A - Quantitative and Qualitative Disclosures About Market Risk                                  |                                                                |  | 34 |   
|Item 8 - Financial Statements and Supplementary Data                                                  |                                                                |  | 35 |   
|Item 9 - Changes In and Disagreements with Accountants on Accounting and Financial Disclosure         |                                                                |  | 35 |   
|Item 9A - Controls and Procedures                                                                     |                                                                |  | 35 |   
|Item 10 - Directors and Executive Officers of the Registrant                                          |                                                                |  | 35 |   
|Item 11 - Executive Compensation                                                                      |                                                                |  | 35 |   
|Item 12 - Security Ownership of Certain Beneficial Owners, Management and Related Stockholder Matters |                                                                |  | 36 |   
|Item 13 - Certain Relationships and Related Transactions                                              |                                                                |  | 36 |   
|Item 14 - Principal Accountant Fees and Services                                                      |                                                                |  | 36 |   

|                                   |  |   |  |               
|---------------------------------- |  | - |  | --------------
|LodgeNet Entertainment Corporation |  | i |  | Form 10-K 2003





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##### Table of Contents



|                                                                          |  |  |    |  | 
|------------------------------------------------------------------------- |  |  | -- |  | 
|Item 15 - Exhibits, Financial Statement Schedules and Reports on Form 8-K |  |  | 36 | 



---

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

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

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | ii |  | Form 10-K 2003





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##### Table of Contents



PART I




Item 1 - Business




Overview

LodgeNet Entertainment Corporation is one of the worlds largest and
leading providers of interactive television systems and broadband services to
hotels, resorts and casinos throughout the United States and Canada, as well as
select international markets. It is estimated that more than 260 million guests
a year have access to a wide variety of LodgeNets interactive television
services, which are designed to make their stay more enjoyable, productive and
convenient. As of December 31, 2003, the Company provided television services
to approximately 5,800 hotel properties serving nearly one million rooms.

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

As shown in the table below, the Company has experienced substantial
revenue growth over the past five years, primarily as the result of the rapid
expansion of the number of rooms installed with the Companys interactive
services.

|                                                          |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|--------------------------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                                          |  | Year Ended December 31,
|                                                          |  |                        
|                                                          |  | 2003                    |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                                          |  |                         |         |      |  |      |         |      |  |     
|Selected Operations Data:                                 |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total Guest Pay interactive rooms (1)                     |  |                         | 924,643 |      |  |      | 876,348 |      |  |      | 812,149 |   |  |   | 725,075 |   |  |   | 661,691 |  
|Total Digital Rooms (1) (2)                               |  |                         | 385,426 |      |  |      | 265,097 |      |  |      | 115,378 |   |  |   |        |   |  |   |        |  
|Total rooms served (1) (3)                                |  |                         | 994,127 |      |  |      | 952,673 |      |  |      | 890,546 |   |  |   | 806,112 |   |  |   | 761,509 |  
|                                                          |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Total revenues                                            |  | $                       | 250,149 |      |  | $    | 234,990 |      |  | $    | 216,895 |   |  | $ | 196,817 |   |  | $ | 181,272 |  
|Operating income (loss)                                   |  | $                       | 6,500   |      |  | $    | 5,975   |      |  | $    | 9,120   |   |  | $ | 2,294   |   |  | $ | (678    | )
|Depreciation and amortization                             |  | $                       | 78,459  |      |  | $    | 75,918  |      |  | $    | 66,008  |   |  | $ | 65,470  |   |  | $ | 60,778  |  
|Operating income before depreciation
and amortization (4) |  | $                       | 84,959  |      |  | $    | 81,893  |      |  | $    | 75,128  |   |  | $ | 67,764  |   |  | $ | 60,100  |  
|Interest expense                                          |  | $                       | (34,239 | )    |  | $    | (33,037 | )    |  | $    | (30,306 | ) |  | $ | (27,809 | ) |  | $ | (27,210 | )
|Net loss                                                  |  | $                       | (35,052 | )    |  | $    | (29,126 | )    |  | $    | (26,408 | ) |  | $ | (39,014 | ) |  | $ | (36,428 | )
|                                                          |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash provided by operating activities                     |  | $                       | 48,563  |      |  | $    | 43,769  |      |  | $    | 46,477  |   |  | $ | 41,180  |   |  | $ | 40,782  |  
|Cash used for investing activities                        |  |                         | (53,618 | )    |  |      | (70,708 | )    |  |      | (77,995 | ) |  |   | (50,248 | ) |  |   | (55,445 | )
|                                                          |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash provided by external financing                       |  | $                       | (5,055  | )    |  | $    | (26,939 | )    |  | $    | (31,518 | ) |  | $ | (9,068  | ) |  | $ | (14,663 | )
|                                                          |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  



| | (1) |  | End of year statistics.                                                                                                                                                                                                                                                                           
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (2) |  | Digital rooms are equipped with an interactive digital system
where on-demand movies, television on-demand programming, and music
content are stored in a digital format and are updated and
delivered via satellite to the Companys systems within respective
hotels. Digital rooms are included

|                                   |  |   |  |               
|---------------------------------- |  | - |  | --------------
|LodgeNet Entertainment Corporation |  | 1 |  | Form 10-K 2003





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##### Table of Contents





| |     |  | with the total Guest Pay
interactive rooms and represent 42% of the Guest Pay interactive
rooms served as of December 31, 2003.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
| | --- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| | (3) |  | Total rooms served include those rooms receiving one or more
of the Companys services, including rooms served by international
licensees.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            
|
| | (4) |  | Operating income before depreciation and amortization is
calculated by adding depreciation and amortization to operating
income. Operating income before depreciation and amortization is not
intended to represent an alternative to operating income and is not
representative of funds available for discretionary use due to the
Companys financing obligations. Management utilizes operating
income before depreciation and amortization to provide a stable and
consistent comparison of operating performance exclusive of
historical costs of capital related to depreciation and
amortization. The Company believes that depreciation and
amortization are fixed or sunk costs, which do not provide a
stable measure for variable or controllable operating performance.

The Company provides its services directly to hotel customers and their
guests throughout the United States and Canada, and through licensing
arrangements with companies in other select countries. Typically, the Companys
contracts with hotels, resorts and casinos are exclusive and have initial,
non-cancelable terms of five to seven years. As of December 31, 2003, the
Companys average remaining contract term was approximately 41 months. The
exclusive nature of these contracts allows the Company to estimate (based on
certain operating assumptions) future revenues, cash flows and rates of return
related to the contracts prior to making a capital investment decision.

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

The Company also provides high-speed Internet access through the sale and
installation of equipment to subscribing hotels. The Company also receives
monthly service fees from such hotels for technical maintenance and call center
support services following the initial installation.

In 2001, the Company introduced a digital-based system that enhances and
expands the delivery of content and services through its interactive television
system, providing travelers with enhanced levels of choice, convenience and
control in the guest room. As of December 31, 2003, the Company had installed
its digital system in over 385,000 rooms, or 42% of its installed Guest Pay
interactive base. In addition to the on-demand movies, video games, and other
services provided by the Companys installed tape-based systems, the digital
system offers (i) increased variety and availability of on-demand movies; (ii)
television on-demand programming; (iii) digital music and music videos; (iv)
Internet on television; (v) access to Internet-sourced content; (vi) on-screen
controls that allow the guest more viewing control and flexibility; (vii)
improved guest marketing and merchandising capabilities; and (viii) a system
architecture that receives video and music content via a satellite distribution
network, resulting in operating cost reductions for the Company. The Company
plans to continue to install its interactive digital system in all newly
installed hotel properties and in selected existing sites as current service
contracts are successfully renewed and extended.

The Company remains focused on executing its long-term business strategy,
which is based on five key elements:



| | 1. |  | Continued expansion of the Companys interactive
digital room base.                               
| | -- |  | --------------------------------------------------------------------------------------------------
|
| | 2. |  | Increased revenue per room by continued expansion of
product offerings to hotels and their guests.
|
| | 3. |  | Continued increases in operating margins through
effective cost controls.                         
|
| | 4. |  | Continued integration of cost-effective system
technologies.                                      
|
| | 5. |  | Continued reduction of the Companys reliance on
external financing.                              

|                                   |  |   |  |               
|---------------------------------- |  | - |  | --------------
|LodgeNet Entertainment Corporation |  | 2 |  | Form 10-K 2003





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##### Table of Contents



The Company is a Delaware corporation with its principal executive offices
located at 3900 West Innovation Street, Sioux Falls, South Dakota 57107. The
Companys telephone number is (605) 988-1000.




Markets and Customers

Domestic Market. The Companys primary market for its services is
predominantly the mid-size and large hotel segments within the United States
and Canada. Based on industry sources, the Company estimates that these
segments account for approximately 72%, or 3.5 million, of the lodging
industrys estimated 4.8 million rooms. Additionally, whereas the Company
served nearly one million rooms as of December 31, 2003, the Company believes
that growth opportunities remain available through (i) economically-viable
rooms not yet served by any provider; (ii) supply growth within the lodging
industry; and (iii) rooms currently served by other service providers when
their contracts expire.

Diversified Customer Base.The Company believes that its interactive hotel
base is well diversified in terms of (i) location; (ii) demographics; and (iii)
customer contracts. As of December 31, 2003, no single state or province
accounted for more than 10% of the hotel properties served by the Company. In
segmenting the Companys hotel base according to six demographic
classifications set by industry sources, no segment of the Companys served
hotels represented more than 30% of its interactive base. The Company provides
its services to various corporate-managed hotel chains such as Baymont Inns &
Suites, Delta Hotels, Doubletree, Embassy Suites, Grand Casinos, Hampton Inn,
Harrahs, Hilton, Homewood Suites, LaQuinta, Omni Hotels, Outrigger, Red Roof
Inn, Ritz Carlton, Sheraton and Wingate Inn, plus major REITs and management
companies such as Felcor, Flagstone, Interstate, Kimpton, Prime, WestCoast
Hospitality, as well as many independent properties using the Fairmont, Holiday
Inn, Inter-Continental, Marriott, Courtyard by Marriott, Prince, Radisson, W
Hotel, Westin and other trade names. In 2000, the Company signed a contract
with Hilton Hotels Corporation (Hilton) to install, on an exclusive basis, its
interactive television system in all Hilton owned properties and to be the
exclusive recommended provider of choice for its managed and franchised
properties. During 2003, hotels covered by the master services agreement with
Hilton represented approximately 12.5% of the Companys consolidated revenue.

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




Services and Products

Guest Pay Interactive Services.The Companys primary source of revenue
is providing in-room, interactive television services to the lodging industry,
for which the hotel guest pays on a per-view, hourly or daily basis. The
high-speed, two-way digital communications design of the Companys system
architecture enables the Company to provide interactive features, such as
on-demand movies, video games, music and music videos, Internet on television
(which does not require a laptop), and television on-demand programming. Guest
Pay interactive revenue packages may also include satellite-delivered basic and
premium television programming, which is paid for by the hotel and provided to
guests free of charge. Programming is delivered through a long-term agreement
with DIRECTV via satellite and distributed to guest rooms over the internal
hotel network. 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 TBS, broadcast news, sports and informational
programs. The Company also sells system equipment and provides contracted
services such as high-speed Internet equipment maintenance and customer support
to hotels.

In 2001, the Company began wide-scale deployment of a digital-based
system. In addition to the services already offered on its tape-based systems,
the digital system allows guests to choose from an expanded menu of
video as well as other forms of programming, including digital music services
and access to Internet content through the television. Rooms having the
Companys digital system generated an average of 39% more revenue during 2003
than its traditional tape-based systems. Additionally, the interactive digital
systems are equipped so that content such as on-demand movies and music content
are updated and delivered via satellite to the Companys system within each
hotel. This not only eliminates videotapes and shipping costs and reduces the
need for technician visits to update the content,

|                                   |  |   |  |               
|---------------------------------- |  | - |  | --------------
|LodgeNet Entertainment Corporation |  | 3 |  | Form 10-K 2003





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##### Table of Contents



but also ensures that all of
the Companys digital hotels can offer the content as of the first date
available for exhibition. In 2003, the Company introduced its next generation
digital system  SigNETure TVSM. This system allows each hotel, working with
the Companys designers, to customize the look and feel of the systems user
interface to reflect the hotels brand standards and to utilize the guest room
televisions for its internal or brand marketing campaigns. As of December 31,
2003, the Company had over 385,000 digital interactive television rooms.

The revenues generated from Guest Pay interactive services are dependent
upon a number of factors, including: (i) the number of rooms equipped with the
Companys interactive television system; (ii) the range of interactive
television and broadband services offered at each hotel; (iii) the popularity
of content offered; (iv) the price of the service purchased by the hotel guest;
and (v) the occupancy rate at the property. The Companys ability to increase
the number of rooms served is dependent on a number of factors, including the
desirability of the Companys technology, new hotel construction, and the
Companys ability to market its services to hotels upon expiration of
competitors contracts with those hotels. The range of services offered is
greater in those rooms equipped with a digital system versus those with a
tape-based system and, therefore, digital equipped rooms generally generate
greater revenue. Revenues vary with the number and popularity of the major
motion pictures available and the guests other entertainment alternatives. The
price charged for each programming option is established by the Company and is
set according to the guest mix profile at each property and overall economic
conditions. Movie prices are set by the Company on a title-by-title basis and
may be higher in some locations and for more popular titles. Occupancy rates
vary by property, based on the propertys competitive position within its
marketplace, over time based on seasonal factors, and as a result of changes in
general economic conditions. Typically, occupancy rates are higher during the
second and third quarters due to seasonal travel patterns.

Other Services.The Company also provides satellite-delivered basic and
premium television programming at properties not receiving Guest Pay
interactive services for which the hotel, rather than its guests, pays the
charges. The Company competes with local cable television operators by
tailoring different programming packages to provide specific channels desired
by the hotel subscriber, which typically reduces the overall cost to the hotel
of the services provided.

The Company also sells system equipment and provides contracted services
such as high-speed Internet equipment maintenance and customer support to
hotels. The Company believes that these services complement its goal of being a
full-service provider of in-room entertainment and information services to the
lodging industry.




Operations

Contracts.The Company provides its Guest Pay interactive television
services under contracts with lodging properties that generally run for a term
of five to seven years. Over the five-year period ended December 31, 2003, the
average initial term of new contracts was six and a half years. The Companys
contracts typically provide that the Company will be the exclusive provider of
in-room, on-demand television entertainment services to the hotels, permit the
Company to set prices for Guest Pay interactive services, and allow the Company
to terminate the contract and remove its systems if the results of operations
of the Companys system installed at the hotel do not meet the Companys return
on investment criteria. These contracts also typically grant the Company a
right of first refusal regarding the provision of additional video related
services to the hotel. Under these contracts, the Company installs its
interactive television system in the hotel free of charge and retains ownership
of all equipment utilized in providing its services. The terms contained in the
contracts with corporate-managed hotels generally are negotiated by that
hotels corporate management, and the hotels subscribe at the direction of
corporate management. In the case of franchised hotels, the contracts are
generally negotiated separately with each hotel. For Guest Pay interactive
services which are paid for by the hotel guest, the hotel collects such
charges, coincident with the collection of room and other charges made by the
hotel guest, and the hotel remits monthly to the Company. The hotel retains a
commission from such charges, which varies depending on the size and
profitability of the system and other factors. The Company generally seeks to
extend and renew hotel contracts in advance of their expiration on
substantially similar terms. The average remaining life of the Companys
current Guest Pay interactive contracts is approximately 41 months.
Approximately 16% of current Guest Pay contracts are coming up for renewal
prior to 2005.

Programming.The Company obtains non-exclusive rights to show recently
released major motion pictures from motion picture studios pursuant to an
agreement with each studio that is typically two to three years in length. The

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royalty rate for each movie is pre-determined, with the studio receiving a
percentage of the gross revenue from the movie. For recently released motion
pictures, the Company typically obtains rights to exhibit the picture while it
is still in theatrical release, but prior to its release to the home video
market or for exhibition on cable television. For its television on-demand
programming, the Company obtains rights to release television on-demand content
for which the Company pays a predetermined percentage of gross revenue or a
one-time fixed fee. The Company obtains independent films, most of which are
non-rated and intended for mature audiences, for a one-time fixed fee. The
Company also obtains non-exclusive rights to digital music content through an
agreement with a third party vendor, whereby the Company pays a predetermined
percentage of the gross revenue from the music service. The Company obtains its
selection of Nintendo video games pursuant to a non-exclusive license agreement
with Nintendo. Under the terms of the agreement, the Company pays a monthly fee
based on revenue generated from Nintendo video game services. The Company
monitors guests entertainment selections and adjusts its programming and
pricing of the programming to respond to viewing patterns.

The Company obtains most of its
basic and premium television programming
pursuant to a seven-year agreement entered into with DIRECTV in January 2000.
The Company also has direct agreements with certain other select programming
providers. The Company pays its programming providers 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.

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

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

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

It is the Companys policy to apply for patents on those product designs
which management believes may be of significance to the Company. The Company
currently holds 11 United States patents, and has other applications for
patents pending, which pertain to various other aspects of the Companys
interactive systems. The Company also licenses industry-related technology from
third parties.

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

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

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

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

Installation Operations.The Companys installation personnel prepare
engineering surveys for each hotel, install the Companys systems, train the
hotel staff to operate the systems and perform quality control tests. Due to
the Companys geographically diversified customer base, the Company has
determined that it is usually more cost effective to utilize subcontracted
installation teams. In 2003, subcontractors completed approximately 87% of the
Companys new and conversion of tape-to-digital installations.

Service Operations.The Company believes that high quality and consistent
systems support and maintenance are essential to competitive success in its
industry. The Company emphasizes the use of Company-employed service personnel
operating from 27 locations throughout the United States and Canada, but also
uses Company-trained subcontractors in areas where there is not a sufficient
concentration of Company-served hotels to warrant a Company-employed service
representative. Currently, the Company-employed service organization has
responsibility for approximately 90% of the Guest Pay interactive hotel rooms
served by the Company. Service personnel are responsible for all preventive and
corrective systems maintenance.

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

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

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Competition

Based on the number of hotels and rooms served, the Company is one of the
worlds largest and leading providers of interactive television systems and
broadband services to hotels, resorts and casinos, serving over 5,800 hotels
and nearly one million rooms. Competition in this industry is very active and
includes virtually all aspects of the entertainment industry. Market
participants include, but are not limited to (i) other interactive television
service providers (such as On Command Corporation, Hospitality Networks,
SeaChange, InRoomVideo, Verizon, Sprint, NexTV, General Dynamics, SVI and other
international providers, such as Quadriga); (ii) cable television companies
(such as Comcast, Cox Cable, Time Warner and Charter Communications); (iii)
direct broadcast satellite companies (such as DIRECTV and EchoStar
Communications); (iv) television networks and programmers (such as ABC, NBC,
CBS, FOX, HBO, and Showtime); (v) Internet service providers and high-speed
portals (such as STSN, Wayport, Guestek, Time Warner, and Yahoo); (vi)
companies offering web sites that provide on-demand movies; (vii) rental
companies that provide videocassettes and DVDs that can be viewed in properly
equipped hotel rooms and on other portable viewing devices; and (viii) hotels
that offer in-room laptops with Internet access or other types of Internet
access systems. Lodging industry guests also obtain entertainment and
information from print media (such as newspapers, magazines, and books),
concerts, sporting events, and movie theatres. Given the dynamism of
communications technology, the Company expects to continue to confront new
sources of competition.

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

Competition with respect to hotel contracts centers on a variety of
factors, depending upon the features important to a particular hotel. Among the
more important factors are: (i) the features and benefits of the service
offering and Internet systems; (ii) the quality of the vendors technical
support and maintenance services; (iii) the financial terms and conditions of
the proposed contract (including commissions to the hotel); and (iv) the
ability to complete system installation in a timely and efficient manner. In
addition, with respect to hotel properties already receiving in-room
entertainment or high-speed Internet 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
interactive television system and broadband architecture that enables the
Company to deliver a broad range of interactive features and services such as
on-demand movies, television on-demand programming, network-based video games,
music services, Internet on television, and high-speed Internet access; (ii)
the flexible design of the Companys system which typically enables it to add
enhancements or integrate new technologies and services as they become
commercially available and they are economically viable; (iii) high quality
customer support and field service operations; and (iv) an experienced
management team and sales organization. The Company believes that its past
success in securing contracts reflects the strong competitive position of the
Companys products and services.

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

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

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customizing packages of programming to provide
only those channels desired by the hotel, typically reducing the overall cost
per room to the hotel operator.

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




Business Strategy

Continued expansion of the Companys interactive digital room base.
Within the Companys target market of hotels with 75 or more rooms (which is
estimated, based on industry resources, to contain 3.5 million hotel rooms),
the Company believes opportunity exists for continued, selective growth in its
Guest Pay interactive room base. The growth opportunities remain available
through (i) economically-viable rooms not yet served by any provider; (ii)
supply growth within the lodging industry; and (iii) rooms currently served by
other service providers when their contracts expire. Historically, the Company
has experienced significant success in capturing such rooms. Over the last
three years, approximately 34% of the Companys growth has come from rooms
previously under contract with other providers. Conversely, the Company has
lost an average of approximately 2% of its installed base per year. Of those
hotels that the Company did not renew, the majority was at the discretion of
the Company, as the expected return on required renewal upgrade capital did not
meet the Companys return on investment criteria. The Company believes that the
cost-effective and flexible design of its scaleable interactive digital system
which offers enhanced revenue opportunities, combined with its expertise in
installation, programming, technical support and customer service, will allow
the Company to continue to expand and retain its interactive room base pursuant
to long-term contracts. Internationally, the Company intends to continue to
expand into selected countries in Asia, Latin America, South America and other
regions through licensing agreements with entities in those areas.

Increased revenue per room by continued expansion of product offerings to
hotels and their guests.The Company plans to increase the revenue it realizes
from each Guest Pay interactive room by expanding and enhancing the scope of
its interactive television programming and broadband services. The Company
intends to continue installing its interactive digital system in properties new
to the Company and in selected existing properties currently served by the
Company in exchange for long-term contract extensions of its services. The
Companys interactive digital system, which is currently installed in 42% of
the Companys Guest Pay interactive room base, generated 39% more revenue
during 2003 than the traditional tape-based rooms due in part to the increased
variety and availability of movie content, television on-demand programming,
digital music services, Internet on television, improved marketing and
merchandising capabilities, and on-screen controls that allow the guest more
viewing control and flexibility. The Company also intends to expand the number
of hotels at which it provides high-speed Internet access services, for which
it receives maintenance and customer support services fees.

Continued increases in operating margins through effective cost controls.
Complementing the Companys room and revenue growth objectives is its ongoing
goal of increasing operating margins by reducing direct and overhead expenses,
as measured on a percentage of revenue and on a per-installed basis. Further,
the Companys digital system continues to lower operating costs by distributing
movies, television on-demand programming, and music content via satellite,
eliminating videotape and shipping costs as well as a technicians visit to the
hotel to load the content. The on-line diagnostic capabilities of the Companys
systems also enable the Company to identify and resolve a majority of reported
system service issues from the Companys service control center without
visiting the hotel property. The Company believes that further efficiencies
will be achieved as it continues to expand the number of installed rooms and
the scope of its interactive television and interactive product offerings.

Continued integration of cost-effective system technologies.The Company
intends to continue to use its product design and development expertise to make
system improvements as well as lower the installation cost of new and upgraded
systems. Lower installation costs allow the Company to economically install its
system into more diverse hotel properties as the Company makes its investment
decisions based upon estimates of future revenues, cash flows and rates of
return related to the contracts. In addition, lower installation and upgrade
costs increase the return on invested capital for any given revenue stream. Lastly, system
enhancements typically increase the market

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demand for the Companys interactive
systems based on new system features and benefits and many times also increase
the revenue generating capability of the system.

Continued reduction of the Companys reliance on external financing.
During 2003, the Company generated $48.6 million in cash flow from operations
and $6.5 million of operating income. Additionally, the Company controlled
discretionary spending, further reduced its capital investment per new digital
room and managed its working capital to generate increased cash from
operations. Given the Companys current business plan for projected capital
investment over the next several years, the Company anticipates that it will
continue to reduce its reliance on external financing to grow its business.

The following table sets forth the decreasing reliance on external
financing for the years ended December 31:

|                                      |  |      |         |      |  |      |         |   |  |   |         |  
|------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                      |  | 2003 |         | 2002 |  | 2001
|                                      |  |      |         |      |  |     
|Statement of Cash Flow Data:          |  |      |         |      |  |      |         |   |  |   |         |  
|Cash provided by operating activities |  | $    | 48,563  |      |  | $    | 43,769  |   |  | $ | 46,477  |  
|Cash used for investing activities    |  |      | (53,618 | )    |  |      | (70,708 | ) |  |   | (77,995 | )
|                                      |  |      |         |      |  |      |         |   |  |   |         |  
|Cash provided by external financing   |  | $    | (5,055  | )    |  | $    | (26,939 | ) |  | $ | (31,518 | )
|                                      |  |      |         |      |  |      |         |   |  |   |         |  




Regulation

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

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

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

On January 18, 2001, the FCC released a Notice of Inquiry regarding
interactive television services (ITV) over cable television. The FCC sought
comment on, among other things, an appropriate definition of ITV services,
whether access to a high-speed connection is necessary to realize ITV
capabilities, and whether a nondiscrimination rule is necessary and/or
appropriate. The FCC has not yet taken any action in response to this
proceeding. It is not possible at this time to predict the outcome of the
proceedings or its effect on the Company.

The foregoing does not purport to describe all present and proposed
federal, state and local regulations and legislation relating to the video
programming industry. Other existing federal, state and local laws and
regulations

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currently are, or may be, the subject of a variety of judicial
proceedings, legislative hearings, and administrative and legislative proposals
that could change in varying degrees the manner in which private cable
operators, other video programming distributors, and Internet service providers
operate. The Company cannot predict the outcome of these proceedings or their
impact upon its operations at this time.




Employees

As of December 31, 2003, the Company had 794 employees in the United
States and Canada, none of which are covered by a collective bargaining
agreement. The Company has not experienced any significant labor problems and
believes that its relationship with its employees is good.




Web Site Access to SEC Filings

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




Item 2 - Properties

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

The Company leases 26 facilities, in various locations, from unaffiliated
third parties. These facilities are combination warehouse/office facilities for
installation and service operations and are located throughout the United
States and Canada. No individual facility occupies greater than 8,000 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.

In connection with the Companys effort to support the development of
technology, which could utilize the Companys interactive system, the Company
advanced $1.0 million to Gamet Technology, Inc. pursuant to a written
promissory note (the Note) during the first quarter of 2003. The Note was
personally guaranteed by Steve and Margaret Urie, the principal owners of Gamet
and collateralized by the unconditional assignment of rights to receive
quarterly payments due to the principal owner pursuant to a long-term note held
by the principal owner in connection with the sale of a prior business. The
Note was due and payable on April 18, 2003. On July 2, 2003, the Company filed
a lawsuit in U.S. District Court, Southern Division, in South Dakota, against
Gamet and against the Uries, demanding payment of the Note. On August 12,
2003, the defendants submitted an answer denying liability on the Note. Gamet
also asserted counterclaims against LodgeNet alleging that LodgeNets failure
to procure private financing for PointOne Technologies, L.L.C., a joint venture
between LodgeNet and Gamet, caused Gamet to suffer damages in an undetermined
amount. On December 29, 2003, the Uries and various companies owned or
controlled by the Uries, including Gamet, filed for Chapter 11 reorganization
in the U.S. Bankruptcy Court of the District of Nevada. It is expected that
the various bankruptcy cases will be consolidated for court management and
trustee administration
purposes into one case. As a result of the bankruptcy filings, LodgeNets
claims against the Uries and Gamet are stayed. Based on the Companys current
expectation and analysis, collection on the Note is expected to begin in 2005
and to be completed by 2008.

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

There were no matters submitted to a vote of security holders during the
quarter ended December 31, 2003.

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 2, 2004, there were outstanding 13,074,726
shares of the Companys Common Stock.

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

|                   |  |      |       |     |  |  |       | 
|------------------ |  | ---- | ----- | --- |  |  | ----- | 
|Quarter Ended      |  | High |       | Low
|                   |  |      |       |    
|March 31, 2003     |  |      | 11.00 |     |  |  | 6.03  | 
|June 30, 2003      |  |      | 13.24 |     |  |  | 7.41  | 
|September 30, 2003 |  |      | 16.00 |     |  |  | 10.53 | 
|December 31, 2003  |  |      | 19.34 |     |  |  | 15.20 | 

|                   |  |      |       |     |  |  |       | 
|------------------ |  | ---- | ----- | --- |  |  | ----- | 
|Quarter Ended      |  | High |       | Low
|                   |  |      |       |    
|March 31, 2002     |  |      | 18.20 |     |  |  | 14.10 | 
|June 30, 2002      |  |      | 19.98 |     |  |  | 14.00 | 
|September 30, 2002 |  |      | 15.40 |     |  |  | 7.30  | 
|December 31, 2002  |  |      | 12.37 |     |  |  | 4.80  | 

On March 2, 2004, the closing price of the Companys Common Stock, as
reported by NASDAQ NMS was $18.76. Stockholders are urged to obtain current
market quotations for the Companys Common Stock. As of March 2, 2004, there
were 126 stockholders of record of the Company with approximately 99% of the
shares held in street name. The Company estimates that as of March 2, 2004,
there were more than 2,500 stockholders of the Company.




Dividends

No dividends have been paid to date on the Common Stock of the Company.
The terms and conditions of the Companys 9.5% Senior Notes and of the
Companys bank Credit Facility both contain covenants which restrict and limit
payments or distributions in respect of the Common Stock of the Company.




Stockholder Rights Plan

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

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

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

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

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

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

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

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

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

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

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 12 |  | Form 10-K 2003





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##### Table of Contents






Item 6 - Selected Financial Data

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

|                                                          |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |       |         |         | 
|--------------------------------------------------------- | --------------------------------------------- | --------------------------------- | -------------- | ----- | ----------------------- | ------- | ------- | ----- | ------- | ------- | ------- | ----- | ------- | ------- | ------- | ----- | ------- | ------- | ------- | ----- | ------- | ------- | 
|                                                          |                                               |                                   |                |       | Year Ended December 31,
|                                                          |                                               |                                   |                |       |                        
|                                                          |                                               |                                   |                |       | 2003                    |         | 2002    |       | 2001    |         | 2000    |       | 1999   
|                                                          |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |        
|Statement of Operations Data:                             |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      
|Revenues:                                                 |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      
|                                                          |                                               | Guest Pay                         |                | $     | 243,732                 |         |         | $     | 226,238 |         |         | $     | 206,001 |         |         | $     | 186,718 |         |         | $     | 169,850 |        
|                                                          |                                               | Other                             |                |       | 6,417                   |         |         |       | 8,752   |         |         |       | 10,894  |         |         |       | 10,099  |         |         |       | 11,422  |        
|                                                          |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      
|                                                          |                                               |                                   | Total revenues |       |                         | 250,149 |         |       |         | 234,990 |         |       |         | 216,895 |         |       |         | 196,817 |         |       |         | 181,272 | 
|Direct costs (exclusive of other operating
expenses)      |                                               |                                   | 111,947        |       |                         |         | 100,782 |       |         |         | 92,090  |       |         |         | 82,450  |       |         |         | 78,490  |      
|Gross profit (exclusive of other operating
expenses)      |                                               |                                   | 138,202        |       |                         |         | 134,208 |       |         |         | 124,805 |       |         |         | 114,367 |       |         |         | 102,782 |      
|Operating expenses                                        |                                               |                                   | 131,702        |       |                         |         | 128,233 |       |         |         | 115,685 |       |         |         | 112,073 |       |         |         | 103,460 |      
|                                                          |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      
|Operating income (loss)                                   |                                               |                                   | 6,500          |       |                         |         | 5,975   |       |         |         | 9,120   |       |         |         | 2,294   |       |         |         | (678    | )    
|Investment gains (losses)                                 |                                               |                                   | 250            |       |                         |         | 872     |       |         |         | (2,790  | )     |         |         | (13,593 | )     |         |         | (9,584  | )    
|Litigation settlements (1)                                |                                               |                                   |               |       |                         |         | (2,700  | )     |         |         |        |       |         |         |        |       |         |         |        |      
|Loss on early retirement of debt (2)                      |                                               |                                   | (7,061         | )     |                         |         |        |       |         |         | (2,091  | )     |         |         |        |       |         |         |        |      
|Interest expense                                          |                                               |                                   | (34,239        | )     |                         |         | (33,037 | )     |         |         | (30,306 | )     |         |         | (27,809 | )     |         |         | (27,210 | )    
|Other income (expense), net                               |                                               |                                   | (43            | )     |                         |         | 314     |       |         |         | 348     |       |         |         | 419     |       |         |         | 1,414   |      
|                                                          |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      
|Loss before income taxes                                  |                                               |                                   | (34,593        | )     |                         |         | (28,576 | )     |         |         | (25,719 | )     |         |         | (38,689 | )     |         |         | (36,058 | )    
|Provision for income taxes                                |                                               |                                   | (459           | )     |                         |         | (550    | )     |         |         | (689    | )     |         |         | (325    | )     |         |         | (370    | )    
|                                                          |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      
|Net loss                                                  |                                               | $                                 | (35,052        | )     |                         | $       | (29,126 | )     |         | $       | (26,408 | )     |         | $       | (39,014 | )     |         | $       | (36,428 | )    
|                                                          |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      
|                                                          | Net loss per common share (basic and
diluted) |                                   | $              | (2.80 | )                       |         | $       | (2.35 | )       |         | $       | (2.16 | )       |         | $       | (3.21 | )       |         | $       | (3.05 | )      
|                                                          |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      
|                                                          |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |       |         |         | 
|Other Data:                                               |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      
|Capital expenditures (3)                                  |                                               | $                                 | 52,868         |       |                         | $       | 72,115  |       |         | $       | 78,386  |       |         | $       | 60,195  |       |         | $       | 51,226  |      
|Average cost per room  new installation (4)              |                                               | $                                 | 405            |       |                         | $       | 438     |       |         | $       | 456     |       |         | $       | 423     |       |         | $       | 391     |      
|Operating income (loss)                                   |                                               | $                                 | 6,500          |       |                         | $       | 5,975   |       |         | $       | 9,120   |       |         | $       | 2,294   |       |         | $       | (678    | )    
|Depreciation and amortization                             |                                               | $                                 | 78,459         |       |                         | $       | 75,918  |       |         | $       | 66,008  |       |         | $       | 65,470  |       |         | $       | 60,778  |      
|Operating income before depreciation and
amortization (5) |                                               | $                                 | 84,959         |       |                         | $       | 81,893  |       |         | $       | 75,128  |       |         | $       | 67,764  |       |         | $       | 60,100  |      
|                                                          |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |       |         |         | 
|Non-Financial Operating Data:                             |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      
|Guest Pay interactive rooms served (6)                    |                                               |                                   | 924,643        |       |                         |         | 876,348 |       |         |         | 812,149 |       |         |         | 725,075 |       |         |         | 661,691 |      
|Rooms with Nintendo® game systems (6)                     |                                               |                                   | 894,365        |       |                         |         | 854,425 |       |         |         | 788,196 |       |         |         | 697,703 |       |         |         | 627,592 |      
|Rooms with Digital services (6)                           |                                               |                                   | 385,426        |       |                         |         | 265,097 |       |         |         | 115,378 |       |         |         |        |       |         |         |        |      
|Free-to-guest rooms served (6)                            |                                               |                                   | 500,170        |       |                         |         | 477,698 |       |         |         | 449,485 |       |         |         | 405,977 |       |         |         | 399,046 |      
|Total rooms served (6) (7)                                |                                               |                                   | 994,127        |       |                         |         | 952,673 |       |         |         | 890,546 |       |         |         | 806,112 |       |         |         | 761,509 |      
|Average monthly revenue per Guest Pay room:               |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      
|                                                          |                                               | Movie revenue                     |                | $     | 17.55                   |         |         | $     | 17.77   |         |         | $     | 17.93   |         |         | $     | 18.19   |         |         | $     | 18.62   |        
|                                                          |                                               | Other interactive service revenue |                |       | 5.04                    |         |         |       | 4.57    |         |         |       | 4.48    |         |         |       | 4.27    |         |         |       | 3.85    |        
|                                                          |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      
|                                                          |                                               |                                   | Total          |       | $                       | 22.59   |         |       | $       | 22.34   |         |       | $       | 22.41   |         |       | $       | 22.46   |         |       | $       | 22.47   | 
|                                                          |                                               |                                   |                |       |                         |         |         |       |         |         |         |       |         |         |         |       |         |         |         |      

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 13 |  | Form 10-K 2003





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##### Table of Contents



|                                        |  |                    |          |      |  |      |          |      |  |      |         |   |  |   |         |   |  |   |         |  
|--------------------------------------- |  | ------------------ | -------- | ---- |  | ---- | -------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                        |  | As of December 31,
|                                        |  |                   
|                                        |  | 2003               |          | 2002 |  | 2001 |          | 2000 |  | 1999
|                                        |  |                    |          |      |  |      |          |      |  |     
|Balance Sheet Data:                     |  |                    |          |      |  |      |          |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash and cash equivalents               |  | $                  | 2,772    |      |  | $    | 1,107    |      |  | $    | 1,528   |   |  | $ | 4,059   |   |  | $ | 1,644   |  
|Total assets                            |  | $                  | 283,268  |      |  | $    | 298,084  |      |  | $    | 291,485 |   |  | $ | 281,605 |   |  | $ | 305,275 |  
|Total debt                              |  | $                  | 368,248  |      |  | $    | 353,790  |      |  | $    | 325,831 |   |  | $ | 290,659 |   |  | $ | 282,990 |  
|Total stockholders equity (deficiency) |  | $                  | (129,002 | )    |  | $    | (101,304 | )    |  | $    | (67,568 | ) |  | $ | (36,426 | ) |  | $ | (5,504  | )

|                                      |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|------------------------------------- |  | ----------------------- | ------- | ---- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | - |  | - | ------- | -
|                                      |  | Year Ended December 31,
|                                      |  |                        
|                                      |  | 2003                    |         | 2002 |  | 2001 |         | 2000 |  | 1999
|                                      |  |                         |         |      |  |      |         |      |  |     
|Statement of Cash Flows Data:         |  |                         |         |      |  |      |         |      |  |      |         |   |  |   |         |   |  |   |         |  
|Cash provided by operating activities |  | $                       | 48,563  |      |  | $    | 43,769  |      |  | $    | 46,477  |   |  | $ | 41,180  |   |  | $ | 40,782  |  
|Cash used for investing activities    |  | $                       | (53,618 | )    |  | $    | (70,708 | )    |  | $    | (77,995 | ) |  | $ | (50,248 | ) |  | $ | (55,445 | )
|Cash provided by financing activities |  | $                       | 6,368   |      |  | $    | 26,513  |      |  | $    | 29,039  |   |  | $ | 11,510  |   |  | $ | 11,030  |  



|(1) |  | During 2002, the Company entered into settlement agreements with
Broadcast Music Inc. (BMI) and the American Society of Composers, Authors
and Publishers (ASCAP), which resolved claims for alleged nonpayment of
royalties on copyrighted musical works performed in major motion pictures.
BMI and ASCAP had asserted that the music, primarily background music,
used within major motion pictures required licensing. BMI and ASCAP
sought damages for public performances of such music from their respective
catalogues. As a result of the settlements, the Company recorded a
provision for the litigation settlements of $2.7 million that is related
to pre-2002 reporting periods. This nonrecurring charge has been reported
as a litigation expense in the accompanying statements of operations.
|--- |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | In June 2003, the Company retired its 10.25% Senior Notes. As a result of
the early retirement, the Company incurred a $7.1 million loss on the
write-off of related debt issuance costs and payment of call and tender
premiums, and transaction expenses. In 2001, the Company recorded a $2.1
million loss on the early retirement of its 1999 bank Credit Facility.                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(3) |  | Presented as cash used for property and equipment additions as reported
in the Statement of Cash Flows.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(4) |  | During 2001, the Company transitioned from installing tape-based systems to
installing digital systems.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(5) |  | Operating income before depreciation and amortization is calculated by
adding depreciation and amortization to operating income. Operating income
before depreciation and amortization is not intended to represent an
alternative to operating income and is not representative of funds
available for discretionary use due to the Companys financing
obligations. Management utilizes operating income before depreciation and
amortization to provide a stable and consistent comparison of operating
performance exclusive of historical costs of capital related to
depreciation and amortization. The Company believes that depreciation and
amortization are fixed or sunk costs, which do not provide a stable
measure for variable or controllable operating performance.                         
|   
|(6) |  | End of year statistics.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                        
|   
|(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 |  | 14 |  | Form 10-K 2003





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##### Table of Contents






Special Note Regarding Forward-Looking Statements

Certain statements in this Annual Report on Form 10-K and in the Companys
Annual Report to Stockholders, which is being provided to stockholders together
with this Annual Report on Form 10-K, including, without limitation, statements
in Item 1, including certain statements under the headings Overview, Markets
and Customers, Services and Products, Operations, Competition, Business
Strategy, and Regulation, in Item 3 under the heading Legal Proceedings,
and in Item 7 under the heading Managements Discussion and Analysis of
Financial Condition and Results of Operations, constitute forward-looking
statements. When used in this Annual Report on Form 10-K or the Companys
Annual Report to Stockholders, the words intends, expects, anticipates,
estimates, believes, goal, no assurance and similar expressions and
statements which are made in the future tense or refer to future events or
developments, are intended to identify such forward-looking statements. Such
forward-looking statements are subject to risks, uncertainties, and other
factors that could cause the Companys actual results, performance or
achievements to be materially different from any future results, performance or
achievements expressed or implied by such forward-looking statements. In
addition to the risks and uncertainties discussed herein, such factors include,
among others, the following: the effects of economic conditions, including in
particular the economic condition of the lodging industry, competition,
programming availability and quality, technological developments, developmental
difficulties and delays, relationships with clients and property owners, the
availability of capital to finance growth, the impact of government
regulations, international crises, acts of terrorism, public health issues, 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 on Form 10-K. The Company expressly
disclaims any obligation or undertaking to release publicly any updates or
revisions to any forward-looking statements contained herein to reflect any
change in the Companys expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.




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

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




Executive Overview

LodgeNet Entertainment Corporation is one of the worlds largest and
leading providers of interactive television systems and broadband services to
hotels, resorts and casinos throughout the United States and Canada, as well as
select international markets. It is estimated that more than 260 million guests
a year have access to a wide variety of LodgeNets interactive television
services, which are designed to make their stay more enjoyable, productive and
convenient. As of December 31, 2003, the Company provided television services
to approximately 5,800 hotel properties serving nearly one million rooms.

Throughout 2003, the Company delivered solid financial results in the face
of the Iraqi war, public health outbreaks, and a slowly recovering economy, all
of which affected the travel and lodging industry. The Company controlled
discretionary spending, further reduced its capital investment per new digital
room, managed its cash position, and remained debt-neutral during the second
half of 2003, while at the same time the Company continued to grow its
business. The Company expanded its digital room base by 45%, or approximately
120,300 rooms during 2003, and at year-end, total rooms served reached
approximately 994,000. The digital system is now installed in over 385,000
rooms, or 42% of the Companys interactive room base.

Guest Pay Interactive Services.The Companys primary source of revenue is
providing in-room, interactive television services to the lodging industry, for
which the hotel guest pays on a per-view, hourly or daily basis. The Companys
services include on-demand movies, video games, music and music videos,
Internet on television (which does not require a laptop), and television
on-demand programming.

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 15 |  | Form 10-K 2003





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##### Table of Contents



The Companys total guest generated revenue depends on a number of
factors, including:



| |  | The number of rooms equipped with the Companys system.The Company
can increase revenue over time by increasing the number of rooms
served by its interactive systems. The Companys ability to expand
its room based is dependent on a number of factors, including the
attractiveness of the Companys technology and service and support to
hotels currently operating without an interactive television system,
newly constructed hotel properties and hotels with expiring contracts
currently served by one of the Companys competitors.  
|- |  | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| 
| |  | The variety of services offered at the hotel.Rooms equipped with the
Companys digital system generate higher revenue than rooms equipped
with the Companys tape-based system primarily because they offer a
greater variety of services and content choices. The Company plans to
continue to grow the revenue it generates per average room by the
installation of its digital system in all newly contracted rooms and
by converting selected tape-based rooms to the Companys digital
system in exchange for long-term contract extensions.
| 
| |  | The popularity of content offered at the hotel.The Companys
revenues vary to a certain degree with the number and popularity of
major motion pictures available for viewing. Historically, a decrease
in the availability of popular major motion pictures has from
time-to-time adversely impacted revenue. Although not completely
within the Companys control, the Company seeks to program and promote
the available major motion picture and other content to maximize
revenue and gross profit.                                          
| 
| |  | The price of the service purchased by the hotel guest.Generally, the
Company controls the prices charged for its products and services and
manages pricing in an effort to maximize revenue and overall gross
profit. The Company establishes pricing based on such things as the
demographics of the property served and the popularity of the content.                                                                                                                                                                                         
| 
| |  | The occupancy rate at the property.The Companys revenue also varies
depending on hotel occupancy rates, which are subject to a number of
factors, including seasonality, general economic conditions and world
events, such as terrorist threats or public health issues. The Company
targets higher occupancy properties in diverse demographic and
geographic locations in an effort to mitigate occupancy-related risks.                                                                                                                     

The Company also generates revenue from the sale of content and services
directly to its hotel customers, which are generally provided free to hotel
guests. Included in these services are satellite-delivered basic and premium
television programming for which the hotel pays the Company a fixed monthly
charge per room. In addition, the Company also sells high-speed Internet
maintenance and customer support services. While this is a highly competitive
area, the Company believes it has important advantages as a result of its
existing hotel customer relationships, nationwide field service network and
24-hour call center, providing services 7 days a week.

The primary direct costs of providing Guest Pay interactive services are:



| |  |  | License fees based on a percent of guest-generated revenue paid to
studios for non-exclusive distribution rights of recently released
major motion pictures;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------
|
| |  |  | Commissions paid to the Companys hotel customers, which are also
based on a percent of guest-generated revenue;                                            
|
| |  |  | Fixed monthly programming charges paid primarily to DIRECTV for
satellite-delivered basic and premium television programming;                               
|
| |  |  | Internet connectivity costs;                                                                                                                                
|
| |  |  | License fees based on a percent of guest-generated revenue for
television on demand, music, music video and video games; and                                
|
| |  |  | One-time license fees paid for independent films, most of which are
non-rated and intended for mature audiences.                                            

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 16 |  | Form 10-K 2003





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##### Table of Contents



Key Metrics:

Rooms Served

One of the metrics the Company monitors is the growth, net of
de-installations, of its Guest Pay interactive room base. De-installation
activity has not had a material effect on the Companys growth and historically
averaging approximately 2% of total installed rooms per year. In the years
indicated, the Company installed its systems in the following number of net new
rooms and had the following total rooms installed as of December 31:

|                                      |  |      |         |      |  |      |         |  |  |  |         | 
|------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  |  | ------- | 
|                                      |  | 2003 |         | 2002 |  | 2001
|                                      |  |      |         |      |  |     
|New Guest Pay interactive rooms (1)   |  |      | 48,295  |      |  |      | 64,199  |  |  |  | 87,074  | 
|Total Guest Pay interactive rooms (2) |  |      | 924,643 |      |  |      | 876,348 |  |  |  | 812,149 | 
|Total rooms served (3)                |  |      | 994,127 |      |  |      | 952,673 |  |  |  | 890,546 | 



|(1) |  | 100% of the Guest Pay interactive rooms installations in 2003 and 2002
received the digital storage system, while the majority of rooms installed
in 2001 received the tape storage system.                                                                                                                                                                     
|--- |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | Guest Pay interactive rooms are equipped with the Companys interactive
television system. The high-speed, two-way digital communications design
of the Companys system architecture enables the Company to provide
interactive features such as on-demand movies, network-based video games,
music services, Internet on television, and television on-demand.
|   
|(3) |  | Total rooms served, representing rooms receiving one or more of the
Companys services, including rooms served by international licensees and
properties receiving only basic and premium television programming.                                                                                                                                               

Digital Room Growth

The Company continues to expand its digital base as it installs the system
in all newly contracted rooms as well as converting select tape-based served
rooms to the digital system in exchange for contract extensions. Total
installations declined in 2003, as compared to 2002, as the Company reduced
capital investment in light of an uncertain economy early in the year and the
decision to remain debt neutral in the second half of the year. The Companys
goal is to have approximately 75% of its room base installed with a digital
system by the end of 2006.

|                                                                |  |      |         |      |  |      |         |   |  |  |         |  
|--------------------------------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  |  | ------- | -
|                                                                |  | 2003 |         | 2002 |  | 2001
|                                                                |  |      |         |      |  |     
|Digital room installations (1)                                  |  |      | 120,329 |      |  |      | 149,719 |   |  |  | 115,378 |  
|Total digital rooms installed                                   |  |      | 385,426 |      |  |      | 265,097 |   |  |  | 115,378 |  
|Digital rooms as a percent of
total Guest Pay interactive
rooms |  |      | 42      | %    |  |      | 30      | % |  |  | 14      | %



|(1) |  | Digital rooms installations include both newly contracted rooms and rooms
that have been converted from a tape-based system to a digital system in
exchange for a long-term contract extension.
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 17 |  | Form 10-K 2003





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##### Table of Contents



Cost of Installation

In addition to the continued expansion of the Companys digital base, the
Company will continue monitoring capital expenditures per new or converted
room. The following table sets forth the Companys average installation and
conversion cost per room during the years ended December 31:

|                                             |  |      |     |      |  |      |     |  |  |   |     | 
|-------------------------------------------- |  | ---- | --- | ---- |  | ---- | --- |  |  | - | --- | 
|                                             |  | 2003 |     | 2002 |  | 2001
|                                             |  |      |     |      |  |     
|Average cost per room  new
installation (1) |  | $    | 405 |      |  | $    | 438 |  |  | $ | 456 | 
|Average cost per room  conversion (1)       |  | $    | 337 |      |  | $    | 373 |  |  | $ | 356 | 



| | (1) |  | During 2001, the Company transitioned from installing tape-based
systems to installing digital systems.
| | --- |  | -------------------------------------------------------------------------------------------------------

Revenue Per Room

As set forth below, in assessing average monthly revenue per room, the
Company also compares rooms served by its digital system versus rooms served by
its tape-based system.

|                                  |                            |                          |   |         |       |      |   |         |       |      |   |       |       |  |   |       |       | 
|--------------------------------- | -------------------------- | ------------------------ | - | ------- | ----- | ---- | - | ------- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                  |                            |                          |   | 2003    |       | 2002
|                                  |                            |                          |   |         |       |     
|                                  |                            |                          |   | Digital |       | Tape |   | Digital |       | Tape
|                                  |                            |                          |   |         |       |      |   |         |       |     
|Average monthly revenue per
room: |                            |                          |   |         |       |      |   |         |       |      |   |       |       |  |   |      
|                                  | Movies                     |                          | $ | 20.92   |       |      | $ | 15.71   |       |      | $ | 21.94 |       |  | $ | 16.66 |      
|                                  | Other interactive services |                          |   | 6.76    |       |      |   | 4.09    |       |      |   | 6.55  |       |  |   | 4.06  |      
|                                  |                            |                          |   |         |       |      |   |         |       |      |   |       |       |  |   |       |      
|                                  |                            | Total per Guest Pay room |   | $       | 27.68 |      |   | $       | 19.80 |      |   | $     | 28.49 |  |   | $     | 20.72 | 
|                                  |                            |                          |   |         |       |      |   |         |       |      |   |       |       |  |   |      

Free Cash Flow

One of the Companys goals is to generate free cash flow, which the
Company defines as having cash provided by operating activities exceed cash
used for investing. The Company seeks to generate free cash flow to reduce its
reliance on external financing to grow its business. In addition to increasing
revenue and controlling expenses, the Company intends to manage its actions
related to this goal by reducing the per-room installation cost of a digital
room and by varying the number of rooms it installs with the digital system in
any given period.

The progress toward the goal of generating free cash flow is set forth in
the following table:

|                                      |  |      |         |      |  |      |         |   |  |   |         |  
|------------------------------------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|                                      |  | 2003 |         | 2002 |  | 2001
|                                      |  |      |         |      |  |     
|Cash provided by operating activities |  | $    | 48,563  |      |  | $    | 43,769  |   |  | $ | 46,477  |  
|Cash used for investing activities    |  |      | (53,618 | )    |  |      | (70,708 | ) |  |   | (77,995 | )
|                                      |  |      |         |      |  |      |         |   |  |   |         |  
|Cash provided by external financing   |  | $    | (5,055  | )    |  | $    | (26,939 | ) |  | $ | (31,518 | )
|                                      |  |      |         |      |  |      |         |   |  |   |         |  

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 18 |  | Form 10-K 2003





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##### Table of Contents



Operating Expense Per Room

In addition to the Companys goal to generate free cash flow and minimize
its dependency on external financing, the Company will continue controlling
operating expenses per room. The following table sets forth the Companys
decreased operating expenses per room and SG&A as a percent of revenue during
the years ended December 31:

|                                   |  |      |      |      |  |      |      |   |  |   |      |  
|---------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- | - |  | - | ---- | -
|                                   |  | 2003 |      | 2002 |  | 2001
|                                   |  |      |      |      |  |     
|Guest Pay operating expenses       |  | $    | 2.93 |      |  | $    | 2.98 |   |  | $ | 3.12 |  
|SG&A expense                       |  |      | 2.01 |      |  |      | 2.18 |   |  |   | 2.28 |  
|                                   |  |      |      |      |  |      |      |   |  |   |      |  
|                                   |  | $    | 4.94 |      |  | $    | 5.16 |   |  | $ | 5.40 |  
|                                   |  |      |      |      |  |      |      |   |  |   |      |  
|SG&A as a percent of total revenue |  |      | 8.7  | %    |  |      | 9.4  | % |  |   | 9.7  | %

Net cash provided by operating activities has increased as the Company has
increased revenue through room additions and new services while controlling
costs and working capital. Cash used for investing activities has decreased as
the cost of installing a digital room has decreased and, for 2003, by a
reduction in the number of rooms installed. These factors have resulted in a
declining need for cash provided by external financing.




Liquidity and Capital Resources

The Company historically has required substantial amounts of capital to
fund operations, expand the Companys business and service existing
indebtedness. During 2003, cash flow from operations was sufficient to cover
all long-term debt service and all but $5.1 million of its investing
activities. In 2002, cash flow from operations was sufficient to cover all
debt service, capital expenditures classified as renewal, general corporate, or
maintenance capital as well as a portion of growth capital. The funding for the
balance of the growth capital expenditures, $26.9 million, was provided by the
Companys Credit Facility. In 2003, net cash provided by operating activities
during 2003 was $48.6 million as compared to $43.8 million in 2002. Capital
expenditures related to property and equipment additions for 2003 were $52.9
million as compared to $72.1 million for 2002.

Net cash provided by operating activities has increased as the Company
increased revenues through new room additions, digital conversion, and new
services while controlling costs and working capital needs. Cash used for
investing activities decreased as the average cost per new installed room
decreased over the past three years from $456 per room in 2001 to $405 in 2003
and average conversion cost per room decreased over the past three years from
$356 per room in 2001 to $337 in 2003. In light of an uncertain economy early
in the year and the decision to remain debt neutral in the second half of the
year, the Company also selectively decreased the number of rooms converted or
installed with the digital system during 2003. These factors have resulted in a
declining need for cash provided from external sources.

Depending on the rate of growth of its business and other factors, the
Company expects to incur capital expenditures of $58 to $60 million in 2004.
Based on that range, the Company estimates it will install approximately 50,000
to 55,000 new rooms and convert approximately 70,000 to 75,000 existing rooms
from tape-based to digital systems in exchange for long-term contract
extensions.

The Company believes that its operating cash flow and borrowing available
under the Credit Facility maturing in 2007 will be sufficient for the
foreseeable future to fund the Companys future growth, financing obligations,
and its negative working capital. As of December 31, 2003, working capital was
negative $6.1 million, compared to negative $5.2 million at December 31, 2002.
If adverse economic conditions persist for an extended period of time,
resulting in lower than anticipated operating cash flows, the Company
anticipates that it could cover any short fall through any combination of additional borrowings available under
its current Credit Facility of approximately $50.7 million, a

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 19 |  | Form 10-K 2003





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##### Table of Contents



reduction in
capital spending and/or a reduction in operating expenses. If the Company were
to reduce its projected capital spending significantly, the Companys growth
rate would be less than historical levels.

The Companys principal sources of liquidity are its operating cash flow
and its Credit Facility. In order to continue to operate and expand its
business, the Company must remain in compliance with covenants imposed by its
Credit Facility and Senior Notes. As of December 31, 2003, the Company was in
compliance with all covenants, terms and conditions related to its Credit
Facility and Senior Notes. Given the Companys current business plan for
projected capital investment during 2004, the Company believes it will remain
in compliance with all covenants, terms and conditions related to its Credit
Facility and Senior Notes. The Company is not aware of any events that qualify
under the material adverse effect clause of the current Credit Facility. The
total amount of long-term debt outstanding, including that portion of debt
classified as current, as of December 31, 2003 was $368.2 million versus $353.8
million as of December 31, 2002.

The Companys leverage and interest coverage ratios were as follows for the
years ended December 31, 2003:

|                                                    |  |      |      |      |  |      |      |  |  |  |      | 
|--------------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  |  | ---- | 
|                                                    |  | 2003 |      | 2002 |  | 2001
|                                                    |  |      |      |      |  |     
|Actual consolidated total leverage ratio (1) (4)    |  |      | 4.39 |      |  |      | 4.38 |  |  |  | 4.31 | 
|Maximum per covenant                                |  |      | 5.00 |      |  |      | 4.50 |  |  |  | 4.75 | 
|                                                    |  |      |      |      |  |      |      |  |  |  |      | 
|Actual senior secured leverage ratio (2) (4)        |  |      | 1.86 |      |  |      | 2.30 |  |  |  | 2.00 | 
|Maximum per covenant                                |  |      | 2.50 |      |  |      | 2.50 |  |  |  | 2.25 | 
|                                                    |  |      |      |      |  |      |      |  |  |  |      | 
|Actual consolidated interest coverage ratio (3) (4) |  |      | 2.44 |      |  |      | 2.47 |  |  |  | 2.51 | 
|Minimum per covenant                                |  |      | 2.25 |      |  |      | 2.25 |  |  |  | 2.25 | 



|(1) |  | The Companys maximum consolidated leverage ratio is a function of total
indebtedness divided by operating income exclusive of depreciation and
amortization and other miscellaneous non-recurring items as defined by the
covenant.                                                                                                                                                                                                                                            
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|   
|(2) |  | The Companys maximum senior secured leverage ratio is a function of
total indebtedness less total unsecured indebtedness, divided by operating
income exclusive of depreciation and amortization and other miscellaneous
non-recurring items as defined by the covenant.                                                                                                                                                                                                       
|   
|(3) |  | The Companys minimum consolidated interest coverage ratio is a function
of operating income exclusive of depreciation and amortization and other
miscellaneous non-recurring items divided by interest expense as defined
by the covenant.                                                                                                                                                                                                                                     
|   
|(4) |  | Maximum consolidated leverage, maximum senior secured leverage ratio, and
minimum consolidated interest coverage ratios are not statistics based on
generally accepted accounting principles. The statistics are presented
here to demonstrate compliance with lenders covenants, as noncompliance
with such covenants could have a material adverse effect on the Company,
and the statistics are not presented as alternative measures of operating
performance or liquidity.

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

In June 2003, the Company amended its existing bank Credit Facility. The
amendment modified the covenants for maximum consolidated total leverage ratio
and minimum consolidated interest coverage ratio. The allowable maximum consolidated total leverage ratio increased from 4.5 to 5.0
until the end of the fourth quarter 2003 and the minimum consolidated interest
coverage ratio increase from 2.25 to 2.50 was deferred from the third quarter
2004 until the first quarter 2005. The Companys future debt covenant ratios
are outlined below:

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 20 |  | Form 10-K 2003





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##### Table of Contents



|                                             |  |         |      |         |  |         |      |         |  |  |      |  |  |  |      | 
|-------------------------------------------- |  | ------- | ---- | ------- |  | ------- | ---- | ------- |  |  | ---- |  |  |  | ---- | 
|                                             |  | Q1 2004 |      | Q3 2004 |  | Q1 2005 |      | Q4 2005
|                                             |  |         |      |         |  |         |      |        
|Maximum consolidated total leverage ratio    |  |         | 4.75 |         |  |         | 4.50 |         |  |  | 4.25 |  |  |  | 4.00 | 
|Maximum senior secured leverage ratio        |  |         | 2.50 |         |  |         | 2.50 |         |  |  | 2.25 |  |  |  | 2.25 | 
|Minimum consolidated interest coverage
ratio |  |         | 2.25 |         |  |         | 2.25 |         |  |  | 2.50 |  |  |  | 2.50 | 

Upon refinancing of the 10.25% Notes as noted below, the Company, at its
sole discretion and without the payment of any additional costs, expenses or
fees, extended the maturity dates of the term loan and the revolver loan under
its bank Credit Facility from June 2006 to August 2008 and August 2007,
respectively.

On June 18, 2003, the Company issued $200 million, principal amount, of
unsecured 9.50% Senior Subordinated Notes (the 9.50% Notes), due June 15,
2013. The proceeds of the 9.50% Notes, which were issued at par, after
underwriter fees and offering expenses, were approximately $192.5 million.
Approximately $154.8 million of such proceeds were used to redeem the
outstanding principal amount of the 10.25% Senior Notes, pay accrued interest,
pay call premiums, and pay related fees. Approximately $35 million of the
proceeds were used to pay all outstanding amounts under the Companys Credit
Facility. The remaining proceeds of approximately $2.7 million were for use in
funding general corporate purposes.

The 9.50% Notes are unsecured, are subordinated in right of payment to all
existing and future senior debt of the Company and rank pari passuin right of
payment with any future senior subordinated indebtedness of the Company. The
9.50% Notes require semi-annual interest payments, commencing December 15,
2003, and contain covenants which restrict the ability of the Company to incur
additional indebtedness, create liens, pay dividends or make certain
distributions in respect to 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, 2003, the Company was in compliance with all covenants,
terms, and conditions of the 9.50% Notes.

The 9.50% Notes are redeemable at the option of the Company, in whole or
in part, on or after June 15, 2008, initially at 104.75% 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 June 15, 2011.
At any time prior to June 15, 2006, the Company may redeem up to 35% of the
aggregate principal amount at 109.50% of the principal amount (plus accrued and
unpaid interest) with the cash proceeds of certain equity offerings.

In December 1996, the Company issued $150 million of unsecured 10.25%
senior notes (the 10.25% Notes), due December 15, 2006. On June 20, 2003, the
Company redeemed approximately 79% of its outstanding 10.25% Notes at 102.688%
of their principal amount, with the balance of the outstanding 10.25% Notes
redeemed on July 1, 2003 at 102.563% of their principal amount, as part of its
refinancing in which the 9.50% Notes were issued.

In the event of significant international crises, acts of terrorism,
public health issues, or catastrophic events, the Company believes that the
general economy and the lodging industry could be negatively affected. If such
a crisis is protracted or the effects on the lodging industry are severe, the
effect on the Companys financial performance could result in the Company being
in violation of one or more of its bank or note covenants. This could require
the Company to renegotiate its covenants, significantly reduce its growth plans
and/or curtail expenditures for operating expenses. While the Company believes
it could renegotiate its covenants, there is no assurance that this could be accomplished, nor can it determine at this time the financial
cost of such a renegotiation or that refinancing, if required, would be
available on terms favorable to the Company.

The foregoing statements regarding capital expenditures and cash
requirements are forward-looking statements and there can be no assurance
actual results will not vary from expected results. The Companys actual cash
flow and cash requirements will vary (and such variations could be material)
depending upon the number of new contracts for services entered into by the
Company, the cost of installations, demand for the Companys

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 21 |  | Form 10-K 2003





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##### Table of Contents



services,
competitive factors, hotel occupancy rates, general economic factors and other
factors including, without limitation, those set forth above under the Special
Note Regarding Forward-Looking Statements.

Obligations and Commitments as of December 31, 2003 (in thousands).

|                         |                                 |                               |   |         |         |        |   |                        |        |       |   |         |        |      |   |         |         |  |   |         |         | 
|------------------------ | ------------------------------- | ----------------------------- | - | ------- | ------- | ------ | - | ---------------------- | ------ | ----- | - | ------- | ------ | ---- | - | ------- | ------- |  | - | ------- | ------- | 
|                         |                                 |                               |   |         |         |        |   | Payments due by period
|                         |                                 |                               |   |         |         |        |   |                       
|                         |                                 |                               |   |         |         |        |   | Less than              |        | 1 - 3 |   | 4 - 5   |        | Over
|                         |                                 |                               |   | Total   |         | 1 year |   | years                  |        | years |   | 5 years
|                         |                                 |                               |   |         |         |        |   |                        |        |       |   |        
|Contractual obligations: |                                 |                               |   |         |         |        |   |                        |        |       |   |         |        |      |   |         |         |  |   |        
|                         | Long-term debt(s)               |                               | $ | 368,246 |         |        | $ | 8,638                  |        |       | $ | 10,379  |        |      | $ | 149,229 |         |  | $ | 200,000 |        
|                         | Interest on fixed rate debt     |                               |   | 182,570 |         |        |   | 20,380                 |        |       |   | 38,690  |        |      |   | 38,000  |         |  |   | 85,500  |        
|                         | Other long-term obligations (1) |                               |   | 8,450   |         |        |   | 2,293                  |        |       |   | 3,303   |        |      |   | 2,812   |         |  |   | 42      |        
|                         | Purchase obligations            |                               |   | 2,822   |         |        |   | 2,822                  |        |       |   |        |        |      |   |        |         |  |   |        |        
|                         |                                 |                               |   |         |         |        |   |                        |        |       |   |         |        |      |   |         |         |  |   |         |        
|                         |                                 | Total contractual obligations |   | $       | 562,088 |        |   | $                      | 34,133 |       |   | $       | 52,372 |      |   | $       | 190,041 |  |   | $       | 285,542 | 
|                         |                                 |                               |   |         |         |        |   |                        |        |       |   |         |        |      |   |         |         |  |   |        

|                              |                           |  |       |       |        |  |                                            |       |       |  |         |   |      |  |   |   |  |  |   |   | 
|----------------------------- | ------------------------- |  | ----- | ----- | ------ |  | ------------------------------------------ | ----- | ----- |  | ------- | - | ---- |  | - | - |  |  | - | - | 
|                              |                           |  |       |       |        |  | Amount of commitment expiration per period
|                              |                           |  |       |       |        |  |                                           
|                              |                           |  |       |       |        |  | Less than                                  |       | 1 - 3 |  | 4 - 5   |   | Over
|                              |                           |  | Total |       | 1 year |  | years                                      |       | years |  | 5 years
|                              |                           |  |       |       |        |  |                                            |       |       |  |        
|Other commercial commitments: |                           |  |       |       |        |  |                                            |       |       |  |         |   |      |  |   |   |  |  |   |  
|                              | Standby letters of credit |  | $     | 1,500 |        |  | $                                          | 1,500 |       |  | $       |  |      |  | $ |  |  |  | $ |  | 
|                              |                           |  |       |       |        |  |                                            |       |       |  |         |   |      |  |   |   |  |  |   |   | 



|(1) |  | Other long-term obligations include future minimum operating lease
payments and payments to Hilton Hotels Corporation for the acquired rights
to provide Internet on television access and television on-demand
programming services to participating hotels and the right to
independently pursue and further develop interactive television content.
|--- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------




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.




Business Risks

Dependence on Performance of Lodging Industry.The Companys business is
closely connected to the performance of the hotel industry where occupancy
rates may fluctuate resulting from various factors. Reduction in hotel
occupancy resulting from business, economic, or other events, such as
hostilities in the Middle East, other significant international crises, acts of
terrorism,public health issues, or catastrophic events could adversely impact
the Companys results of operations.

The overall travel industry has been adversely affected by the weaker
general economic climate. Occupancy rates of the properties served by the
Company during 2003 were 70 basis points below the level experienced in 2002.
While the average occupancy rate for the Companys served hotels is typically
higher than the average of the entire lodging industry, the Companys business
is clearly linked to the continued effects of changes in occupancy levels.
Occupancy rates have been below the level experienced in 2002 and prior years.
If hotel occupancy rates were to decline significantly below current levels,
the Companys revenues would be adversely affected.

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 22 |  | Form 10-K 2003





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##### Table of Contents



To help mitigate the impact of occupancy levels on operating income, the
Company continues to control operating expenses and capital spending. The
Company plans to reassess its operating and capital expenditure plans
periodically to respond to changes in the economic environment. Additionally,
the Companys room base is geographically diversified, with more than
two-thirds of properties served being in highway or suburban locations. Less
than 5% of the room base is concentrated in each of the top ten urban areas of
the United States. By serving a wide variety of geographically dispersed
properties, the Company mitigates reliance on any one geographic sector.

Technological Developments, Developmental Difficulties and Delays. The
Companys success depends on new product development. The entertainment and
communications industry is ever-changing as new technologies are introduced.
Technological advances may result in an adverse competitive situation for the
Company. While the Company mitigates risks by continually designing,
engineering, and developing products and systems that can be upgraded to
support new services or integrated with new technologies as they become
economically viable, there can be no assurance that the Company will continue
to be successful in these efforts. New technologies, including the expansion of
digital distribution in our markets, may fundamentally change the method and
cost of distributing content. This may increase competition and result in a
decrease in our revenue. In addition, the Company may experience difficulties
and delays in developing new products and systems or in integrating the
Companys system with new technologies. The Company may have to incur
significant capital expenditures in order to adapt to technological changes.

Relationships with Clients and Property Owners.The Company believes that
its interactive hotel base is well diversified in terms of (i) location; (ii)
demographics; and (iii) customer contracts. The Company provides its services
to various corporate-managed hotel chains such as Baymont Inns & Suites, Delta
Hotels, Doubletree, Embassy Suites, Grand Casinos, Hampton Inn, Harrahs,
Hilton, Homewood Suites, LaQuinta, Omni Hotels, Outrigger, Red Roof Inn, Ritz
Carlton, Sheraton and Wingate Inn, plus major REITs and management companies
such as Felcor, Flagstone, Interstate, Kimpton, Prime, WestCoast Hospitality,
as well as many independent properties using the Fairmont, Holiday Inn,
Inter-Continental, Marriott, Courtyard by Marriott, Prince, Radisson, W Hotel,
Westin and other trade names. The Company relies on its diverse hotel base and
geographic diversity to mitigate these exposures, as well as the fact that the
Companys services are provided under long-term contracts, Nevertheless, the
Companys success depends on maintaining good relationships with the clients
and property owners it serves. During 2003, hotels covered by the master
services agreement with the Hilton Hotels Corporation represented approximately
12.5% of the Companys consolidated revenue and at December 31, 2003
approximately 10.6% of the Companys total rooms served. The loss of this
customer, or any group of customers could have a material adverse effect on the
results of operations and financial condition.

Programming Availability and Quality.The Company depends upon major
motion picture studios for its major motion picture programming content. The
Company obtains non-exclusive rights to recently released major motion pictures
from motion picture studios pursuant to agreements with each studio. The
quality and popularity of the major motion pictures available at any given time
and from year to year can vary widely. Generally the more popular titles at the
box office will also be more popular with hotel guests. The Company also
obtains independent films, most of which are non-rated and intended for mature
audiences, from distributors and studios. The Company provides music services
through an agreement with a third party vendor. The Company provides Nintendo
video game services through an agreement with Nintendo. The Companys success
depends upon its ability to provide content that hotel guests are willing to
pay to view. However, the Company cannot predict the future popularity or
quality of the movies, music, games or other content that the Company provides
or may provide in the future. If, for any reason, such content became less
popular than it is currently or if any negative publicity, lawsuits, or
boycotts by opponents of the mature-themed programming content distributed by
the Company had a negative impact on the willingness of the hotel industry
generally to offer such content to guests, then such events could have a
material adverse effect on the Companys business. In addition, if any
significant portion of the content the Company provides to hotel guests were to
become unavailable, for reasons which could include licensing difficulties,
governmental regulation or issues of community standards, the Companys
business could be adversely impacted. Additionally, the Company is dependent on others for its programming
content, and increases in its costs or license fees to obtain such programming
could reduce its cash flow and profitability.

Availability of Capital to Finance Growth.The Company believes that its
operating cash flows and funding availability under its Credit Facility will be
sufficient to fund the Companys future growth, its financing obligations, and

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 23 |  | Form 10-K 2003





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##### Table of Contents



its negative working capital. If however, operating cash flows are
significantly below the amount anticipated in its current business plan, the
Company expects to cover the short fall through any combination of additional
borrowings available under its Credit Facility, a reduction in capital
spending, and/or a reduction in operating expenses. If the Company were to
reduce its projected capital spending significantly, the Companys growth would
be adversely affected. While the Company is currently in compliance with all of
the covenants in its Credit Facility, and believes its business plan allows it
to remain in compliance, if the lodging industry were to suffer a dramatic
decrease in occupancy rates, due to an extraordinary event such as war or acts

of terrorism, the resulting impact on the Companys business could result in a
violation of one or more financial covenants. While the Company believes it
could renegotiate its bank covenants, there is no assurance that this could be
accomplished, nor can it determine at this time the financial cost of such a
renegotiation, or that refinancing, if required would be available on terms
favorable to the Company.

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|LodgeNet Entertainment Corporation |  | 24 |  | Form 10-K 2003





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##### Table of Contents






Results of Operations - Years Ended December 31, 2003 and 2002

Revenue Analysis

Total revenue for 2003 was $250.1 million, an increase of $15.2 million or
6.5% compared to 2002. The increase resulted primarily from a 6.5% increase in
average Guest Pay interactive rooms in operation, driven by the addition of
over 120,000 rooms served by the Companys interactive digital system, which
represents a 45.4% increase over 2002. The following table sets forth the
components of the Companys revenue (in thousands) for the years ended December
31:

|          |           |       |   |         |         |          |  |          |       |          |   |         |         |          |  |      |       | 
|--------- | --------- | ----- | - | ------- | ------- | -------- |  | -------- | ----- | -------- | - | ------- | ------- | -------- |  | ---- | ----- | 
|          |           |       |   | 2003    |         | 2002    
|          |           |       |   |         |         |         
|          |           |       |   |         |         |          |  | Percent  |       |          |   |         |         | Percent 
|          |           |       |   |         |         |          |  | of Total |       |          |   |         |         | of Total
|          |           |       |   | Amount  |         | Revenues |  | Amount   |       | Revenues
|          |           |       |   |         |         |          |  |          |       |         
|Revenues: |           |       |   |         |         |          |  |          |       |          |   |         |         |          |  |     
|          | Guest Pay |       | $ | 243,732 |         |          |  | 97.4     |       |          | $ | 226,238 |         |          |  | 96.3 |      
|          | Other     |       |   | 6,417   |         |          |  | 2.6      |       |          |   | 8,752   |         |          |  | 3.7  |      
|          |           |       |   |         |         |          |  |          |       |          |   |         |         |          |  |      |      
|          |           | Total |   | $       | 250,149 |          |  |          | 100.0 |          |   | $       | 234,990 |          |  |      | 100.0 | 
|          |           |       |   |         |         |          |  |          |       |          |   |         |         |          |  |     

Guest Pay Interactive Services.Guest Pay interactive service revenue
increased 7.7%, or $17.5 million, in 2003 as compared to 2002. The increase was
primarily due to the additional 55,300 average Guest Pay rooms in operation and
the growth of Guest Pay rooms installed with the interactive digital system,
which generated approximately 39% greater revenue than a tape-based system
during the year. The following table sets forth information with respect to
revenue per Guest Pay room for the years ended December 31:

|                                  |                           |                          |   |       |       |      |   |       |       | 
|--------------------------------- | ------------------------- | ------------------------ | - | ----- | ----- | ---- | - | ----- | ----- | 
|                                  |                           |                          |   | 2003  |       | 2002
|                                  |                           |                          |   |       |       |     
|Average monthly revenue per room: |                           |                          |   |       |       |      |   |      
|                                  | Movie revenue             |                          | $ | 17.55 |       |      | $ | 17.77 |      
|                                  | Other interactive service |                          |   | 5.04  |       |      |   | 4.57  |      
|                                  |                           |                          |   |       |       |      |   |       |      
|                                  |                           | Total per Guest Pay room |   | $     | 22.59 |      |   | $     | 22.34 | 
|                                  |                           |                          |   |       |       |      |   |      

Average movie revenue per room decreased 1.2% from 2002 due primarily to a
70 basis point decline in occupancy rates of the properties served by the
Company. This factor was partially offset by higher prices charged for movies.

Average other interactive service revenue per room increased 10.3% from
the prior year. This increase was a result of the continued expansion of
revenue from TV Internet, television on-demand programming, digital music,
cable television programming, and other interactive TV services available
through the new digital system.

The following table compares revenue per Guest Pay room for rooms served
by the Companys interactive digital system versus rooms served by the
traditional tape-based system for the years ended December 31:

|                                  |                           |                          |   |         |       |      |   |         |       |      |   |       |       |  |   |       |       | 
|--------------------------------- | ------------------------- | ------------------------ | - | ------- | ----- | ---- | - | ------- | ----- | ---- | - | ----- | ----- |  | - | ----- | ----- | 
|                                  |                           |                          |   | 2003    |       | 2002
|                                  |                           |                          |   |         |       |     
|                                  |                           |                          |   | Digital |       | Tape |   | Digital |       | Tape
|                                  |                           |                          |   |         |       |      |   |         |       |     
|Average monthly revenue per
room: |                           |                          |   |         |       |      |   |         |       |      |   |       |       |  |   |      
|                                  | Movies                    |                          | $ | 20.92   |       |      | $ | 15.71   |       |      | $ | 21.94 |       |  | $ | 16.66 |      
|                                  | Other interactive service |                          |   | 6.76    |       |      |   | 4.09    |       |      |   | 6.55  |       |  |   | 4.06  |      
|                                  |                           |                          |   |         |       |      |   |         |       |      |   |       |       |  |   |       |      
|                                  |                           | Total per Guest Pay room |   | $       | 27.68 |      |   | $       | 19.80 |      |   | $     | 28.49 |  |   | $     | 20.72 | 
|                                  |                           |                          |   |         |       |      |   |         |       |      |   |       |       |  |   |      

Average Guest Pay revenue per room from the Companys digital system was
39.8% higher than revenue from the tape-based system during 2003 and 37.5%
higher in 2002.

Other Revenue.Revenue from other sources is comprised of free-to-guest
services provided to hotels not receiving Guest Pay services and sales of
system equipment and service parts and labor. The $2.3 million decrease in

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|LodgeNet Entertainment Corporation |  | 25 |  | Form 10-K 2003





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##### Table of Contents



other revenue primarily resulted from decreased equipment sales to
international licensees due to the civil and economic uncertainties in those
international markets served by the Company.

Expense Analysis

Direct Costs and Gross Profit (exclusive of other operating expenses
discussed separately below).The following table sets forth information
regarding the Companys direct costs (in thousands) and gross profit margin for
the years ended December 31:

|                     |           |   |         |         |      |   |         |        |  
|-------------------- | --------- | - | ------- | ------- | ---- | - | ------- | ------ | -
|                     |           |   | 2003    |         | 2002
|                     |           |   |         |         |     
|Direct costs:        |           |   |         |         |      |   |         |       
|                     | Guest Pay |   | $       | 108,916 |      |   | $       | 96,043 |  
|                     | Other     |   |         | 3,031   |      |   |         | 4,739  |  
|                     |           |   |         |         |      |   |         |        |  
|                     |           | $ | 111,947 |         |      | $ | 100,782 |       
|                     |           |   |         |         |      |   |         |       
|Gross profit margin: |           |   |         |         |      |   |         |       
|                     | Guest Pay |   |         | 55.3    | %    |   |         | 57.5   | %
|                     | Other     |   |         | 52.8    | %    |   |         | 45.9   | %
|                     | Total     |   |         | 55.2    | %    |   |         | 57.1   | %

Guest Pay interactive direct costs increased 13.4% to $108.9 million in
2003 from $96.0 million in the prior year. Guest Pay direct costs (movie
license fees, license fees for music, music videos, video games, and television
on-demand programming and the commission retained by the hotel) are primarily
based on related revenue, and such costs generally vary directly with revenue.
Conversely, Internet connectivity fees are fixed costs independent of changes
to revenue or occupancy. The addition of Internet connectivity costs to the
Companys direct cost structure began in August 2002 with the launch of the
Companys TV Internet product. As a percentage of revenue, the decrease to
Guest Pay gross profit margin from 57.5% to 55.3% was due to increased Internet
connectivity costs, hotel commissions, and programming costs. As previously
noted, the addition of Internet connectivity, a fixed costs associated with the
launch of the Companys TV Internet product in August 2002, was the primary
contributor to the change in gross margin during 2003. Hotel commissions
increased as a result of the Companys utilization of its pay for performance
commission structure whereby an increase in revenue per room could result in a
higher commission paid to the hotel. The increase in programming costs was
driven by a shift in the type of programming purchased by hotel guests.

Other direct costs associated with other revenue decreased $1.7 million,
or 36.0%, in 2003 from the prior year and the gross profit margin increased
from 45.9% in 2002 to 52.8% in 2003. The resulting increased gross profit
margin was attributable to the reduction of lower margin sales of equipment to
international licensees.

The Companys total gross profit increased 3.0% in 2003 to $138.2 million
on a 6.5% increase in revenue as compared to 2002. As a percentage of revenue,
the Companys overall gross profit margin decreased from 57.1% to 55.2%. In
addition to the information provided above, the following table sets forth the
primary change drivers of composite gross margin for the year ended December
31:

|                    |                   |  |      |   |      |  |        |   |  |  |      |      | 
|------------------- | ----------------- |  | ---- | - | ---- |  | ------ | - |  |  | ---- | ---- | 
|                    |                   |  | 2003 |   | 2002 |  | Change
|                    |                   |  |      |   |      |  |       
|Gross profit margin |                   |  | 55.2 | % |      |  | 57.1   | % |  |  | -1.9 | %   
|Change drivers:     |                   |  |      |   |      |  |        |   |  |  |      |     
|                    | TV Internet       |  |      |   |      |  |        |   |  |  |      | -1.1 | 
|                    | Hotel commissions |  |      |   |      |  |        |   |  |  |      | -0.5 | 
|                    | Programming costs |  |      |   |      |  |        |   |  |  |      | -0.3 | 
|                    |                   |  |      |   |      |  |        |   |  |  |      |     
|                    |                   |  |      |   |      |  |        |   |  |  | -1.9 | %   
|                    |                   |  |      |   |      |  |        |   |  |  |      |     

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|LodgeNet Entertainment Corporation |  | 26 |  | Form 10-K 2003





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##### Table of Contents



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

|                    |                                     |                          |   |        |         |          |  |          |      |          |   |        |         |          |  |      |      | 
|------------------- | ----------------------------------- | ------------------------ | - | ------ | ------- | -------- |  | -------- | ---- | -------- | - | ------ | ------- | -------- |  | ---- | ---- | 
|                    |                                     |                          |   | 2003   |         | 2002    
|                    |                                     |                          |   |        |         |         
|                    |                                     |                          |   |        |         |          |  | Percent  |      |          |   |        |         | Percent 
|                    |                                     |                          |   |        |         |          |  | of Total |      |          |   |        |         | of Total
|                    |                                     |                          |   | Amount |         | Revenues |  | Amount   |      | Revenues
|                    |                                     |                          |   |        |         |          |  |          |      |         
|Operating expenses: |                                     |                          |   |        |         |          |  |          |      |          |   |        |         |          |  |     
|                    | Guest Pay operations                |                          | $ | 31,597 |         |          |  | 12.6     |      |          | $ | 30,207 |         |          |  | 12.9 |     
|                    | Selling, general and administrative |                          |   | 21,646 |         |          |  | 8.7      |      |          |   | 22,108 |         |          |  | 9.4  |     
|                    | Depreciation and amortization       |                          |   | 78,459 |         |          |  | 31.4     |      |          |   | 75,918 |         |          |  | 32.3 |     
|                    |                                     |                          |   |        |         |          |  |          |      |          |   |        |         |          |  |      |     
|                    |                                     | Total operating expenses |   | $      | 131,702 |          |  |          | 52.7 |          |   | $      | 128,233 |          |  |      | 54.6 | 
|                    |                                     |                          |   |        |         |          |  |          |      |          |   |        |         |          |  |     

Guest Pay operations expenses consist of costs directly related to the
operation and maintenance of systems at hotel sites. Guest Pay operations
expenses increased by $1.4 million, or 4.6%, in 2003 from the prior year. This
increase is primarily attributable to the 6.5% increase in average installed
Guest Pay interactive rooms in operation during 2003 as compared to 2002.
Offsetting the increase in rooms were continued operating improvements and
efficiencies including reduced tape duplication and related freight costs as a
result of the Companys expanding digital room base. Per average installed
room, Guest Pay operations expenses decreased by 1.7% to $2.93 per month in
2003 as compared to $2.98 per month in 2002.

Selling, general and administrative expenses decreased 2.1% to $21.6
million in 2003 from $22.1 million in 2002. The decrease was primarily due to
reductions in litigation fees and expenses, offset by increases in
payroll-related expenses. As a percentage of revenue, selling, general and
administrative expenses were 8.7% in 2003 and 9.4% in 2002. Per average
installed room, selling, general and administrative expenses decreased to $2.01
per month in 2003 compared to $2.18 per month in 2002.

Depreciation and amortization expenses increased 3.3% to $78.5 million in
2003 from $75.9 million in the prior year. The increase was partially due to
the additional 55,300 average Guest Pay interactive rooms in operation. In
2003, the Company also incurred additional amortization expense of $1.6 million
for software development and other intangibles, offset by the changes in fully
depreciated assets remaining in service. As a percentage of revenue,
depreciation and amortization expenses decreased to 31.4% in 2003 from 32.3% in
2002.

Operating Income.As a result of increased Guest Pay interactive revenue
and decreased operating expenses as a percent of revenue driven by greater
operating efficiencies, the Company generated operating income of $6.5 million
in 2003 as compared to operating income of $6.0 million in 2002.

Investment Gains (Losses)

InnMedia LLC.InnMedia was formed by LodgeNet and Hilton during the
fourth quarter of 2000. The Company had a 47.5% equity interest in InnMedia and
recorded losses under the equity method of accounting for an investment of $2.6
million during 2001 and $3.0 million during 2000. On April 12, 2002, the
Company terminated the Distribution and Carriage Agreement, dated October 9,
2000, and Services Agreement, dated October 9, 2000, with InnMedia. The
terminations followed the institution of legal proceedings by InnMedia against
the Company. The agreements were terminated due to, among other things,
InnMedias effective repudiation of the agreements and InnMedias failure to
perform. As a result of the dispute with InnMedia, the Company charged off
$471,000 in uncollectable receivables and continued to incur the costs
associated with the provisioning of InnMedias services, totaling $914,000
through the end of July 2002. Prior to the terminations, the Company had
charged InnMedia for system access fees of $633,000, connectivity costs of $793,000, and
support and administrative expenses of $355,000 related to the first quarter of
2002.

Effective July 31, 2002, the Company and InnMedias co-owner, Hilton,
mutually agreed to dissolve InnMedia. InnMedia and the Company mutually
released their claims against each other, and the lawsuit filed by InnMedia
against the Company was dismissed with prejudice on August 7, 2002. During the
third quarter of 2002,

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|LodgeNet Entertainment Corporation |  | 27 |  | Form 10-K 2003





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the Company contributed $252,000 for its share of
pre-dissolution operating costs. For the year ended December 31, 2002, the
Company recorded an equity loss of $419,000. In 2003, InnMedia was fully
dissolved with no additional funding required to cover dissolution expenses.

ResNet Merger/GICC Investment.In November 1998, the operations of the
Companys majority-owned subsidiary, ResNet Communications, LLC (ResNet),
were merged with two non-affiliated entities to form Global Interactive
Communications Corporation (GICC). GICCs business consisted of providing
cable television programming and telecommunications services to the
multi-family dwelling unit market. The Company contributed net assets totaling
$31.3 million in exchange for a 30% equity interest in GICC and notes
receivable totaling $10.8 million. The Company accounted for its investment in
GICC using the equity method of accounting and recorded a loss of $183,000 for
the year ended 2001. In the second quarter of 2001, the Company transferred
its equity interest back to GICC and had no further financing obligation to
GICC. GICC filed for bankruptcy protection in the third quarter of 2001. In
2002, the Company recovered the full amount of its receivable, which was
$316,000 as of December 31, 2001, and recorded an investment gain of $1.3
million from the $1.7 million in proceeds derived from the sale of GICCs
assets. The Company received the final proceeds in 2003 and recorded an
investment gain of $250,000.

Litigation Settlements.During 2002, the Company entered into settlement
agreements with Broadcast Music Inc. (BMI) and the American Society of
Composers, Authors and Publishers (ASCAP), which resolved claims for alleged
nonpayment of royalties on copyrighted musical works performed in major motion
pictures. BMI and ASCAP had asserted that the music, primarily background
music, used within major motion pictures required licensing. BMI and ASCAP
sought damages for public performances of such music from their respective
catalogues. As a result of the settlements, the Company recorded a provision
for the litigation settlements of $2.7 million that is related to pre-2002
reporting periods. This nonrecurring charge was reported as a litigation
expense in the 2002 statement of operations. The Company has paid approximately
$2.4 million of the settlement amount as of December 31, 2003, with the balance
to be paid in the first half of 2004.

Loss on Early Retirement of Debt.As a result of the early retirement of
the 10.25% Senior Notes in 2003, the Company incurred a $7.1 million loss on
the write-off of related debt issuance costs and payment of call and tender
premiums, and transaction expenses.

Interest Expense.Interest expense was $34.2 million in 2003 compared to
$33.0 million in 2002 due to increases in long-term debt incurred in the first
half of 2003 to fund the Companys continuing expansion of its business and
refinancing costs. The average principal amount of long-term debt outstanding
during 2003 was approximately $361 million (at a weighted average interest rate
of approximately 9.5%) as compared to an average principal amount outstanding
of approximately $339 million (at a weighted average interest rate of
approximately 9.8%) during 2002.

Taxes.During 2003, the Company incurred franchise tax of $459,000 versus
$550,000 during 2002.

Net Loss.As a result of factors previously described, the Company
incurred a net loss of $35.1 million as compared to a net loss of $29.1 million
in 2002.

|                                   |  |    |  |               
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|LodgeNet Entertainment Corporation |  | 28 |  | Form 10-K 2003





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

Revenue Analysis

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

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

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

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

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

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

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

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 29 |  | Form 10-K 2002





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##### Table of Contents



Expense Analysis

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

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

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

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

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

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

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

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

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

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

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

Investment Losses

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

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

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

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

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

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

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

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

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




Critical Accounting Policies

Managements discussion and analysis of financial condition and results of
operations are based upon the Companys financial statements, which have been
prepared in conformity with accounting principles generally accepted in the
United States of America. The Companys primary cost drivers are fact-based
with predetermined rates, such as hotel commissions, license fees paid for
major motion pictures, or one-time fixed fee for independent films. However,
the preparation of financial statements requires the Company to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
the reported amounts of revenues and expenses during the reporting period. The
Company bases its estimates on historical experience and on various other
assumptions that the Company believes to be reasonable based upon the available
information. The following critical policies relate to the more significant
judgments and estimates used in the preparation of the financial statements:

Revenue Recognition.The Company recognizes revenue from the sale of
interactive television services in the period the related services are sold to
the hotel or guest. No future performance obligations exist on a service that
has been provided. The price related to the Companys products or services are
fixed prior to delivery of the products or services. Revenue from the sale of
system equipment and service parts and labor is recognized when the
equipment is delivered or the service has been provided. The Company also
has advance billings for certain free-to-guest programming services where the
revenue is deferred and recognized in the periods that services are provided.

Allowance for doubtful accounts.The Company determines the estimate of
the allowance for doubtful accounts considering several factors, including: (1)
historical experience, (2) aging of the accounts receivable, and (3) contract
terms between the hotel and the Company. In accordance with the Companys hotel
contracts, monies

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collected by the hotel for interactive television services
are held in trust on behalf of the Company. Collectibility is reasonably
assured as supported by the Companys nominal write-off history. For periods
ended December 31, 2003, 2002, and 2001, charges to the allowance for doubtful
account for related interactive television services were $313,000, $283,000,
and $148,000, respectively. If the financial condition of a hotel chain or
group of hotels were to deteriorate and reduce the ability to remit the
Companys monies, the Company may be required to increase its allowance by
recording additional bad debt expense.

Allowance for excess or obsolete system components.The Company regularly
evaluates component levels to ascertain build requirements based on its backlog
and service requirements based on its current installed base. When a certain
system component becomes obsolete due to technological changes and it is
determined that the component cannot be utilized within its current installed
base, the Company records a provision for excess and obsolete component
inventory based on estimated forecasts of product demand and service
requirements. The Company makes every effort to ensure the accuracy of its
forecasts of service requirements and future production, however any
significant unanticipated changes in demand or technological advances could
have an impact on the value of system components and reported operating
results.

Property and equipment.The Companys property and equipment is stated at
cost, net of accumulated depreciation and amortization. Installed Guest Pay
and free-to-guest systems consist of equipment, related costs of installation,
including certain payroll costs, sales commissions and customer acquisition
costs. Maintenance costs, which do not significantly extend the useful lives of
the respective assets, and repair costs are charged to Guest Pay operations as
incurred. The Company begins depreciating Guest Pay and free-to-guest systems
when such systems are installed and activated. Depreciation of other equipment
begins when such equipment is placed in service. The Company attributes no
salvage value to equipment, and depreciation and amortization are computed
using the straight-line method over the following useful lives:

|                   |                            |  |        |       | 
|------------------ | -------------------------- |  | ------ | ----- | 
|                   |                            |  | Years 
|                   |                            |  |       
|Buildings          |                            |  | 30     |      
|Guest Pay systems: |                            |  |        |      
|                   | Installed system costs     |  |        | 2 - 7 | 
|                   | Customer acquisition costs |  |        | 5 - 7 | 
|                   | System components          |  |        | 5 - 7 | 
|                   | Software costs             |  |        | 3 - 5 | 
|Other equipment    |                            |  | 3 - 10 |      




Recent Accounting Developments

In December 2002, the Financial Accounting Standards Board issued SFAS No. 148,
Accounting for Stock Based Compensation-Transition and Disclosure-as Amendment
to FAS 123. SFAS 148 provides two additional transition methods for entities
that adopt the preferable method of accounting for stock based compensation. In
addition, the statement requires disclosure of comparable information for all
companies regardless of whether, when, or how an entity adopts the preferable,
fair value based method of accounting. These disclosures are now required for
interim periods in addition to the traditional annual disclosure. The
amendments to SFAS No. 123, which provide for additional transition methods,
were effective for periods beginning after December 15, 2002, although earlier
application was permitted. Certain disclosure amendments were required for
financial statements for fiscal years ending after December 15, 2002, and have
been reflected in these consolidated financial statements. The remaining
amendments to the disclosure requirements were required for financial reports
containing condensed financial statements for interim periods beginning after December 15, 2002. The Company
adopted the disclosure provisions of this statement and had no impact to the
consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities and issued a revised interpretation in December
2003 (FIN 46R). FIN 46R requires that if a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest entity must
be included in the consolidated financial statements with those of the business
enterprise. FIN 46R must be applied for periods ending after March 15, 2004,
and was effective immediately for all variable interest entities created after
January 31, 2003. The Company does not have ownership in any variable

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interest
entities and the adoption of FIN 46R had no impact on the Companys financial
condition or results of operations.

In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This statement amends SFAS 133 to provide clarification on the
financial accounting and reporting of derivative instruments and hedging
activities and requires contracts with similar characteristics to be accounted
for on a comparable basis. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. The adoption of this statement, effective July 1,
2003, had no effect on the Companys financial condition or results of
operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
requires that certain financial instruments issued in the form of shares that
are mandatory redeemable as well as certain other financial instruments be
classified as liabilities in the financial statements. SFAS No. 150 was
effective for financial instruments entered into or modified after May 31, 2003
and otherwise it was generally effective on July 1, 2003. The adoption of this
statement had no impact on the Companys consolidated financial position or
results of operations.

In May 2003, the FASB Emerging Issues Task Force (EITF) reached a final
consensus on EITF 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. EITF 00-21 addresses how to account for multiple-deliverable
revenue arrangements and focuses on when a revenue arrangement should be
separated into different revenue-generating deliverables or units of
accounting and if so, how the arrangement considerations should be allocated
to the different deliverables or units of accounting. The provisions of EITF
00-21 were effective for revenue arrangements entered into at the beginning of
the first interim period after June 15, 2003. The adoption of EITF 00-21 did
not have an impact on the Companys consolidated financial position or results
of operations.

In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104 (SAB No. 104), Revenue Recognition, which
codifies, revises and rescinds certain sections of SAB No. 101, Revenue
Recognition, in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC rules and
regulations. The changes noted in SAB No. 104 had no impact on the Companys
consolidated financial position or results of operations.




Item 7A- Quantitative and Qualitative Disclosures About Market Risk

The Company is exposed to various market risks, including potential losses
resulting from adverse changes in interest rates and foreign currency exchange
rates. The Company does not enter into derivatives or other financial
instruments for trading or speculative purposes.

Interest.At December 31, 2003, the Company had debt totaling $368.2
million. The Company has interest rate swap arrangements covering debt with a
notional amount of $100 million to effectively change the underlying debt from
a variable interest rate to a fixed interest rate for the term of the swap
agreements. Additionally, the Company has an interest rate swap arrangement
covering debt with a notional amount of $50 million to effectively change the
underlying debt from a fixed interest rate to a variable interest rate. After
giving effect to the interest rate swap arrangements, the Company had fixed
rate debt of $264.6 million and variable rate debt of $103.6 million at
December 31, 2003. For fixed rate debt, interest rate fluctuations affect the
fair market value but do not impact earnings or cash flows. Conversely, for
variable rate debt, interest rate fluctuations generally do not affect the fair
market value but do impact future earnings and cash flows, assuming other
factors are held constant. Assuming other variables remain constant (such as
debt levels), a one percentage point increase to interest rates would decrease
the unrealized fair market value of the fixed rate debt by an estimated $24
million. The impact on earnings and cash flow for the next year resulting from
a one-percentage point increase to interest rates would be approximately $1
million assuming other variables remain constant.

Foreign Currency Transactions.A portion of the Companys revenues is
derived from the sale of Guest Pay services in Canada. The results of
operations and financial position of the Companys operations in Canada are
measured in Canadian dollars and translated into U.S. dollars. The effects of
foreign currency fluctuations in Canada are somewhat mitigated by the fact that
expenses and liabilities are generally incurred in Canadian dollars. The
reported income of the Companys Canadian subsidiary will be higher or lower
depending on a weakening or strengthening of the

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U.S. dollar against the
Canadian dollar. Additionally, a portion of the Companys assets are based in
Canada and are translated into U.S. dollars at foreign currency exchange rates
in effect as of the end of each period. Accordingly, the Companys consolidated
assets will fluctuate depending on the weakening or strengthening of the U.S.
dollar against the Canadian dollar. During 2003, the Companys consolidated
balance sheet increased $2.4 million due to foreign currency fluctuations.




Item 8 - Financial Statements and Supplementary Data

See
Item 15  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.




Item 9A - Controls and Procedures

Evaluation of Disclosure Controls and Procedures.Based on their
evaluation as of the end of the period covered by this Annual Report on Form
10-K, the Companys Chief Executive Officer and Chief Financial Officer have
concluded that the Companys disclosure controls and procedures (as defined in
Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934) are
effective to ensure that information required to be disclosed by the Company in
reports that it files or submits under the Securities Exchange Act of 1934 is
recorded, processed, summarized and reported within the time periods specified
in Securities and Exchange Commission rules and forms.

Changes in Internal Control Over Financial Reporting.There were no
changes in the Companys internal control over financial reporting identified
in connection with the evaluation of disclosure controls and procedures that
occurred during our fourth fiscal quarter that have materially affected, or are
reasonably likely to materially affect, the Companys internal control over
financial reporting.

PART III




Item 10 - Directors and Executive Officers of the Registrant

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

Information concerning Audit Committee membership and the Audit
Committees designated financial expert is incorporated by reference from the
sections entitled Election of Directors  Corporate Governance and Committees
of the Board of Directors Committees and Audit Committee Report of the
Companys definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of its last fiscal year

The Company has adopted a written
code of business conduct and ethics,
which applies to all employees, including the principal executive officer,
principal financial and accounting officer, controller or persons performing
similar functions. The code is found on the Companys intranet and the
Companys web site. The Companys web site address is http://www.lodgenet.com.




Item 11 - Executive Compensation

Information concerning executive remuneration and transactions is
incorporated by reference from the sections entitled Election of
DirectorsDirector Compensation; Election of DirectorsExecutive
Compensation; Report of the Compensation Committee on Executive Compensation
and Performance Graph of the Companys definitive Proxy Statement to be filed
pursuant to Regulation 14A within 120 days after the end of
its last fiscal
year.

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Item 12 - Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information concerning security ownership of certain beneficial owners and
management is incorporated by reference from the section entitled About the
Annual MeetingWho are the largest owners of the Companys stock and how much
stock do the Companys directors and executive officers own? 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. Information concerning related
stockholder matters is incorporated by reference from the section entitled
Equity Compensation Plan Information of the Companys definitive Proxy
Statement to be filed pursuant to Regulation 14A within 120 days after the end
of its last fiscal year.




Item 13 - Certain Relationships and Related Transactions

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




Item 14 - Principal Accountant Fees and Services

The information concerning principal accountant fees and services is
incorporated by reference from the section entitled Audit Committee Report of
the Companys definitive Proxy Statement to be filed pursuant to Regulation 14A
within 120 days after the end of its last fiscal year.

PART IV




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

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, 2003, included herein.

Reports on Form 8-K  During the quarter ended December 31, 2003, the Company
filed the following reports on Form 8-K:

On October 16, 2003, the Company filed a Report on Form 8-K to furnish under
Item 12 a copy of a press release regarding its financial results for the third
quarter of 2003 and certain other information and a copy of a Power Point
presentation posted on the Companys web site in advance of an earnings
telephone conference held October 16, 2003.

On November 7, 2003, the Company filed a Report on Form 8-K to file under Item
7 the Consent of Independent Public Accountants.

On November 10, 2003, the Company filed a report on Form 8-K to file under Item
5 information concerning Mr. Petersens prepaid forward contract dated as of
November 10, 2003.

On December 9, 2003, the Company filed a report on Form 8-K to furnish as an
exhibit under Item 9 a copy of a press release dated December 9, 2003, the
press release announced the signing of an agreement with Interstate Hotels and
Resorts designating LodgeNet Entertainment Corporation as a preferred provider
for supplying interactive television services for hotels under Interstates
management.

Exhibits  Following is a list of Exhibits filed with this report. Exhibits
10.10, 10.14, 10.19, 10.20, 10.22 and 10.24 constitute management contracts.
Exhibits 10.1, 10.3, 10.4, 10.7, 10.13, 10.21, 10.23, 10.25, 10.26 and 10.27
constitute compensatory plans.

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If you would like a copy of any of the Exhibits listed herein, please submit a
written request to LodgeNet Entertainment Corporation, Attention: Corporate
Secretary, 3900 West Innovation Street, Sioux Falls, South Dakota 57107-7002,
telephone (605) 988-1000, and the Company will provide you with such Exhibit(s)
upon the payment of a nominal fee, such fee being limited to the expenses
incurred by the Company in providing you with the requested Exhibit(s).

Exhibit No.

3.1 Certificate of Incorporation of the Company (1)

3.2 By-Laws of the Registrant (1)

3.3 Amendment No. 1 to Restated Certificate of Incorporation of the Company (11)

4.1 Indenture dated June 18, 2003 between LodgeNet Entertainment Corporation
and HSBC Bank USA as Trustee, relating to the 9.50% Senior Subordinated Notes
due 2013 (17)

4.2 Form of Notes (included in Exhibit 4.1)

4.3 First Supplemental Indenture dated June 18, 2003 between LodgeNet
Entertainment Corporation and HSBC Bank USA as Trustee, relating to the 9.50%
Senior Subordinated Notes due 2013 (17)

10.1 LodgeNet Entertainment Corporation Stock Option Plan (as amended and
restated effective May 8, 2001) (6)

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

10.3 1993 Plan Form of Stock Option Agreement for Non-Employee Directors (3)

10.4 1993 Plan Form of Incentive Stock Option Agreement for Key Employees (3)

10.5 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)

10.6 Amendment to Securities Purchase Agreement, dated as of December 19, 1996
(6)

10.7 Form of Executive Severance Agreement between the Company and each of
Scott C. Petersen, David M. Bankers and Steven D. Truckenmiller; all dated as
of July 25, 1995 (5)

10.8 First Amendment, dated October 17, 1996, to License Agreement between
Nintendo of America, Inc. and LodgeNet Entertainment Corporation (6)

10.9 Confidential License Agreement for Use of Nintendo Video Game Systems with
Hotel Entertainment System, dated May 12, 1998, between LodgeNet Entertainment
Corporation and Nintendo of America Inc.  (7)

10.10 Form of Employment Agreement between the Company and David M. Bankers (8)

10.11 Master Services Agreement between Hilton Hotels Corporation and LodgeNet
Entertainment Corporation dated October 9, 2000  (9)

10.12 Warrant to Purchase Common Stock of LodgeNet Entertainment Corporation
dated October 9, 2000 (9)

10.13 Executive Severance Agreement between the Company and Gary H. Ritondaro
dated March 1, 2001 (10)

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10.14 Employment Agreement between the Company and Gary H. Ritondaro dated
March 1, 2001 (10)

10.15 Credit Agreement dated August 29, 2001 by and among LodgeNet
Entertainment Corporation, Canadian Imperial Bank of Commerce, Bear Stearns
Corporate Lending, Inc., U. S. Bank National Association, Fleet National Bank
and the Lenders Named Therein (11)

10.16 Amendment To Master Services Agreement dated August 2, 2002 by and
between Hilton Hotels Corporation and LodgeNet Entertainment Corporation (12)

10.17 Hilton LodgeNet Agreement dated August 2, 2002 by and between Hilton
Hotels Corporation and LodgeNet Entertainment Corporation (12)

10.18 First Amendment to Credit Agreement, dated August 19, 2002, by and
between LodgeNet Entertainment Corporation and Canadian Imperial Bank, as
Administrative Agent for the Lenders named therein (13)

10.19 Employment Agreement between the Company and Scott C. Petersen dated
September 23, 2002 (14)

10.20 Employment Agreement between the Company and Stephen D. McCarty dated March 01, 2003 (15)

10.21 Executive Severance Agreement between the Company and Stephen D. McCarty
dated March 1, 2003 (15)

10.22 Employment Agreement between the Company and Steven Pofahl dated March 01, 2003 (15)

10.23 Executive Severance Agreement between the Company and Steven Pofahl dated March 1, 2003 (15)

10.24 Employment Agreement between the Company and Steven D. Truckenmiller dated March 01, 2003 (15)

10.25 LodgeNet Entertainment Corporation 2003 Stock Option and Incentive Plan (16)

10.26 2003 Plan Form of Stock Option Agreement for Non-Employee Directors

10.27 2003 Plan Form of Incentive Stock Option Agreement for Key Employees

10.28 Second Amendment to Credit Agreement dated June 13, 2003 among LodgeNet
Entertainment Corporation and Canadian Imperial Bank of Commerce, as
Administrative Agent for the Lenders named therein

10.29 Third Amendment to Credit Agreement dated January 13, 2004 among LodgeNet
Entertainment Corporation and Canadian Imperial Bank of Commerce, as
Administrative Agent for the Lenders named therein

10.30 Amendments, dated December 12, 2001, October 11, 2002, April 28, 2003 and
February 6, 2004 of 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 of computation of ratios

21.1 Subsidiaries of the Company

23.1 Consent of Independent Public Accountants

31.1 Rule 13a-14(a)/15d-14(a) Certifications

32.1 Section 1350 Certifications



---

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

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 38 |  | Form 10-K 2003





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##### Table of Contents



(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. (File No. 033-67676).

(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. (File No. 033-67676).

(3)  Incorporated by Reference to the Companys Annual Report on Form 10-K for
the year ended December 31, 1993, as filed with the Securities and Exchange
Commission, March 25, 1994. (File No. 000-22334).

(4)  Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 1995, as filed with the Securities and Exchange
Commission, August 14, 1995. (File No. 000-22334).

(5)  Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 1995, as filed with the Securities and
Exchange Commission, November 14, 1995. (File No. 000-22334).

(6)  Incorporated by Reference to the Companys Annual Report on Form 10-K for
the year ended December 31, 1996, as filed with the Securities and Exchange
Commission, March 17, 1997. (File No. 000-22334).

(7)  Incorporated by Reference to the Companys Annual Report on Form 10-K for
the year ended December 31, 1998, as filed with the Securities and Exchange
Commission, March 25, 1999.

(8)  Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended June 30, 1999, as filed with the Securities and Exchange
Commission, August 13, 1999.

(9)  Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2000, as filed with the Securities and
Exchange Commission, November 14, 2000.

(10)  Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended March 31, 2001, as filed with the Securities and Exchange
Commission, May 14, 2001.

(11)  Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2001, as filed with the Securities and
Exchange Commission, November 14, 2001.

(12)  Incorporated by Reference to the Companys Current Report on Form 8-K, as
filed with the Securities and Exchange Commission, August 15, 2002.

(13)  Incorporated by Reference to the Companys Current Report on Form 8-K, as
filed with the Securities and Exchange Commission, August 20, 2002.

(14)  Incorporated by Reference to the Companys Quarterly Report on Form 10-Q
for the quarter ended September 30, 2002, as filed with the Securities and
Exchange Commission, November 13, 2002.

(15)  Incorporated by Reference to the Companys Annual Report on Form 10-K for
the year ended December 31, 2002, as filed with the Securities and Exchange
Commission, March 20, 2003.

(16)  Incorporated by Reference to the Companys 2003 Definitive Proxy
Statement, as filed with the Securities and Exchange Commission, April 7, 2003.

(17)  Incorporated by Reference to the Companys Current Report on Form 8-K, as
filed with the Securities and Exchange Commission, June 19, 2003.

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 39 |  | Form 10-K 2003





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##### Table of Contents






Signatures

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized in the City of Sioux
Falls, State of South Dakota, on March 12, 2004.

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

Pursuant to the requirements of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, and in the capacities indicated, on March 12, 2004.

|                                           |  |                                                                                                         |  |               
|------------------------------------------ |  | ------------------------------------------------------------------------------------------------------- |  | --------------
|Signature                                  |  | Title                                                                                                   |  | Date          
|                                           |  |                                                                                                         |  |               
|/s/ Scott C. PetersenScott C. Petersen     |  | President, Chief Executive Officer
and Chairman of the Board of Directors
(Principal Executive Officer) |  | March 12, 2004
|                                          
|/s/ Gary H. RitondaroGary H. Ritondaro     |  | Senior Vice President
Chief Financial Officer
(Principal Financial & Accounting Officer)                |  | March 12, 2004
|                                          
|/s/ R. Douglas BradburyR. Douglas Bradbury |  | Director                                                                                                |  | March 12, 2004
|                                          
|/s/ Lawrence Flinn, Jr.Lawrence Flinn, Jr. |  | Director                                                                                                |  | March 12, 2004
|                                          
|/s/ Richard R. HyllandRichard R. Hylland   |  | Director                                                                                                |  | March 12, 2004
|                                          
|/s/ R. F. LeyendeckerR. F. Leyendecker     |  | Director                                                                                                |  | March 12, 2004
|                                          
|/s/ Jarl MohnJarl Mohn                     |  | Director                                                                                                |  | March 12, 2004
|                                          
|/s/ Scott H. ShlecterScott H. Shlecter     |  | Director                                                                                                |  | March 12, 2004

|                                   |  |    |  |               
|---------------------------------- |  | -- |  | --------------
|LodgeNet Entertainment Corporation |  | 40 |  | Form 10-K 2003





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##### Table of Contents






INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

LodgeNet Entertainment Corporation and Subsidiaries

Index to Consolidated Financial Statements

|                                                                                                   |  |      |        | 
|-------------------------------------------------------------------------------------------------- |  | ---- | ------ | 
|                                                                                                   |  | Page
|Report of Independent Auditors                                                                     |  |      | F - 2  | 
|Report of Independent Accountants                                                                  |  |      | F - 3  | 
|Consolidated Balance Sheets as of December 31, 2003 and 2002                                       |  |      | F - 4  | 
|Consolidated Statements of Operations  Three Years Ended December 31, 2003                        |  |      | F - 5  | 
|Consolidated Statements of Stockholders Equity (Deficiency)  Three Years Ended December 31, 2003 |  |      | F - 6  | 
|Consolidated Statements of Cash Flows  Three Years Ended December 31, 2003                        |  |      | F - 7  | 
|Notes to Consolidated Financial Statements                                                         |  |      | F - 8  | 
|                                                                                                   |  |      |        | 
|Index to Financial Schedules                                                                       |  |      |        | 
|                                                                                                   |  |      |        | 
|Report of Independent Accountants on Schedule                                                      |  |      | F - 24 | 
|Schedule II  Valuation and Qualifying Accounts                                                    |  |      | F - 25 | 

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-1 |  | Form 10-K 2003





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##### Table of Contents






Report of Independent Auditors

To the Board of Directors and Stockholders
of LodgeNet Entertainment Corporation

In our opinion, the accompanying consolidated balance sheet as of December 31,
2003 and 2002, and the related statements of operations, stockholders equity
(deficiency) and cash flows for the years then ended present fairly, in all
material respects, the financial position of LodgeNet Entertainment Corporation
and its subsidiaries as of December 31, 2003 and 2002, and the results of their
operations and their cash flows for the years then ended in conformity with
accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule as of and for the
years ended December 31, 2003 and 2002, presents fairly, in all material
respects, the information set forth therein when read in conjunction with the
related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Companys
management; our responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits. We conducted
our audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion. The financial statements of the Company as of December 31, 2001, and
for the year then ended prior to the revision discussed in note 19, Loss on
Early Retirement of Debt, were audited by other independent accountants who
have ceased operations. Those independent accountants expressed an unqualified
opinion on those financial statements in their report dated February 6, 2002.

As discussed above, the financial statements of LodgeNet Entertainment
Corporation as of December 31, 2001, and for the year then ended, were audited
by other independent accountants who have ceased operations. As described in
note 19, Loss on Early Retirement of Debt, these financial statements have been
revised to include the reclassification required by SFAS No. 145, Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Correction,which was adopted by the Company during the year ended
December 31, 2002. We audited the reclassification in 2001 related to the
adoption of SFAS 145 as described in the Summary of Significant Accounting
Policies note. In our opinion, the reclassification for 2001 is appropriate.
However, we were not engaged to audit, review, or apply any procedures to the
2001 financial statements of the Company other than with respect to such
reclassification, accordingly, we do not express an opinion or any other form
of assurance on the 2001 financial statements taken as a whole.

/s/ PricewaterhouseCoopers LLP

Minneapolis, Minnesota
February 3, 2004

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-2 |  | Form 10-K 2003





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##### Table of Contents






Report of Independent Accountants

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

To LodgeNet Entertainment Corporation:

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

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

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

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

Arthur Andersen LLP

Minneapolis, Minnesota
February 6, 2002

*     The 2001 and 2000 consolidated balance sheets and the 2000 and 1999
consolidated statements of operations, stockholders equity (deficit) and cash
flows are not required to be presented in the 2003 annual report.

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-3 |  | Form 10-K 2003





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##### Table of Contents






LodgeNet Entertainment Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollar amounts in thousands, except share data)

|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |          |          |  
|------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------- | ------- | ------------ | -------- | ---- | ------- | -------- | -------- | -
|                                                  |                                                                                                                                                      |                                         |         | December 31,
|                                                  |                                                                                                                                                      |                                         |         |             
|                                                  |                                                                                                                                                      |                                         |         | 2003         |          | 2002
|                                                  |                                                                                                                                                      |                                         |         |              |          |     
|Assets                                            |                                                                                                                                                      |                                         |         |              |          |      |         |         
|Current assets:                                   |                                                                                                                                                      |                                         |         |              |          |      |         |         
|                                                  | Cash and cash equivalents                                                                                                                            |                                         | $       | 2,772        |          |      | $       | 1,107    |         
|                                                  | Accounts receivable, net                                                                                                                             |                                         |         | 28,150       |          |      |         | 28,373   |         
|                                                  | Prepaid expenses and other                                                                                                                           |                                         |         | 3,233        |          |      |         | 3,772    |         
|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |         
|                                                  |                                                                                                                                                      | Total current assets                    |         |              | 34,155   |      |         |          | 33,252   |  
|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |          |          |  
|Property and equipment, net                       |                                                                                                                                                      |                                         | 227,037 |              |          |      | 243,656 |         
|Debt issuance costs, net                          |                                                                                                                                                      |                                         | 11,036  |              |          |      | 7,443   |         
|Intangible assets, net                            |                                                                                                                                                      |                                         | 8,270   |              |          |      | 12,042  |         
|Other assets                                      |                                                                                                                                                      |                                         | 2,770   |              |          |      | 1,691   |         
|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |          |         
|                                                  |                                                                                                                                                      | $                                       | 283,268 |              |          | $    | 298,084 |         
|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |         
|Liabilities and Stockholders Equity (Deficiency) |                                                                                                                                                      |                                         |         |              |          |      |         |         
|Current liabilities:                              |                                                                                                                                                      |                                         |         |              |          |      |         |         
|                                                  | Accounts payable                                                                                                                                     |                                         | $       | 15,012       |          |      | $       | 12,812   |         
|                                                  | Current maturities of long-term debt                                                                                                                 |                                         |         | 8,638        |          |      |         | 9,320    |         
|                                                  | Accrued expenses                                                                                                                                     |                                         |         | 12,697       |          |      |         | 12,977   |         
|                                                  | Deferred revenue                                                                                                                                     |                                         |         | 3,918        |          |      |         | 3,371    |         
|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |         
|                                                  |                                                                                                                                                      | Total current liabilities               |         |              | 40,265   |      |         |          | 38,480   |  
|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |          |          |  
|Long-term debt                                    |                                                                                                                                                      |                                         | 359,610 |              |          |      | 344,470 |         
|Other long-term liability                         |                                                                                                                                                      |                                         | 3,999   |              |          |      | 4,995   |         
|Derivative instruments                            |                                                                                                                                                      |                                         | 8,396   |              |          |      | 11,443  |         
|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |          |         
|                                                  | Total liabilities                                                                                                                                    |                                         |         | 412,270      |          |      |         | 399,388  |         
|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |         
|Commitments and contingencies                     |                                                                                                                                                      |                                         |         |              |          |      |         |         
|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |          |          |  
|Stockholders equity (deficiency):                |                                                                                                                                                      |                                         |         |              |          |      |         |         
|                                                  | Preferred stock, $.01 par value, 5,000,000 shares authorized;
no shares issued or outstanding                                                        |                                         |         |              |          |      |         |          |         
|                                                  | Common stock, $.01 par value, 50,000,000 shares authorized;
12,722,267 and 12,431,149 shares outstanding at December 31,
2003 and 2002, respectively |                                         |         | 127          |          |      |         | 124      |         
|                                                  | Additional paid-in capital                                                                                                                           |                                         |         | 155,163      |          |      |         | 153,363  |         
|                                                  | Accumulated deficit                                                                                                                                  |                                         |         | (276,567     | )        |      |         | (241,515 | )       
|                                                  | Accumulated other comprehensive loss                                                                                                                 |                                         |         | (7,725       | )        |      |         | (13,276  | )       
|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |          |         
|                                                  |                                                                                                                                                      | Total stockholders equity (deficiency) |         |              | (129,002 | )    |         |          | (101,304 | )
|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |          |         
|                                                  |                                                                                                                                                      | $                                       | 283,268 |              |          | $    | 298,084 |         
|                                                  |                                                                                                                                                      |                                         |         |              |          |      |         |         

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

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-4 |  | Form 10-K 2003





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##### Table of Contents






LodgeNet Entertainment Corporation and Subsidiaries
Consolidated Statements of Operations
(Dollar amounts in thousands, except share data)

|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |         |         | 
|--------------------------------------------------------------------------- | ----------------------------------- | --------------------------------------------------------------------------------- | ---------- | ------------------------ | ------- | ---- | ---------- | ------- | ------- | - | ---------- | ------- | ------- | 
|                                                                            |                                     |                                                                                   |            | Years Ended December 31,
|                                                                            |                                     |                                                                                   |            |                         
|                                                                            |                                     |                                                                                   |            | 2003                     |         | 2002 |            | 2001   
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |        
|Revenues:                                                                   |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |        
|                                                                            | Guest Pay                           |                                                                                   | $          | 243,732                  |         |      | $          | 226,238 |         |   | $          | 206,001 |        
|                                                                            | Other                               |                                                                                   |            | 6,417                    |         |      |            | 8,752   |         |   |            | 10,894  |        
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |         |        
|                                                                            |                                     | Total revenues                                                                    |            |                          | 250,149 |      |            |         | 234,990 |   |            |         | 216,895 | 
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |        
|Direct costs:                                                               |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |        
|                                                                            | Guest Pay                           |                                                                                   |            | 108,916                  |         |      |            | 96,043  |         |   |            | 85,288  |        
|                                                                            | Other                               |                                                                                   |            | 3,031                    |         |      |            | 4,739   |         |   |            | 6,802   |        
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |         |        
|                                                                            |                                     | Total direct costs (exclusive of other operating
expenses shown separately below) |            |                          | 111,947 |      |            |         | 100,782 |   |            |         | 92,090  | 
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |        
|Gross profit (exclusive of other operating expenses
shown separately below) |                                     |                                                                                   | 138,202    |                          |         |      | 134,208    |         |         |   | 124,805    |        
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |        
|Operating expenses:                                                         |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |        
|                                                                            | Guest Pay operations                |                                                                                   |            | 31,597                   |         |      |            | 30,207  |         |   |            | 28,698  |        
|                                                                            | Selling, general and administrative |                                                                                   |            | 21,646                   |         |      |            | 22,108  |         |   |            | 20,979  |        
|                                                                            | Depreciation and amortization       |                                                                                   |            | 78,459                   |         |      |            | 75,918  |         |   |            | 66,008  |        
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |         |        
|                                                                            |                                     | Total operating expenses                                                          |            |                          | 131,702 |      |            |         | 128,233 |   |            |         | 115,685 | 
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |        
|Operating income                                                            |                                     |                                                                                   | 6,500      |                          |         |      | 5,975      |         |         |   | 9,120      |        
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |         |         | 
|Investment gains (losses)                                                   |                                     |                                                                                   | 250        |                          |         |      | 872        |         |         |   | (2,790     | )      
|Litigation settlements                                                      |                                     |                                                                                   |           |                          |         |      | (2,700     | )       |         |   |           |        
|Loss on early retirement of debt                                            |                                     |                                                                                   | (7,061     | )                        |         |      |           |         |         |   | (2,091     | )      
|Interest expense                                                            |                                     |                                                                                   | (34,239    | )                        |         |      | (33,037    | )       |         |   | (30,306    | )      
|Other income (expense), net                                                 |                                     |                                                                                   | (43        | )                        |         |      | 314        |         |         |   | 348        |        
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |        
|Loss before income taxes                                                    |                                     |                                                                                   | (34,593    | )                        |         |      | (28,576    | )       |         |   | (25,719    | )      
|Provision for income taxes                                                  |                                     |                                                                                   | (459       | )                        |         |      | (550       | )       |         |   | (689       | )      
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |        
|Net loss                                                                    |                                     | $                                                                                 | (35,052    | )                        |         | $    | (29,126    | )       |         | $ | (26,408    | )      
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |        
|Net loss per common share (basic and diluted)                               |                                     | $                                                                                 | (2.80      | )                        |         | $    | (2.35      | )       |         | $ | (2.16      | )      
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |        
|Weighted average shares outstanding (basic and diluted)                     |                                     |                                                                                   | 12,512,725 |                          |         |      | 12,378,678 |         |         |   | 12,248,301 |        
|                                                                            |                                     |                                                                                   |            |                          |         |      |            |         |         |   |            |        

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

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-5 |  | Form 10-K 2003





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##### Table of Contents






LodgeNet Entertainment Corporation and Subsidiaries
Consolidated Statements of Stockholders Equity (Deficiency)
(Dollar amounts in thousands, except share data)

|                           |                              |                                                  |            |              |   |            |     |             |   |               |         |               |   |       |          |   |         |   |         |             |        |   |          |       |         |  
|-------------------------- | ---------------------------- | ------------------------------------------------ | ---------- | ------------ | - | ---------- | --- | ----------- | - | ------------- | ------- | ------------- | - | ----- | -------- | - | ------- | - | ------- | ----------- | ------ | - | -------- | ----- | ------- | -
|                           |                              |                                                  |            |              |   |            |     |             |   |               |         |               |   |       |          |   |         |   |         | Accumulated |        |   |          |      
|                           |                              |                                                  |            | Common Stock |   | Additional |     |             |   |               |         | Other         |   |       |          |  
|                           |                              |                                                  |            |              |   | Paid-in    |     | Accumulated |   | Comprehensive |         |               |   |      
|                           |                              |                                                  |            | Shares       |   | Amount     |     | Capital     |   | Deficit       |         | Income/(Loss) |   | Total
|                           |                              |                                                  |            |              |   |            |     |             |   |               |         |               |   |      
|Balance, December 31, 2000 |                              |                                                  | 12,212,039 |              |   | $          | 122 |             |   | $             | 150,663 |               |   | $     | (185,981 | ) |         | $ | (1,230  | )           |        | $ | (36,426  | )    
|                           | Common stock option activity |                                                  |            | 72,959       |   |            |     | 1           |   |               |         | 793           |   |       |          |  |         |   |         |            |        |   |          | 794   |        
|                           | Warrants issued (Note 13)    |                                                  |            |             |   |            |     |            |   |               |         | 534           |   |       |          |  |         |   |         |            |        |   |          | 534   |        
|                           | Comprehensive loss:          |                                                  |            |              |   |            |     |             |   |               |         |               |   |       |          |   |         |   |         |             |        |   |          |       |        
|                           |                              | Net loss                                         |            |              |  |            |     |             |  |               |         |               |  |       |          |   | (26,408 | ) |         |             |       |   |          |       |         |  
|                           |                              | Foreign currency
translation adjustment          |            |              |  |            |     |             |  |               |         |               |  |       |          |   |        |   |         |             | (693   | ) |          |       |         |  
|                           |                              | Cumulative effect of
adoption of SFAS No. 133    |            |              |  |            |     |             |  |               |         |               |  |       |          |   |        |   |         |             | (1,287 | ) |          |       |         |  
|                           |                              | Unrealized gain (loss) on
derivative instruments |            |              |  |            |     |             |  |               |         |               |  |       |          |   |        |   |         |             | (4,082 | ) |          |       |         |  
|                           |                              | Comprehensive loss                               |            |              |  |            |     |             |  |               |         |               |  |       |          |   |        |   |         |             |       |   |          |       | (32,470 | )
|                           |                              |                                                  |            |              |   |            |     |             |   |               |         |               |   |       |          |   |         |   |         |             |        |   |          |      
|Balance, December 31, 2001 |                              |                                                  | 12,284,998 |              |   | $          | 123 |             |   | $             | 151,990 |               |   | $     | (212,389 | ) |         | $ | (7,292  | )           |        | $ | (67,568  | )    
|                           | Common stock option activity |                                                  |            | 146,151      |   |            |     | 1           |   |               |         | 1,030         |   |       |          |  |         |   |         |            |        |   |          | 1,031 |        
|                           | Warrants issued (Note 13)    |                                                  |            |             |   |            |     |            |   |               |         | 343           |   |       |          |  |         |   |         |            |        |   |          | 343   |        
|                           | Comprehensive loss:          |                                                  |            |              |   |            |     |             |   |               |         |               |   |       |          |   |         |   |         |             |        |   |          |       |        
|                           |                              | Net loss                                         |            |              |  |            |     |             |  |               |         |               |  |       |          |   | (29,126 | ) |         |             |       |   |          |       |         |  
|                           |                              | Foreign currency
translation adjustment          |            |              |  |            |     |             |  |               |         |               |  |       |          |   |        |   |         |             | 89     |   |          |       |         |  
|                           |                              | Unrealized gain (loss) on
derivative instruments |            |              |  |            |     |             |  |               |         |               |  |       |          |   |        |   |         |             | (6,073 | ) |          |       |         |  
|                           |                              | Comprehensive loss                               |            |              |  |            |     |             |  |               |         |               |  |       |          |   |        |   |         |             |       |   |          |       | (35,110 | )
|                           |                              |                                                  |            |              |   |            |     |             |   |               |         |               |   |       |          |   |         |   |         |             |        |   |          |      
|Balance, December 31, 2002 |                              |                                                  | 12,431,149 |              |   | $          | 124 |             |   | $             | 153,363 |               |   | $     | (241,515 | ) |         | $ | (13,276 | )           |        | $ | (101,304 | )    
|                           | Common stock option activity |                                                  |            | 291,118      |   |            |     | 3           |   |               |         | 1,399         |   |       |          |  |         |   |         |            |        |   |          | 1,402 |        
|                           | Warrants issued (Note 13)    |                                                  |            |             |   |            |     |            |   |               |         | 401           |   |       |          |  |         |   |         |            |        |   |          | 401   |        
|                           | Comprehensive loss:          |                                                  |            |              |   |            |     |             |   |               |         |               |   |       |          |   |         |   |         |             |        |   |          |       |        
|                           |                              | Net loss                                         |            |              |  |            |     |             |  |               |         |               |  |       |          |   | (35,052 | ) |         |             |       |   |          |       |         |  
|                           |                              | Foreign currency
translation adjustment          |            |              |  |            |     |             |  |               |         |               |  |       |          |   |        |   |         |             | 2,504  |   |          |       |         |  
|                           |                              | Unrealized gain (loss) on
derivative instruments |            |              |  |            |     |             |  |               |         |               |  |       |          |   |        |   |         |             | 3,047  |   |          |       |         |  
|                           |                              | Comprehensive loss                               |            |              |  |            |     |             |  |               |         |               |  |       |          |   |        |   |         |             |       |   |          |       | (29,501 | )
|                           |                              |                                                  |            |              |   |            |     |             |   |               |         |               |   |       |          |   |         |   |         |             |        |   |          |      
|Balance, December 31, 2003 |                              |                                                  | 12,722,267 |              |   | $          | 127 |             |   | $             | 155,163 |               |   | $     | (276,567 | ) |         | $ | (7,725  | )           |        | $ | (129,002 | )    
|                           |                              |                                                  |            |              |   |            |     |             |   |               |         |               |   |       |          |   |         |   |         |             |        |   |          |      

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

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-6 |  | Form 10-K 2003





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##### Table of Contents






LodgeNet Entertainment Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(Dollar amounts in thousands)

|                                                 |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |         |        |       |  
|------------------------------------------------ | ------------------------------------------------------------------------------- | ------------------------------------------- | ------------------------------------- | -------- | ------------------------ | ----- | ------- | ------- | ------ | ------ | ------- | ------- | ------ | ----- | -
|                                                 |                                                                                 |                                             |                                       |          | Years Ended December 31,
|                                                 |                                                                                 |                                             |                                       |          |                         
|                                                 |                                                                                 |                                             |                                       |          | 2003                     |       | 2002    |         | 2001  
|                                                 |                                                                                 |                                             |                                       |          |                          |       |         |         |       
|Operating activities:                            |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |        
|                                                 | Net loss                                                                        |                                             | $                                     | (35,052  | )                        |       | $       | (29,126 | )      |        | $       | (26,408 | )     
|                                                 | Adjustments to reconcile net loss to net cash provided
by operating activities: |                                             |                                       |          |                          |       |         |         |        |        |         |         |       
|                                                 |                                                                                 | Depreciation and amortization               |                                       |          | 78,459                   |       |         |         | 75,918 |        |         |         | 66,008 |      
|                                                 |                                                                                 | Investment (gains) losses                   |                                       |          | (250                     | )     |         |         | (872   | )      |         |         | 2,790  |      
|                                                 |                                                                                 | Loss on early retirement of debt            |                                       |          | 2,477                    |       |         |         |       |        |         |         | 2,091  |      
|                                                 |                                                                                 | Change in operating assets and liabilities: |                                       |          |                          |       |         |         |        |        |         |         |        |      
|                                                 |                                                                                 |                                             | Accounts receivable                   |          |                          | 499   |         |         |        | (1,684 | )       |         |        | (212  | )
|                                                 |                                                                                 |                                             | Prepaid expenses and other            |          |                          | 580   |         |         |        | (844   | )       |         |        | 1,080 |  
|                                                 |                                                                                 |                                             | Accounts payable                      |          |                          | 2,120 |         |         |        | (1,694 | )       |         |        | 1,435 |  
|                                                 |                                                                                 |                                             | Accrued expenses and deferred revenue |          |                          | (162  | )       |         |        | 2,208  |         |         |        | (86   | )
|                                                 |                                                                                 |                                             | Other                                 |          |                          | (108  | )       |         |        | (137   | )       |         |        | (221  | )
|                                                 |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |        
|Net cash provided by operating activities        |                                                                                 |                                             | 48,563                                |          |                          |       | 43,769  |         |        |        | 46,477  |        
|                                                 |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |        
|Investing activities:                            |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |        
|                                                 | Property and equipment additions                                                |                                             |                                       | (52,868  | )                        |       |         | (72,115 | )      |        |         | (78,386 | )     
|                                                 | Proceeds from sale of investments                                               |                                             |                                       |         |                          |       |         |        |        |        |         | 1,393   |       
|                                                 | Note receivable advances                                                        |                                             |                                       | (1,000   | )                        |       |         |        |        |        |         |        |       
|                                                 | Proceeds from (investments in) affiliates, net                                  |                                             |                                       | 250      |                          |       |         | 1,407   |        |        |         | (1,002  | )     
|                                                 |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |         |       
|Net cash used for investing activities           |                                                                                 |                                             | (53,618                               | )        |                          |       | (70,708 | )       |        |        | (77,995 | )      
|                                                 |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |        
|Financing activities:                            |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |        
|                                                 | Proceeds from long-term debt                                                    |                                             |                                       | 200,000  |                          |       |         |        |        |        |         | 150,000 |       
|                                                 | Repayment of long-term debt                                                     |                                             |                                       | (158,301 | )                        |       |         | (7,542  | )      |        |         | (81,428 | )     
|                                                 | Payment of capital lease obligations                                            |                                             |                                       | (1,052   | )                        |       |         | (707    | )      |        |         | (498    | )     
|                                                 | Borrowings under revolving credit facility                                      |                                             |                                       | 30,500   |                          |       |         | 40,000  |        |        |         | 27,000  |       
|                                                 | Repayments of revolving credit facility                                         |                                             |                                       | (57,500  | )                        |       |         | (6,000  | )      |        |         | (61,000 | )     
|                                                 | Debt issuance costs                                                             |                                             |                                       | (7,902   | )                        |       |         | (269    | )      |        |         | (5,829  | )     
|                                                 | Exercise of stock options                                                       |                                             |                                       | 1,402    |                          |       |         | 1,031   |        |        |         | 794     |       
|                                                 | Payment of other long-term liability                                            |                                             |                                       | (779     | )                        |       |         |        |        |        |         |        |       
|                                                 |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |        
|Net cash provided by financing activities        |                                                                                 |                                             | 6,368                                 |          |                          |       | 26,513  |         |        |        | 29,039  |        
|                                                 |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |        
|Effect of exchange rates on cash                 |                                                                                 |                                             | 352                                   |          |                          |       | 5       |         |        |        | (52     | )      
|                                                 |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |        
|Increase (decrease) in cash and cash equivalents |                                                                                 |                                             | 1,665                                 |          |                          |       | (421    | )       |        |        | (2,531  | )      
|Cash and cash equivalents at beginning of period |                                                                                 |                                             | 1,107                                 |          |                          |       | 1,528   |         |        |        | 4,059   |        
|                                                 |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |         |       
|Cash and cash equivalents at end of period       |                                                                                 | $                                           | 2,772                                 |          |                          | $     | 1,107   |         |        | $      | 1,528   |        
|                                                 |                                                                                 |                                             |                                       |          |                          |       |         |         |        |        |         |        

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

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-7 |  | Form 10-K 2003





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##### Table of Contents






LodgeNet Entertainment Corporation and Subsidiaries
Notes to Consolidated Financial Statements

Note 1  The Company

LodgeNet Entertainment Corporation is one of the worlds largest and leading
providers of interactive television systems and broadband services to hotels,
resorts and casinos throughout the United States and Canada, as well as select
international markets. It is estimated that more than 260 million guests a year
have access to a wide variety of LodgeNets interactive television services,
which are designed to make their stay more enjoyable, productive and
convenient. As of December 31, 2003, the Company provided television services
to approximately 5,800 hotel properties serving nearly one million rooms.

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

The rapid growth of the Companys business has historically required capital
resources in excess of operating cash flows. The Company believes that its
operating cash flows and borrowings available under its Credit Facility will be
sufficient to fund the Companys future growth plans, financing obligations and
its negative working capital. However, if operating cash flows are
significantly below the amount anticipated in its current business plan, the
Company would cover the short fall through any combination of additional
borrowings available under its current Credit Facility, a reduction in capital
spending and/or a reduction in operating expenses.

Note 2  Summary of Significant Accounting Policies

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

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

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

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

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-8 |  | Form 10-K 2003





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##### Table of Contents



Property and EquipmentThe Companys property and equipment is stated at
cost, net of accumulated depreciation and amortization. Installed Guest Pay
and free-to-guest systems consist of equipment, related costs of installation,
including certain payroll costs, sales commissions and customer acquisition
costs. Maintenance costs, which do not significantly extend the useful lives of
the respective assets, and repair costs are charged to Guest Pay operations as
incurred. The Company begins depreciating Guest Pay and free-to-guest systems
when such systems are installed and activated. Depreciation of other equipment
begins when such equipment is placed in service. The Company attributes no
salvage value to equipment, and depreciation and amortization are computed
using the straight-line method over the following useful lives:

|                   |                            |  |        |       | 
|------------------ | -------------------------- |  | ------ | ----- | 
|                   |                            |  | Years 
|                   |                            |  |       
|Buildings          |                            |  | 30     |      
|Guest Pay systems: |                            |  |        |      
|                   | Installed system costs     |  |        | 2 - 7 | 
|                   | Customer acquisition costs |  |        | 5 - 7 | 
|                   | System components          |  |        | 5 - 7 | 
|                   | Software costs             |  |        | 3 - 5 | 
|Other equipment    |                            |  | 3 - 10 |      

Allowance for Excess or Obsolete System ComponentsThe Company regularly
evaluates component levels to ascertain build requirements based on its backlog
and service requirements based on its current installed base. When a certain
system component becomes obsolete due to technological changes and it is
determined that the component cannot be utilized within its current installed
base, the Company records a provision for excess and obsolete component
inventory based on estimated forecasts of product demand and service
requirements. The Company makes every effort to ensure the accuracy of its
forecasts of service requirements and future production, however any
significant unanticipated changes in demand or technological advances could
have an impact on the value of system components and reported operating
results.

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 $1,993,000, $2,705,000 and $1,152,000 during the years
ended December 31, 2003, 2002 and 2001, respectively, and amortization of such
costs was $2,471,000, $1,896,000 and $1,529,000, respectively. The Company
charged $671,000, $814,000, and $842,000 to operations for each of the years
presented related to research and development activities.

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

The Companys Guest Pay revenue consists of services that are purchased by
guests on a per-view, hourly, or daily basis and include on-demand movies,
music and music videos, video games, Internet on television (which does not
require a laptop), and television on-demand programs. Guest Pay packages may
also include additional satellite-delivered basic and premium television, video
review of room charges, video checkout, guest surveying, and merchandising
services that are paid for by the hotel and provided to guests at no charge.
In addition, the Company provides high-speed laptop Internet access services
that hotels can also provide to their guests. The primary direct costs of
providing Guest Pay interactive services are (i) license fees based on a
percent of guest-generated revenue paid to studios for non-exclusive
distribution rights to recently-released major motion pictures; (ii) nominal
one-time license fees paid for independent films, most of which are non-rated
and intended for mature audiences; (iii) license fees based on a percent of
guest-generated revenue for television on demand, music, music videos and video
games; (iv) fixed monthly programming charges paid primarily to DIRECTV for
satellite-delivered basic and premium television programming; (v) Internet connectivity costs; and (vi) the
commission retained by the hotel. Guest Pay operating

|                                   |  |     |  |               
|---------------------------------- |  | --- |  | --------------
|LodgeNet Entertainment Corporation |  | F-9 |  | Form 10-K 2003





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##### Table of Contents



expenses include costs
of system maintenance and support, programming delivery and distribution, data
retrieval, insurance, and personal property taxes.

Concentration of Credit Risks and Customer DataThe Company derives virtually
all of its revenue from entities in the lodging industry. During 2003, hotels
owned, managed or franchised by Hilton Hotels Corporation (Hilton) represented
approximately 12.5% of the Companys consolidated revenue. The loss of this
hotel chain customer could have a material adverse effect on the Companys
results of operations and financial condition.

Allowance for Doubtful AccountsThe Company determines the estimate of the
allowance for doubtful accounts considering several factors, including: (1)
historical experience, (2) aging of the accounts receivable, and (3) contract
terms between the hotel and the Company. In accordance with the Companys hotel
contracts, monies collected by the hotel for interactive television services
are held in trust on behalf of the Company. Collectibility is reasonably
assured as supported by the Companys nominal write-off history. If the
financial condition of a hotel chain or group of hotels were to deteriorate and
reduce the ability to remit the Companys monies, the Company may be required
to increase its allowance by recording additional bad debt expense. The
allowance for doubtful accounts was $300,000 at December 31, 2003 and 2002.
The provision for doubtful accounts was $313,000 in 2003, $754,000 in 2002,
which included $471,000 of uncollectible receivables from the termination of
InnMedia, and $148,000 in 2001.

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

In August 2003, the Company entered into a $50 million interest rate swap
agreement, which expires in June 2013, to effectively change the underlying
debt from a fixed interest rate to a variable interest rate. The swap
agreement has been designated as, and meets the criteria for, a fair value
hedge. In addition, the Company had existing interest rate swap agreements on
$100 million of long-term debt, of which $50 million expires in December 2005
and $50 million expires in March 2006, to effectively change the underlying
debt from a variable interest rate to a fixed interest rate for the term of the
swap agreements. The swap agreements have been designated as, and meet the
criteria for, cash flow hedges. The Company is required by its bank Credit
Facility to have a minimum of 50% of its term loan balance covered under
interest rate swap arrangements and cannot exceed $150 million in swap
agreements. The Company does not utilize these instruments for speculative or
trading purposes. Net amounts paid or received are reflected as adjustments to
interest expense.

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. Valuation allowances are established when
necessary to reduce deferred tax assets to the amount expected to be realized.

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

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-10 |  | Form 10-K 2003





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##### Table of Contents



|                           |                      |   |                |        |             |   |               |       |   |   |         |        |  
|-------------------------- | -------------------- | - | -------------- | ------ | ----------- | - | ------------- | ----- | - | - | ------- | ------ | -
|                           |                      |   | Unrealized     |        | Foreign     |   | Accumulated  
|                           |                      |   | Gain (Loss) on |        | Currency    |   | Other        
|                           |                      |   | Derivative     |        | Translation |   | Comprehensive
|                           |                      |   | Instruments    |        | Adjustment  |   | Income (Loss)
|                           |                      |   |                |        |             |   |              
|Balance, December 31, 2000 |                      | $ |               |        |             | $ | (1,230        | )     |   | $ | (1,230  | )     
|                           | Change during period |   |                | (5,369 | )           |   |               | (693  | ) |   |         | (6,062 | )
|                           |                      |   |                |        |             |   |               |       |   |   |         |       
|Balance, December 31, 2001 |                      |   | (5,369         | )      |             |   | (1,923        | )     |   |   | (7,292  | )     
|                           | Change during period |   |                | (6,073 | )           |   |               | 89    |   |   |         | (5,984 | )
|                           |                      |   |                |        |             |   |               |       |   |   |         |       
|Balance, December 31, 2002 |                      |   | (11,442        | )      |             |   | (1,834        | )     |   |   | (13,276 | )     
|                           | Change during period |   |                | 3,047  |             |   |               | 2,504 |   |   |         | 5,551  |  
|                           |                      |   |                |        |             |   |               |       |   |   |         |       
|Balance, December 31, 2003 |                      | $ | (8,395         | )      |             | $ | 670           |       |   | $ | (7,725  | )     
|                           |                      |   |                |        |             |   |               |       |   |   |         |       

Earnings Per Share ComputationThe Company follows SFAS No. 128, Earnings
Per Share which requires the computation and disclosure of basic and diluted
earnings per share (EPS). Basic EPS is computed based only on the weighted
average number of common shares actually outstanding during the period.
Diluted EPS is computed based on the weighted average number of common shares
outstanding plus all potentially dilutive common shares outstanding during the
period. Potential common shares that have an anti-dilutive effect are excluded
from diluted earnings per share.

The loss per common share for the three years ended December 31, 2003, 2002 and
2001, is based on 12,512,725, 12,378,678 and 12,248,301 weighted average shares
outstanding during the respective periods. Weighted average options to purchase
2,858,237, 2,612,861, and 2,261,948 shares of common stock and warrants to
purchase 2,122,000, 2,059,000, and 2,004,000 shares of common stock were not
included in computing diluted EPS because their effects were antidilutive for
each of the years presented.

Stock-based CompensationThe Company measures compensation costs associated
with its stock option plans using the intrinsic value method. Accordingly,
compensation cost for stock options is measured as the excess, if any, of the
quoted market price of the Companys stock at the date of grant over the amount
an employee must pay to acquire the stock. Had compensation costs been
determined based on the fair value method at the date of grant for awards, net
loss and loss per share would have changed to the pro forma amounts as follows
for the years ended December 31 (in thousands of dollars, except per share
amounts):

|                                                                                                              |             |   |         |       |      |   |         |       |   |   |         |       |  
|------------------------------------------------------------------------------------------------------------- | ----------- | - | ------- | ----- | ---- | - | ------- | ----- | - | - | ------- | ----- | -
|                                                                                                              |             |   | 2003    |       | 2002 |   | 2001   
|                                                                                                              |             |   |         |       |      |   |        
|Net loss, as reported                                                                                         |             | $ | (35,052 | )     |      | $ | (29,126 | )     |   | $ | (26,408 | )    
|Add: stock based employee compensation expense
determined under fair value method, net
of related tax
effects |             |   | (3,839  | )     |      |   | (4,385  | )     |   |   | (2,924  | )    
|                                                                                                              |             |   |         |       |      |   |         |       |   |   |         |      
|Net loss, pro forma                                                                                           |             | $ | (38,891 | )     |      | $ | (33,511 | )     |   | $ | (29,332 | )    
|                                                                                                              |             |   |         |       |      |   |         |       |   |   |         |      
|Loss per share (basic and diluted)                                                                            |             |   |         |       |      |   |         |       |   |   |         |      
|                                                                                                              | As reported |   | $       | (2.80 | )    |   | $       | (2.35 | ) |   | $       | (2.16 | )
|                                                                                                              | Pro forma   |   |         | (3.11 | )    |   |         | (2.71 | ) |   |         | (2.39 | )

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

Statements of Cash FlowsCash equivalents are comprised of demand deposits
and temporary investments in highly liquid securities having original
maturities of 90 days or less at the date of purchase. Cash paid for interest
was $34,636,000, $33,059,000, and $32,076,000 during the years ended December
31, 2003, 2002, and 2001, respectively. Equipment acquired under capital lease
arrangements totaled $785,000, $2,208,000, and $1,100,000 during the years
ended December 31, 2003, 2002, and 2001, respectively. During 2003, 2002 and
2001, the Company issued 65,808, 48,042 and 48,156 stock purchase warrants valued at $401,000, $343,000 and
$534,000,

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-11 |  | Form 10-K 2003





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##### Table of Contents



respectively to Hilton Hotels Corporation (Hilton) to acquire rights
to deliver interactive television services in Hilton hotels.

Effect of Recently Issued Accounting StandardsIn December 2002, the
Financial Accounting Standards Board issued SFAS No. 148, Accounting for Stock
Based CompensationTransition and Disclosureas Amendment to FAS 123. SFAS 148
provides two additional transition methods for entities that adopt the
preferable method of accounting for stock based compensation. In addition, the
statement requires disclosure of comparable information for all companies
regardless of whether, when, or how an entity adopts the preferable, fair value
based method of accounting. These disclosures are now required for interim
periods in addition to the traditional annual disclosure. The amendments to
SFAS No. 123, which provide for additional transition methods, were effective
for periods beginning after December 15, 2002, although earlier application was
permitted. Certain disclosure amendments were required for financial statements
for fiscal years ending after December 15, 2002, and have been reflected in
these consolidated financial statements. The remaining amendments to the
disclosure requirements were required for financial reports containing
condensed financial statements for interim periods beginning after December 15,
2002. The Company adopted the disclosure provisions of this statement and had
no impact to the consolidated financial statements.

In January 2003, the FASB issued FASB Interpretation No. 46, Consolidation of
Variable Interest Entities and issued a revised interpretation in December
2003 (FIN 46R). FIN 46R requires that if a business enterprise has a
controlling financial interest in a variable interest entity, the assets,
liabilities, and results of the activities of the variable interest entity must
be included in the consolidated financial statements with those of the business
enterprise. FIN 46R must be applied for periods ending after March 15, 2004,
and is effective immediately for all variable interest entities created after
January 31, 2003. The Company does not have ownership in any variable interest
entities and the adoption of FIN 46R had no impact on the Companys financial
condition or results of operations.

In April 2003, the FASB issued Statement of Financial Accounting Standards No.
149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. This statement amends SFAS 133 to provide clarification on the
financial accounting and reporting of derivative instruments and hedging
activities and requires contracts with similar characteristics to be accounted
for on a comparable basis. SFAS 149 is effective for contracts entered into or
modified after June 30, 2003. The adoption of this statement, effective July 1,
2003, had no effect on the Companys financial condition or results of
operations.

In May 2003, the FASB issued SFAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of Both Liabilities and Equity. SFAS No. 150
requires that certain financial instruments issued in the form of shares that
are mandatory redeemable as well as certain other financial instruments be
classified as liabilities in the financial statements. SFAS No. 150 was
effective for financial instruments entered into or modified after May 31, 2003
and otherwise it was generally effective on July 1, 2003. The adoption of this
statement had no impact on the Companys consolidated financial position or
results of operations.

In May 2003, the FASB Emerging Issues Task Force (EITF) reached a final
consensus on EITF 00-21, Accounting for Revenue Arrangements with Multiple
Deliverables. EITF 00-21 addresses how to account for multiple-deliverable
revenue arrangements and focuses on when a revenue arrangement should be
separated into different revenue-generating deliverables or units of
accounting and if so, how the arrangement considerations should be allocated
to the different deliverables or units of accounting. The provisions of EITF
00-21 were effective for revenue arrangements entered into at the beginning of
the first interim period after June 15, 2003. The adoption of EITF 00-21 did
not have an impact on the Companys consolidated financial position or results
of operations.

In December 2003, the Securities and Exchange Commission issued Staff
Accounting Bulletin No. 104 (SAB No. 104), Revenue Recognition, which
codifies, revises and rescinds certain sections of SAB No. 101, Revenue
Recognition, in order to make this interpretive guidance consistent with
current authoritative accounting and auditing guidance and SEC rules and
regulations. The changes noted in SAB No. 104 had no impact on the Companys
consolidated financial position or results of operations.

|                                   |  |      |  |               
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|LodgeNet Entertainment Corporation |  | F-12 |  | Form 10-K 2003





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Note 3  Investments

Gamet and PointOne In the first quarter of 2003, the Company entered into an
agreement with Gamet Technology, Inc (Gamet), a company engaged in the casino
system technology industry, to form a limited liability company, PointOne
Technologies, LLC (PointOne). The business purpose of PointOne was to engage
in the development of server-based gaming systems for the casino industry by
utilizing some of the Companys intellectual property. The Company entered into
a technology licensing agreement with PointOne, for which the Company received
a 37.5% equity interest in PointOne, which could be diluted to less than 20%
under certain circumstances. The Companys contribution consisted of the
license of certain technology rights to PointOne, and accordingly did not
record an investment in PointOne as an asset. Gamet also contributed certain
intellectual property related to server-based gaming to PointOne and entered
into a technology licensing agreement with PointOne for other owned software,
pursuant to which Gamet received a 62.5% equity interest in PointOne.

Other than the non-exclusive and non-transferable rights to utilize the
Companys licensed technology, the Company did not provide additional funding
nor was the Company obligated or committed to providing any current and future
funds to PointOne. The Company also reserved the right to terminate its
technology licensing agreement if PointOne did not attain a specified level of
funding by September of 2003. PointOne raised $850,000 in financing from
private investors. However, PointOne was not able to obtain additional funds
through permanent equity financing or other sources. In May 2003, PointOnes
operations were suspended. The parties are currently in dispute regarding the
ultimate disposition of PointOne and its technology. During the second quarter,
the Company provided certain services to PointOne for which the Company
invoiced approximately $100,000. This amount due from PointOne was fully
reserved as a bad debt expense during the second quarter of 2003.

During the first quarter of 2003, the Company advanced $1.0 million to Gamet
pursuant to a written promissory note. The note is personally guaranteed by the
principal owners of Gamet and collateralized by the unconditional assignment of
rights to receive quarterly payments due to the principal owner pursuant to a
long-term note held by the principal owner in connection with the sale of a
prior business. The note was due and payable on April 18, 2003. On July 2,
2003, the Company filed a lawsuit in U.S. District Court, Southern Division, in
South Dakota, against Gamet and against Steve and Margaret Urie (the Uries)
Gamets principal owners demanding payment of the promissory note. On August
12, 2003, the defendants submitted an answer denying liability on the Note.
Gamet also asserted a counterclaim against LodgeNet alleging that LodgeNets
failure to procure private financing for PointOne Technologies, L.L.C., a joint
venture between LodgeNet and Gamet, caused Gamet to suffer damages in an
undetermined amount. On December 29, 2003, the Uries and various companies
owned or controlled by the Uries, including Gamet, filed for Chapter 11
reorganization in the U.S. Bankruptcy Court of the District of Nevada. It is
expected that the various bankruptcy cases will be consolidated for court
management and trustee administration purposes into one case. As a result of
the bankruptcy filings, LodgeNets claims against the Uries and Gamet are
stayed. Based on the Companys current expectation, collection on the Note is
expected to begin in 2005 and complete by 2008.

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

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

|                                   |  |      |  |               
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|LodgeNet Entertainment Corporation |  | F-13 |  | Form 10-K 2003





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##### Table of Contents



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

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

ResNet Merger/GICC Investment- In November 1998, the operations of the
Companys majority-owned subsidiary, ResNet Communications, LLC (ResNet),
were merged with two non-affiliated entities to form Global Interactive
Communications Corporation (GICC). GICCs business consisted of providing
cable television programming and telecommunications services to the
multi-family dwelling unit market. The Company contributed net assets totaling
$31.3 million in exchange for a 30% equity interest in GICC and notes
receivable totaling $10.8 million. The Company accounted for its investment in
GICC using the equity method of accounting and recorded a loss of $183,000 for
the year ended 2001. In the second quarter of 2001, the Company transferred
its equity interest back to GICC and had no further financing obligation to
GICC. GICC filed for bankruptcy protection in the third quarter of 2001. In
2002, the Company recovered the full amount of its receivable, which was
$316,000 as of December 31, 2001, and recorded an investment gain of $1.3
million from the $1.7 million in proceeds derived from the sale of GICCs
assets. The Company received the final proceeds in 2003 and recorded an
investment gain of $250,000.

Note 4  Fair Value of Financial Instruments

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

|                      |                           |  |          |          |       |  |          |          |       |  |   |          |   |  |   |          |  
|--------------------- | ------------------------- |  | -------- | -------- | ----- |  | -------- | -------- | ----- |  | - | -------- | - |  | - | -------- | -
|                      |                           |  | 2003     |          | 2002 
|                      |                           |  |          |          |      
|                      |                           |  | Carrying |          | Fair  |  | Carrying |          | Fair 
|                      |                           |  | Amount   |          | Value |  | Amount   |          | Value
|                      |                           |  |          |          |       |  |          |          |      
|Assets (Liabilities): |                           |  |          |          |       |  |          |          |       |  |   |          |   |  |   |         
|                      | Interest rate swaps       |  | $        | (8,396   | )     |  | $        | (8,396   | )     |  | $ | (11,443  | ) |  | $ | (11,443  | )
|                      | Other long-term liability |  | $        | (3,999   | )     |  | $        | (3,999   | )     |  | $ | (4,995   | ) |  | $ | (4,995   | )
|                      | Long-term debt            |  | $        | (368,248 | )     |  | $        | (387,328 | )     |  | $ | (353,790 | ) |  | $ | (347,070 | )

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

|                                   |  |      |  |               
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|LodgeNet Entertainment Corporation |  | F-14 |  | Form 10-K 2003





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##### Table of Contents



Note 5  Property and Equipment

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

|                                     |                            |       |          |         |         |      |          |         |         | 
|------------------------------------ | -------------------------- | ----- | -------- | ------- | ------- | ---- | -------- | ------- | ------- | 
|                                     |                            |       |          | 2003    |         | 2002
|                                     |                            |       |          |         |         |     
|Land, building and equipment         |                            | $     | 76,519   |         |         | $    | 73,152   |        
|Free-to-guest systems                |                            |       | 30,990   |         |         |      | 28,160   |        
|Guest Pay systems:                   |                            |       |          |         |         |      |          |        
|                                     | Installed system costs     |       |          | 428,757 |         |      |          | 403,366 |        
|                                     | Customer acquisition costs |       |          | 47,095  |         |      |          | 43,291  |        
|                                     | System components          |       |          | 27,674  |         |      |          | 28,867  |        
|                                     | Software costs             |       |          | 19,217  |         |      |          | 17,224  |        
|                                     |                            |       |          |         |         |      |          |        
|                                     |                            | Total |          |         | 630,252 |      |          |         | 594,060 | 
|Less - Depreciation and amortization |                            |       | (403,215 | )       |         |      | (350,404 | )      
|                                     |                            |       |          |         |         |      |          |        
|Property and equipment, net          |                            | $     | 227,037  |         |         | $    | 243,656  |        
|                                     |                            |       |          |         |         |      |          |        

Note 6  Debt Issuance Costs

Costs associated with the issuance of debt securities and with obtaining credit
facilities are capitalized and amortized over the term of the related borrowing
or facility. The Company capitalized $7,902,000, $269,000 and $5,829,000 of
debt issuance costs during the years ended December 31, 2003, 2002 and 2001,
respectively. Unamortized debt issuance costs of $2,091,000 and $2,477,000
were written off in 2003 and 2001, respectively resulting in a loss on early
retirement of debt (see Note 19). Amortization of the debt issuance costs was
$1,831,000 in 2003, $2,002,000 in 2002, and $1,178,000 in 2001. The components
of the debt issuance costs recorded in the balance sheets are as follows at
December 31 (in thousands of dollars):

|                         |  |      |        |      |  |   |        |  
|------------------------ |  | ---- | ------ | ---- |  | - | ------ | -
|                         |  | 2003 |        | 2002
|                         |  |      |        |     
|Debt issuance costs      |  | $    | 14,812 |      |  | $ | 13,851 |  
|Accumulated amortization |  |      | (3,776 | )    |  |   | (6,408 | )
|                         |  |      |        |      |  |   |        |  
|                         |  | $    | 11,036 |      |  | $ | 7,443  |  
|                         |  |      |        |      |  |   |        |  

Note 7  Intangible Assets

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

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

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|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-15 |  | Form 10-K 2003





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##### Table of Contents



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

|                                |                      |   |          |        |              |   |          |        |              |   |        |        |  |   |       |       | 
|------------------------------- | -------------------- | - | -------- | ------ | ------------ | - | -------- | ------ | ------------ | - | ------ | ------ |  | - | ----- | ----- | 
|                                |                      |   | 2003     |        | 2002        
|                                |                      |   |          |        |             
|                                |                      |   | Carrying |        | Accumulated  |   | Carrying |        | Accumulated 
|                                |                      |   | Amount   |        | Amortization |   | Amount   |        | Amortization
|                                |                      |   |          |        |              |   |          |        |             
|Assets subject to
amortization: |                      |   |          |        |              |   |          |        |              |   |        |        |  |   |       |      
|                                | Acquired technology  |   | $        | 14,291 |              |   | $        | 10,406 |              |   | $      | 14,291 |  |   | $     | 7,892 | 
|                                | Acquired intangibles |   |          | 5,774  |              |   |          | 1,636  |              |   |        | 5,774  |  |   |       | 481   | 
|                                | Other                |   |          | 539    |              |   |          | 292    |              |   |        | 539    |  |   |       | 189   | 
|                                |                      |   |          |        |              |   |          |        |              |   |        |        |  |   |       |      
|                                |                      | $ | 20,604   |        |              | $ | 12,334   |        |              | $ | 20,604 |        |  | $ | 8,562 |      
|                                |                      |   |          |        |              |   |          |        |              |   |        |        |  |   |       |      

The Company recorded amortization expense of $3,772,000, $2,548,000 and
$2,451,000 during the years ended December 31, 2003, 2002 and 2001,
respectively. The Company estimates amortization expense for the years ended
December 31, as follows: 2004  $3,631,000; 2005  $2,602,000; 2006 -
$1,307,000; 2007  $673,000. The future amortization expense is an estimate.
Actual amounts may change from such estimated amounts due to additional
intangible asset acquisitions, potential impairment, accelerated amortization,
or other events.

Note 8  Accrued Expenses

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

|                     |  |      |        |      |  |   |        | 
|-------------------- |  | ---- | ------ | ---- |  | - | ------ | 
|                     |  | 2003 |        | 2002
|                     |  |      |        |     
|Accrued taxes        |  | $    | 3,160  |      |  | $ | 3,143  | 
|Accrued compensation |  |      | 4,049  |      |  |   | 3,699  | 
|Accrued interest     |  |      | 1,559  |      |  |   | 1,956  | 
|Other                |  |      | 3,929  |      |  |   | 4,179  | 
|                     |  |      |        |      |  |   |        | 
|                     |  | $    | 12,697 |      |  | $ | 12,977 | 
|                     |  |      |        |      |  |   |        | 

Note 9  Long-term Debt and Credit Facilities

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

|                        |                           |   |         |         |      |   |         |         |  
|----------------------- | ------------------------- | - | ------- | ------- | ---- | - | ------- | ------- | -
|                        |                           |   | 2003    |         | 2002
|                        |                           |   |         |         |     
|Bank Credit Facility:   |                           |   |         |         |      |   |         |        
|                        | Bank term loan            |   | $       | 146,625 |      |   | $       | 148,125 |  
|                        | Revolving credit facility |   |         | 7,000   |      |   |         | 34,000  |  
|9.50% senior notes      |                           |   | 200,000 |         |      |   |        |        
|10.25% senior notes     |                           |   |        |         |      |   | 150,000 |        
|11.50% senior notes     |                           |   | 12,000  |         |      |   | 18,000  |        
|                        | Less unamortized discount |   |         | (82     | )    |   |         | (186    | )
|Capital leases          |                           |   | 2,705   |         |      |   | 3,050   |        
|Other                   |                           |   |        |         |      |   | 801     |        
|                        |                           |   |         |         |      |   |         |        
|                        |                           |   | 368,248 |         |      |   | 353,790 |        
|Less current maturities |                           |   | (8,638  | )       |      |   | (9,320  | )      
|                        |                           |   |         |         |      |   |         |        
|                        |                           | $ | 359,610 |         |      | $ | 344,470 |        
|                        |                           |   |         |         |      |   |         |        

Bank Credit Facility On August 29, 2001, the Company entered into a $225
million bank credit facility, comprised of a $150 million term loan and a $75
million revolving credit facility that may be increased to $100 million,
subject to certain limitations. The term loan matures in August 2008 and
quarterly repayments began in December 2001. The term loan bears interest at
the Companys option of (1) the banks base rate plus a margin of 2.75% or (2)
LIBOR plus a margin of 4.00%. In January 2004, the term loan was amended to
define the interest rate to be (1) the banks base rate plus a margin of 2.75%
or (2) LIBOR plus a margin of 3.50%. The term loan interest rate as of
December 31, 2003 was 5.16%. The revolving credit facility matures in August 2007 and borrowings
under the credit facility

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|LodgeNet Entertainment Corporation |  | F-16 |  | Form 10-K 2003





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##### Table of Contents



bear interest at the Companys option of (1) the
banks base rate plus a margin of from 1.00% to 1.75%, or (2) LIBOR plus a
margin of from 2.25% to 3.00%. The weighted average interest rate of the
revolving credit facility as of December 31, 2003, was 5.86%. Loans under the
Credit Facility are collateralized by a first priority security interest in all
of the Companys assets.

The facility provides for the issuance of letters of credit up to $10 million,
subject to customary terms and conditions. As of December 31, 2003, the
Company had outstanding letters of credit totaling $1.5 million.

The facility includes terms and conditions which require compliance in
accordance with a material adverse effect covenant as well as the maintenance
of certain financial ratios and place limitations on capital expenditures,
additional indebtedness, liens, investments, guarantees, asset sales and
certain payments or distributions in respect of the common stock. In June 2003,
the Company received consent to offer the 9.50% senior subordinated notes
described below, and amended its existing bank Credit Facility. The amendment
modified the covenants for maximum consolidated total leverage ratio and
minimum consolidated interest coverage ratio. The allowable maximum
consolidated total leverage ratio increased from 4.5 to 5.0 until the end of
the fourth quarter 2003 at which time, the ratio steps down to 4.75 times for
the first two quarters of 2004 and to 4.5 times for the last two quarters of
2004. The minimum consolidated interest coverage ratio change from 2.25 to
2.50 was deferred from the third quarter 2004 until the first quarter 2005. As
of December 31, 2003, the Companys leverage and interest coverage ratios were
4.39 and 2.44, respectively. Upon refinancing of the 10.25% Notes, the
Company, at its sole discretion and without the payment of any additional
costs, expenses or fees, extended the maturity dates of the term loan and the
revolver loan from June 2006 to August 2008 and August 2007, respectively. The
Company was in compliance with all covenants, terms and conditions of the bank
Credit Facility.

9.50% Senior Notes In June 2003, the Company issued $200 million of unsecured
9.50% Senior Subordinated Notes (the 9.50% Notes), due June 15, 2013. The
proceeds of the 9.50% Notes, which were issued at par, after underwriter fees
and offering expenses, were approximately $192.5 million. Approximately $154.8
million of such proceeds were used to redeem the outstanding principal amount
of the 10.25% Senior Notes, pay accrued interest, pay call premiums, and pay
related fees. Approximately $35 million of the proceeds were used to pay all
outstanding amounts under the Companys Credit Facility. The remaining
proceeds of approximately $2.7 million were placed in cash for use in funding
general corporate purposes.

The 9.50% Notes are unsecured, are subordinated in right of payment to all
existing and future senior debt of the Company and rank pari passuin right of
payment with any future senior subordinated indebtedness of the Company. The
9.50% Notes require semi-annual interest payments, commencing December 15,
2003, and contain covenants which restrict the ability of the Company to incur
additional indebtedness, create liens, pay dividends or make certain
distributions in respect to 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, 2003, the Company was in compliance with all covenants,
terms, and conditions of the 9.50% Notes.

The 9.50% Notes are redeemable at the option of the Company, in whole or in
part, on or after June 15, 2008, initially at 104.75% 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 June 15, 2011.
At any time prior to June 15, 2006, the Company may redeem up to 35% of the
aggregate principal amount at 109.50% of the principal amount (plus accrued and
unpaid interest) with the cash proceeds of certain equity offerings.

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 were unsecured, ranked pari passuin right of payment with future
unsubordinated unsecured indebtedness and ranked senior in right of payment to
all subordinated indebtedness of the Company. The 10.25% Notes required
semi-annual interest payments and contained certain covenants including
limitations on indebtedness, liens, guarantees, asset sales and certain
payments or distributions in respect to capital stock. On June 20, 2003, the
Company redeemed approximately 79% of its outstanding 10.25%
Notes at 102.688% of their principal amount, with the balance of the
outstanding 10.25% Notes redeemed on July 1, 2003 at 102.563% of their
principal amount, as part of its refinancing in which the 9.50% Notes were
issued.

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-17 |  | Form 10-K 2003





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##### Table of Contents



11.50% Senior Notes During 1995, the Company issued $30 million principal
amount of unsecured 11.50% senior notes (the 11.50% Notes). The 11.50% Notes
are unsecured, rank pari passuin right of payment with future unsubordinated
unsecured indebtedness and rank senior in right of payment to all subordinated
indebtedness of the Company. Annual principal payments of $6 million commenced
in July 2001 and continue through July 2005. The 11.50% Notes require
semi-annual interest payments and contain certain covenants including
limitations on indebtedness, liens, guarantees, asset sales and certain
payments or distributions in respect to capital stock. As of December 31,
2003, the Company was in compliance with all covenants, terms, and conditions
of the 11.50% Notes.

The Company issued a total of 480,000 warrants to purchase common stock of the
Company in connection with the issuance of the 11.50% Notes. Each warrant
entitles the holder to purchase one share of common stock at an exercise price
of $7.00 per share. 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.

Capital Leases As of December 31, 2003, the Company has total capital lease
obligations of $2,705,000. Equipment acquired under capital lease
arrangements totaled $785,000, $2,208,000, and $1,100,000 during the years
ended December 31, 2003, 2002, and 2001, respectively.

Long-term debt has the following scheduled principal maturities for the years
ended December 31 (in thousands of dollars): 2004  $8,638; 2005  $8,296; 2006
- $2,083; 2007  $8,604; 2008  $140,625, beyond 2008  $200,000.

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

Note 10  Commitments and Contingencies

Programming Agreements The Company obtains non-exclusive rights to show
recently released major motion pictures from motion picture studios pursuant to
an agreement with each studio that is typically two to three years in length.
The royalty rate for each movie is pre-determined, with the studio receiving a
percentage of the gross revenue from the movie. For its television on-demand
programming, the Company obtains rights to release television on-demand content
for which the Company pays a predetermined percentage of gross revenue or a
one-time fixed fee. The Company obtains independent films, most of which are
non-rated and intended for mature audiences, for a one-time fixed fee. The
Company also obtains non-exclusive rights to digital music content through an
agreement with a third party vendor, whereby the Company pays a predetermined
percentage of the gross revenue from the music service. The Company obtains
its selection of Nintendo video games pursuant to a non-exclusive license
agreement with Nintendo. Under the terms of the agreement, the Company pays a
monthly fee based on revenue generated from Nintendo video game services.
These agreements contain various restrictions, including default and
termination procedures.

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, 2003, require future minimum lease payments, as follows: 2004 
$499,000; 2005 $441,000; 2006 $362,000; 2007 $234,000; 2008  $126,000;
2009  $42,000. The leases expire at dates ranging from 2004 to 2009. Rental
expense under all operating leases was $654,000, $591,000, and $536,000 for the
years ended December 31, 2003, 2002, and 2001, respectively.

Hilton Agreement Effective July 31, 2002, the Company expanded its master
services agreement with Hilton Hotels Corporation. The Company acquired the
right to provide Internet on television access and television on-demand
programming services to participating hotels and the right to independently
pursue and further develop interactive television content throughout the
Companys entire room base. As consideration, the Company agreed to pay Hilton
$5.8 million, on a present value basis, over a five-year period (see Note 7).

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

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-18 |  | Form 10-K 2003





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##### Table of Contents



Note 11  Stockholders Equity

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

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

Note 12  Stock Option Plans

The Company has stock options plans that provide for the granting of up to
4,876,792 non-qualified or incentive stock options on the Companys common
stock. Certain officers, directors and key employees have been granted options
to purchase common stock of the Company under these plans. Stock options
issued under the plans generally have an exercise price equal to the fair
market value on the date of grant. Options become exercisable in accordance
with vesting schedules determined by a committee of the Board of Directors, and
generally expire ten years after the date of grant. Options totaling 4,700
expired as of December 31, 2003, and outstanding options expire beginning in
2004 through 2013. The following is a summary of the stock option activity for
the years ended December 31:

|                             |                            |  |             |          |          |   |          |       | 
|---------------------------- | -------------------------- |  | ----------- | -------- | -------- | - | -------- | ----- | 
|                             |                            |  |             |          |          |   | Weighted
|                             |                            |  |             |          |          |   | Average 
|                             |                            |  | Options     |          | Exercise
|                             |                            |  | Outstanding |          | Price   
|                             |                            |  |             |          |         
|Balance at December 31, 2000 |                            |  | 2,274,002   |          |          | $ | 13.32    |      
|                             | Options granted            |  |             | 485,284  |          |   |          | 16.61 | 
|                             | Options exercised          |  |             | (72,959  | )        |   |          | 10.86 | 
|                             | Options forfeited/canceled |  |             | (86,350  | )        |   |          | 17.87 | 
|                             |                            |  |             |          |          |   |          |      
|Balance at December 31, 2001 |                            |  | 2,599,977   |          |          |   | 13.81    |      
|                             | Options granted            |  |             | 493,345  |          |   |          | 12.06 | 
|                             | Options exercised          |  |             | (146,151 | )        |   |          | 7.06  | 
|                             | Options forfeited/canceled |  |             | (14,000  | )        |   |          | 18.23 | 
|                             |                            |  |             |          |          |   |          |      
|Balance at December 31, 2002 |                            |  | 2,933,171   |          |          |   | 13.83    |      
|                             | Options granted            |  |             | 89,965   |          |   |          | 12.02 | 
|                             | Options exercised          |  |             | (291,118 | )        |   |          | 6.03  | 
|                             | Options forfeited/canceled |  |             | (79,357  | )        |   |          | 10.24 | 
|                             |                            |  |             |          |          |   |          |      
|Balance at December 31, 2003 |                            |  | 2,652,661   |          |          | $ | 14.73    |      
|                             |                            |  |             |          |          |   |          |      

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-19 |  | Form 10-K 2003





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##### Table of Contents



The following is a summary of stock options outstanding as of December 31,
2003:

|                   |  |        |                     |          |                     |       |           |          |          |       |       |  |  |          |           |  |  |   |       |  | 
|------------------ |  | ------ | ------------------- | -------- | ------------------- | ----- | --------- | -------- | -------- | ----- | ----- |  |  | -------- | --------- |  |  | - | ----- |  | 
|                   |  |        | Outstanding Options |          | Exercisable Options
|                   |  |        |                     |          |                    
|                   |  |        |                     |          |                     |       | Weighted  |          |          |       |       |  |  |          |           |  |  |   |      
|                   |  |        |                     |          |                     |       | Average   |          | Weighted |       |       |  |  |          | Weighted 
|                   |  |        |                     |          |                     |       | Remaining |          | Average  |       |       |  |  |          | Average  
|Exercise           |  |        |                     |          |                     | Term  |           | Exercise |          |       |       |  |  | Exercise
|Price Range        |  | Number |                     | in Years |                     | Price |           | Number   |          | Price
|                   |  |        |                     |          |                     |       |           |          |          |      
|$  2.77
to $  3.23 |  |        | 14,395              |          |                     |       | 1.0       |          |          |       | 3.23  |  |  |          | 14,395    |  |  |   | 3.23  | 
|$  6.46
to $  9.79 |  |        | 214,366             |          |                     |       | 3.1       |          |          |       | 8.81  |  |  |          | 199,866   |  |  |   | 8.84  | 
|$10.19 to $13.77   |  |        | 979,725             |          |                     |       | 5.9       |          |          |       | 11.04 |  |  |          | 756,475   |  |  |   | 11.28 | 
|$14.00 to $15.84   |  |        | 427,300             |          |                     |       | 6.5       |          |          |       | 15.70 |  |  |          | 318,492   |  |  |   | 15.74 | 
|$16.00 to $17.50   |  |        | 511,875             |          |                     |       | 7.0       |          |          |       | 16.52 |  |  |          | 296,891   |  |  |   | 16.55 | 
|$18.08 to $24.64   |  |        | 505,000             |          |                     |       | 6.6       |          |          |       | 22.07 |  |  |          | 434,750   |  |  |   | 21.87 | 
|                   |  |        |                     |          |                     |       |           |          |          |       |       |  |  |          |           |  |  |   |       | 
|                   |  |        | 2,652,661           |          |                     |       | 6.1       |          |          | $     | 14.73 |  |  |          | 2,020,869 |  |  | $ | 14.74 | 
|                   |  |        |                     |          |                     |       |           |          |          |       |       |  |  |          |           |  |  |   |       | 

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

|                                               |  |      |      |      |  |      |      |  |  |   |      | 
|---------------------------------------------- |  | ---- | ---- | ---- |  | ---- | ---- |  |  | - | ---- | 
|                                               |  | 2003 |      | 2002 |  | 2001
|                                               |  |      |      |      |  |     
|Weighted
average fair
value per option granted |  | $    | 6.30 |      |  | $    | 6.50 |  |  | $ | 9.05 | 
|                                               |  |      |      |      |  |      |      |  |  |   |      | 

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 - 2.97% in
2003, 3.82% in 2002, and 4.55% in 2001; (iii) weighted average expected life -
5.0 years, and (iv) weighted average expected volatility - 59.0% in 2003, 59.0%
in 2002, and 58.8% in 2001.

Note 13  Warrants

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

On October 9, 2000, the Company entered into an agreement with Hilton to
provide LodgeNets interactive television services into Hiltons owned, leased
and joint venture hotels in the United States. Under terms of the agreement,
Hilton was issued a warrant granting it the right to purchase up to 2.1 million
shares of LodgeNet common stock over seven years at a price of $20.44 per
share. Warrants in the amount of 1.5 million shares relate to hotels owned or
operated by Hilton and vested immediately. The remaining 600,000 warrant
shares relate to hotels franchised through Hilton and will vest on a per room
basis as LodgeNet obtains contracts for delivery of services to these hotels.
The Company followed EITF 96-18 to account for the warrants issued. The fair
value of the 1.5 million warrant shares was estimated at $21.8 million using
the Black-Scholes valuation method and was recorded as contract acquisition
costs within fixed assets and credited to additional paid-in capital. The 600,000
warrant shares will be measured and similarly accounted for upon delivery of
the related room contracts. During 2003, 2002 and 2001, 65,808, 48,042 and
48,156 of these warrant shares were issued with a fair value of $401,000,
$343,000 and $534,000, respectively, and were recorded as contract acquisition
costs within fixed assets and credited to additional paid-in capital. The costs
are amortized over the contract life.

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-20 |  | Form 10-K 2003





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##### Table of Contents



Note 14  Employee Benefit Plans

The Company sponsors defined contribution plans covering eligible employees.
The plans provide for employer contributions based primarily on the level of
employee participation. Contribution expense for the Company was $780,000,
$667,000, and $743,000, in 2003, 2002, and 2001, respectively.

Note 15  Income Taxes

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

|         |  |      |         |      |  |      |         |   |  |   |         |  
|-------- |  | ---- | ------- | ---- |  | ---- | ------- | - |  | - | ------- | -
|         |  | 2003 |         | 2002 |  | 2001
|         |  |      |         |      |  |     
|Domestic |  | $    | (33,031 | )    |  | $    | (28,080 | ) |  | $ | (25,675 | )
|Foreign  |  |      | (1,562  | )    |  |      | (496    | ) |  |   | (44     | )
|         |  |      |         |      |  |      |         |   |  |   |         |  
|Total    |  | $    | (34,593 | )    |  | $    | (28,576 | ) |  | $ | (25,719 | )
|         |  |      |         |      |  |      |         |   |  |   |         |  

The provisions for income taxes of $459,000 in 2003, $550,000 in 2002, and
$689,000 in 2001, consist of current state taxes. Such amounts differ from
that which would be obtained by applying the statutory federal income tax rate
to loss before income taxes due primarily to changes in the valuation allowance
reflecting changes in net deferred tax assets.

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

|                     |                                     |   |         |        |      |   |         |        | 
|-------------------- | ----------------------------------- | - | ------- | ------ | ---- | - | ------- | ------ | 
|                     |                                     |   | 2003    |        | 2002
|                     |                                     |   |         |        |     
|Deferred tax assets: |                                     |   |         |        |      |   |         |       
|                     | Net operating loss carryforwards    |   | $       | 61,107 |      |   | $       | 52,465 | 
|                     | Losses of unconsolidated affiliates |   |         | 55     |      |   |         | 55     | 
|                     | Reserves and accruals               |   |         | 1,042  |      |   |         | 1,115  | 
|                     | Deferred credits                    |   |         | 1,332  |      |   |         | 1,146  | 
|                     | Book over tax depreciation          |   |         | 2,515  |      |   |         | 1,705  | 
|                     |                                     |   |         |        |      |   |         |       
|Deferred tax assets  |                                     |   | 66,051  |        |      |   | 56,486  |       
|Valuation allowance  |                                     |   | (66,051 | )      |      |   | (56,486 | )     
|                     |                                     |   |         |        |      |   |         |        | 
|Net deferred taxes   |                                     | $ |        |        |      | $ |        |       
|                     |                                     |   |         |        |      |   |         |       

The Company has net operating loss carryforwards of approximately $179 million
for federal income tax purposes. Such carryforwards expire beginning in 2004
through 2018, and federal tax regulations limit the availability and timing of
usage of carryforwards. Net operating loss carryforwards expiring in the next
five years are as follows: (in thousands of dollars): 2004  $1,897; 2005 -
$3,428; 2006  $3,437; 2007  $3,748; 2008  $3,751. The Company established
the valuation allowance for deferred tax assets after considering its
historical financial performance, existing deferred tax liabilities, and
certain information about future years.

Note 16  Other Related Party Transactions

The Company has $1.1 million, principle amount, in outstanding advances to a
former officer as of December 31, 2003. The advances were made in 2000 and
2001 under the terms of a promissory note. Interest is payable monthly at the
rate applicable to the Company under its Credit Facility. Shares of the
Companys stock held by the former officer and a mortgage on real property
collateralize the note. In February 2004, the Company received a payment of
$567,000 from the former officer. It is expected that the remaining
principle amount
will be paid during 2004.

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-21 |  | Form 10-K 2003





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##### Table of Contents



Note 17  Segment Information

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

|              |  |      |         |      |  |      |         |  |  |   |         | 
|------------- |  | ---- | ------- | ---- |  | ---- | ------- |  |  | - | ------- | 
|              |  | 2003 |         | 2002 |  | 2001
|              |  |      |         |      |  |     
|United States |  | $    | 239,364 |      |  | $    | 223,427 |  |  | $ | 203,911 | 
|Canada        |  |      | 10,016  |      |  |      | 9,655   |  |  |   | 9,951   | 
|Other         |  |      | 769     |      |  |      | 1,908   |  |  |   | 3,033   | 
|              |  |      |         |      |  |      |         |  |  |   |         | 
|Total         |  | $    | 250,149 |      |  | $    | 234,990 |  |  | $ | 216,895 | 
|              |  |      |         |      |  |      |         |  |  |   |         | 

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

|              |  |      |         |      |  |   |         | 
|------------- |  | ---- | ------- | ---- |  | - | ------- | 
|              |  | 2003 |         | 2002
|              |  |      |         |     
|United States |  | $    | 216,182 |      |  | $ | 232,874 | 
|Canada        |  |      | 10,855  |      |  |   | 10,782  | 
|              |  |      |         |      |  |   |         | 
|Total         |  | $    | 227,037 |      |  | $ | 243,656 | 
|              |  |      |         |      |  |   |         | 

Note 18  Litigation Settlements

During 2002, the Company entered into settlement agreements with Broadcast
Music Inc. (BMI) and the American Society of Composers, Authors and Publishers
(ASCAP), which resolved claims for alleged nonpayment of royalties on
copyrighted musical works performed in major motion pictures. BMI and ASCAP had
asserted that the music, primarily background music, used within major motion
pictures required licensing. BMI and ASCAP sought damages for public
performances of such music from their respective catalogues. As a result of the
settlements, the Company recorded a provision for the litigation settlements of
$2.7 million that is related to pre-2002 reporting periods. This nonrecurring
charge was reported as a litigation expense in the 2002 statement of
operations. The Company has paid approximately $2.4 million of the settlement
amount as of December 31, 2003, with the balance to be paid in the first half
of 2004.

Note 19  Loss on Early Retirement of Debt

Effective January 1, 2002, the Company adopted the provisions of SFAS No. 145,
Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement
No. 13, and Technical Corrections. In connection with the adoption, the
Company reclassified the $2.1 million of other expense  loss on early
retirement of its 1999 bank Credit Facility, which was recorded in the third
quarter of 2001 as an extraordinary item, as a separate line below operating
income in the Companys consolidated statement of operations. In June 2003, the
Company redeemed its 10.25% Notes due December 15, 2006 in conjunction with the
issuance of the 9.50% Notes. As a result of this early redemption, the Company
incurred call and tender premiums, and related expenses, in the amount of $4.6
million and wrote off unamortized debt issuance costs of $2.5 million.

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-22 |  | Form 10-K 2003





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##### Table of Contents



Note 20  Selected Quarterly Financial Data (Unaudited)

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

|      |                                                          |  |           |        |          |  |               |         |              |  |   |        |   |  |   |         |  
|----- | -------------------------------------------------------- |  | --------- | ------ | -------- |  | ------------- | ------- | ------------ |  | - | ------ | - |  | - | ------- | -
|      |                                                          |  | Quarter   |        | Quarter  |  | Quarter       |         | Quarter     
|      |                                                          |  | Ending    |        | Ending   |  | Ending        |         | Ending      
|      |                                                          |  | March 31, |        | June 30, |  | September 30, |         | December 31,
|      |                                                          |  |           |        |          |  |               |         |             
|2002: |                                                          |  |           |        |          |  |               |         |              |  |   |        |   |  |   |        
|      | Revenues                                                 |  | $         | 55,009 |          |  | $             | 58,700  |              |  | $ | 63,660 |   |  | $ | 57,621  |  
|      | Gross profit (exclusive of other
operating expenses) (1) |  |           | 32,554 |          |  |               | 33,745  |              |  |   | 35,879 |   |  |   | 32,030  |  
|      | Net loss (2)                                             |  |           | (6,665 | )        |  |               | (5,701  | )            |  |   | (5,512 | ) |  |   | (11,248 | )
|      | Per common share                                         |  | $         | (.54   | )        |  | $             | (.46    | )            |  | $ | (.44   | ) |  | $ | (.91    | )
|     
|2003: |                                                          |  |           |        |          |  |               |         |              |  |   |        |   |  |   |        
|      | Revenues                                                 |  | $         | 59,646 |          |  | $             | 62,404  |              |  | $ | 67,768 |   |  | $ | 60,331  |  
|      | Gross profit (exclusive of other
operating expenses)     |  |           | 33,050 |          |  |               | 34,473  |              |  |   | 36,659 |   |  |   | 34,020  |  
|      | Net loss                                                 |  |           | (8,419 | )        |  |               | (13,256 | )            |  |   | (5,429 | ) |  |   | (7,948  | )
|      | Per common share                                         |  | $         | (.68   | )        |  | $             | (1.07   | )            |  | $ | (.43   | ) |  | $ | (.63    | )

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

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

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-23 |  | Form 10-K 2003





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##### Table of Contents






Report of Independent Accountants on Schedule

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

To LodgeNet Entertainment Corporation:

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

Arthur Andersen LLP

Minneapolis, Minnesota
February 6, 2002

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-24 |  | Form 10-K 2003





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##### Table of Contents



LodgeNet Entertainment Corporation and Subsidiaries




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

|                                                         |                               |                                 |  |           |     |            |  |           |     |  |  |         |     |  |  |   |     | 
|-------------------------------------------------------- | ----------------------------- | ------------------------------- |  | --------- | --- | ---------- |  | --------- | --- |  |  | ------- | --- |  |  | - | --- | 
|                                                         |                               |                                 |  |           |     |            |  | Additions |     |  |  |         |     |  |  |  
|                                                         |                               |                                 |  | Balance   |     | Charged to |  |           |     |  |  | Balance
|                                                         |                               |                                 |  | Beginning |     | Costs and  |  |           |     |  |  | End of 
|Description                                              |                               | of Period                       |  | Expenses  |     | Deductions |  | Period   
|                                                         |                               |                                 |  |           |     |            |  |          
|Allowances deducted from related
balance sheet accounts: |                               |                                 |  |           |     |            |  |           |     |  |  |         |     |  |  |  
|                                                         | Year Ended December 31, 2001: |                                 |  |           |     |            |  |           |     |  |  |         |     |  |  |   |    
|                                                         |                               | Allowance for Doubtful Accounts |  | $         | 800 |            |  | $         | 148 |  |  | $       | 448 |  |  | $ | 500 | 
|                                                         | Year Ended December 31, 2002: |                                 |  |           |     |            |  |           |     |  |  |         |     |  |  |   |    
|                                                         |                               | Allowance for Doubtful Accounts |  | $         | 500 |            |  | $         | 754 |  |  | $       | 954 |  |  | $ | 300 | 
|                                                         | Year Ended December 31, 2003: |                                 |  |           |     |            |  |           |     |  |  |         |     |  |  |   |    
|                                                         |                               | Allowance for Doubtful Accounts |  | $         | 300 |            |  | $         | 313 |  |  | $       | 313 |  |  | $ | 300 | 

|                                   |  |      |  |               
|---------------------------------- |  | ---- |  | --------------
|LodgeNet Entertainment Corporation |  | F-25 |  | Form 10-K 2003