UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-K

(Mark One)

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

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

LodgeNet Interactive 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

Securities registered pursuant to Section 12(b) of the Act:		Common Stock, $.01 par value. Registered on the NASDAQ Global Select Market
Securities registered pursuant to Section 12(g) of the Act:		None.

			Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No þ
			Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No þ
			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 þ No o
			Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit and post such files). Yes o No o
			Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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 this Form 10-K or any amendment to this Form 10-K. þ
			Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer o		Accelerated Filer þ		Non-accelerated Filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

			Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No þ
			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. $87,708,006

The number of shares of common stock of the Registrant outstanding as of March 7, 2011, was 25,152,080 shares.

DOCUMENTS INCORPORATED BY REFERENCE — Portions of the Registrant’s definitive proxy statement for the 2011 Annual Meeting of Stockholders, which will be filed within 120 days of the fiscal year ended December 31, 2010, are incorporated by reference in Part III of this Form 10-K.

 

 

Table of Contents

Item 1 — Business			1
Overview			1
Competitive Strengths			1
Business Strategy			3
Overview of Markets Served			5
Hospitality and Advertising Services			5
Healthcare			12
Competition			14
Regulation			16
Employees			17
Corporate Information and Web Site Access to SEC Filings			17
Item 1A — Risk Factors			18
Item 1B — Unresolved Staff Comments			25
Item 2 — Properties			25
Item 3 — Legal Proceedings			25
Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			27
Performance Graph			27
Issuer Purchases of Equity Securities			28
Dividends			28
Stockholder Rights Plan			28
Item 6 — Selected Financial Data			32
Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations			34
Executive Overview			34
Hospitality and Advertising Services Business			35
Healthcare Business			39
General Operations			40
Liquidity and Capital Resources			41
Seasonality			44
Results of Operations — Years Ended December 31, 2010 and 2009			45
Results of Operations — Years Ended December 31, 2009 and 2008			49
Critical Accounting Policies			51
Recent Accounting Developments			51
Item 7A — Quantitative and Qualitative Disclosures About Market Risk			52
Item 8 — Financial Statements and Supplementary Data			53
Item 9 — Changes In and Disagreements with Accountants on Accounting and Financial Disclosure			53
Item 9A — Controls and Procedures			53
Item 9B — Other Information			54
Item 10 — Directors, Executive Officers and Corporate Governance			55
Item 11 — Executive Compensation			55
Item 12 — Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			55

Item 13 — Certain Relationships and Related Transactions, and Director Independence			55
Item 14 — Principal Accountant Fees and Services			55
Item 15 — Exhibits and Financial Statement Schedules			56
EX-12.1
EX-21.1
EX-23.1
EX-31.1
EX-31.2
EX-32.1

As used herein (unless the context otherwise requires) “LodgeNet” and/or the “Registrant,” as well as the terms “we,” “us” and “our,” refer to LodgeNet Interactive Corporation (f/k/a LodgeNet Entertainment Corporation) and its consolidated subsidiaries.

“LodgeNet,” “On Command,” “The Hotel Networks,” “eSUITE” and the LodgeNet logo are trademarks or registered trademarks of LodgeNet Interactive Corporation. All rights reserved. All other trademarks or service marks used herein are the property of their respective owners.

PART I

Item 1 — Business

Overview

We are the largest provider of interactive media and connectivity solutions to the hospitality industry in the United States, Canada and Mexico. Our primary offerings include guest-paid entertainment, such as on-demand movies, and hotel-paid services, including cable television programming and Internet access services. As of December 31, 2010, we provided interactive and media networks and connectivity solutions to approximately 1.8 million hotel rooms in North America and provide our hospitality solutions in select international markets, primarily through local or regional licensees. In addition, we also have a growing presence in the healthcare market, where we sell and maintain interactive television systems which provide on-demand patient education, information and entertainment to healthcare facilities throughout the United States. As of December 31, 2010, our systems were installed in 56 healthcare facilities, representing approximately 12,200 beds, and we had an additional six facilities under contract.

The interactive media and connectivity solutions we offer the hospitality industry generally include a wide range of guest-paid entertainment options, including movies, games, music and on-demand television programming delivered through the television. We refer to these offerings as Guest Entertainment content, which guests typically purchase on a per-view, hourly or daily basis. We also provide services for which hotels pay us a monthly service fee, which we refer to as Hotel Services. These offerings include cable television programming and broadband Internet, as well as video, Internet and technical support services. We also sell broadband Internet and interactive television systems and equipment to hotels, including related professional design, project management and installation services. These services are reported under System Sales and Related Services. Through The Hotel Networks (“THN”), we deliver advertising-supported media into select segments of our interactive television room base, from which we earn revenue from the sale of television commercials or other marketing-based programs.

We have master agreements with many of the leading hotel franchising organizations, which provide a framework of the key terms, conditions and content which we will offer their franchisees. We then enter into long-term contracts with the owners or operators of the individual hotels, which typically have a term of five to seven years. In addition, to ensure we have quality entertainment content for our hotel partners and their guests, we have agreements with the major movie studios and other content distributors, such as DIRECTV®, to ensure continued and timely access to the latest and most popular movie titles and cable channels.

In the healthcare industry, we generate revenue from the sale of interactive television system hardware, software license and installation services. Additionally, we earn recurring revenues from the sale of on-demand and television entertainment content, patient education content, software maintenance and technical support services.

In June 2010, we unveiled our next generation, interactive television platform, called Envision, which connects our interactive, high-definition guest room televisions to Internet-sourced content and information. Envision will support extensive branding, as well as a variety of interactive applications designed to assist hoteliers to increase on-premise revenues and save operating costs. In addition, Envision will enhance the guest experience by allowing guests to easily and conveniently perform a variety of functions, such as purchasing local event tickets and hotel branded merchandise, reserving tee times and making restaurant reservations. We believe Envision represents a new revenue growth opportunity for us, as it enables new subscription and transactional-based revenues. We deployed our initial Envision system in January 2011.

Competitive Strengths

Leading Market Position. We are the largest provider of interactive television systems to the hospitality industry and estimate we have an approximately 85% share of the hospitality VOD-served market, reaching over 500 million travelers annually. We focus on the mid-scale through luxury hotel segment, where we believe demand for our content and services is strongest. Our existing installed base of rooms enables us to achieve attractive economies of scale for both content distribution as well as new product and technology development.

Long-term relationships. We maintain master agreements with many of the leading hotel franchising organizations in North America, and have individual five to seven year contracts with over 9,000 individual hotel properties executed by their specific ownership or management companies. Our long-term contracts create recurring revenues for the Company, enabling us to reasonably predict the rates of return on our property-based capital investments. We have been a trusted distribution partner of many of the major Hollywood movie studios since the early 1980’s, and have expanded our distribution relationships to include leading cable television channels and distributors such as HBO and DIRECTV. Our contracts with the major motion picture studios provide us with access to the latest Hollywood content prior to its release to the home video market. We also offer hoteliers and their guests access to special content, such as our Hotel SportsNET^SM programming, where guests can access sporting event coverage from the NFL, NHL, NBA, ESPN and College Sports TV (“CSTV”) even if they are away from their home team market. We believe no other competitor matches the duration and breadth of our relationships with the major entertainment content providers.

Proprietary, interactive high-definition platform. We believe we operate the most advanced interactive television distribution network in our industry. Our interactive system connects each individual hotel room television to a digital server located within the hotel, where content is stored and continuously updated via our satellite distribution network. We began deploying the high-definition (“HD”) configuration of our interactive television system in 2005 and we currently have our HD interactive television system installed in over 270,000 rooms from our 1.7 million interactive television room base. These HD rooms generate significantly more revenue per room per month than our average systems, providing an attractive rate of return on our capital investment. We believe increasing the size of our HD room base represents a significant opportunity for the Company to improve the guest room experience, enhance our hotel customer relationships and increase our per-room revenues. Additionally, it creates the foundation upon which we will introduce our new Envision software applications.

Increasingly Diversified Revenue Streams. We have steadily diversified our revenue streams beyond our traditional business of in-room on-demand entertainment. Our diversified revenues have grown from approximately 20% in 2006 to more than 40% of our total revenue for 2010, as we have been successful in growing our Hotel Services revenues, including cable television programming and Internet access, as well as entering the targeted advertising and healthcare markets. We currently provide cable television programming to over 1.0 million hotel rooms and broadband Internet access services to approximately 180,000 hotel rooms, both of which are contracted on a per room, per month fee basis. We also provide advertisers opportunities to target the attractive, but hard to reach, traveler demographic through our THN subsidiary, where nationally programmed commercials are replaced with ads targeted at the business and vacation traveler demographic. Additionally, we have our eSUITE interactive television solution installed in 56 hospitals as of December 31, 2010.

Free Cash Flow Generation. We have increased the amount of free cash generated by our business over the past several years, by reducing our operating costs, decreasing the number of rooms and the amount of capital we invest per HD room we install or upgrade, reducing our interest cost and managing our working capital. For the year ended December 31, 2010, we generated approximately $80.0 million of free cash flow, prior to paying down debt. Our free cash flow is expected to enable us to continue to upgrade existing rooms to HD systems in return for contract extensions, as well as invest in new products and target new markets.

Business Strategy

Our goal is to continue to expand and enhance our position as the leading provider of interactive media and connectivity solutions to the hospitality and healthcare industries in the United States, Canada and Mexico. To accomplish our goal, we intend to pursue the following strategies:

Capitalize on the favorable economics of and demand for our HD system. We can improve the in-room television experience by providing hotel guests with a greatly enhanced viewing experience through our high-definition, interactive television system; and our agreement to install these systems in rooms enables us to extend our hotel contracts for an incremental five to seven years. We have HD systems installed in over 270,000 hotel rooms, representing approximately 16% of our installed room base. Rooms equipped with our HD systems are generating approximately 60% greater per-room revenue for us than our rooms installed with analog technology. The higher revenue performance is driven by 1) a lift in Guest Entertainment revenue within our HD rooms, 2) a higher penetration of LodgeNet-provided HD cable programming within HD rooms and 3) the mix of converted rooms are from generally higher chain scale properties. Our return on investment and payback has significantly improved, as the cost of installing a room with our HD technology has decreased by nearly 50% since 2008.

Leverage our installed base of over 1.8 million hotel rooms to continue to introduce new products and services. Our installed base of 1.8 million hotel rooms gives us the scale to launch new product innovations, such as enhanced Internet access services and on-demand television programming, as well as targeted advertising through our THN subsidiary. We will begin deploying our next generation Envision software into our room base in 2011. Envision will provide hotel guests access to a number of Internet-sourced, traveler centric applications designed to enhance and automate the hotel guest experience, such as purchasing local event tickets and hotel branded merchandise, making restaurant reservations and viewing content streamed from the Internet. Envision will enable hotels to provide additional services to their guests from which we expect to earn recurring subscription revenues, which will not fluctuate with occupancy or consumer buying patterns.

Maintain strong relationships with our hotel, studio and technology partners. We seek to continue to be a value added partner for hoteliers by delivering industry leading content and applications for use within their operations. By providing customized promotional and informational content, we facilitate the brand promotion and customer loyalty initiatives of our hotelier partners; and our interactive services, including in-room check out and several of our new Envision applications, are designed to help hotels reduce costs and streamline their own operations while enhancing the guest experience. We expect to continue to be an attractive distribution channel for studios and select technology providers, as we believe our in-room movie sales provide a high-margin revenue opportunity for the studios and attractive technology implementation opportunities for our technology providers.

Successfully continue to grow our healthcare business. We believe we are in the early stages of penetrating this large and attractive market, as we serve approximately 1% of the existing hospital beds in the United States. We believe there are strong underlying growth drivers for us in the healthcare market due to growing demand for healthcare services and the increasing focus by hospitals on interactive patient education.

Focus on free cash flow generation. We have increased free cash flow generation during 2010 by over 20% compared to 2009. We accomplished this by prudently managing our capital deployment, controlling costs, efficiently managing our working capital and deleveraging our balance sheet. Since the end of 2008, we have reduced our consolidated outstanding debt from $588.5 million to $373.6 million.

The following table presents selected operations data for the period 2006 through 2010. In 2007, LodgeNet acquired the assets of StayOnline, Inc. and the stock of Ascent Entertainment Group, Inc., which owned 100% of the capital stock of On Command Corporation. These acquisitions substantially increased our Hospitality room base and affected our financial results for 2007. Dollar amounts are in thousands, except for room data:

		Year Ended December 31,
		2010				2009				2008				2007				2006
Financial Highlights:
Revenue		$	452,172			$	484,492			$	533,879			$	485,588			$	288,213
Operating income (loss)			23,410				21,692				(5,071	)			(4,236	)			26,932
Depreciation and amortization (1)			83,236				100,309				124,060				116,378				66,311
Share-based compensation and restricted stock			1,762				1,724				2,275				1,737				1,677
Net (loss) income			(11,685	)			(10,155	)			(48,418	)			(65,172	)			1,841
Net (loss) income attributable to common stockholders		$	(17,435	)		$	(13,269	)		$	(48,418	)		$	(65,172	)		$	1,841
Selected Operations Data:
Hospitality
Total rooms served (2)			1,829,712				1,909,323				1,977,015				1,962,090				1,052,025
Total Guest Entertainment rooms (3) (8)			1,680,322				1,779,979				1,866,353				1,860,720				1,004,937
Total High Definition rooms (4) (8)			270,384				231,588				191,491				84,327				23,502
Percentage of Total Guest Entertainment rooms			16.1	%			13.0	%			10.3	%			4.5	%			2.3	%
Total Television Programming (FTG) rooms (5) (8)			1,030,437				1,087,860				1,105,754				1,068,256				535,777
Percentage of Total Guest Entertainment rooms			61.3	%			61.1	%			59.2	%			57.4	%			53.3	%
Total Broadband Internet rooms (6) (8)			178,047				201,936				229,003				218,860				37,686
Advertising
Total Advertising and Media Services rooms (7) (8)			1,173,808				1,207,465				893,738				716,219				—
Healthcare
Total hospitals installed			56				45				28				20				11
Total beds installed			12,224				9,192				6,543				4,387				2,162

We define free cash flow, a non-GAAP measure, as cash provided by operating activities less cash used for certain investing activities. Free cash flow is a key liquidity measure, but should not be construed as an alternative to cash flows from operating activities or as a measure of our profitability or performance. We provide information about free cash flow because we believe it is a useful way for us, and our investors, to measure our ability to satisfy cash needs, including interest payments on our debt, taxes and capital expenditures. GAAP requires us to provide information about cash flow generated from operations. Our definition of free cash flow does not take into account our debt service requirements or other commitments. Accordingly, free cash flow is not necessarily indicative of amounts of cash which may be available to us for discretionary purposes. Our method of computing free cash flow may not be comparable to other similarly titled measures of other companies.

Overview of Markets Served

HOSPITALITY AND ADVERTISING SERVICES

In the hospitality market, we provide our interactive media and connectivity solutions to hotel customers and their guests throughout the United States, Canada and Mexico, and through licensing arrangements with companies in other select countries. Our hospitality business is focused on: Guest Entertainment services, which includes products guests purchase on a pay-per-view or similar basis; Hotel Services, which includes the cable television programming and broadband Internet service we provide to hotels; System Sales and Related Services, which includes the sale of cable television equipment, broadband Internet equipment and HDTV installations; and Advertising Services, which consists of the sale of advertising directed to hotel guests and carriage services to programming providers by THN. Except for Guest Entertainment and Advertising Services, our other services are sold directly to hotels and do not involve guest purchases. Our strategy is to maximize our traditional Guest Entertainment business, primarily through the expansion of HDTV rooms, while we develop new products and services, such as our newly-introduced Envision product, to grow diversified, new revenue within our Hotel Services and System Sales and Related Services over time. Many of our potential diversified revenue sources are focused on products and services which require limited capital investment by us; however, certain of our potential diversified revenue sources may require significant capital investment.

Markets and Customers

Diversified Customer Base. The primary market for our interactive media solutions is the mid-size and large hotel segments within the United States, Canada and Mexico. We believe our hotel base is well diversified in terms of location, demographics and customer contracts. As of December 31, 2010, no single state or province accounted for more than 8% of the hotel properties served by us. We provide our services to various hotel chains, ownership groups and management companies representing some of the finest hotels in the world, including Marriott International, Inc. (J.W. Marriott, Ritz-Carlton, Renaissance, Courtyard by Marriott, Fairfield Inn & Suites, Residence Inn, Springhill Suites and Towne Place Suites); Hilton Worldwide (Hilton, Doubletree, Embassy Suites, Hampton Inn & Suites, Hilton Garden Inn, Homewood Suites, Conrad Hotels & Resorts and The Waldorf Astoria Collection); Starwood Hotels & Resorts (aloft, Element, Westin, W Hotels, Sheraton, Four Points by Sheraton and The Luxury Collection); Hyatt Hotels Corporation (Andaz, Hyatt, Hyatt Regency, Park Hyatt and Hyatt Place); Four Seasons, Fairmont; Harrah’s; Kimpton Hotels & Restaurants; Wyndham Hotels & Resorts (Wyndham, Wyndham Garden, Wingate by Wyndham); Gaylord Hotels; Omni Hotels; Loews Hotels, Outrigger; Grand Casino; Felcor; Interstate; John Q. Hammons, Davidson Hotels, Winegardner & Hammons; Las Vegas Sands Corporation (Venetian Resort Hotel Casino, Four Seasons Hotel Macau, Sands Macau Hotel, Venetian Macau Resort Hotel); and Sage Hospitality, as well as many independent properties. During 2010, our two largest brands covered by master services agreements, Hilton Worldwide and Marriott International, represented approximately 18.9% and 16.3%, respectively, of our consolidated revenue. Properties owned and operated by Hilton accounted for approximately 1.3% of consolidated revenue, as most of the hotels served under the Hilton agreement are owned by independent franchisees. Marriott does not own any of the properties served under the Marriott agreement. The properties are all owned by independent franchisees. Each property is subject to an individual long-term property level agreement. No other master service agreement accounted for more than 10% of our consolidated revenue. Additionally, our room base is geographically diversified, which mitigates our reliance on any one geographic sector.

We also provide services in select international markets through licensing arrangements with companies in these areas. Under these arrangements, we sell the equipment and license our interactive television system and technologies to the licensee and receive a royalty based on gross revenue. We intend to continue to expand in selected countries in Asia, South America, Europe and other regions. Financial information related to our domestic and international operations is included in Note 16 of the Consolidated Financial Statements.

Products and Services

Guest Entertainment

Approximately 60% of our revenue within the hospitality market comes from the sale of on-demand entertainment content, which the hotel guest buys on a per-view, hourly or daily basis. We design, develop and operate interactive television systems installed at hotel properties, and it is through these systems our Guest Entertainment revenues are generated.

Our interactive television systems provide a broad array of guest entertainment and other interactive services, including:

	Ø		on-demand movies;
	Ø		on-demand television programming;
	Ø		on-demand digital music programming;
	Ø		daily subscription sports programming;
	Ø		on-screen controls which allow the guest more viewing control and flexibility; and
	Ø		interactive guest marketing and merchandising capabilities.

The vast majority of these systems are owned by us, although, in some cases, hotels purchase the systems from us. The interactive system connects each individual hotel room to a server, referred to as the “headend,” located within the hotel. Because of the flexible and modular design of the system architecture, we can typically upgrade our software and hardware to support the introduction of new interactive services and integrate new technologies as they become commercially available and economically viable.

In 2005, we began deploying an HD configuration of our digital system, which allows the delivery of a variety of high-definition programming services to guest rooms. The HD configuration uses the same content management and satellite distribution network as our standard digital system; however, in the HD system, the content is sent in a digital format from the headend server to a commercial, in-room digital television. In our standard digital systems, the content is sent to the in-room television using an analog transport technology. The HD system utilizes the Pro:Idiom^TM premium content copy protection technology to enable LodgeNet-served hotels to display HD premium satellite and video-on-demand entertainment licensed by satellite programmers and movie studios. Our experience has been that rooms with HD systems generate higher average monthly per-room revenue than non-HD rooms. Accordingly, we actively converted analog rooms to HDTV’s beginning in 2006. The rate of HD conversions has been reduced recently, as hotels have deferred their purchase of high-definition televisions and we have reduced the amount of capital allocated to installation activities. However, we expect the number of rooms served with our HD system will expand significantly during the next several years, as we utilize our free cash flow for new HD installations and system upgrades. Our goal is to have HDTV installed in more than 50% of our room base over the next three to four years.

The Guest Entertainment revenues generated from our interactive television services are dependent upon a number of factors, including:

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

Increasing the number of rooms served by our interactive television system is dependent on a number of factors, including the amount of capital we elect to allocate to installation activities, the desirability of our technology, new hotel construction and the number of hotels which choose to purchase a system from us. Revenues vary with the number, availability and popularity of major motion pictures and the guests’ other entertainment alternatives. The price charged for each interactive programming option is established by us and is segmented according to the guest mix profile at each property and overall economic conditions. Movie prices are set on a title-by-title basis and may be higher in some locations and for more popular titles. In addition, our content management systems allow us to refresh interactive menus; promote different products and different titles to different demographics; and change pricing of our products, selection and promotions based on time-of-day or day-of-week, among other marketing efforts to the guest. Our systems allow us to measure guests’ entertainment selections and we adjust our programming and the pricing of the programming to respond to viewing patterns. Occupancy rates vary by property based on the property’s competitive position within its marketplace, seasonality 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, and these quarters typically generate our strongest financial results.

Hotel Contracts. We provide our interactive television services under contracts with lodging properties, which generally are for a term of five to seven years. Our contracts typically require that we will be the exclusive provider of in-room, on-demand television entertainment services to the hotels, permit us to set prices for the interactive services, and allow us to terminate the contract and remove our system if the results of operations do not meet our return on investment criteria. Under these contracts, we generally install our interactive television network in the hotel and retain ownership of all equipment utilized in providing our services (except for the television sets and other in-room equipment, which are paid for by the hotels). The length of each agreement is determined based on a number of factors, including the revenue potential of the hotel, the amount of capital we are investing in the equipment and other considerations. A term of five to seven years is generally adequate to assure we receive the expected return on our invested capital and, to the extent this is not the case, we generally require the hotel to contribute a portion of the capital required. In cases where the hotel customer contributes to the capital costs of the system, the term and other provisions of the agreement may be modified from those set forth above; however, the terms will be designed to meet our return on investment criteria. When a property level agreement is for a period of less than five years, the individual property generally must contribute most, if not all, of the required capital. We also offer, to certain hotel customers who would not otherwise qualify for the installation of our systems using our capital, or who desire to exercise greater control over content and pricing, the opportunity to purchase our systems combined with long-term service maintenance and content agreements with us.

While a separate service agreement is executed with each property, we also enter into master agreements which govern the terms on which services will be rendered to the properties affiliated with various hotel brands. Historically, these master agreements gave us status as a “preferred provider” for the term of the agreements and specified the terms on which our systems would be made available to all properties affiliated with the brands covered by the agreements and established standards which required franchise properties to install certain types of systems. While such agreements were beneficial in that they required any hotels owned or managed by the brands to execute hotel level agreements and authorized (but did not require) franchised hotels to sign property level agreements, they also typically specified the financial terms of all agreements with the affiliated brands and required systems be made available on the contracted terms without regard for the return on investment for a particular property. Increasingly, franchisors have exhibited a reluctance to enforce brand standards and, in some cases, have eliminated such standards altogether, particularly in economy or limited service properties. Existing master agreements also created problems for management groups which owned properties affiliated with a number of brands and faced conflicting contract requirements specified by the various existing master agreements. In order to address these issues, beginning in 2008, we changed our approach to major brand relations by moving to standard pricing terms for the largest brands, with the understanding we could adjust pricing terms periodically, and limited our obligation to install systems in properties which did not meet specified minimum performance criteria. It is expected all master agreements in the future will be consistent with this new model.

While we consider master agreements to be desirable, such master agreements no longer assure a guaranteed amount of business, and thus are not a substitute for property level agreements.

For the on-demand programming which is purchased by the hotel guest, the hotel collects such charges on our behalf, along with the collection of room and other charges made by the hotel guest, and the hotel remits funds to us on a monthly basis. The hotel retains a commission for such services, which varies depending on the size and profitability of the system and other factors. We generally seek to extend and renew hotel contracts in advance of their expiration. Over the last five years, we have de-installed from 2% to 6% of our installed base per year. During 2010, we de-installed approximately 109,000 rooms, or approximately 6% of our installed base. De-installations typically reflect certain sites electing not to continue to provide on-demand programming to their guests or our decision not to renew contracts at select properties, primarily limited service and extended stay properties, as the revenue generated at these properties frequently does not meet our payback criteria.

Hotel Services, System Sales and Related Services and Other Diversified Revenue

One of our principal business goals is to diversify our sources of revenue by the following products and services:

Television Programming. We offer a wide variety of satellite-delivered television programming paid for by the hotel and provided to guests at no charge. The television programming is delivered via satellite through DIRECTV, pursuant to an agreement, and distributed to guest rooms over the internal hotel network, and typically includes premium channels such as HBO and Showtime, which broadcast major motion pictures and specialty programming, as well as non-premium channels, such as CNN and ESPN. With the launch of our HD system, we also began offering high-definition television programming to the extent available from broadcast sources and DIRECTV.

The television programming is generally provided under contracts with hotel properties which generally run for the same period as the interactive television contract for a given property. The hotel pays a fixed fee per room per month for this programming, which in turn is provided to the guest without charge. We categorize this recurring revenue as Hotel Services revenue. We also generate revenue through the sales of the system equipment necessary to provide this service to the hotels. This revenue is categorized as revenue from System Sales and Related Services.

Broadband Internet System Sales, Service and Support. We also design, install and operate wired and wireless broadband Internet access systems at hotel properties. These systems control access to the Internet, allow hotels to charge or provide the access as a guest amenity and provide bandwidth management tools. We generate revenue through the sale and installation of the equipment and we provide ongoing maintenance, service and call center support services to hotel properties installed by us and also to hotel properties installed by other providers. While this is a highly competitive area, we believe we have important advantages as a result of our existing hotel customer relationships, our expertise in integrating and customizing connectivity solutions for hospitality, our nationwide field service network and a 24-hour call center to support calls from hotel customers.

Contracts for broadband Internet access services to hotels generally have terms of three to four years. Pursuant to these agreements, the hotel pays us a fixed fee per room per month for providing 24-hour help desk services to their guests having questions about accessing the Internet. In some cases, we also enter into technical service agreements, for which the hotel pays an incremental fixed fee per room per month. We also provide technical service under an hourly service charge arrangement. We categorize the recurring monthly revenue as Hotel Services revenue and the revenue from equipment sales as revenue from System Sales and Related Services.

System Sales and Related Services. In addition to the sale of Internet connectivity systems and satellite television reception equipment to our hotel customers, we also generate revenue from the sale of interactive television systems to our international licensees. We also offer hotel properties which do not meet our economic and/or demographic profile, or wish to accelerate the installation of their system, the opportunity to purchase our interactive television system. We then program, operate and maintain the system and receive a percentage of revenue generated from Guest Entertainment purchases. We categorize the revenue generated from these sales as System Sales and Related Services. Our Professional Solutions Group provides services to hotels such as system planning, technical installations, project management and support services, primarily focused on high-definition television and low voltage wiring installations. Generally, the Professional Solutions Group quotes and sells its services on a project-by-project basis.

Hospitality Operations and Structure

Sales and Marketing. For the hospitality market, we focus our sales and marketing strategies on acquiring new contracts from hotels, extending and retaining existing contracts, and marketing our interactive services to hotel brands, management companies, ownership groups and individual hotels. Our sales organization includes national account representatives, who develop relationships with national hotel brands, and regional sales representatives, who maintain relationships primarily with franchise organizations and management groups, regional hotel management and ownership organizations. We market our services and products to hotels by advertising in industry trade publications, attending industry trade conferences, trade shows and direct marketing. Sales activities are coordinated from our headquarters. Given our long operating history and reputation for service and innovation, we believe we are well recognized in the market among our existing and potential customers.

We market our services to hotel guests through a variety of means, including an interactive, image-based menu and purchasing protocol using on-screen graphics, promotions and programming information. Our 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 our system. Our systems also generally have a promotion channel located within the television lineup which presents movie trailers and other information about the services available on the system.

Installation Operations. Once a contract has been signed with a hotel, our installation personnel prepare engineering surveys for each site, install our systems, train the site staff to operate the systems and perform quality control tests. Due to our geographically diversified customer base, we have determined it is usually more cost effective to utilize subcontracted installation teams, which are managed and coordinated by our in-house installation employees. We work closely with our company-trained subcontractors and have a separate quality control department to regularly monitor quality standards.

Service Operations. We believe high quality and consistent systems support and maintenance are essential to our continued competitive success. We emphasize the use of company-employed service personnel operating from locations throughout the United States, Canada and Mexico, but also use company-trained subcontractors in areas where there is not a sufficient concentration of company-served hotels to warrant a company-employed service representative. Service personnel are responsible for all preventive and corrective systems maintenance. Our service organization is also utilized to support our broadband Internet systems.

We maintain a toll-free customer support hot line, which is staffed 24 hours a day, 365 days a year. The on-line diagnostic capability of our systems enables us to identify and resolve most of reported system service issues from our service control center without visiting the hotel. When a service visit is required, the modular design of our systems permits service personnel to replace only those components which are defective at the site.

Component Suppliers. We contract directly with various electronics firms for the manufacturing and assembly of certain system hardware, the design of which is controlled by us. We have found these suppliers to be dependable and generally able to meet delivery schedules on time. We believe, in the event of a termination of any of our sources, with proper notification from the supplier, alternate suppliers could be located without incurring significant costs or delays. Certain electronic component parts used within our 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 we were to experience a shortage of any given electronic part, we believe alternative parts could be obtained or system design changes implemented. In such event, we could experience a temporary reduction in the rate of new installations or conversions to high definition and/or an increase in the cost of such installations. All other components of our systems are standard commercial products, such as computers, hard drives, routers, modulators and amplifiers, which are available from multiple sources. We believe our anticipated growth can be accommodated through existing suppliers.

Programming. We obtain non-exclusive rights to show recently released major motion pictures from motion picture studios pursuant to an agreement with each studio, which is typically two to three years in length. The royalty rate for each movie is predetermined, with the studio receiving a percentage of the gross revenue from the movie. For recently released motion pictures, we typically obtain rights to exhibit the picture while it is still in theatrical release and prior to its release to the home video market or for exhibition on cable television. For our television on-demand programming, we obtain the rights to exhibit television on-demand content for which we pay a predetermined percentage of gross revenue or a one-time fixed fee. In addition, we distribute satellite-delivered cable television programming, including HD format programming, through an agreement with DIRECTV. We also have agreements with certain other select television programming providers, such as HBO. We pay our television programming providers a fixed, monthly fee for each room or subscriber receiving the service. We believe our relationships with the television programming suppliers are good and expect to renew these contracts as necessary on competitive terms. We obtain independent films, most of which are non-rated and intended for mature audiences, for a one-time fixed fee. We also obtain non-exclusive rights to digital music content, through an agreement with one of our subsidiaries, whereby we pay a predetermined percentage of the gross revenue from the music service. We obtain our selection of Nintendo^® video games pursuant to a non-exclusive license agreement with Nintendo, which expires in May 2013. Under the terms of the agreement, we pay a monthly fee equal to a percent of revenue generated from the sale of Nintendo video game services. For our Hotel SportsNET^SM programming, we obtained the rights to exhibit sporting event content from the NFL, NHL, NBA, ESPN and College Sports TV (“CSTV”), for which we pay a predetermined percentage of gross revenue.

Technology, Product Development, and Patents. We design and develop our own interactive television systems. Because such systems utilize an open architecture design incorporating industry standard interfaces, historically we have been able to upgrade system software to support the introduction of new services or integrate new technologies as they become economically viable. Our interactive television system incorporates commercially manufactured, off-the-shelf electronic and computer components and hardware.

Our system architecture utilizes a proprietary, two-way digital communications design to process and respond in real time to input commands from guests through the television in each guest room. This capability, combined with our menus and guest interface screens, enables us to provide guests with sophisticated interactive television services which include: on-demand movies with pause, skip, forward, back and save functionality; network-based video games; music services; on-demand television programming; and a variety of other interactive services. Our system also interfaces with the hotel systems, allowing guests to review room charges, check out, take guest surveys and view interactive information about the hotel and its services.

Our interactive television systems consist of equipment located within the guest room and associated equipment required for the generation, reception, storage, transmission, amplification and modulation of signals located elsewhere in the hotel. Typical in-room equipment includes a terminal unit and a hand-held television remote control. For those properties equipped with the digital systems, in-room equipment may also include an infrared computer keyboard or a video game controller. Video and music programming originates from the system headend and is transmitted to individual rooms over the hotel’s coax-based (“RF”) or Internet Protocol (“IP”) Local Area 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 our 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 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.

In addition, we are continuing to develop and integrate technologies which enable us to deliver high-definition television and Internet-sourced content to our hotels and their guests. These developments extend our digital platform with new technology, including specially-equipped digital televisions and set-top or set-back boxes which are able to receive RF signals or IP video data and decrypt and decode this digital content and render menus in the guestroom. These HD systems are contrasted with our traditional systems, which deliver an analog signal to the room from either a digital storage device or analog tape-based storage. The digital content is encrypted to protect the rights of content owners, who consider this protection when granting us distribution rights. Our new digital video and IP solutions leverage our current headend-based platform and our industry-leading content management and distribution technology, providing scalability, reliability and lower costs than many other models.

Our content management systems allow us to refresh interactive menus, by brand or even down to a specific property level, if desired; promote different products and titles to different demographics; and change pricing of our products, selection and promotions based on time-of-day or day-of-week, among other marketing efforts to the guest.

At those properties where we have sold broadband Internet systems, we offer a selection of technology systems, which consist of commercial off-the-shelf networking equipment used to provide wired and wireless connections to guests’ computers. To support these systems, we have our own proprietary Visitor Based Network (“VBN”) software, which manages connections between the guest and the Internet, and also offer solutions which use licensed VBN software. The connection to the Internet is provided by either the hotel or an Internet Service Provider contracted by us.

Our policy is to apply for patents on those product designs which management believes may be of significance to our business. We currently hold 19 United States and foreign patents, and have other applications for patents pending, which pertain to various aspects of our interactive systems. We also license industry-related technology from third parties.

Advertising and Media Services

THN provides a platform to create and generate revenue for our Company through paid advertising or sponsorships. THN’s primary business is presenting advertisers with the opportunity to target attractive demographic groups, such as business professionals, affluent consumers and travelers. These “mobile professionals” represent a coveted demographic to many marketers, and THN provides a set of programs to reach this audience. In 2010, THN had advertisers from industries such as insurance, pharmaceutical, automotive, travel, financial services, technology, consumer goods and telecommunications.

THN provides traditional television advertising, place-based digital advertising and promotional marketing solutions focused on business-class and upscale hotels. We believe by approaching guests with relevant messaging when they are in the comfort of a hotel room, free of distractions, advertisers have a prime opportunity to capture the attention of and connect with these desired consumers. This is accomplished through three primary program offerings:

	1)		Traditional Television Advertising. The THN “Superblock” consists of a package of 10 cable networks broadcast through THN’s private satellite network. Based on the agreement THN has with most of these networks, THN has 100% of the national and local commercials available across these networks, which is then sold to advertisers in a block format.
	2)		Video-On-Demand/Interactive Advertising. THN offers two approaches to interactive advertising. “Freeviews” is an on-demand advertising program which enables guests to choose from a variety of advertiser-sponsored content within the interactive television menu, which they can view free of charge. “Interactive Channels” is a program which allows marketers to promote their products or brands on an interactive, linear channel located within the standard free television lineup, from which guests can then “telescope” into content stored on the interactive television server. Freeviews and Interactive Channel content categories include target areas such as golf, travel, technology, health, fitness, and music. These programs are also Nielsen rated, so we can demonstrate to advertisers their ad impressions are being delivered.
	3)		Programming Carriage Services. Network, cable and content companies value the branding and “sampling” hotel broadcast distribution provides to a large and important demographic. Both satellite and server channels can provide programming “trial,” which research shows leads to a significant viewership conversion when guests return home.

Sales and Marketing. We focus our sales and marketing activities on selling advertising time and sponsorship opportunities to consumer brands and their representative advertising agencies. Our sales organization calls on clients and the full array of agencies, from promotional, out-of-home (“OOH”) and interactive agencies to broadcast planners and buyers. Additionally, we market our company and services through trade publications, various web sites and industry conferences.

Installation and Service Operations. We utilize both internal installation personnel and subcontractors to install contracted equipment and services to hotels. We also utilize the Hospitality field service operations and customer support services to provide high quality and consistent system support and maintenance for the systems deployed in the hotels. The satellite uplink and distribution of our networks is provided via contract with third party providers, with ad insertion and trafficking provided by an in-house team based in New York City.

Programming. Additionally, we market customized content and programming to hotels in both a linear channel and on-demand format. This includes packages of traditional cable programming, as well as proprietary content we source or produce ourselves. In some cases, we are able to collect distribution fees from content partners due to the marketing exposure generated through our hotel networks.

Technology and Product Development. THN leverages the technology and product development of the other LodgeNet divisions, as well as develops innovative, advertising-specific applications. THN also has dedicated resources for promotional development, interactive programming and new media.

HEALTHCARE

We sell a variety of products to acute care and specialty hospitals, including eSUITE, an interactive television solution which provides innovative ways for hospitals to educate, entertain and engage their patients. Revenue is generated from the sale of system hardware, software licenses and professional services. Additionally, we earn recurring revenues from the sale of on-demand movies and television content, patient education videos, software maintenance and technical support services. eSUITE is built on the same system architecture used in Hospitality, with additional enhancements needed to meet the unique needs of the healthcare environment, including patient education applications and clinical system integrations. Contract terms are typically for five years, with many sites implementing services in phases, providing future growth opportunities. Systems are sold through both direct sales and sales agents who have established relationships with healthcare facilities.

As of December 31, 2010, we had 56 facilities installed with our interactive television system.

Healthcare Market and Customers

The healthcare market in the United States consists of over 940,000 hospital beds across 5,800 facilities. We believe most hospitals currently do not have any form of interactive television services. Customers who have purchased systems from us represent some of the most highly regarded hospitals and health systems in the United States, including Brigham and Women’s Hospital in Boston, Massachusetts; The University of Texas MD Anderson Cancer Center in Houston; Children’s Pittsburgh, part of UPMC Health System; Baylor Plano/Baylor Heart in Texas; Kaiser Oakland/Sunnyside in California; The University of Chicago Northshore Hospital; and Cedars-Sinai Medical Center in Los Angeles, California.

The primary reasons hospitals purchase interactive television systems are to increase patient satisfaction, to improve clinical outcomes and to increase operational efficiencies.

Recently, significant focus has been placed on healthcare reform, which is intended to improve the quality of care, while promoting efficiencies in delivery and containing costs. Hospitals looking to meet the requirements of the four Medicare payment reform initiatives will be best served by adopting a patient engagement strategy which employs the use of technology; is implemented within the inpatient environment, with follow-up care across the care continuum; is effective at motivating patients to play an active role in their own care; and can reach all patients, including the most vulnerable. eSUITE meets all of these requirements. Our solution provides critical information in a video format, which drives comprehension, while dynamic automation promotes operational efficiencies and robust integrations provide the ability to track and report on patient viewing and comprehension. eSUITE is a powerful engagement tool which meets current requirements, while providing a strong foundation which can be built upon to meet future needs.

Interactive television systems are most commonly purchased when a new hospital is under construction, in conjunction with a renovation project or at the time a facility is migrating to flat-panel televisions. Often times, hospitals try to leverage their facility investments to provide greater patient satisfaction and enhanced patient experiences.

Healthcare Market Services and Products

LodgeNet Healthcare offers care facilities a variety of solutions, including the following:

	Ø		eSUITE, an interactive television system which includes specialized applications and integrated services;
	Ø		professional services — including cable plant design, modification and installation, as well as television installation services;
	Ø		DIRECTV satellite equipment sales and programming;
	Ø		digital signage and messaging solutions; and
	Ø		service agreements covering cable plant, DIRECTV, television and interactive system support.

Additional applications delivered through our interactive television system include:

	Ø		custom welcome channel;
	Ø		safety videos;
	Ø		hospital information channel;
	Ø		digital healthcare open channel;
	Ø		relaxation channel;
	Ø		music channels;
	Ø		interactive games;
	Ø		interactive information about the hospital and its services;
	Ø		interactive information about a patient’s care team and schedule;

	Ø		assigned education application — enables care providers to assign specific videos to patients based on their diagnoses; includes ability to track viewing and comprehension and the ability to chart the information in the patient’s electronic medical record;
	Ø		patient request application — allows patients to submit common requests through the television directly to the person responsible for fulfillment, allowing nursing staff to focus on patient care;
	Ø		patient feedback surveys — designed to capture and build in-service recovery so patient issues can be identified and addressed by the care staff while the patient is still in the hospital;
	Ø		retail promotions — for revenue-generating services such as outpatient pharmacy, home medical equipment, health clubs and other outreach/continuum of care services; and
	Ø		meal ordering application — provides information on diet types and allows patients to order meals based on diagnosis and allergies.

Sales and Marketing. In the healthcare market, we focus our sales and marketing strategy on the acquisition of new care facility contracts, while increasing awareness of our eSUITE solution. Our sales organization consists of internal direct sales and third-party sales/lead referral agents with care facility relationships. Marketing efforts include direct mail campaigns, print ads in trade publications, digital/online promotions, tradeshows, summits and public relation tactics including press releases, webinars and whitepapers.

Installation and Service Operations. We utilize both internal personnel and subcontractors to install contracted equipment and services to individual healthcare facilities. To manage the cost and quality of our installations, we assemble the systems at our corporate headquarters and utilize the same group of subcontractors who install our Hospitality interactive systems. We also utilize the Hospitality field service operations and customer support services to provide high quality and consistent system support and maintenance for the systems deployed in healthcare facilities.

Programming. We sell programming to healthcare facilities using various third-party distributors. We obtain the rights to show major motion pictures, which are typically offered to patients at no charge, as well as patient education content, pursuant to non-exclusive programming agreements. These agreements are typically three to five years in length, with programming royalties based on the number of beds at each healthcare facility receiving services. In addition, we also utilize our existing relationships with DIRECTV for television programming and Nintendo for video game services.

Technology and Product Development. We generally leverage the technology and product development utilized in the Hospitality market to provide solutions and services to healthcare facilities, with limited modifications and customizations.

Competition

Hospitality

Based on the number of hotels and rooms served, we are the world’s largest provider of interactive media and connectivity solutions to hotels. Competitors for media and connectivity services include, but are not limited to:

	Ø		other interactive television service providers, such as Hospitality Networks, Inc. (a wholly-owned subsidiary of Cox Communications, Inc.), NXTV, Kool Connect, SuiteLinq, Guest-Tek, iBAHN, Tivus, Roomlinx and international providers, such as Acentic, MagiNet and Quadriga;
	Ø		other providers of basic and premium television programming, such as Charter Communications, Comcast, Cox Cable, Dish Network, DIRECTV, Time Warner, BulkTV, Televue, Tangerine Global and World Cinema;
	Ø		television networks and programmers, such as ABC, NBC, CBS, FOX, HBO, and Showtime;
	Ø		other broadband Internet service providers, such as iBAHN, Guest-Tek, EthoStream, SuperClick, Comcast, Time Warner, Verizon, AT&T, Wi-Fi Venue Services, Influx, Xeta and T-Mobile; and
	Ø		companies which offer in-room computers with Internet access or other types of Internet access systems.

Other indirect competition for guest attention and revenue include: television programming; portable media devices such as MP3 players, iPods^® and DVD players; other devices such as laptop computers and cell phones; devices, such as iPads^®, which can access web content; websites which offer on-demand videos, television programs and movies; and other forms of entertainment and information such as newspapers, magazines and books, concerts, sporting events and movie theaters. Given the high level of innovation in communications technology, we expect to continue to confront new sources of competition.

A number of potential competitors, including those identified above, could use their existing infrastructure to provide in-room entertainment services to the hospitality industry. Some of these potential competitors are already providing guest entertainment, television programming or Internet-related services to the hospitality industry. Some of these companies have substantially greater financial and other resources than we do, and it is possible such competitors may develop a technology which is more cost effective than ours. To respond to competition, we will need to continue to enhance our interactive systems, expand our 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:

	Ø		the features and benefits of the service offering, and Internet or interactive system;
	Ø		the quality of the vendor’s technical support and maintenance services;
	Ø		the financial terms and conditions of the proposed contract, including commissions to the hotel or capital cost of the system; and
	Ø		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. We believe our competitive advantages include:

	Ø		the size of our existing customer base;
	Ø		our history of innovation;
	Ø		our diverse client base;
	Ø		our technically-innovative high definition platform;
	Ø		our digital platform;
	Ø		our flexible interactive television system;
	Ø		our content management system; and
	Ø		our field service group, which is, we believe, the largest technical services group focused on the hospitality industry.

We believe our past success in securing contracts reflects the strong competitive position of our products and services. While we believe our system architecture is comparable or superior to the systems currently being used by our competitors in the hospitality industry, our competitors may develop cost effective systems comparable or superior to ours. Also, we may not be able to continue our current level of success in obtaining new contracts from hotels currently served by other providers or previously un-served, and we may not be able to retain contracts with hotels we serve when our contracts expire.

In the basic and premium television programming market, the local franchised cable operator in a hotel’s market may have a substantial market presence. Such operators generally offer the hotel owner only standard packages of programming, typically developed for the residential market rather than the hospitality market, and at a fixed price per room based on all the channels provided. We compete with the franchised cable operator for basic and premium programming contracts by customizing packages of programming to provide only those channels desired by the hotel, typically reducing the overall cost per room to the hotel operator.

Competitive pressures in the interactive television, basic and premium television programming and broadband Internet access segments could result in reduced market share for us, higher hotel commissions, lower margins and increased expenditures for marketing, product development and systems installation, each of which could adversely affect our financial condition and operating results.

Advertising and Media Services

THN occupies a unique niche in the advertising industry, providing commercial branding and promotional programs targeted towards hotel guests based on our hotel relationships and distribution network. This consumer group, which contains many affluent and business travelers, represents an important, and at times, elusive, target for many companies and brands. Advertisers do have other options when considering how to best reach and engage with these potential consumers. Although there are but a few known “in-hotel” competitors which offer programs such as sampling and public space digital advertising, there are many others which target travelers and the business community in other ways. This includes:

	Ø		Airport Advertising: Place-based OOH media found in airports, represented by companies such as Viacom, CBS Outdoor and JC Decaux;
	Ø		Airline Advertising: Television programming supported with commercials during flight, tray-top ads and ad-supported in-flight magazines and airline sampling programs, represented by companies such as IdeaCast and Brand Connections; and
	Ø		Office Advertising: Place-based digital media in office buildings, office elevators, etc., represented by companies such as Wall Street Journal, Captivate Media and others.

More generally, we compete against the full array of media and marketing services companies. This includes television broadcasters and cable companies, such as FOX, CBS, NBC, ABC, CNN, and ESPN. It also includes magazine and web publishers, especially those focused on travelers, affluent and business markets. These broader media companies offer superior reach, but are generally not as targeted as THN’s advertising programs.

We believe our competitive advantages include:

	Ø		significant experience in the hotel space, with well established hotel relationships;
	Ø		ability to leverage the LodgeNet field support and technical infrastructure;
	Ø		broad array of advertising options, including hotel television media, VOD media and in-room promotion;
	Ø		hotel television media which is Nielsen monitored, rated and guaranteed for advertisers;
	Ø		ideal environmental factors for ad receptivity — no DVRs, few distractions, comfortable setting;
	Ø		consumer engagement which is both long and of a high quality;
	Ø		ability to integrate our marketing programs — combining media with promotion;
	Ø		sophisticated technology allowing “telescoping,” where consumers can click from a linear commercial to an interactive ad menu; and
	Ø		large size of our existing customer base.

Healthcare

Main competitors in the healthcare market include, but are not limited to:

	Ø		other interactive patient care providers, such as GetWell Network, Skylight and Allen Technologies;
	Ø		companies which primarily sell or lease television sets and also offer some phone and television-based interactive services, which include TVRC and TeleHealth; and
	Ø		other providers of basic and premium television programming, such as Charter Communications, Comcast, Cox Cable, Dish Network, DIRECTV and Time Warner.

We believe our competitive advantages include:

	Ø		our significant experience from thirty years of service in the lodging sector;
	Ø		the technical reliability of our solution;
	Ø		our nationwide service and support organization;
	Ø		our ability to leverage features from our lodging systems to efficiently customize and deploy new solutions to healthcare facilities;
	Ø		our ability to provide our services over existing cable infrastructure;
	Ø		our access to HD content with Pro:IdiomTM encryption technology;
	Ø		our understanding of interactive television and guest ease-of-use;
	Ø		our ability to assign content to specific patients through multiple mediums and track behaviors; and
	Ø		our ability to integrate to third-party systems for patient information, as well as reporting of viewing and end-user behaviors.

Regulation

Hospitality

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, which is designed to provide cable service, including video programming, and which is provided to multiple subscribers within a community, but the law exempts from that definition, among other facilities, a facility which serves subscribers without using any public rights-of-way. We construct and operate separate headend systems at each hotel and those systems do not use public rights-of-way. Consequently, we are 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.

The FCC rules define a multi-channel video programming distributor as “a person such as, but not limited to, a cable operator, a multi-channel multipoint distribution service, a direct broadcast satellite service, or a television receive-only satellite program distributor, who make available for purchase, multiple channels of video programming.” We may be considered to be a multi-channel multipoint distribution service. As such, we may be subject to various provisions of the Communications Act. The Communications Act includes laws and regulations which would benefit our operations, such as provisions which ensure our access to programming on fair, reasonable and nondiscriminatory terms, as well as provisions which may subject us to additional requirements, such as the requirement to obtain consent from broadcasters in order to retransmit their signal over our systems.

Broadband Internet Access. The FCC has classified high-speed Internet access as an interstate information service as defined by the Communications Act. To date, the FCC has not imposed any regulations on information service providers, although it may do so in the future.

As part of our revenue diversification effort, we have begun to serve as a conduit for personal information to third-party credit card processors, service partners and others. The handling of such personal information requires we comply with a variety of federal, state and industry requirements governing the use and protection of such information, including, but not limited to, Federal Trade Commission (“FTC”) consumer protection regulations and Payment Card Industry (“PCI”) data security standards.

Healthcare

The Health Insurance Portability and Accountability Act (“HIPAA”) addresses the security and privacy of health data. The privacy and security rules promulgated under HIPAA apply only to “covered entities” — health plans, healthcare clearinghouses and healthcare providers. If LodgeNet enters into a contract with a healthcare facility which makes it a business associate, or a company which performs functions or activities involving the use or disclosure of protected health information on behalf of a covered entity, LodgeNet must comply with the terms and conditions of such contract, which will require LodgeNet to appropriately safeguard the confidentiality, integrity and availability of the protected health information it receives or transmits on behalf of the covered entity.

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

Employees

As of December 31, 2010, we had 1,049 employees in the United States, Canada and Mexico. We have not experienced any significant labor problems and believe our relationships with our employees are good.

Corporate Information and Web Site Access to SEC Filings

We are a Delaware corporation with our principal executive offices located at 3900 West Innovation Street, Sioux Falls, South Dakota 57107. Our telephone number is (605) 988-1000.

Our web site address is http://www.lodgenet.com. We make our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, including all amendments to those reports, available free of charge on our web site as soon as reasonably practicable after such material is electronically filed with or furnished to the Securities and Exchange Commission (“SEC”).

Item 1A — Risk Factors

We experienced sustained revenue decline and net losses in 2010, 2009 and 2008. If we are not profitable in the long-term or do not generate sustained levels of free cash flow, a non-GAAP measure which we define as cash provided by operating activities less cash used for investing activities, it could have a harmful effect on our results of operations and business. We reported net losses of $11.7 million, $10.2 million and $48.4 million for the fiscal years ended December 31, 2010, 2009 and 2008, respectively. With regard to free cash flow, we generated $79.9 million, $64.8 million and $25.4 million for the fiscal years ended December 31, 2010, 2009 and 2008, respectively. Our financial results and amount of free cash flow for the fiscal year 2011 and beyond will be dependent to a significant degree on general economic conditions and our ability to successfully execute our business plan.

Our business is generally impacted by conditions affecting the hospitality industry’s performance. Our results are generally connected to the performance of the hospitality industry, where occupancy rates may fluctuate resulting from various factors. Reduction in hotel occupancy and consumer buy rates resulting from business, economic or other events, such as generally weak economic conditions, significant international crises, acts of terrorism, war or public health issues, adversely impacts our business, financial condition and results of operations. The general economic conditions over the last several years have adversely affected the hotel industry and our business. The overall travel industry and consumer buying pattern can be, has been in the past and/or currently is, adversely affected by weaker general economic climates, consumer sentiment, geopolitical instability and concerns about public health.

Our revenue is dependent on factors beyond our control, including the currently recovering economy, reduced business travel and reduced consumer spending. Generally, our revenue is dependent on the timely availability of content, including popular major motion pictures, the occupancy rate of each hotel property served, the percentage of occupied rooms buying movies or other services at the property and the price of the services. Occupancy rates vary based on the property’s location, its competitive position within the marketplace, seasonal factors, economic conditions, the level of business travel, changes in travel patterns due to public health concerns, the threat of terrorism, wars and other international crises and other factors outside of our control. Occupancy rates are usually higher during the summer and lower during winter. The percentage of occupied rooms buying movies or other services at the property generally reflects the hotel’s guest mix profile, the popularity and seasonality of movies, the availability of HD content, other services available at the hotel and the guests’ other entertainment alternatives. The percentage of occupied rooms buying movies and other services at the property also varies over time with general economic conditions. Over the past three years, and due to the negative economic conditions and reduced business travel, our revenue has been negatively impacted by lower purchases and lower hotel occupancy rates. The average monthly revenue per-room we generated from Guest Entertainment decreased from $16.38 in 2008 to $12.41 in 2010. Because many factors described above are out of our control, we may not be able to control the negative trends we have recently reported in our revenue.

We operate in a very competitive business environment and competition could reduce our revenue and our cash flow. Our business is primarily reliant on our Guest Entertainment and Hotel Services revenues, which are highly competitive. If we are unable to compete effectively with large diversified entertainment service providers and large technology service providers who have substantially greater resources than we have, our operating margins and market share could be reduced and the growth of our business inhibited. In particular, we compete directly for customers with a variety of other media service providers, including other interactive television service providers, high definition television services, local cable providers and direct broadcast satellite companies, television networks and programmers, Internet service providers and portals, technology consulting and service firms, companies offering web sites which provide on-demand movies, movie downloads, rental companies providing DVDs which can be viewed in properly equipped hotel rooms or on other portable viewing devices, including iPads, and hotels which offer in-room laptops with Internet access or other types of Internet access systems.

A continuing trend toward business combinations and alliances in both the domestic and foreign entertainment service industries may create significant new competitors for us. Many of these combined entities could have resources greater than ours. These combined entities may provide bundled packages of programming, delivery and other services which compete directly with the products we offer. Our competitors may also offer services sooner and at more competitive rates than we do. We may need to reduce our prices or license additional programming to remain competitive, and we may be unable to sustain future price levels as competition increases. Our failure to achieve or sustain market acceptance of our offered services at desired pricing levels could impair our ability to generate free cash flow, which could harm our business.

Diversification activities may not be successful. We have sought to diversify our business and decrease reliance on revenue from Guest Entertainment offerings. These activities have included sales of systems to healthcare facilities, the sale of advertising within the hospitality market, the sale of media systems and services to hotels and the sale of in-room broadband Internet access. We may pursue additional markets in the future which we consider to be complementary to our other businesses. In addition, we are also working to create new diversified revenue streams within the hospitality market, primarily from our new Envision applications. However, the diversification into areas in which we do not have the same experience as our traditional business, including, but not limited to, our Envision applications, involves a variety of risks, such as increased capital expenditures and diversion of limited resources and personnel from our traditional business, as well as management’s time and attention. In addition, our newer business activities may generate lower margins than our Guest Entertainment offerings and may require significant levels of capital to grow successfully. Furthermore, we may not be able to market these new businesses successfully, for any number of reasons. Accordingly, we may not be successful in developing and growing these new revenue streams.

Our revenue could be affected if our hotel customers decide to eliminate certain services we provide or restrict the types of content offered at their hotels. The size of our room base, our revenue, profitability and cash flow could be negatively impacted if a significant number of franchisors determine video-on-demand or other services we provide would no longer be preferred by certain hotel franchising companies. In addition, certain franchisors may decide to no longer include content offerings such as mature content films. Our revenue, profitability and cash flow could be adversely affected if a significant number of franchisors or hotel properties make such decisions.

We may not have adequate capital resources to support our business, which could have a harmful effect on our business and prospects. We may have insufficient capital resources to support our business if our cash from operations decreases or our capital expenditure or working capital requirements increase, whether as a result of product development efforts, changes in technology or otherwise, and we are unable to access financing on acceptable terms. This would have the following adverse impacts on our business and prospects, among others:

	Ø		we may modify our business plan and adjust or delay capital spending necessary to expand or maintain our customer base or to continue to deploy our HD systems and other technological advances throughout our installed room base;
	Ø		we may lose a substantial number of customers if we delay or limit our capital investments;
	Ø		we may have insufficient capital to make payments on our outstanding indebtedness as they become due;
	Ø		we may have to delay or limit our product development and diversification activities; and
	Ø		we may be required to seek additional capital through additional equity or debt financings, asset sales, collaborative arrangements or other sources, which may not be available to us on a timely basis, if at all, or may not be available on acceptable terms.

We may have to incur significant capital expenditures in order to adapt to technological change. The television-based interactive service industry has been, and is likely to continue to be, subject to:

	Ø		rapid and significant technological change, including continuing developments in technology, which do not presently have widely accepted standards; and
	Ø		frequent introductions of new services and alternative technologies, including new technologies for providing high-definition television and providing Internet content.

New technologies may emerge which may be superior to, or may not be compatible with, some of our current technologies, which may require us to make significant capital expenditures to remain competitive. In particular, we expect to incur capital expenditures for high-definition television platforms in our hotel properties. Many of our competitors, including cable and Internet service providers, may have greater financial and technical resources to adapt to and capitalize on any such technological changes more effectively than we can. Our future success will depend, in part, on our ability to anticipate and adapt to technological changes and to offer, on a timely basis, services which meet customer demands and evolving industry standards. In part, we rely on third parties for the development of, and access to, communications and network technology. As a result, we may be unable to obtain access to new technology on a timely basis or on satisfactory terms. If we fail to adapt successfully to any technological change or obsolescence, or fail to obtain access to important technologies, our revenues and business could be harmed.

Opportunities to expand our installed customer room base may be limited, so we may be unable to grow our revenue. While new hotel construction and hotel expansions offer an opportunity to expand our customer base, increases in un-served rooms due to the addition of new hotel rooms in any given year are generally not substantial and are impacted by general economic conditions. Additionally, we may be limited by certain financial constraints or choose not to make capital or other expenditures, which would adversely affect growth if our cash management strategy calls for us to conserve available resources. Even if we are willing to make such expenditures, we may not be successful in our efforts to further expand our installed customer room base. These circumstances may limit our ability to expand our installed room base, which in turn could limit our ability to grow revenue.

We may not be successful in renewing hotel properties to long-term contracts, which may reduce our revenue. We have rooms in our renewal window where we generally seek to extend and renew hotel contracts. We may not be successful in renewing a portion of those rooms due to the hotel electing not to continue to provide our services to their guests and replacing our interactive television services with high-definition television programming only or a different interactive television services provider. We have experienced a higher level of de-installation activities during 2010, where we de-installed approximately 109,000 rooms, or approximately 6% of our installed base. Over the last five years, we have de-installed from 2% to 6% of our installed base per year.

New technologies, including the growth of wireless devices, roll out of 4G technologies and expansion of digital distribution of content in our markets, may increase competition and result in a decrease in our revenue. Another major source of competition is the increasing popularity of personal wireless devices, such as iPads and smart phones, all of which may occupy hotel guests’ time and make them less likely to purchase our Guest Entertainment services. The increasing availability of content on such devices, the improved video quality of the content on such devices and faster wireless delivery speeds may make hotel guests less likely to purchase Guest Entertainment services. Our success can depend on new product development. The entertainment and communications industry is ever-changing as new technologies are introduced. Advances in technology, such as new video formats, downloading or alternative methods of product delivery and distribution channels, such as the Internet, or certain changes in consumer behavior driven by these or other technologies and methods of delivery, could have a negative effect on our business. While we mitigate risks by continually designing, engineering and developing products and systems which can be upgraded to support new services or integrated with new technologies as they become economically viable, there can be no assurance we will continue to be successful in these efforts. The deployment of high-definition television (“HDTV”) and the introduction of new technologies, such as Internet Protocol television (“IPTV”), into the hospitality market could accelerate the convergence of broadcast, telecommunications, Internet and other media and could result in material changes in the economics, regulations, intellectual property usage and technical platforms on which our business relies. Video-on-demand has been introduced over the Internet, as high-speed broadband access has greatly increased the speed and quality of viewing content, including the on-going rollout of 4G technology, enabling the viewing of feature-length movies on personal computers or Internet-connected television. These changes could lower cost barriers for our competitors desiring to enter into, or expand their presence in, the television-based interactive services business. Increased competition may adversely affect our business including the scale, source and volatility of our revenue streams, cost structures and cash flow, and may require us to significantly change our operations.

Our revenue may be adversely affected by a reduction or elimination of the time between our receipt of movies and the movies being made available to the home market. We receive our movies directly from movie studios and the timing is at the studios’ discretion. Historically, we have received movies prior to their being more broadly distributed via movie rental or retail stores. We believe this “window of release” has yielded a competitive advantage, as hotel guests have been able to view movies in the hotel rooms prior to being able to rent or purchase them for home viewing. Recently, this advance window of release has been reduced by certain studios and a further reduction or elimination of this advance window of release could adversely affect our revenue. In addition, if a studio delays release of a movie to us in a manner inconsistent with past practices, we may not be able to generate as much revenue from such movie as we could have with an earlier release date.

If we fail to develop new products, services and product enhancements, our business and prospects could be harmed. We have a continuing product development program designed to develop new products and services and to enhance and improve existing products and services. The successful development of products, services and product enhancements is subject to numerous risks, both known and unknown, including:

	Ø		unanticipated delays;
	Ø		access to capital;
	Ø		budget overruns;
	Ø		technical problems; and
	Ø		customer acceptance.

These difficulties could result in the abandonment or substantial change in the design, development and commercialization of these new products or product enhancements.

Given the uncertainties inherent with product development and introduction, we cannot assure any given product development efforts will be successful on a timely basis, within budget or at all. Our failure to develop new products, services and product enhancements on a timely basis or within budget could harm our business and prospects. In addition, there is no assurance any new product, service or product enhancement will be attractive to hotels and/or the hotel guests.

Our business could be harmed if we are unable to protect our proprietary technology. We rely primarily on a combination of trade secrets, patents, copyright and trademark laws and confidentiality procedures to protect our technology. Despite these precautions, unauthorized third parties may infringe, copy, or reverse engineer portions of our technology. We do not know if current or future patent applications will be issued within the scope of claims sought, if at all, or whether any patent issued will be challenged or invalidated. In addition, we have applied, or plan to apply for, corresponding patents and patent applications in several foreign countries for some of our existing patents and patent applications. There is a risk these patent applications will not provide significant protection for our products and technology. Our competitors may independently develop similar technology our patents do not cover. In addition, because patent applications in the United States can provide patent protection from the date of filing but are not publicly disclosed until approximately 18 months after the patent application has been filed, other patent applications may have been filed in those previous 18 months which relate to our technology and of which we are unaware. Moreover, there is a risk foreign intellectual property laws will not protect our intellectual rights to the same extent as United States intellectual property laws. In the absence of significant patent protection, we may be vulnerable to competitors who attempt to copy our products, processes or technology, which could harm our business.

If our products or services employ technology which infringes the proprietary rights of others, we may be subject to infringement claims, forced to pay certain fees to license technology or be required to stop selling our products. Our business could be harmed if we infringe upon the intellectual property rights of others. We have been notified in the past, and may be in the future, that we may be infringing intellectual property rights possessed by third parties. If any such claims are asserted, we may seek to enter into royalty or licensing agreements. There is a risk in these situations no license will be available or a license will not be available on reasonable terms, precluding our use of the applicable technology. Alternatively, we may decide to litigate such claims or to design around the patented technology. These actions could be costly and would divert the efforts and attention of our management and technical personnel. A successful claim of infringement against us or our failure or inability to license infringed or similar technology could damage our business to the extent we are required to pay substantial monetary damages or if, as a result of a successful claim, we are unable to sell our products or services without redeveloping them or are otherwise forced to incur significant additional expense. As a result, any infringement claims by third parties or claims for indemnification by customers resulting from infringement claims, whether or not proven to be true, may harm our business and prospects.

We are dependent on others for our programming content and increases in our costs or license fees to obtain such programming could reduce our cash flow and profitability. Our guest room programming content is provided primarily by movie studios, major television networks and other providers, aggregators and distributors of entertainment content. We currently pay each of these parties a fee for the right to distribute their programming in our installed guest rooms. In the future, we may be exposed to volatile or increased programming costs which may adversely affect our operating results. Our entertainment content providers may demand higher royalty rates or higher minimum payments than we are currently paying or may defer making their content available to us. We do not have a formal agreement with some of our content providers and, therefore, content from these providers may not be available in the future on terms which are acceptable to us, or at all. Increased licensing fees would also negatively impact our operating results.

The lack of quality programming or a change in available content could reduce our profitability and cash flows. Our profitability and cash flow is dependent on our ability to provide quality and popular programming to our hotel guests. We currently provide hotel guests major movies we obtain from movie studios. The quality and popularity of major movies 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. We also provide hotel guests independent films, most of which are non-rated and intended for mature audiences, music services and Nintendo video games. Our ability to be profitable and generate positive cash flow depends upon our ability to provide content for which hotel guests are willing to pay. However, we cannot predict the future popularity or quality of the movies, music, games or other content we provide or may provide in the future. If, for any reason, such content became less popular than it is currently, or is not made available to us for distribution on a timely basis, our business could be adversely impacted. In addition, if any significant portion of the content we provide to hotel guests were to become unavailable, for reasons which could include licensing difficulties, governmental regulation or issues of public standards, our business could be adversely impacted. In addition, any negative publicity, lawsuit or boycotts by opponents of the mature-themed programming content could have a negative impact on the willingness of the hospitality industry to offer such content to guests, which, in turn, could have a detrimental effect on our revenues and ability to achieve stated business goals.

Federal, state, local and foreign legislation and regulation may negatively impact our business and growth. We may be classified as a multi-channel video programming distributor, and thus may be subject to various provisions of 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, and the regulations promulgated under those acts. In addition, the Internet-based services offered by us may be affected by various laws and governmental regulations. While there are currently few laws or regulations directly regarding access to or commerce on commercial online services, new laws and regulations are under debate by federal and local lawmakers and 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 may cause a decline for our Internet-based services and products or have other adverse effects on our business. In addition, any legislative or regulatory changes restricting content which may be delivered over our systems, particularly mature content, could significantly reduce our revenue and operating income. Federal, state, local and foreign laws and regulations are, or may be, the subject of a variety of judicial, administrative and legislative hearings and proceedings which could change, in varying degrees, the regulatory classification applicable to us and the manner in which we are regulated. We cannot predict the outcome of these proceedings or the impact on our operations at this time.

If our hotel customers become dissatisfied with our service, they may elect not to renew certain products or services with us or elect to terminate service agreements, which could have an adverse affect on our ability to maintain or grow our revenue. In the event our customers become dissatisfied with the scope or capability of our products or services, or the level of funding we are willing or able to allocate to hotel-based investments, they may elect not to renew certain products or services, such as video-on-demand, upon expiration or terminate their existing agreements with us. The loss of these products or services or a loss of any significant number of hotel customers could have a detrimental effect on our operations and financial condition.

Our data systems could fail or their security could be compromised, and we will increasingly be handling personal data requiring our compliance with a variety of regulations. Our business operations depend on the reliability of sophisticated data systems. Any failure of these systems, or any breach of our systems’ security measures, could adversely affect our operations, at least until our data can be restored and/or the breaches remediated. Historically, virtually all purchases made by hotel guests using our systems were posted to the guest’s hotel folio. As a result, we did not receive, store or process personal information in conjunction with business transactions governed by government and industry privacy and security requirements, such as credit card transactions. As our revenue diversification efforts increase, we have, to a limited extent, begun to serve as a conduit for personal information to third-party credit processors, service partners and others, and it is likely we will do so more regularly. The handling of such personal information requires we comply with a variety of federal, state and industry requirements governing the use and protection of such information, including, but not limited to, FTC consumer protection regulations and Payment Card Industry (“PCI”) data security standards and, for the Healthcare division, the requirements of the Health Insurance Policy Portability Act (“HIPPA”) and regulations thereunder. While we believe we have taken the steps necessary to assure compliance with all applicable regulations and have made necessary changes to our data systems, any failure of these systems or any breach of the security of these systems could adversely affect our operations and expose us to increased cost, liability for lost personal information and increased regulatory obligations.

Many of our key functions are concentrated in a single location, and a natural disaster could seriously impact our ability to operate. Our IT systems, production, inventory control systems, executive offices and finance/accounting functions, among others, are primarily centralized in our Sioux Falls, SD facility. A natural disaster, such as a tornado, could seriously disrupt our ability to continue or resume normal operations for some period of time. While we have certain business continuity plans in place, no assurances can be given as to how quickly we would be able to resume operations and how long it may take to return to normal operations. We may experience business interruptions and could incur substantial losses beyond what may be covered by applicable insurance policies, and may experience a loss of customers, vendors and employees during the recovery period.

Our significant level of debt and interest payment obligations may impair our financial condition, limit our ability to compete, expose us to interest rate risk to the extent of our variable-rate debt and prevent us from meeting our financial obligations. As of December 31, 2010, we had $373.6 million of consolidated debt. Subject to restrictions in our Credit Facility and instruments governing our current and future debt securities, we may also incur additional amounts of debt for working capital, capital expenditures and other purposes. This substantial level of indebtedness could have important consequences, including the following:

	Ø		make it more difficult for us to satisfy our financial obligations and dividend payments required on our outstanding preferred stock;
	Ø		require us to dedicate a substantial portion of our cash flow from operations to payments on our indebtedness and dividend payments required on our outstanding preferred stock, thereby reducing the availability of our cash flow to fund working capital, capital expenditures and other general corporate purposes;
	Ø		limit our ability to borrow additional funds to expand our business or alleviate liquidity constraints;
	Ø		limit our ability to refinance all or a portion of our indebtedness on or before maturity;
	Ø		limit our ability to pursue potential acquisitions;
	Ø		increase our vulnerability to general adverse economic and industry conditions;
	Ø		increase our cost of borrowing;
	Ø		limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate; and
	Ø		place us at a competitive disadvantage relative to companies which have proportionately less indebtedness.

Covenants under our Credit Facility may restrict our future operations and adverse consequences could result in the event of non-compliance. Our current Credit Facility contains covenants which may restrict our ability to finance future operations or capital needs or to engage in other business activities. Future borrowing instruments, such as credit facilities and indentures, if any, are also likely to contain restrictive covenants and may require us to pledge assets as security under those future arrangements. The terms of our current Credit Facility, including financial covenants, restrict, among other things, our ability and the ability of our subsidiaries to:

	Ø		incur, assume or permit to exist additional indebtedness, guaranty obligations or hedging arrangements;
	Ø		declare or pay certain dividends or make other payments on, redeem or repurchase our capital stock; make loans and investments or repay subordinated indebtedness;
	Ø		engage in sale-leaseback transactions;
	Ø		enter into transactions with affiliates;
	Ø		sell assets;
	Ø		create or suffer to exist liens;
	Ø		create restrictions on dividend and other payments to us from our subsidiaries;
	Ø		change the nature of the business we conduct; and
	Ø		issue or sell stock of subsidiaries; and engage in a merger, sale or consolidation.

Events beyond our control, including changes in general economic and business conditions, as well as our financial performance, may adversely affect our business. In addition, the Credit Facility contains certain financial ratio and financial condition covenants. Such changes in general economic and business conditions, or our financial performance, may affect our ability to meet those financial ratios and financial conditions tests and to otherwise remain in compliance with the requirements of our Credit Facility and other material agreements. A breach of any of these covenants would result in a default under the applicable debt instrument or agreement. In that event, the amounts under the applicable agreement could be declared immediately due and payable, or require us to amend the Credit Facility, resulting in significantly higher annual interest expense, and such a default may cause a default under some of our material agreements. As a result of these covenants and restrictions, we are limited in how to conduct our business and we may be unable to compete effectively, to meet our customer demands for installations or service or take advantage of new business opportunities.

In order to continue operating efficiently and expand our business, we must remain in compliance with covenants outlined in our Credit Facility. Our ability to remain in compliance with those covenants will depend on our ability to generate sufficient Consolidated EBITDA (a term defined in our Credit Facility) and to manage our capital investment and debt levels. We are currently pursuing an amendment of our Credit Facility, which may increase our interest costs, require upfront fees and modify certain other terms which will be less favorable than we currently have. If we are not able to remain in compliance with our current debt covenants and our lenders will not amend or waive covenants with which we are not in compliance, the debt would be due, we would not be able to satisfy our financial obligations and we would need to seek alternative financing. If we were not able to secure alternative financing, this would have a substantial adverse impact on the Company and our ability to continue our operations.

The price of our common stock may be subject to volatility. As of December 31, 2010, a substantial portion of our common stock was held by a limited number of institutional investors, and the amount of capital stock held by non-institutional holders is believed to be limited. This concentration of ownership may limit the amount of stock available for sale or purchase at any particular time, and may result in significant increases or decreases in the price of our common stock due to factors which may not reflect the market as a whole or our economic condition or results of operations.

Item 1B — Unresolved Staff Comments

None.

Item 2 — Properties

Our headquarters, including our distribution center and principal executive offices, are located in Sioux Falls, South Dakota. Our owned facility is used for executive, administrative and support functions; assembly and distribution; and warehouse space. We believe our facility will be sufficient to accommodate foreseeable local operational space requirements.

We lease 28 facilities, in various locations, from unaffiliated third parties. These facilities include offices for our subsidiaries and combination warehouse/office facilities for our installation and service operations, and are located throughout the United States, Canada and Mexico.

Item 3 — Legal Proceedings

We are subject to litigation arising in the ordinary course of business. As of the date hereof, we believe the resolution of such litigation will not have a material adverse effect upon our financial condition, results of operations or cash flows.

On July 11, 2008, LinkSmart Wireless Technology, LLC, a California limited liability company based in Pasadena, California, filed several actions for patent infringement in the U.S. District Court in Marshall, Texas. The suits allege the Company and numerous other defendants infringe a patent issued on August 17, 2004, entitled “User Specific Automatic Data Redirection System.” All pending cases have been consolidated. The complaint does not specify an amount in controversy. The Company believes it does not infringe the patent in question, has filed responsive pleadings and is vigorously defending the action. The suit is in the discovery stage. The U.S. Patent and Trademark Office has undertaken a re-examination of the patent which is the subject of this suit, and issued a preliminary finding that the patent is invalid. On June 30, 2010, the Court, through the Magistrate Judge, issued a Memorandum Opinion and Order (the “Markman Order”), which construed certain disputed terms in the patent at issue in the case. The plaintiff and several defendants have filed objections with the Court for review of various portions of the Order. On July 1, 2010, the Magistrate Judge issued a report and recommendation that the Court grant the motion of the defendants for summary judgment with respect to claims 15, 16, 17, 19, 22 and 23 of the patent on grounds that such claims in the patent are indefinite and invalid. The plaintiff has filed objections with the Court for review of report and recommendation regarding summary judgment. On October 26, 2010, the Court issued an order staying the case pending the final determination in the Patent Office re-examination proceeding.

On November 17, 2009, Nomadix, Inc., a Delaware corporation based in Newbury Park, California, filed an action for patent infringement in the U.S. District Court in Los Angeles, California. The suit alleged the Company and its subsidiaries On Command Corporation and LodgeNet StayOnline, Inc. infringed five patents. The complaint also asserted claims against a number of other defendants, including Hewlett-Packard Company, Wayport, Inc., Ibahn Corporation, Guest-Tek Interactive Entertainment Ltd. and Guest-Tek Entertainment Inc., Aruba Networks, Inc., Superclick, Inc. and Superclick Networks, Inc. On May 21, 2010, the plaintiff filed an amended complaint asserting infringement of a patent issued on March 30, 2010 entitled “Systems and Methods for Providing Dynamic Network Authorization, Authentication and Accounting.” The Company filed a responsive pleading denying such allegations. This action and a related patent infringement action filed by the Company against Nomadix in the U.S. District Court for South Dakota were settled as of December 31, 2010. In connection with the settlement, the parties entered into a patent license agreement and a strategic technology alliance which includes a number of ordinary course commercial agreements, including agreements pursuant to which the Company will be able to offer various hardware and software developed by Nomadix and its affiliates in the United States, Canada and Mexico, and Nomadix and its affiliates will be able to offer hardware and software developed by the Company in various countries served by such entities.

PART II

Item 5 — Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock currently trades on the NASDAQ Global Select Market (“NASDAQ Exchange”) under the symbol “LNET.” Our common stock began trading on the NASDAQ Exchange on October 14, 1993 upon the effectiveness of our initial public offering. As of March 7, 2011, there were outstanding 25,152,080 shares of common stock.

The following table sets forth, for the fiscal quarters indicated, the range of high and low sales prices of our common stock as reported by NASDAQ:

Quarter Ended		High				Low				Quarter Ended		High				Low
March 31, 2010			7.38				4.96			March 31, 2009			1.73				0.50
June 30, 2010			7.41				3.61			June 30, 2009			5.99				1.50
September 30, 2010			4.50				2.32			September 30, 2009			7.75				3.11
December 31, 2010			4.48				2.14			December 31, 2009			7.77				4.26

On March 7, 2011, the closing price of our common stock, as reported by NASDAQ Exchange, was $3.13. Stockholders are urged to obtain current market quotations for our common stock. As of March 7, 2011, we have 106 stockholders of record with approximately 98.6% of the shares held in “street name.” We estimate that as of March 7, 2011, we had 4,051 beneficial owners of our common stock.

We have 5,000,000 shares of preferred stock authorized at $0.01 par value per share, of which 57,500 10% Series B cumulative perpetual convertible shares were issued and outstanding as of December 31, 2010, with a liquidation preference of $1,000 per share.

Performance Graph

The following graph compares the percentage change in the Company’s cumulative total stockholder return on its common stock with (i) the cumulative total return of the NASDAQ Market Index and (ii) the cumulative total return of all companies (the “Peer Group”) with the same four-digit standard industrial code (“SIC”) as the Company (SIC 4841 — Cable and Other Pay Television Services) over the period from January 1, 2005 through December 31, 2010, The graph assumes an initial investment of $100 in each of the Company, the NASDAQ Market Index and the Peer Group and reinvestment of dividends. The Company did not declare or pay any dividends on its common stock in 2010. The graph is not necessarily indicative of future price performance.

This graph shall not be deemed incorporated by reference by any general statement incorporating by reference this Annual Report on Form 10-K into any filing under the Securities Act or under the Exchange Act, except to the extent the Company specifically incorporates this information by reference, and shall not otherwise be deemed filed under such Acts.

Issuer Purchases of Equity Securities

During 2010, we did not repurchase any shares of our common stock.

Dividends

No dividends have been paid to date on our common stock. The terms and conditions of our bank Credit Facility contain covenants, which restrict and limit payments or distributions in respect of our common stock.

Subject to the declaration of dividends by our Board of Directors, cumulative dividends on the preferred stock will be paid at a rate of 10% per annum of the $1,000 liquidation preference per share, starting from the date of original issue, June 29, 2009. Dividends accumulate quarterly in arrears on each January 15, April 15, July 15 and October 15, beginning on October 15, 2009. Payments must come from funds legally available for dividend payments. Dividends were declared on the preferred stock by our Board of Directors, and as of December 31, 2010, we had $1.4 million of unpaid dividends. The dividends were recorded as a reduction to additional paid-in capital, due to our accumulated deficit balance. The preferred stock dividends were paid on January 18, 2011.

Stockholder Rights Plan

In February 2008, we adopted a stockholder rights plan (the “2008 Rights Plan”), which was approved by the stockholders at the Annual Meeting on May 14, 2008. The rights plan is intended to maximize stockholder value by providing flexibility to the Board of Directors in the event an offer for LodgeNet is received which is either inadequate or not in the best interest of all stockholders.

The following is a summary of the material terms of the 2008 Rights Plan. The statements below are only a summary, and we refer you to the full text of the 2008 Rights Plan, which was filed as an exhibit to Form 8-A filed with the SEC on March 3, 2008. Each statement in this summary is qualified in its entirety by this reference.

General

Under the terms of the 2008 Rights Plan, each share of common stock outstanding has one Right attached to it, so the purchase of a share of common stock is also a purchase of the attached Right. Certificates representing the Company’s common stock also represent the attached Rights. The Rights are not currently exercisable or separately tradable.

After the “Distribution Date,” which is described below, each Right will become separately tradable and initially will entitle the holder to purchase from the Company one one-thousandth of a share of Series A Participating Preferred Stock (the “Preferred Shares”) at a price of $60.00 (the “Purchase Price”), subject to adjustment. Each one one-thousandth of a Preferred Share has rights roughly equivalent to one share of common stock. If certain circumstances occur as discussed below, the Rights would instead entitle their holders to purchase common stock of the Company or an acquirer. Assuming the Plan is approved by the stockholders every three years, the Rights will expire at the close of business on February 28, 2017 (the “Final Expiration Date”).

Events Causing Exercisability and Separate Transferability

A “Distribution Date” will occur and the Rights will become exercisable and separately tradable upon the earlier of:

	(1)		the first public announcement a person or group (other than the Company, any subsidiary, or a benefit plan of the Company or its subsidiaries), has acquired, or obtained the right to acquire, except under limited circumstances, beneficial ownership of 20 percent or more of the outstanding common stock; or
	(2)		the close of business on the tenth business day (or such later date as the Company’s Board of Directors may determine) after the commencement of, or a public announcement of, an intention to commence (which tender offer is not terminated within such ten business days), a tender or exchange offer the consummation of which would result in a person or group becoming an Acquiring Person (as defined in the following).

Generally, a person or group whose acquisition of common stock causes a Distribution Date pursuant to clause (1) above (including pursuant to the completion of a tender or exchange offer described in (2)) is an “Acquiring Person.” As soon as practicable following the Distribution Date, separate Right certificates will be mailed to holders of record of the common stock as of the close of business on the Distribution Date.

Events Causing Adjustment of the Shares Acquirable Upon Exercise of the Purchase Price

Generally, if any person becomes an Acquiring Person, each holder of a Right, other than the Acquiring Person (and any affiliates and certain transferees), will then have the right to receive, upon exercise and payment to the Company of the Purchase Price, instead of one one-thousandth of a Preferred Share, the number of shares of Company common stock having an average market value equal to two times the Purchase Price. Any Rights beneficially owned by any Acquiring Person (or any affiliate or certain transferees) will be null and void. In other words, the Rights holders, other than the Acquiring Person and certain others, may at that time purchase Company common stock at a 50 percent discount.

Alternatively, in the event that, after the first public announcement, a person or group has become an Acquiring Person, the Company is a party to a merger, statutory share exchange or sale of more than 50 percent of the Company’s assets or earning power in a transaction with an Acquiring Person or certain specified related parties or in which all holders of Company common stock are not treated alike, then each holder of a Right (except Rights which have been voided as set forth previously) shall have the right to receive, upon exercise and payment to the Company of the Purchase Price, instead of one one-thousandth of a Preferred Share, common shares of the acquiring or surviving company having an average market value equal to two times the Purchase Price. In other words, the Rights holders, other than the Acquiring Person and certain others, may at that time purchase the acquiring or surviving company’s common shares at a 50 percent discount.

The Purchase Price payable and the number of shares issuable upon exercise of the Rights are subject to adjustment, from time to time, to prevent dilution upon the occurrence of specified events affecting the Preferred Shares. The number of outstanding Rights and the Purchase Price are also subject to adjustment in the event of a stock dividend on the common stock payable in common stock or subdivisions or combinations of the common stock occurring before the Distribution Date.

Redemption of the Rights

At any time before a person becomes an Acquiring Person, the Board may redeem the Rights in whole, but not in part, at a price of $0.01 per Right (the “Redemption Price”), payable in cash or common stock. The Board may also redeem the Rights for a limited time after 60 days after the later of the date a person or group becomes an Acquiring Person and the effective date of a registration statement under the Securities Act of 1933 with respect to securities issuable upon exercise of the Rights.

In addition, if the Company receives a “Qualified Offer” (as defined in the following paragraph), the Rights may be redeemed by the stockholders if approved by the holders of at least a majority of the outstanding common stock at a special meeting of stockholders called to vote on a resolution accepting the Qualified Offer and to authorize the redemption of the Rights pursuant to the provisions of the Agreement. The special meeting must be held within 90 business days after the Company receives a request from stockholders to hold such a meeting. If a resolution to redeem the Rights is approved at the special meeting (or if the special meeting is not held on or before the 90^th business day after receipt of the request for a meeting), it will become effective immediately prior to the consummation of any Qualified Offer consummated within 60 days after the earlier of the special meeting or the 90^th business day after receipt of a request for a special meeting of shareholders.

A “Qualified Offer” is a tender offer for all outstanding common stock not already beneficially owned by the person making the offer which meets all of the following conditions:

	Ø		the same per share price is offered for all shares, and such price per share is greater than the highest closing price for the common stock during the 12 month period immediately preceding the date on which the offer is commenced, represents a reasonable premium above the average of the closing prices for the five trading days immediately preceding the date on which the offer is commenced, is at least 80 percent cash (with any non-cash consideration consisting of common stock of the offeror), and is to be paid upon consummation of the offer;
	Ø		if the consideration offered includes shares of common stock of the offeror, the offeror is a publicly owned United States corporation and its common stock is traded on either the New York Stock Exchange or The NASDAQ Stock Market (“NASDAQ”), no further stockholder approval is required to issue such common stock, no other class of voting stock of the offeror is outstanding, and the offeror shall permit the Company’s investment banking firm and legal counsel to have access to such offeror’s books, records, management, accountants and other advisers for the purpose of permitting such investment banking firm and such legal counsel to conduct a due diligence review to permit such investment banking firm to be able to render a fairness opinion with respect to the consideration being offered; the offer is accompanied by written financing commitments and/or the offeror has on hand cash or cash equivalents for the full amount of all financing necessary to consummate the offer and follow-on merger;

	Ø		the offer is subject to a non-waivable condition that a minimum of 90 percent of the outstanding common stock (other than those owned by the offeror) will be tendered and not withdrawn as of the offer’s expiration date;
	Ø		the offer by its terms remains open for at least 60 business days and at least 10 business days after the date of any special meeting of shareholders called under the redemption provisions, plus 15 business days after any change in price or after any bona fide alternative offer for a higher consideration is made;
	Ø		the offer is accompanied by a written opinion of a nationally recognized investment banking firm stating the price to be paid to holders pursuant to the offer is fair and including any written presentation of such firm showing the analysis and range of values underlying such conclusion;
	Ø		on or before the date the offer is commenced, such person makes an irrevocable written commitment to the Company (1) to acquire, within five business days following completion of the offer, all shares of common stock not beneficially owned by such person at the same cash price per share as paid in the offer, (2) not to amend its offer to reduce the price or otherwise change the terms in a way which is adverse to tendering shareholders, and (3) if the offer is not consummated, such person will not make another offer for the common stock within one year if at least 85 percent of the common stock not owned by such person has not been tendered; and
	Ø		the offer is subject only to the conditions specified in the definition and usual and customary terms and conditions, and is not subject to any financing, funding or similar condition, nor to any condition relating to completion of or satisfaction with any due diligence or similar investigation.

Amendments

The 2008 Rights Plan may be amended by the Board before the Distribution Date without the consent of the Rights holders. After the Distribution Date, the Rights Plan may be amended by the Board to cure any ambiguity, to correct or supplement any provision which may be defective or inconsistent with any other provision, to make changes which do not adversely affect the interests of holders of Rights (excluding the interests of any Acquiring Person) or, subject to certain limitations, to shorten or lengthen any time period under the Rights Plan (other than a time period governing redemption at a time when the Rights are not redeemable).

Term

The 2008 Rights Plan expires on the date of our 2011 Annual Meeting of Shareholders unless an extension is ratified for an additional three years.

Item 6 — Selected Financial Data

The following is a summary of the Statement of Operations and other data derived from the audited financial statements. The data should be read in conjunction with our 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,
		2010				2009				2008				2007				2006
Select Financial Data:
Revenues:
Hospitality and Advertising Services		$	443,654			$	476,658			$	527,810			$	481,111			$	285,939
Healthcare			8,518				7,834				6,069				4,477				2,274
Total revenues			452,172				484,492				533,879				485,588				288,213
Income (loss) from operations			23,410				21,692				(5,071	)			(4,236	)			26,932
Net (loss) income			(11,685	)			(10,155	)			(48,418	)			(65,172	)			1,841
Preferred stock dividends			(5,750	)			(3,114	)			—				—				—
Net (loss) income attributable to common stockholders		$	(17,435	)		$	(13,269	)		$	(48,418	)		$	(65,172	)		$	1,841
Net (loss) income per common share (basic and diluted)		$	(0.71	)		$	(0.59	)		$	(2.16	)		$	(3.00	)		$	0.10
Other Data:
Investing activities:
Capital expenditures (1)		$	21,825			$	21,341			$	64,407			$	79,097			$	48,268
Average cost per room — new HD installation		$	200			$	339			$	398			$	460			$	438
Average Hospitality and Advertising Services revenue per room		$	21.29			$	21.73			$	23.69			$	21.76			$	23.72

		As of December 31,
		2010				2009				2008				2007				2006
Balance Sheet Data:
Cash and cash equivalents		$	8,381			$	17,011			$	10,800			$	25,569			$	22,795
Total assets		$	444,006			$	508,354			$	589,786			$	693,823			$	263,209
Total debt		$	373,639			$	469,946			$	588,520			$	624,594			$	270,169
Total stockholders’ deficiency		$	(54,349	)		$	(70,987	)		$	(128,748	)		$	(48,242	)		$	(58,122	)

		Year Ended December 31,
		2010				2009				2008				2007				2006
Statement of Cash Flows Data:
Cash provided by operating activities		$	101,706			$	86,172			$	89,853			$	58,869			$	72,301
Property and equipment additions			(21,825	)			(21,341	)			(64,407	)			(79,097	)			(48,268	)
			79,881				64,831				25,446				(20,228	)			24,033
Cash used for acquisition and other activities, net			—				—				—				(354,177	)			(2,336	)
		$	79,881			$	64,831			$	25,446			$	(374,405	)		$	21,697

Special Note Regarding Forward-Looking Statements

Certain statements in this report or documents incorporated herein by reference constitute “forward-looking statements.” When used in this report, the words “intends,” “expects,” “anticipates,” “estimates,” “believes,” “goal,” “no assurance” and similar expressions, and statements which are made in the future tense or refer to future events or developments, are intended to identify such forward-looking statements. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In addition to the risks and uncertainties discussed in Item 1A of this Annual Report on Form 10-K for the year ended December 31, 2010, in any prospectus supplement or any report or document incorporated herein by reference, such factors include, among others, the following:

	Ø		the effects of general economic and financial conditions;
	Ø		the economic condition of the hospitality industry, which can be particularly affected by general economic and financial conditions, as well as by factors such as high gas prices, levels of unemployment, consumer confidence, acts or threats of terrorism and public health issues;
	Ø		decreases in hotel occupancy, whether related to economic conditions or other causes;
	Ø		competition from providers of similar services and from alternative sources;
	Ø		changes in demand for our products and services;
	Ø		programming costs, availability, timeliness and quality;
	Ø		technological developments by competitors;
	Ø		developmental costs, difficulties and delays;
	Ø		relationships with clients and property owners;
	Ø		the impact of covenants contained in our credit agreement, compliance with which could adversely affect capital available to finance growth, and the violation of which would constitute an event of default;
	Ø		changes to government laws and regulations and industry compliance standards;
	Ø		potential effects of litigation;
	Ø		risks of expansion into new markets and territories;
	Ø		risks related to the security of our data systems; and
	Ø		other factors detailed, from time to time, in our filings with the SEC.

These forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our 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 our Consolidated Financial Statements, including the notes thereto, appearing elsewhere herein.

Executive Overview

We are the largest provider of interactive media and connectivity solutions to the hospitality industry in the United States, Canada and Mexico. Our primary offerings include guest-paid entertainment, such as on-demand movies, and hotel-paid services, including cable television programming and Internet access services. As of December 31, 2010, we provided interactive and media networks and connectivity solutions to approximately 1.8 million hotel rooms in North America and provide our hospitality solutions in select international markets, primarily through local or regional licensees. In addition, we also have a growing presence in the healthcare market, where we sell and maintain interactive television systems which provide on-demand patient education, information and entertainment to healthcare facilities throughout the United States. As of December 31, 2010, our systems were installed in 56 healthcare facilities, representing approximately 12,200 beds, and we had an additional six facilities under contract.

Our video-on-demand served room base consists of 1.7 million hotel rooms in approximately 9,000 of the best hotels throughout the United States, Canada and Mexico, and our business strategy is focused unlocking the full value those rooms represent. We believe there is substantial value beyond the returns we are generating from our current analog base, and converting that base to high definition (“HD”) represents a significant and proven opportunity. Rooms with our HD system generated approximately 60% more revenue than rooms installed with analog technology. The higher revenue performance is driven by 1) a lift in Guest Entertainment revenue within our HD rooms, 2) a higher penetration of LodgeNet-provided HD cable programming within HD rooms and 3) the mix of converted rooms are from generally higher chain scale properties. Another highlight of our HD system is the rapid decline in the amount of capital we invest to equip a room with HD, as we leverage the technology cost curve and benefit from ongoing operating efficiencies. During the last year, we have seen a 41.0% decrease in the cost to install a new HD room, from an average of $339 in 2009 to $200 for 2010. In addition, we believe Envision, our next generation, interactive television platform, will create additional revenues from Internet-sourced and other interactive applications, information and entertainment. We successfully installed our first Envision system in January 2011.

Our total revenue for 2010 was $452.2 million, a decrease of $32.3 million or 6.7%, compared to 2009. The decrease in revenue came mainly from a decrease in Guest Entertainment revenue, as well as from System Sales and Related Services, partially offset by increases in revenue from Hotel Services, Advertising Services and Healthcare. Guest Entertainment revenue decreased $37.2 million or 12.6% in 2010, resulting from an 8.0% reduction in revenue on a per installed room basis, in addition to a 5.0% reduction in the average number of rooms served over the prior year period. Hotel Services revenue increased $4.5 million or 3.4% for 2010. This increase resulted from price changes and higher priced programming packages purchased by hotels as they install high-definition television systems. System Sales and Related Services decreased $3.3 million or 7.8% in 2010. The decrease was primarily driven by a decline in broadband equipment sales. The Hotel Networks (“THN”), our advertising services subsidiary, generated $9.9 million of Advertising Services revenue during 2010 compared to $6.9 million in the prior year, an increase of $3.0 million or 42.7%. This increase was primarily the result of an increase in carriage services revenue. Healthcare revenue increased $0.7 million or 8.7%, to $8.5 million during 2010 versus $7.8 million in 2009.

Total direct costs were $254.0 million in 2010, a decrease of $19.9 million or 7.3%, as compared to $273.9 million in 2009. The decrease in total direct costs was primarily due to decreased commissions and content royalties, lower system and equipment costs and a reduction in recurring connectivity and other Internet support costs. Advertising Services experienced lower fixed costs in 2010 as well, due to lower satellite distribution costs. Partially offsetting these reductions was an increase in television programming costs, which vary with the increased revenue and the services provided. These changes improved gross margins to 43.8% in 2010 compared to 43.5% for the prior year.

System operations expenses and selling, general and administrative (“SG&A”) expenses were $91.1 million in 2010 compared to $88.1 million in 2009. The increase was driven by debt issuance costs of $0.7 million related to financing options, higher legal fees, service and maintenance costs, travel, higher fuel costs and business development costs.

We generated $101.7 million of cash from operating activities during 2010, as compared to $86.2 million in 2009. The increase was primarily from the increase of our accounts payable balance. A portion of this working capital increase is expected to reverse in 2011. Cash used for property and equipment additions, including growth related capital, was $21.8 million in 2010. During the year, we also used the cash generated from operations to pay the required term loan principal repayments of $4.6 million and made $96.8 million of additional payments. We achieved our final covenant step-down during the third quarter of 2010, and ended the year with a leverage ratio (as defined on page 42), calculated on a consolidated debt basis, of 3.43 times compared to the covenant of 3.50 times.

Hospitality and Advertising Services Business

Guest Entertainment (includes purchases for on-demand movies, network-based video games, music and music videos and television on-demand programming). One of our main sources of revenue, generating 57.2% of total revenue, is providing in-room, interactive guest entertainment, for which the hotel guest pays on a per-view, hourly or daily basis.

Our total guest-generated revenue depends on a number of factors, including:

	Ø		The number of rooms on our network. We can increase revenue over time by increasing the number of rooms served by our interactive television systems. Our ability to expand our room base is dependent on a number of factors, including newly constructed hotel properties and the attractiveness of our technology, service and support to hotels currently operating without an interactive television system.
	Ø		The occupancy rate at the property. Our revenue also varies depending on hotel occupancy rates, which are subject to a number of factors, including seasonality, general economic conditions and world events, such as terrorist threats or public health issues. Occupancy rates for the properties we serve are typically higher during the second and third quarters due to seasonal travel patterns. We target higher occupancy properties in diverse demographic and geographic locations in an effort to mitigate occupancy-related risks.
	Ø		The buy rate of hotel guests. This is impacted by a number of issues, some of which are not under our control. Specific issues impacting buy rate include:

	Ø		The number of rooms equipped with our high-definition (“HD”) systems. We can increase revenue by increasing the number of HD rooms served. Our ability to expand our HD room base is dependent on a number of factors, including availability of capital resources from the hotels and us to invest in HD televisions and equipment. We are focused on accelerating the installation of our HD systems as hotels increase their purchase of HD televisions, since the revenue generated from the digital quality experience within our installed HD rooms is approximately 60% higher than our analog rooms.
	Ø		The popularity, timeliness and amount of content offered at the hotel. Our revenues vary, to a certain degree, with the number, timeliness and popularity of movie content available for viewing, and whether the content is presented in digital or analog format. Historically, a decrease in the availability of popular movie content has adversely impacted revenue, and the availability of high definition content has increased revenue. Although not completely within our control, we seek to program and promote the most popular available movie content and other content to maximize revenue and profitability.
	Ø		The price of the service purchased by the hotel guest. Generally, we control the prices charged for our products and services and manage pricing in an effort to maximize revenue and overall profitability. We establish pricing based on such things as the demographics of the property served, the popularity of the content and overall general economic conditions. Our technology enables us to measure the popularity of our content and make decisions to best position such content and optimize revenue from such content.

	Ø		The availability of alternative programming. We compete directly for customers with a variety of other interactive service providers, including other interactive television service providers, cable television companies, direct broadcast satellite companies, television networks and programmers, Internet service providers and portals, technology consulting and service firms, companies offering web sites which provide on-demand movies, movie downloads, rental companies providing DVDs which can be viewed in properly equipped hotel rooms or on other portable viewing devices and hotels which offer in-room laptops with Internet access or other types of Internet access systems. We also compete, in varying degrees, with other leisure-time activities such as movie theaters, the Internet, radio, print media, personal computers and other alternative sources of entertainment and information.
	Ø		Consumer sentiment. The willingness of guests to purchase our entertainment services is also impacted by the general economic environment and its impact on consumer sentiment. Historically, such impacts were not generally material to our revenue results; however, since the last half of 2008, economic conditions have had a significant, negative impact on our revenue levels. As economic conditions improve in the future, guest purchase activity may or may not increase to the same levels previously experienced by the Company.

The primary direct costs of providing Guest Entertainment are:

	Ø		license fees paid to major motion picture studios, which are variable and based on a percent of guest-generated revenue, for non-exclusive distribution rights of recently released major motion pictures;
	Ø		commissions paid to our hotel customers, which are also variable and based on a percent of guest-generated revenue;
	Ø		license fees, which are based on a percent of guest-generated revenue, for television on-demand, music, music videos, video games and sports programming; and
	Ø		one-time license fees paid for independent films, most of which are non-rated and intended for mature audiences.

Hotel Services (includes revenue from hotels for services such as television channels and recurring broadband Internet service and support to the hotels). Another major source of our revenue is providing cable television programming and Internet services to the lodging industry, for which the hotel pays a fixed monthly fee.

	Ø		Cable Television Programming. We offer a wide variety of satellite-delivered cable television programming paid for by the hotel and provided to guests at no charge. The cable television programming is delivered via satellite, pursuant to an agreement with DIRECTV, and is distributed over the internal hotel network, and typically includes premium channels such as HBO and Showtime, which broadcast major motion pictures and specialty programming, as well as non-premium channels, such as CNN and ESPN. With the launch of the high-definition configuration of our interactive television system, we also began offering high-definition cable television programming to the extent available from broadcast sources and DIRECTV.
	Ø		Broadband Internet Service and Support. We also design, install and operate wired and wireless broadband Internet systems at hotel properties. These systems control access to the Internet, provide bandwidth management tools and allow hotels to charge guests or provide the access as a guest amenity. Post-installation, we generate recurring revenue through the ongoing maintenance, service and call center support services to hotel properties installed by us and also to hotel properties installed by other providers or through a revenue-share model in which hotel guests pay for broadband Internet and we pay a commission to our hotel customers. While this is a highly competitive area, we believe we have important advantages as a result of our proactive monitoring interface with hotel systems to improve up time, existing hotel customer relationships and our nationwide field service network.

System Sales and Related Services. We also generate revenue from other products and services within the hotel and lodging industry, including sales of broadband Internet and other interactive television systems and equipment, cable television programming reception equipment, Internet conference services and professional services, such as design, project management and installation services.

Advertising Services. We deliver advertising-supported media into select hotel segments, from which we earn revenue from the sale of television commercials, channel access or other marketing-based programs. The demographic and professional profile of the traveler within our room base tends to have characteristics we believe may be attractive to consumer marketing organizations. By approaching guests with relevant messaging when they are in the comfort of a hotel room, free of distractions, advertisers have a prime opportunity to capture the attention of and connect with these desired consumers. In addition to market demands, our revenue is also dependent on rooms available to promote customer products and services. As of December 31, 2010 and December 31, 2009, we provided advertising media services to approximately 1.2 million hotel rooms. We also deliver targeted advertising and services to approximately 360,000 hotel rooms on 10 popular satellite-delivered channels.

Key Metrics:

Rooms Served

One of the metrics we monitor within our Hospitality and Advertising Services business is the number of rooms we serve with our various services. As of December 31, we had the following number of rooms installed with the designated service:

		2010				2009				2008
Total rooms served (1)			1,829,712				1,909,323				1,977,015
Total Guest Entertainment rooms (2)			1,680,322				1,779,979				1,866,353
Total HD rooms (3)			270,384				231,588				191,491
Percent of Total Guest Entertainment rooms			16.1	%			13.0	%			10.3	%
Total Cable Television Programming (FTG) rooms (4)			1,030,437				1,087,860				1,105,754
Percent of Total Guest Entertainment rooms			61.3	%			61.1	%			59.2	%
Total Broadband Internet rooms (5)			178,047				201,936				229,003
Percent of Total rooms served			9.7	%			10.6	%			11.6	%

High Definition Room Growth

We also track the penetration of our high-definition television (“HDTV”) system, since rooms equipped with HDTV services typically generate higher revenue from Guest Entertainment and Hotel Services than rooms equipped with our standard-definition VOD systems. HDTV room growth occurs as we install our HDTV system in newly contracted rooms or convert certain existing rooms to the HDTV system in exchange for contract extensions. The installation of an HDTV system typically requires a capital investment by both the Company and the hotel operator. HDTV growth has been constrained by reduced hotel capital spending budgets, given the negative impact of the economy on the hospitality industry. We are prepared to increase capital investment levels and work jointly with our best hotel customers to continue the rollout of high-definition systems within the operating and capital plans of the hotels and the Company. We installed our HDTV systems in the following number of net new rooms as of December 31:

		2010				2009				2008
Net new HDTV rooms			38,633				40,097				105,099

HDTV rooms, including new installations and major upgrades, are equipped with high-definition capabilities.

Capital Investment Per Installed Room

The average investment per room associated with an installation can fluctuate due to engineering efforts, component costs, product segmentation, cost of assembly and installation, average number of rooms for properties installed, certain fixed costs and hotel capital contributions. The following table sets forth our average installation and conversion investment cost per room during the years ended December 31:

		2010				2009				2008
Average cost per HD room — new installation		$	200			$	339			$	398
Average cost per HD room — conversion		$	167			$	241			$	320

The decrease in the average cost per new and converted HD rooms from 2008 to 2010 was primarily driven by lower component and overhead costs, larger average number of rooms for properties installed, hotels contributing a greater share of total installation costs through purchases of systems and equipment and engineering efforts.

Average Revenue Per Room

We monitor the average revenue we generate per Hospitality and Advertising Services room. Guest Entertainment revenue can fluctuate based on several factors, including occupancy, consumer sentiment, mix of travelers, the availability of high definition and alternative programming, the popularity of movie content, the mix of services purchased and the overall economic environment. Hotel Services revenue can fluctuate based on the percentage of our hotels purchasing cable television programming services from us, the type of services provided at each site, as well as the number of hotels purchasing broadband service and support from us. System Sales and Related Services revenue can fluctuate based on the number of system and equipment sales, including broadband systems sales. Advertising Services revenue can fluctuate based on the demand for advertising and the performance of products and services sold to business and leisure travelers, as well as the number of rooms available to promote within. The following table sets forth the components of our Hospitality and Advertising Services revenue per room for the years ended December 31:

		2010				2009				2008
Average monthly revenue per room:
Hospitality and Advertising Services
Guest Entertainment		$	12.41			$	13.49			$	16.38
Hotel Services			6.53				6.00				5.45
System Sales and Related Services			1.88				1.93				1.50
Advertising Services			0.47				0.31				0.36
Total Hospitality and Advertising Services revenue per room		$	21.29			$	21.73			$	23.69

Direct Costs

Guest Entertainment direct costs vary based on content license fees, the mix of Guest Entertainment products purchased and the commission earned by the hotel. Hotel Services direct costs include the cost of cable television programming and the cost of broadband Internet support services. The direct costs of System Sales and Related Services primarily include the cost of the systems and equipment sold to hotels. Advertising Services direct costs include the cost of developing and distributing programming. The overall direct cost margin primarily varies based on the composition of revenue. The following table sets forth our Hospitality and Advertising Services direct expenses per room for the years ended December 31:

		2010				2009				2008
Direct costs per room:
Hospitality and Advertising Services
Guest Entertainment		$	4.85			$	5.41			$	6.40
Hotel Services			5.64				5.24				4.99
System Sales and Related Services			1.25				1.39				1.12
Advertising Services			0.25				0.27				0.32
Total Hospitality and Advertising Services direct costs per room		$	11.99			$	12.31			$	12.83

The average direct cost per Guest Entertainment room varies with revenue and, from 2008 to 2010, was driven by lower commissions earned by the hotels and offset by a change in the mix of movie products purchased.

Healthcare Business

The healthcare market in the United States consists of over 940,000 hospital beds across 5,800 facilities. We believe most hospitals currently do not have any form of interactive television services. The primary reasons hospitals purchase interactive television systems are to increase patient satisfaction, to improve clinical outcomes and to increase operational efficiencies. Our Healthcare revenue is generated through a variety of services and solutions provided to care facilities, including:

	Ø		revenue generated from the sale of the interactive system hardware, software license and installation services;
	Ø		revenue from the sale and installation of DIRECTV satellite equipment and related programming;
	Ø		revenue from recurring support agreements for interactive content, software maintenance and technical field service support, including service agreements covering cable plant, DIRECTV satellite equipment and interactive systems; and
	Ø		revenue generated from cable plant design, modification and installation, as well as television installation services.

As of December 31, 2010, we equipped 56 healthcare facilities, or approximately 12,200 beds, with these services and solutions to improve the overall patient experience, as compared to 45 properties or approximately 9,200 beds as of December 31, 2009.

General Operations

Total Operating Expenses

We also monitor and manage the operating expenses per room. System operations expenses consist of costs directly related to the operation and maintenance of systems at hotel sites. Selling, general and administrative expenses (“SG&A”) primarily include payroll costs, share based compensation, engineering development costs and legal, marketing, professional and compliance costs. The following table sets forth the components of our operating expenses per room for the years ended December 31:

		2010				2009				2008
System operations expenses		$	2.06			$	1.94			$	2.60
SG&A expenses			2.31				2.07				2.37
Depreciation and amortization (D&A)			4.00				4.58				5.57
Goodwill impairment charge			—				—				0.50
Restructuring charge			0.02				0.02				0.23
Other operating income (1)			(0.01	)			—				(0.05	)
		$	8.38			$	8.61			$	11.22
System operations as a percent of total revenue			9.5	%			8.8	%			10.8	%
SG&A as a percent of total revenue			10.6	%			9.4	%			9.9	%
D&A as a percent of total revenue			18.4	%			20.7	%			23.3	%
Total operating expenses as a percent of total revenue			38.6	%			39.0	%			46.9	%

Special Note Regarding the Use of Non-GAAP Financial Information

To supplement our consolidated financial statements presented in accordance with accounting principles generally accepted in the United States (“GAAP”), we use free cash flow, a non-GAAP measure derived from results based on GAAP. The presentation of this additional information is not meant to be considered superior to, in isolation of, or as a substitute for, results prepared in accordance with GAAP.

We define free cash flow, a non-GAAP measure, as cash provided by operating activities less cash used for certain investing activities. Free cash flow is a key liquidity measure, but should not be construed as an alternative to cash flows from operating activities or as a measure of our profitability or performance. We provide information about free cash flow because we believe it is a useful way for us, and our investors, to measure our ability to satisfy cash needs, including interest payments on our debt, taxes and capital expenditures. GAAP requires us to provide information about cash flow generated from operations. Our definition of free cash flow does not take into account our debt service requirements or other commitments. Accordingly, free cash flow is not necessarily indicative of amounts of cash which may be available to us for discretionary purposes. Our method of computing free cash flow may not be comparable to other similarly titled measures of other companies.

Free Cash Flow

We manage our free cash flow by seeking to maximize the amount of cash we generate from our operations and managing the level of our investment activity. During 2010, we allocated a substantial portion of our cash flow from operations to the repayment of debt and used the balance of the cash flow for capital expenditures. We can manage capital expenditures by reducing the per-room installation cost of a room and by varying the number of rooms we install in any given period.

Levels of free cash flow are set forth in the following table (dollar amounts in thousands):

		2010				2009				2008
Cash provided by operating activities		$	101,706			$	86,172			$	89,853
Property and equipment additions			(21,825	)			(21,341	)			(64,407	)
		$	79,881			$	64,831			$	25,446

Liquidity and Capital Resources

We ended the year with cash of $8.4 million and were in compliance with all of the Credit Facility covenants. For the year, cash provided by operating activities was $101.7 million. In 2010, we used $21.8 million of the cash we generated for property and equipment additions. During 2010, we made additional payments of $96.8 million against our Credit Facility, in addition to the scheduled quarterly payments of $4.6 million. We also utilized $5.8 million for preferred stock dividends. During 2009, cash provided by operating activities was $86.2 million. During 2009, we used $21.3 million for property and equipment additions and made additional payments of $85.4 million against our Credit Facility, including proceeds from our preferred stock offering, in addition to the scheduled quarterly payments of $5.7 million. We used $1.7 million for preferred stock dividends in 2009.

In March 2010, we entered into an agreement to sell 2,160,000 shares of our common stock to the underwriter, for resale to the public. The underwriter had an option to purchase up to 324,000 additional shares of common stock to cover overallotments. We completed our offering of 2,484,000 shares (inclusive of the underwriter’s option to purchase the additional 324,000 shares), bringing the total aggregate common stock sold to $14.9 million. Net proceeds from the issuance of common stock were $13.7 million, with offering and related costs totaling $1.2 million. The net proceeds of $13.7 million were used to reduce our debt.

In June 2009, we entered into a purchase agreement to sell 50,000 shares of our 10% Series B Cumulative Perpetual Convertible Preferred Stock, $0.01 par value per share, with a liquidation preference of $1,000 per share. The initial purchaser was also granted a 30-day option to purchase up to an additional 7,500 shares of the preferred stock to cover overallotments. We completed our offering of 57,500 shares (inclusive of the initial purchaser’s option to purchase the additional 7,500 shares), bringing the total aggregate liquidation preference of the preferred stock sold to $57.5 million. Net proceeds from the issuance of preferred stock were $53.7 million, with offering and related costs totaling $3.8 million.

Our principal sources of liquidity are our cash from operations, our cash on hand and the $50.0 million revolver portion of our Credit Facility, which matures in 2013. We believe our cash on hand, operating cash flow, borrowing available under the Credit Facility and potential availability under the shelf registration will be sufficient to fund our business and comply with our financing obligations. We plan to allocate a portion of our future cash flow from operations to the repayment of debt, as necessary, and to the expansion of our high-definition room base. As of December 31, 2010, working capital was negative $50.5 million, compared to negative $4.9 million at December 31, 2009. The change was primarily from the increase of our accounts payable balance. A portion of this working capital increase is expected to reverse in 2011. The change was also driven by the fair value of derivative instruments liability becoming short term as our interest rate swaps expire in June 2011.

The collectability of our receivables is reasonably assured, as supported by our broad customer base. Our interactive hotel base is well diversified in terms of location, demographics and customer contracts. We provide our services to various hotel chains, ownership groups and management companies. In accordance with our hotel contracts, monies collected by the hotel for interactive television services are held in trust on our behalf, thereby limiting our risk from hotel bankruptcies.

In order to fund our acquisitions of On Command and StayOnline, in April 2007 we entered into a $675.0 million bank Credit Facility, comprised of a $625.0 million term loan, which matures in April 2014, and a $50.0 million revolving Credit Facility, which matures in April 2013. The required quarterly payments are approximately $1.0 million, and will be adjusted for any reduction in principal as a result of our early repayments against the loan. For the fourth quarter of 2010, the adjusted quarterly payment requirement was $1.1 million. The term loan bears interest at our option of (1) the bank’s base rate plus a margin of 1.00% or (2) LIBOR plus a margin of 2.00%. The agreement provides that when our consolidated leverage ratio is below 3.25 times, the term loan bears interest at our option of (1) the bank’s base rate plus a margin of 0.75% or (2) LIBOR plus a margin of 1.75%. The term loan is collateralized by substantially all of the assets of the Company. The Credit Facility includes terms and conditions which require compliance with leverage and interest coverage covenants. The Credit Facility also stipulated we enter into hedge agreements to provide at least 50% of the outstanding term loan into a fixed interest rate for a period not less than two years. We currently have two outstanding fixed rate swap agreements for $437.5 million, with fixed interest rates ranging from 4.97% to 5.09% (see Note 9 to the Consolidated Financial Statements). The term loan interest rate as of December 31, 2010 was 2.31%. The all-in weighted average interest rate as of December 31, 2010 was 7.36%, which includes both the term loan interest rate and the difference in the swaps’ fixed interest rate versus LIBOR, including any ineffective portion of the hedge. As of December 31, 2010, we were in compliance with all financial covenants required of our bank Credit Facility.

Our leverage and interest coverage ratios were as follows for the years ended December 31:

		2010				2009				2008
Actual consolidated leverage ratio (1) (3)			3.43				3.82				4.30
Maximum per covenant			3.50				4.00				4.50
Actual consolidated interest coverage ratio (2) (3)			3.19				3.23				3.22
Minimum per covenant			3.00				2.75				2.50

Per the bank Credit Facility, our maximum consolidated leverage ratio of 3.50 and minimum consolidated interest coverage ratio of 3.00 continue to maturity in 2014.

We do not utilize special purpose entities or off balance sheet financial arrangements.

In order to continue operating efficiently and expand our business, we must remain in compliance with covenants outlined in our Credit Facility. Our ability to remain in compliance with those covenants will depend on our ability to generate sufficient Consolidated EBITDA (a term defined in our Credit Facility) and to manage our capital investment and debt levels. We continue taking actions within our control to manage our debt level and remain in compliance with our debt covenants. The actions within our control include our prudent management of capital investment, working capital and operating costs and exploring other alternatives, which include seeking an amendment to our Credit Facility. We are currently pursuing an amendment of our Credit Facility, which may increase our interest costs, require upfront fees and modify certain other terms which will be less favorable than we currently have. If we are not able to remain in compliance with our current debt covenants and our lenders will not amend or waive covenants with which we are not in compliance, the debt would be due, we would not be able to satisfy our financial obligations and we would need to seek alternative financing. If we were not able to secure alternative financing, this would have a substantial adverse impact on the Company and our ability to continue our operations.

We achieved a consolidated leverage ratio of 3.43 compared to the maximum allowable of 3.50 for the fourth quarter of 2010. Our ability to continue to comply with our current covenants, as well as any revised covenants resulting from an amendment to our Credit Facility, is subject to the general economic climate and business conditions beyond our control. Additionally, our ability to comply with these covenants depends on achieving our planned operating results and making further debt reductions, as necessary. Although there are signs of stabilization in certain sectors of the economy, the uncertainties impacting travel and lodging, in addition to the constraints in the credit markets, consumer conservatism and other market dynamics, may continue to negatively impact our planned results and required covenants. If we are not able to remain in compliance with our current debt covenants, or the revised covenants in the event we are successful in amending our Credit Facility, it will likely have a significant, unfavorable impact on our business and financial condition.

The Credit Facility also requires we notify the agent upon the occurrence of a “Material Adverse Effect” prior to any draw on the Company’s revolving Credit Facility, as such terms are defined and used within our bank Credit Facility. However, under the Credit Facility, the provision of such a notice is not an event of default, but if such an event occurred, it could restrict the Company’s ability to obtain additional financing under the revolving Credit Facility. As of December 31, 2010, we are not aware of any events which would qualify as a Material Adverse Effect under the Credit Facility. The total amount of long-term debt outstanding, including the current portion, as of December 31, 2010 was $373.6 million versus $469.9 million as of December 31, 2009.

In April 2007, we entered into interest rate swap agreements with notional values of $312.5 million, at a fixed rate of 5.09%, and $125.0 million, at a fixed rate of 4.97%, both of which expire in June 2011. These swap arrangements 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 were designated as, and met the criteria for, cash flow hedges and are not considered speculative in nature. A portion of the $125.0 million notional amount swap, entered into in April 2007 and expiring in June 2011, was rendered ineffective due to the additional payments on our term loan. The ineffective portion of the change in fair value of this cash flow hedge was a loss of $1.5 million for the year ended December 31, 2010, and was recognized in interest expense in our Consolidated Statements of Operations. All of the swap agreements have been issued by Credit Suisse International.

The Credit Facility provides for the issuance of letters of credit up to $15.0 million, subject to customary terms and conditions. As of December 31, 2010, we had outstanding letters of credit totaling $395,000.

Obligations and commitments as of December 31, 2010 were as follows (dollar amounts in thousands):

						Payments due by period
						Less than				2 - 3				4 - 5				Over
		Total				1 year				years				years				5 years
Contractual obligations:
Long-term debt(s)		$	373,639			$	4,807			$	8,591			$	360,241			$	—
Interest on bank term loan (1)			29,464				9,210				17,981				2,273				—
Interest on derivative instruments (net)			10,435				10,435				—				—				—
Operating lease payments			2,967				1,440				1,307				220				—
Purchase obligations (2)			10,509				4,886				3,688				1,840				95
Minimum royalties and commissions (3)			1,499				1,019				480				—				—
Total contractual obligations		$	428,513			$	31,797			$	32,047			$	364,574			$	95

						Amount of commitment expiration per period
						Less than				2 - 3				4 - 5				Over
		Total				1 year				years				years				5 years
Other commercial commitments:
Standby letters of credit		$	395			$	395			$	—			$	—			$	—

Seasonality

Our quarterly operating results are subject to fluctuation, depending upon hotel occupancy rates and other factors, including travel patterns and the economy. Our hotel customers typically experience higher occupancy rates during the second and third quarters, due to seasonal travel patterns and, accordingly, we historically have higher revenue and cash flow in those quarters. However, quarterly revenue can be affected by the availability of popular content during those quarters and by consumer purchasing behavior. We have no control over when new content is released or how popular it will be, or the effect of economic conditions on consumer behavior.

Results of Operations — Years Ended December 31, 2010 and 2009

Revenue Analysis. Total revenue for 2010 was $452.2 million, a decrease of $32.3 million or 6.7%, compared to 2009. The decrease in revenue was primarily from a decrease in Guest Entertainment and System Sales and Related Services revenue, partially offset by increases in Hotel Services, Advertising Services and Healthcare revenue. The following table sets forth the components of our revenue (dollar amounts in thousands) for the years ended December 31:

		2010								2009
						Percent								Percent
						of Total								of Total
		Amount				Revenues				Amount				Revenues
Revenues:
Hospitality and Advertising Services
Guest Entertainment		$	258,617				57.2	%		$	295,817				61.1	%
Hotel Services			136,089				30.1	%			131,559				27.2	%
System Sales and Related Services			39,081				8.6	%			42,367				8.7	%
Advertising Services			9,867				2.2	%			6,915				1.4	%
Total Hospitality and Advertising Services			443,654				98.1	%			476,658				98.4	%
Healthcare			8,518				1.9	%			7,834				1.6	%
		$	452,172				100.0	%		$	484,492				100.0	%

Hospitality and Advertising Services revenue, which includes Guest Entertainment, Hotel Services, System Sales and Related Services and Advertising Services, decreased $33.0 million or 6.9%, to $443.7 million in 2010 compared to $476.7 million in 2009. Average monthly Hospitality and Advertising Services revenue per room was $21.29 for 2010, a decrease of 2.0% as compared to $21.73 per room in the prior year. The following table sets forth information with respect to Hospitality and Advertising Services revenue per room for the years ended December 31:

		2010				2009
Average monthly revenue per room:
Hospitality and Advertising Services
Guest Entertainment		$	12.41			$	13.49
Hotel Services			6.53				6.00
System Sales and Related Services			1.88				1.93
Advertising Services			0.47				0.31
Total Hospitality and Advertising Services revenue per room		$	21.29			$	21.73

Guest Entertainment revenue, which includes on-demand entertainment such as movies, television on-demand, music and games, decreased $37.2 million or 12.6%, to $258.6 million in 2010 as compared to $295.8 million in 2009. On a per-room basis, monthly Guest Entertainment revenue for 2010 declined 8.0%, to $12.41 compared to $13.49 for 2009. We had a 5.0% reduction in the average number of rooms served year over year, some of which were low margin properties. Average monthly movie revenue per room was $11.60 for 2010, an 8.4% reduction as compared to $12.66 per room in the prior year. The decline in revenue per room was driven by the continued conservative consumer buying pattern and a low penetration of high-definition services across our 1.7 million Guest Entertainment rooms. Non-movie Guest Entertainment revenue per room decreased 2.4%, to $0.81 for 2010, driven by reductions in games and television Internet purchases, partially offset by an increase in on-demand television purchases.

Hotel Services revenue, which includes recurring revenue from hotels for cable television programming and broadband Internet service and support, increased $4.5 million or 3.4%, to $136.1 million during 2010 versus $131.6 million in 2009. On a per-room basis, monthly Hotel Services revenue for 2010 increased 8.8%, to $6.53 compared to $6.00 for 2009. Monthly cable television programming revenue per room increased 9.0%, to $5.96 for 2010 as compared to $5.47 for 2009. These increases resulted from price changes and higher priced programming packages purchased by hotels as they install high-definition television systems. Recurring broadband Internet revenue per room for 2010 increased to $0.57 versus $0.53 for 2009.

System Sales and Related Services revenue includes the sale of cable television programming equipment, broadband Internet equipment, HDTV installations and other services to hotels. For 2010, revenue decreased $3.3 million or 7.8%, to $39.1 million as compared to $42.4 million for 2009. The decrease was driven by a decline in broadband equipment sales.

Advertising Services revenue consists of revenue generated by The Hotel Networks (“THN”), our advertising services subsidiary acquired as part of the On Command acquisition. Revenue increased $3.0 million or 42.7%, to $9.9 million during 2010 as compared to $6.9 million for 2009. This increase was primarily the result of increased carriage services revenue, where we provide cable channels to providers for the distribution of their programming, and other general advertising.

Healthcare revenue includes the sale of interactive systems and services to healthcare facilities. Healthcare revenue increased by $0.7 million or 8.7%, to $8.5 million for 2010 versus $7.8 million in 2009, primarily from recurring service and maintenance agreement revenues. During 2010, we installed 12 facilities and 3,045 beds compared to 17 facilities and 2,659 beds in 2009. We have six signed healthcare contracts in our backlog waiting for installation.

Direct Costs (exclusive of operating expenses and depreciation and amortization discussed separately below). Total direct costs were $254.0 million in 2010, a decrease of $19.9 million or 7.3%, as compared to $273.9 million in 2009. Total direct costs were 56.2% of revenue for 2010 as compared to 56.5% for 2009. Direct costs related to the Hospitality and Advertising Services business, which includes Guest Entertainment, Hotel Services, System Sales and Related Services and Advertising Services, were $249.7 million for 2010 compared to $270.0 million in 2009. The decrease in total direct costs was primarily related to decreases in hotel commissions and content royalties, lower system and equipment costs and a reduction in recurring connectivity and other Internet support costs. Advertising Services had lower costs during 2010 due to lower satellite distribution costs. These decreases were partially offset by an increase in television programming costs, which vary with the increased revenue and the services provided.

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

		2010								2009
						Percent								Percent
						of Total								of Total
		Amount				Revenues				Amount				Revenues
Operating expenses:
System operations		$	42,940				9.5	%		$	42,605				8.8	%
Selling, general and administrative (1)			48,151				10.6	%			45,494				9.4	%
Depreciation and amortization			83,236				18.4	%			100,309				20.7	%
Restructuring charge (2)			421				0.1	%			603				0.1	%
Other operating income			(21	)			0.0	%			(126	)			0.0	%
Total operating expenses		$	174,727				38.6	%		$	188,885				39.0	%

System operations expenses increased $0.3 million or 0.8%, to $42.9 million in 2010 as compared to $42.6 million in 2009. The increase was driven primarily by higher fuel costs. As a percentage of total revenue, system operations expenses increased to 9.5% this year as compared to 8.8% in the prior year. Per average installed room, system operations expenses also increased, to $2.06 per room per month for 2010 compared to $1.94 for 2009.

Selling, general and administrative (“SG&A”) expenses increased $2.7 million or 5.8%, to $48.2 million in 2010 as compared to $45.5 million in 2009. As a percentage of revenue, SG&A expenses were 10.6% in the current year compared to 9.4% in the prior year. SG&A expenses were $2.31 per average installed room per month in 2010 compared to $2.07 in 2009. The increases resulted from debt issuance costs related to financing options, higher legal fees, service and maintenance costs, travel and business development costs.

Depreciation and amortization expenses were $83.2 million in 2010 as compared to $100.3 million in 2009. The decline was due to the reduction in capital investments over the past two years and certain assets becoming fully depreciated. As a percentage of revenue, depreciation and amortization expenses were 18.4% in 2010 compared to 20.7% in 2009.

During 2010, we incurred costs of $421,000 related to our workforce reduction initiatives, while we had costs of $603,000 in 2009.

Operating Income. As a result of the factors described above, operating income increased to $23.4 million in 2010 as compared to $21.7 million in the prior year.

Interest Expense. Interest expense was $33.5 million in the current year versus $38.1 million in 2009. The decrease resulted from the change in the weighted average outstanding balance of our debt under the Credit Facility, to $423.9 million at December 31, 2010 from $535.0 million at December 31, 2009. The all-in weighted average interest rate increased to 7.36% for the current year versus 6.97% for 2009. Interest expense for 2010 included $1.5 million of non-cash interest charges related to our interest rate swap position; there were no such charges included for 2009.

Gain on Extinguishment of Debt. During 2009, we acquired $31.5 million of our outstanding debt as part of a debt reduction initiative, at 70.5% of par value, and recorded a gain on extinguishment of the debt of $9.3 million. The acquisition was made through a wholly-owned subsidiary, a permitted investment under our Credit Facility.

Loss on Early Retirement of Debt. In 2010, we made additional payments on our term loan totaling $96.8 million and wrote off $1.1 million of unamortized debt issuance costs. During 2009, we made additional payments of $85.4 million on our term loan and wrote off $1.5 million of unamortized debt issuance costs associated with the early retirement of our debt.

Other Income (Expense). During 2010, we recorded $0.3 million of other income, including interest income. In 2009, we recorded a total of $0.7 million of other expense. This consisted of an investment loss of $1.4 million related to our 2007 investment of $5.0 million in a high-speed Internet service provider, due to continued softness in certain markets, and $0.7 million of other income, including interest income.

Taxes. During 2010, we incurred state franchise taxes of $0.8 million. For 2009, we also incurred state franchise taxes of $0.8 million.

Net Loss. As a result of the factors described above, net loss was $11.7 million for 2010 compared to a net loss of $10.2 million in the prior year.

Results of Operations — Years Ended December 31, 2009 and 2008

Revenue Analysis. Total revenue for 2009 was $484.5 million, a decrease of $49.4 million or 9.3%, compared to 2008. The decrease was driven by lower Guest Entertainment and Advertising Services revenues, partially offset by increases in revenue from Hotel Services, System Sales and Related Services and Healthcare.

Hospitality and Advertising Services revenue, which includes Guest Entertainment, Hotel Services, System Sales and Related Services and Advertising Services, decreased $51.1 million or 9.7%, to $476.7 million in 2009 compared to $527.8 million in 2008. Average monthly Hospitality and Advertising Services revenue per room was $21.73 for 2009, a decrease of 8.3% as compared to $23.69 in the prior year. Guest Entertainment revenue decreased $69.2 million or 18.9%, to $295.8 million in 2009 as compared to $365.0 million in 2008. Hotel Services revenue, from cable television programming and broadband Internet service and support, increased $10.1 million or 8.2%, to $131.6 million during 2009 versus $121.5 million in 2008. System Sales and Related Services revenue, including cable television equipment, broadband Internet equipment, HDTV installations and other services to hotels, increased $9.0 million or 26.7%, to $42.4 million for 2009 as compared to $33.4 million for 2008. Advertising Services revenue consists of revenue generated by our advertising subsidiary, and decreased $1.0 million or 12.3%, to $6.9 million during 2009 as compared to $7.9 million in 2008.

Healthcare revenue, which includes the sale of interactive systems and services to healthcare facilities, increased $1.7 million or 29.1%, to $7.8 million during 2009 as compared to $6.1 million for 2008.

Direct costs (exclusive of operating expenses and depreciation and amortization discussed separately below). Total direct costs were $273.9 million, or 56.5% of revenue, in 2009, a decrease of $15.1 million as compared to $289.0 million, or 54.1% of revenue, in 2008. The change in cost as a percentage of revenue was due to a change in the mix of products or services sold year over year, driven by the increased percentage of revenue generated by cable television programming and system sales, which generally have lower margins than our Guest Entertainment revenues.

Operating Expenses. System operations expenses decreased $15.3 million or 26.4%, to $42.6 million in 2009 as compared to $57.9 million in 2008. Selling, general and administrative (“SG&A”) expenses decreased $7.3 million or 13.8%, to $45.5 million in 2009 as compared to $52.8 million in 2008. These decreases were due to the expected synergies from our post-merger consolidation of certain duplicative general and administrative expenses and our labor expense reduction initiatives implemented during 2008 and 2009. Depreciation and amortization expenses were $100.3 million in 2009 as compared to $124.1 million in 2008. As a percentage of revenue, depreciation and amortization expenses were 20.7% in 2009 compared to 23.3% in 2008.

In 2008, due to the erosion of the capital markets and the economy in general, we incurred a goodwill and purchased intangibles impairment charge of $11.2 million, related to Advertising Services, and recorded a write down of $0.6 million related to On Command purchased intangibles. See Note 6 to the Consolidated Financial Statements.

During 2009, we incurred restructuring costs of approximately $680,000 related to facility consolidation, partially offset by unused severance benefits of approximately $77,000. During 2008, we incurred costs of $5.0 million related to post-acquisition restructuring activities.

Other operating income for 2008 included proceeds of $815,000 from insurance related to business interruption and property damage claims associated with Hurricane Katrina.

Operating Income (Loss). As a result of the factors described above, operating income was $21.7 million in 2009 as compared to an operating loss of $(5.1) million in 2008.

Interest Expense. Interest expense was $38.1 million in 2009 versus $42.6 million in 2008. The decrease resulted from the change in the weighted average outstanding balance of our debt under our Credit Facility, to $535.0 million at December 31, 2009 from $616.7 million at December 31, 2008. The all-in weighted average interest rate increased to 6.97% for 2009 versus 6.78% for 2008.

Gain on Extinguishment of Debt. During 2009, we acquired $31.5 million of our outstanding debt as part of a debt reduction initiative, at 70.5% of par value, and recorded a gain on extinguishment of the debt of $9.3 million. The acquisition was made through a wholly-owned subsidiary, a permitted investment under our Credit Facility. In 2008, we acquired $2.9 million of outstanding debt at 50.0% of par value and recorded a gain on the extinguishment of debt of $1.4 million.

Loss on Early Retirement of Debt. During 2009, we made additional payments of $85.4 million on our term loan and wrote off $1.5 million of unamortized debt issuance costs associated with the early retirement of our debt. During 2008, we made additional payments of $27.5 million on our term loan and wrote off $0.4 million of unamortized debt issuance costs.

Other Expense. In 2009, we recorded a total of $0.7 million of other expense, which included an investment loss of $1.4 million related to our 2007 investment in a high-speed Internet service provider, offset by $0.7 million of other income, including interest income. In 2008, we recorded a total of $0.9 million of other expense, including an investment loss of $0.6 million related to our investment in the Internet service provider, and $0.3 million of other expense, net of interest income.

Taxes. During 2009, we incurred state franchise taxes of $0.8 million. For 2008, we also incurred state franchise taxes of $0.8 million.

Net Loss. As a result of the factors described above, net loss was $10.2 million for 2009 compared to a net loss of $48.4 million in the prior year.

Critical Accounting Policies

Management’s discussion and analysis of financial condition and results of operations are based upon our financial statements, which have been prepared in conformity with accounting principles generally accepted in the United States of America. Our primary cost drivers are predetermined rates, such as hotel commissions; license fees paid for major motion pictures and other content or one-time fixed fees for independent films; and cable television programming costs. However, the preparation of financial statements requires us to make estimates and assumptions which affect the reported amounts of assets and liabilities and the reported amounts of revenues and expenses during the reporting period. We base our estimates on historical experience and on various other assumptions we believe to be reasonable based upon the available information. The critical policies related to the more significant judgments and estimates used in the preparation of the financial statements are further discussed within the Notes of the financial statements as follows:

	Ø		Revenue Recognition — footnote #2
	Ø		Goodwill and Other Intangible Assets — footnote #6
	Ø		Restructuring — footnote #14

Recent Accounting Developments

In October 2009, the Financial Accounting Standards Board (“FASB”) issued FASB Accounting Standards Update (“ASU’) No. 2009-13, “Multiple-Deliverable Revenue Arrangements,” which is now codified under FASB Accounting Standards Codification (“ASC”) Topic 605, “Revenue Recognition.” This ASU establishes a selling price hierarchy for determining the selling price of a deliverable; eliminates the residual method of allocation and requires arrangement consideration be allocated at the inception of the arrangement to all deliverables using the relative selling price method; and requires a vendor determine its best estimate of selling price in a manner consistent with that used to determine the selling price of the deliverable on a standalone basis. The ASU also significantly expands the required disclosures related to a vendor’s multiple-deliverable revenue arrangements. FASB ASU No. 2009-13 was effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. Depending on how we sell and deliver future systems and services, this ASU could have an effect on the timing of revenue recognition and our consolidated results of operations or cash flows.

In October 2009, the FASB issued FASB ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements,” which is now codified under FASB ASC Topic 985, “Software.” This ASU changes the accounting model for revenue arrangements which include both tangible products and software elements, providing guidance on how to determine which software, if any, relating to the tangible product would be excluded from the scope of the software revenue guidance. FASB ASU No. 2009-14 was effective on a prospective basis for revenue arrangements entered into or materially modified in fiscal years beginning on or after June 15, 2010, with early adoption permitted. Depending on how we sell and deliver future systems and services, this ASU could have an effect on the timing of revenue recognition and our consolidated results of operations or cash flows.

In April 2010, the FASB issued FASB ASU No. 2010-17, “Milestone Method of Revenue Recognition,” which is now codified under FASB ASC Topic 605, “Revenue Recognition.” This ASU provides guidance on defining a milestone and determining when it may be appropriate to apply the milestone method of revenue recognition for research and development transactions. Consideration which is contingent upon achievement of a milestone in its entirety can be recognized as revenue in the period in which the milestone is achieved only if the milestone meets all criteria to be considered substantive. A milestone should be considered substantive in its entirety, and an individual milestone may not be bifurcated. An arrangement may include more than one milestone, and each milestone should be evaluated individually to determine if it is substantive. FASB ASU No. 2010-17 was effective on a prospective basis for milestones achieved in fiscal years (and interim periods within those years) beginning on or after June 15, 2010, with early adoption permitted. Depending on how we sell and deliver future systems and services, this ASU could have an effect on the timing of revenue recognition and our consolidated results of operations or cash flows.

In December 2010, the FASB issued FASB ASU No. 2010-28, “When to Perform Step 2 of the Goodwill Impairment Test for Reporting Units with Zero or Negative Carrying Amounts,” which is now codified under FASB ASC Topic 350, “Intangibles — Goodwill and Other.” This ASU provides amendments to Step 1 of the goodwill impairment test for reporting units with zero or negative carrying amounts. For those reporting units, an entity is required to perform Step 2 of the goodwill impairment test if it is more likely than not a goodwill impairment exists. When determining whether it is more likely than not an impairment exists, an entity should consider whether there are any adverse qualitative factors, such as a significant deterioration in market conditions, indicating an impairment may exist. FASB ASU No. 2010-28 is effective for fiscal years (and interim periods within those years) beginning after December 15, 2010. Early adoption is not permitted. Upon adoption of the amendments, an entity with reporting units having carrying amounts which are zero or negative is required to assess whether is it more likely than not the reporting units’ goodwill is impaired. If the entity determines impairment exists, the entity must perform Step 2 of the goodwill impairment test for that reporting unit or units. Step 2 involves allocating the fair value of the reporting unit to each asset and liability, with the excess being implied goodwill. An impairment loss results if the amount of recorded goodwill exceeds the implied goodwill. Any resulting goodwill impairment should be recorded as a cumulative-effect adjustment to beginning retained earnings in the period of adoption. We have reporting units with negative carrying value and are evaluating the effect from the adoption of this ASU. Depending on market conditions or other qualitative factors, this ASU could have a material effect on our consolidated results of operations.

Item 7A — Quantitative and Qualitative Disclosures About Market Risk

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

Interest. At December 31, 2010, we had debt totaling $373.6 million, as follows (dollar amounts in thousands):

		Carrying				Fair
		Amount				Value
Bank Credit Facility:
Bank term loan		$	372,511			$	348,298
Capital leases			1,128				1,128
		$	373,639			$	349,426

The fair value of our long-term debt is estimated based on current interest rates for similar debt of the same remaining maturities and quoted market prices, except for capital leases, which are reported at carrying value. For our capital leases, the carrying value approximates the fair value. In addition, the fair value of our long-term debt is strictly hypothetical and not indicative of what we are required to pay under the terms of our debt instruments.

We have two interest rate swap agreements, with notional values of $312.5 million, at a fixed rate of 5.09%, and $125.0 million, at a fixed rate of 4.97%, both of which expire in June 2011. The term loan interest rate as of December 31, 2010 was 2.31% and the capital lease interest rate was 7.14%. Our all-in weighted average interest rate, which includes both the term loan interest rate and the difference in the swaps’ fixed interest rate versus LIBOR, for the year ended December 31, 2010, was 7.36%, compared to 6.97% for the year ended December 31, 2009. After giving effect to the interest rate swap arrangements, we had fixed rate debt of $373.6 million and no variable rate debt, as the total swap amount was greater than our term loan amount at December 31, 2010. For fixed rate debt, interest rate fluctuations affect the fair market value but do not impact earnings or cash flows, if effective. 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. There would be no impact on earnings and cash flow for the next year resulting from a one percentage point increase to interest rates, assuming other variables remain constant. Upon expiration of the interest rate swaps in June 2011, a one percentage point increase to interest rates, assuming other variables remain constant, would impact second half 2011 earnings and cash flow by approximately $1.9 million.

Economic Condition and Consumer Confidence. Our results are generally connected to the performance of the lodging industry, where occupancy rates may fluctuate resulting from various factors. Reduction in hotel occupancy and consumer buy rates, resulting from business, general economic or other events, such as a recession in the United States, significant international crises, acts of terrorism, war or public health issues, could adversely impact our business, financial condition and results of operations. The overall travel industry and consumer buying pattern can be, and has been in the past, adversely affected by weaker general economic climates, geopolitical instability and concerns about public health.

Foreign Currency Transactions. A portion of our revenue is derived from the sale of Guest Entertainment services in Canada and Mexico. The results of operations and financial position of our operations in Canada and Mexico are measured in their local currencies and translated into U.S. dollars. The effects of foreign currency fluctuations in Canada and Mexico are somewhat mitigated by the fact expenses and liabilities are generally incurred in the local currency. The reported income of our Canadian and Mexican subsidiaries will be higher or lower depending on a weakening or strengthening of the U.S. dollar against the local currency. Additionally, a portion of our assets are based in Canada and Mexico and are translated into U.S. dollars at foreign currency exchange rates in effect as of the end of each period. Accordingly, our consolidated assets will fluctuate depending on the weakening or strengthening of the U.S. dollar against the local currency.

Item 8 — Financial Statements and Supplementary Data

See “Item 15 — Exhibits and Financial Statement Schedules” for LodgeNet’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 Chief Executive Officer and Chief Financial Officer have concluded the 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 information required to be disclosed by us in reports we file or submit 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. Additionally, our disclosure controls and procedures were also effective in ensuring information required to be disclosed in our Exchange Act reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

Management’s report on internal control over financial reporting. Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as defined in Rule 13a-15(f) of the Securities Exchange Act of 1934. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Our internal control over financial reporting includes those policies and procedures which (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of assets; (ii) provide reasonable assurance transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets, which could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate.

Management has assessed our internal control over financial reporting in relation to criteria described in Internal Control — Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, using those criteria, we concluded that, as of December 31, 2010, our internal control over financial reporting was effective.

PricewaterhouseCoopers LLP, an independent registered public accounting firm, has audited the Company’s internal control over financial reporting as of December 31, 2010, as stated in their report appearing on page F-2 of this Annual Report on Form 10-K.

Changes in Internal Control over Financial Reporting. There was no change in our internal control over financial reporting during the quarter ended December 31, 2010 which has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B — Other Information

None.

PART III

Item 10 — Directors, Executive Officers and Corporate Governance

The information concerning our directors and executive officers 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 our 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 our definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year.

We have adopted a written code of business conduct and ethics, which applies to all employees, including the principal executive officer, principal financial officer and accounting officer, controller or persons performing similar functions and all members of the Board of Directors. The policies are found on our web site, which is http://www.lodgenet.com.

The charters of our Audit Committee, Governance and Nominating Committee and Compensation Committee may also be found on our website.

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 our definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year.

Item 12 — Security Ownership of Certain Beneficial Owners and Management 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 LodgeNet’s stock and how much stock do our directors and executive officers own?” of our definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. Information concerning securities authorized for issuance under equity compensation plans is incorporated by reference from the section entitled “Equity Compensation Plan Information” of our definitive Proxy Statement to be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. We do not know of any arrangement which could, at a subsequent date, result in a change of control.

Item 13 — Certain Relationships and Related Transactions, and Director Independence

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

PART IV

Item 15 — Exhibits and Financial Statement Schedules

Consolidated Financial Statements and Schedules — Reference is made to the “Index to Consolidated Financial Statements” of LodgeNet Interactive 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, 2010, included herein.

Exhibits — Following is a list of Exhibits filed with this report. Exhibits 10.17 through 10.24 constitute management contracts. Exhibits 10.1, 10.2, 10.3, 10.7, 10.8, 10.9, 10.10, and 10.11 constitute compensatory plans.

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

Exhibit No.

	3.1			Certificate of Incorporation of LodgeNet (1)
	3.2			Restated By-Laws of the Registrant (2)
	3.3			Amendment No. 1 to Restated Certificate of Incorporation of LodgeNet (3)
	3.4			Certificate of Ownership and Merger merging LodgeNet Interactive Corporation into LodgeNet Entertainment Corporation (4)
	4.1			Rights Agreement dated as of February 28, 2008 between LodgeNet Interactive Corporation and Computershare Investor Services, LLC (5)
	4.2			Certificate of Designations for 10% Series B Cumulative Perpetual Convertible Preferred Stock (6)
	10.1			LodgeNet Interactive Corporation Stock Option Plan (as amended and restated effective May 9, 2001) (7)
	10.2			1993 Plan Form of Stock Option Agreement for Non-Employee Directors (8)
	10.3			1993 Plan Form of Incentive Stock Option Agreement for Key Employees (8)
	10.4			Master Services Agreement between Hilton Worldwide and LodgeNet Interactive Corporation dated October 9, 2000 † (9)
	10.5			Amendment To Master Services Agreement dated August 2, 2002 by and between Hilton Worldwide and LodgeNet Interactive Corporation (10)
	10.6			Hilton LodgeNet Agreement dated August 2, 2002 by and between Hilton Worldwide and LodgeNet Interactive Corporation (11)
	10.7			LodgeNet Interactive Corporation 2003 Stock Option and Incentive Plan (12)
	10.8			2003 Plan Form of Stock Option Agreement for Non-Employee Directors (13)
	10.9			2003 Plan Form of Incentive Stock Option Agreement for Key Employees (14)
	10.10			Form of Restricted Stock Agreement for Time-Based Vesting (15)

	10.11			Form of Restricted Stock Agreement for Performance-Based Vesting (16)
	10.16			$675,000,000 Credit Agreement dated as of April 4, 2007 among LodgeNet Entertainment Corporation, as Borrower, Credit Suisse Securities (USA) LLC as Syndication Agent, U.S. Bank National Association as Documentation Agent, and Bear Stearns Corporate Lending Inc. as Administrative Agent (17)
	10.17			Second Amended and Restated Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive Corporation and Scott C. Petersen (18)
	10.18			Executive Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive Corporation and David M. Bankers (19)
	10.19			Executive Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive Corporation and James G. Naro (20)
	10.20			Executive Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive Corporation and Steven R. Pofahl (21)
	10.21			Executive Employment Agreement dated as of January 29, 2008 between LodgeNet Interactive Corporation and Gary H. Ritondaro (22)
	10.22			Executive Employment Agreement dated as of February 4, 2008 between LodgeNet Interactive Corporation and Derek S. White (23)
	10.23			Executive Employment Agreement dated as of August 27, 2008 between LodgeNet Interactive Corporation and Scott E. Young (24)
	10.24			Executive Employment Agreement dates as of February 25, 2010 between LodgeNet Interactive Corporation and Frank P. Elsenbast (25)
	12.1			Statement Regarding Computation of Ratios
	21.1			Subsidiaries of the Company
	23.1			Consent of Independent Registered Public Accounting Firm
	31.1			Rule 13a-14(a)/15d-14(a) Certifications of Chief Financial Officer
	31.2			Rule 13a-14(a)/15d-14(a) Certifications of Chief Executive Officer
	32.1			Section 1350 Certifications