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Article by DailyStocks_admin    (03-16-08 12:45 PM)

LodgeNet Entertainment Corp. CEO SCOTT C PETERSEN bought 25,000 shares on 3-12-2008 at 8.76

BUSINESS OVERVIEW

Overview
We are one of the world’s largest providers of interactive television and broadband solutions to hotels throughout the United States and Canada, as well as to select international markets. As of December 31, 2006, we provided interactive television services to approximately 6,000 hotel properties serving over one million hotel rooms. In addition, LodgeNet delivers on-demand patient education, information and entertainment to healthcare facilities in the United States. As of December 31, 2006, our systems were installed in twelve healthcare facilities and we had six additional hospitals under contract.
As part of our service to the hotel industry, we provide a wide range of interactive television services, including on-demand movies, on-demand games, music and music videos, subscription sports programming and television on-demand programming. We generally refer to these products as guest pay interactive services and guests typically purchase these services on a per-view, hourly, or daily basis. Our service package may also include satellite-delivered basic and premium television programming and other interactive entertainment and information services that are paid for by the hotel and provided to guests at no charge, which we generally refer to as free-to-guest services. In addition, we provide high-speed Internet access, or “HSIA” services to some of our hotel customers. Our ability to provide high-speed Internet access was enhanced by our acquisition of substantially all the assets of StayOnline, Inc., in a transaction that was completed on February 1, 2007. With the close of this acquisition, we now provide HSIA services to approximately 175,000 rooms.
With regard to the healthcare industry, we sell our interactive systems and license our software to individual healthcare facilities. We generate revenue from the initial sale of the system hardware, software license and installation services. Additionally, we earn recurring revenues from the provision of on-demand and television entertainment content, software maintenance and technical services.
Our focus is on the execution of our long-term business strategy, which is summarized as follows:
Ø expand our interactive television and broadband networks within the lodging industry;

Ø increase hotel guest room revenue and gross profit;

Ø diversify our business into healthcare and other adjacent markets; and

Ø generate increasing levels of cash flow.
As shown in the table below, revenue and operating income have been increasing over the past five years. In 2006, we reported net income for the first time in our history. Dollar amounts are shown in thousands, except for room data.

Overview of Markets Served
We provide our services directly to hotel customers and their guests throughout the United States and Canada, and through licensing arrangements with companies in other select countries. Typically, our contracts with hotels are exclusive and have initial, non-cancelable terms of five to seven years. As of December 31, 2006, the average remaining contract term was approximately 39 months and equated to approximately 39.2 million room months under contract. The exclusive nature of these contracts allows us to estimate (based on historical information and certain operating assumptions) future revenues, cash flows and rates of return related to the contracts prior to making a capital investment decision.
We design, develop, and operate the interactive television systems that are installed at hotel properties. 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 in 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.
We also provide high-speed Internet access services through the sale and installation of equipment to subscribing hotels. We receive monthly service fees from such hotels for technical maintenance and call center support services following the initial installation.

In 2001, we began deploying a digital system, which has allowed us to expand the array of features and content available through our systems. As of December 31, 2006, we had installed our digital system in approximately 733,400 rooms, or 73% of our installed Guest Pay interactive base. In addition to the on-demand movies, video games, and other services provided by our tape-based systems, the digital system offers the following:
Ø increased variety and availability of on-demand movies;

Ø television on-demand programming;

Ø on-demand digital music programming;

Ø subscription sports programming;

Ø Internet on television;

Ø access to Internet-sourced content;

Ø on-screen controls that allow the guest more viewing control and flexibility;

Ø improved guest marketing and merchandising capabilities; and

Ø system architecture that receives video and music content via a satellite distribution network, resulting in operating cost reductions.
We plan to continue to install the interactive digital system in all newly installed hotel properties and in selected existing sites as current service contracts are successfully renewed and extended.
We provide our services to various hotel chains, ownership groups, and management companies, including Hilton Hotels Corporation (Hilton, Doubletree, Embassy Suites, Hampton Inn, Hilton Garden Inn, Homewood Suites, Conrad), Starwood Hotels and Resorts (Westin, W Hotels, Sheraton, Four Points), Marriott (The Ritz Carlton, Marriott, Courtyard by Marriott), Global Hyatt Corporation (Hyatt Place), Carlson Hospitality (Radisson, Park Plaza, Country Inn & Suites, Park Inn), Felcor (Hampton Inn, Homewood Suites, Marriott, Courtyard by Marriott, Westin, Sheraton, Crown Plaza, Fairfield, Holiday Inn), Interstate (Wyndham, Courtyard by Marriott, Radisson, Comfort Inn, Four Points, Amerisuites), Kimpton, LaQuinta, Omni Hotels, Outrigger, Grand Casinos, and Wingate Inn, as well as many independent properties.
In 2004, we began to offer our interactive television system to healthcare facilities in the United States. As of December 31, 2006, twelve hospitals had installed our system and we had an additional six facilities under contract. In this market, we sell our interactive systems to healthcare facilities or licensed resellers. Revenue is earned from the initial sale of system hardware, software licensing, and installation services. We additionally earn recurring revenues, under long-term contracts, by providing entertainment content, software maintenance and technical field service. We plan to continue to pursue opportunities in the healthcare market and expect to contract and install additional hospitals in 2007.
Pending Acquisition of Ascent Entertainment Group, Inc.
On December 13, 2006, we entered into a definitive agreement with Liberty Satellite Technology, Inc., a wholly- owned subsidiary of Liberty Media Corporation, to purchase 100% of the outstanding stock of Ascent Entertainment Group, Inc. and its subsidiaries (“Ascent”). On Command Corporation, a competitor of the Company, is a wholly- owned subsidiary of Ascent. On Command also owns 80% of The Hotel Network, Inc., a provider of advertising supported television services to hotels. On Command currently serves approximately 832,000 hotel rooms in the United States, Canada and Mexico. The purchase price of Ascent is $380.0 million, of which $332.0 million will be paid in cash and the balance of which will be paid by the issuance of 2,050,000 shares of common stock of the Company. Following the completion of the proposed transaction, Liberty Satellite will own approximately 9.9% of our total shares outstanding. The transaction is awaiting antitrust clearance by the U.S. government, and is subject to the satisfaction or waiver of certain other standard conditions. In a related transaction, PAR Capital Advisors has agreed to purchase an additional 1,000,000 shares of the Company’s common stock, the proceeds of which will be used to pay a portion of the cash consideration for the Ascent transaction. Both the Liberty Satellite stock and the Par Capital Advisors stock will be sold at $23.65 per share, a purchase price equal to the average closing price of the common stock of the Company on the NASDAQ stock market for a period of ten trading days prior to the execution of these agreements.

Hotel Market and Customers
U.S. and Canadian Market . The primary market for our interactive television network is the mid-size and large hotel segments within the United States and Canada. Based on industry sources, we estimate that these segments account for approximately 74%, or 3.6 million of the lodging industry’s estimated 4.9 million rooms. In addition, we believe that growth opportunities are available through (i) supply growth within the lodging industry, (ii) rooms currently served by other service providers when their contracts expire, and (iii) economically-viable rooms not yet served by any provider.
Diversified Customer Base. We believe that our interactive hotel base is well diversified in terms of (i) location; (ii) demographics; and (iii) customer contracts. As of December 31, 2006, no single state or province accounted for more than 13% of the hotel properties served by us. We provide our services to various hotel chains, ownership groups, and management companies, including Hilton Hotels Corporation (Hilton, Doubletree, Embassy Suites, Hampton Inn, Hilton Garden Inn, Homewood Suites, Conrad), Starwood Hotels and Resorts (Westin, W Hotels, Sheraton, Four Points), Marriott (The Ritz Carlton, Marriott, Courtyard by Marriott), Global Hyatt Corporation (Hyatt Place), Carlson Hospitality (Radisson, Park Plaza, Country Inn & Suites, Park Inn), Felcor (Hampton Inn, Homewood Suites, Marriott, Courtyard by Marriott, Westin, Sheraton, Crown Plaza, Fairfield, Holiday Inn), Interstate (Wyndham, Courtyard by Marriott, Radisson, Comfort Inn, Four Points by Sheraton, Amerisuites), Kimpton, LaQuinta, Omni Hotels, Outrigger, Grand Casinos, and Wingate Inn, as well as many independent properties. During 2006, hotels covered by the master services agreement with Hilton Hotels Corporation, which was signed in 2000, represented approximately 20.8% of our consolidated revenue, of which, the Hilton owned properties accounted for less than 5% of consolidated revenue. Each property is subject to an individual seven-year property level agreement. No other master service agreement accounted for more than 10% of our consolidated revenue.
International Hotel Markets. We also provide services in select international markets — primarily countries located in Central and South America — through licensing arrangements with companies in these areas. Under these arrangements, we do not make any capital investment. Instead, we sell equipment and license our interactive television system and technologies to the licensee and receive a royalty based on gross revenue. Financial information related to our operating segments and international operations is included in Note 17 of our consolidated financial statements. In 2007, we plan to continue to expand our business in various international markets.
Hotel Market Services and Products
Guest Pay Interactive Services. Our primary source of revenue is providing interactive television services to the lodging industry, for which the hotel guest pays on a per-view, hourly or daily basis. The high-speed, two-way digital communications design of our system architecture enables us to provide interactive features, such as on-demand movies, network-based video games, music and music videos, television on-demand programming, daily sports programming and Internet on television (which does not require a laptop). Guest Pay interactive revenue packages may also include satellite-delivered basic and premium television programming, video review of room charges, video checkout, guest surveying, and merchandising services that are paid for by the hotel and provided to guests at no charge. Television programming is delivered via satellite through DIRECTV pursuant to a long-term agreement and distributed to approximately 51% of our guest rooms over the internal hotel network, and typically includes premium channels, such as HBO, Showtime and The Disney Channel, which broadcast major motion pictures and specialty programming, as well as non-premium channels, such as CNN and ESPN.
In 2001, we began wide-scale deployment of our digital system. In addition to the movies and games already offered on our tape-based systems, the digital system allows guests to choose from an expanded menu of video on an on-demand basis as well as other forms of programming, including digital music services, television on-demand programming and access to Internet content through the television. The range of services offered is greater in those rooms equipped with a digital system versus those with a tape-based system and, therefore, rooms equipped with our digital system generate greater revenue than rooms equipped with a tape-based system. Additionally, the interactive digital systems are equipped so that content such as on-demand movies and music content are updated and delivered via satellite to our system within each hotel. This not only eliminates videotapes and shipping costs and reduces the need for technician visits to update the content, but also ensures that all of the hotels we serve with a digital system can offer the content as of the first date available for exhibition.
In 2003, we launched the SigNETure TV SM configuration of our digital system. This system, coupled with our LodgeNet Media Management System (LMMS), gives us the ability to better market and merchandise our content to hotel guests, and gives our hotel customers many benefits, including allowing hotels to:
Ø customize the “look and feel” of the user interface;

Ø use the system for the hotel’s internal branding or marketing campaigns; and

Ø use the system to provide information regarding other hotel services.
We believe that SigNETure TV SM offers us a competitive advantage and will increase our hotel customers’ loyalty. As a result, we expect that the continued deployment of the SigNETure TV SM system will facilitate revenue growth by enhancing our competitive advantage when signing new hotel contracts and through marketing of our services and products to hotel guests.
In 2005, we introduced our new Hotel SportsNET SM service, which provides guests the ability to purchase daily subscriptions to certain professional and college sports television packages. During 2006, our Hotel SportsNET SM line up included NFL SUNDAY TICKET, NHL CENTER ICE, NBA LEAGUE PASS, MLB EXTRA INNINGS and college sports programming including ESPN’s GamePlan, ESPN’s Full Court and College Sports TV (CSTV). As of December 31, 2006, Hotel SportsNET SM was installed in approximately 76,000 rooms.
In 2005, we launched our SigNETure HDTV SM offering. This digital system configuration enables us to deliver high-definition entertainment content to guests in the hotels we serve that are equipped to receive and display HDTV. As of December 31, 2006, we had more than 17,000 rooms equipped with high-definition capabilities. We have programming agreements with DIRECTV to deliver HBO HD, ESPN HD, ESPN 2 HD, Discovery HD and HD NET television programming. We also have agreements or other arrangements with DIRECTV, ESPN, Paramount, Universal, MGM, DreamWorks, Lion’s Gate, Magnolia and First Independent Pictures to provide high-definition guest room entertainment content to the hotels we serve that are equipped to receive and display HDTV. We plan to pursue agreements with additional providers of HD television and movie content, and we are actively working with a number of major television manufacturers to integrate their television displays with our HDTV platform solution. As part of the integration effort, several manufacturers have adopted 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. During 2006, we believe our SigNETure HDTV SM solution combined with our LMMS helped us to secure Global Hyatt Corporation as a customer. We were selected as the exclusive provider of interactive TV and HDTV services for Global Hyatt’s new upscale select service brand, Hyatt Place. During 2005, we believe key contracts with Starwood Hotels & Resorts Worldwide, Inc., and The Ritz-Carlton Hotel Company, L.L.C., a wholly-owned subsidiary of Marriott International, Inc., were secured as a result of our SigNETure HDTV SM solution leadership.
The revenues generated from Guest Pay interactive 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 television and broadband 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; and

Ø the occupancy rate at the property.
Our ability to increase the number of rooms served by our network is dependent on a number of factors, including the desirability of our technology, new hotel construction, and our ability to market our services to hotels upon expiration of competitors’ contracts with those hotels. Revenues vary with the number, availability and popularity of major motion pictures and the guests’ other entertainment alternatives. The price charged for each 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 LMMS allows us to refresh interactive menus, promote different products and different titles to different demographics, 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 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.
High Speed Internet Access System Sales, Service and Support. During 2006, we continued to promote the sale and installation of high-speed Internet equipment and services. 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 that have been installed by us and also to hotel properties that have been installed by other providers. We provide, in some cases, the hotel property with the portal to access the Internet. While this is a highly competitive area, we believe we have important advantages as a result of our existing hotel customer relationships, our nationwide field service network, and our 24-hour call center which provides services 7 days a week. In November 2006, we signed an agreement to acquire substantially all of the assets of StayOnline, Inc., a provider of HSIA services to hotels. This transaction was completed on February 1, 2007. With the close of this acquisition, we serve approximately 175,000 rooms with HSIA services.
Other Services. In addition to the sale of equipment to our international markets, we also generate revenue from the sale of content and services directly to our hotel customers, which are generally provided free to hotel guests. Included in these services is satellite-delivered basic and premium television programming for which the hotel pays us a fixed monthly charge per room. We provide this service to approximately 18,000 rooms in hotels which choose not to offer VOD services, and we compete with local cable television operators for providing such services by tailoring different programming packages to provide specific channels desired by the hotel subscriber, which typically reduces the overall cost to the hotel for the services provided.
Contracts. We provide Guest Pay interactive television services under contracts with lodging properties that generally run for a term of five to seven years. Over the five-year period ended December 31, 2006, the average initial term of new contracts was approximately six and a half years. Our contracts typically provide that we will be the exclusive provider of in-room, on-demand television entertainment services to the hotels, permit us to set prices for Guest Pay 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 free of charge and retain ownership of all equipment utilized in providing our services (except for the television sets, which are owned by the hotels). The terms contained in the contracts with corporate-managed hotels are generally negotiated by that hotel’s corporate management, and the hotels subscribe at the direction of corporate management. In the case of franchised hotels, the contracts are generally negotiated separately with each hotel. We also offer to certain hotel customers who would not otherwise qualify for installation of our systems, the opportunity to purchase our systems combined with long-term service maintenance and content agreements with us.
For Guest Pay interactive services which are paid for 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 on substantially similar terms. As of December 31, 2006, the average remaining life of our current Guest Pay interactive contracts was approximately 39 months and equated to approximately 39.2 million room months under contract. Approximately 19% of current Guest Pay rooms are subject to renewal prior to 2008. Over the last five years, we have de-installed an average of approximately 3% of our installed base per year. During 2006, we de-installed approximately 65,000 rooms. In addition to certain sites switching to their local cable provider, we have chosen not to renew contracts at select properties, primarily limited service and extended stay properties, as the revenue generated at these properties does not meet our minimum payback criteria. We believe it is a sound business decision as we intend to deploy our capital for renewals and for new rooms where we believe we can generate the highest return on our investment. Internationally, we intend to continue to expand in selected countries in Asia, Latin America, South America, Europe and other regions through long-term licensing agreements or other arrangements with entities in those areas.

Programming. We obtain non-exclusive rights to show recently released major motion pictures from motion picture studios pursuant to an agreement with each studio that is typically two to three years in length. The royalty rate for each movie is pre-determined, with the studio receiving a percentage of the gross revenue from the movie. For recently released motion pictures, we typically obtain rights to exhibit the picture while it is still in theatrical release, but prior to its release to the home video market or for exhibition on cable television. For 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 obtain non-exclusive rights to cable or premium television programming, including HD format programming, through a long-term agreement with DIRECTV, which expires in January 2010, whereby we pay a fixed monthly fee per property served. We also have agreements with certain other select television programming providers. We pay our television programming providers a fixed, monthly fee for each room or subscriber receiving the service. We believe that 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 a third party vendor, 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, subject to a monthly minimum. For our Hotel SportsNET SM programming we obtained the rights to exhibit sporting event content from the NFL, NHL, NBA, MLB, 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 generally 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 our scaleable broadband system architecture with 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. This capability combined with our menus and guest interface screens enables us to provide guests with sophisticated interactive television services that include: on-demand movies with pause, skip, forward, back and save functionality, network-based video games, music services, Internet viewing and a variety of other interactive services. Our system also interfaces with the hotel systems allowing guests to review room charges, checkout, 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, 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 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 Guest Pay interactive services to the guest room and also records purchase transactions and billing data to the hotel’s accounting system, which posts the charge to the guest’s bill.
In addition, we are continuing to develop and integrate technologies that enable us to deliver high-definition television (HDTV) and other digital content to our hotels and their guests. These developments extend our digital platform with new technology including “boxless” digital televisions and set-top or set-back boxes that are able to decrypt and decode this digital content in the guestroom. These HD systems are contrasted with our existing systems that deliver an analog signal to the room from either an analog tape-based or digital storage device. The digital content is encrypted to protect the rights of content owners, who consider this protection when granting us distribution rights.

Our LMMS allows 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.
At those properties where we have sold HSIA systems, the systems consist of commercial off-the-shelf networking equipment used to provide wired and wireless connections to guests’ computers. We license Visitor Based Network (VBN) software that manages connections between the guest and the Internet. 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 10 United States 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.
Healthcare and Adjacent Markets
During 2006, we continued to develop our product offering and presence in the healthcare industry and, as of December 31, 2006, had twelve facilities installed with our interactive system and six additional facilities under contract. In this market, we sell our interactive systems to healthcare facilities or licensed resellers. Revenue is earned from the initial sale of system hardware, software licensing, and installation services. We additionally earn recurring revenues, under long-term contracts, by providing entertainment content, software maintenance and technical field service. We plan to continue to pursue opportunities in the healthcare market and expect to contract and install additional hospitals in 2007.
In the second quarter of 2006, we began selling our digital system combined with a multi-year maintenance contract to IdleAire Technologies Corp., which produces and markets technology for installation at truck stops that provide various services for sleeper cabs in long-haul trucks. IdleAire purchases our interactive television platform, licenses our software, and contracts with us for a variety of entertainment and service options as part of its overall service offering. We are also investigating other adjacent markets into which we can sell our interactive television system including timeshare developments.
Programming . Our healthcare programming is provided by various third party distributors. We obtain the non-exclusive rights to show major motion pictures as well as patient education content pursuant to 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 our cable and premium television programming and Nintendo for video game services.
The programming provided in the travel center market is comparable with the programming in the hotel market; accordingly, we utilize our existing vendor relationships and programming arrangements.
Technology, Product Development: We have been able to leverage the technology and product development utilized in the hotel market to the healthcare and travel center markets with limited modifications.

CEO BACKGROUND

Chairman of the Board, President and Chief Executive Officer of the Company. Mr. Petersen joined the Company in 1987 as Senior Vice President for Corporate and Legal Affairs, was appointed Executive Vice President and Chief Operating Officer in 1991, was appointed President and Chief Executive Officer in July 1998 and became Chairman of the Board in October 2000.

Managing Director and Portfolio Manager of Kayne Anderson Capital Advisors LP, February 2002 — present; Independent Consultant, October 2000 to February 2002; Founder and CEO of Jewelry.Com from September 1999 — September 2000; Founder and President, L.E.K. Consulting, LLC, September 1986-August 1999.

Private Investor; former Vice President and Regulatory Affairs for NorthWestern Services Group, Inc. a division of NorthWestern Corporation, d/b/a NorthWestern Energy (NWEC)*, 2000-2003; former President and Chief Executive Officer for NorthWestern Energy Corporation and NorCom Advanced Technologies, Inc. (both wholly owned subsidiaries of NWEC), 1996-2000.(2)

Partner, Allen Austin Executive Search; former Vice President, Global Alliances & Business Development, Hewlett-Packard Company (HPQ)*, a technology solutions provider to consumers, businesses and institutions, 2002 to 2005; Vice President, Strategic Business Development, Compaq Computer Corporation, December 2000 — May 2002; Co-Founder and Vice President, BroadWord Communications, December 1999 — November 2000.

Private Investor; former Executive Vice President, RCN Corporation, October 2003-March 2004; former Executive Vice President of Level 3 Communications, Inc. (LVLT)*, a telecommunications and information services company, from August 1997-January 2003; former Vice Chairman of the Board of LVLT from February 2000-January 2003; and former Chief Financial Officer of LVLT, 1997-2000.

Chairman & CEO of DT Capital, a private investment firm, 2003 to present; Director, MDC Partners Inc., a marketing communications company, (MDCA)*; vice chairman, Rawhide Management, LLC, a development stage renewable energy entity, 2006 to present;, 1999 to present; former President, Chief Operating Officer and Director of NorthWestern Corporation (NWEC)*, a diversified energy and communications company, former Vice Chairman of NorthWestern Growth Corporation, Cornerstone Propane GP, Inc., Blue Dot Services, Inc., and Expanets, Inc. from 1998 to 2003.(2)

COMPENSATION

Director Compensation

Effective for 2006, the Board of Directors adopted the following compensation schedule for non-employee directors. Non-employee directors will receive $15,000 per year, payable quarterly. In addition, each non-employee director will receive $1,500 for each committee meeting attended in person and $500 for each committee meeting attended by teleconference. Committee chairs will receive an additional annual fee of $5,000, and the Audit Committee “financial expert” will also receive an additional annual fee of $5,000. The non-employee directors also receive reimbursement for travel and related expenses for attendance at Board of Directors and Committee meetings. In addition, non-employee directors receive 2,500 shares of stock on each anniversary of such election during the term of service, one half of which stock vests on issuance, and the remainder of which is issued as restricted stock which vests on the first anniversary of the grant. In 2006, the non-employee directors also received an option to purchase 5,000 shares of the Company’s stock at current fair market value on the date of the grant. One third of this option vested on the date of the grant, with one third to vest on the first anniversary of the date of the grant, and the final third to vest on the second anniversary of the date of the grant. The non-employee directors also have the right to elect to defer the receipt of cash and stock compensation in accordance with the provisions of the Company’s 2006 Non-Employee Directors Fee Plan.

Compliance with Reporting Requirements of Section 16 of the Exchange Act

Under Section 16(a) of the Exchange Act, the Company’s directors, executive officers and any persons holding 10% or more of the common stock are required to report their ownership of common stock and any changes in that ownership to the Securities and Exchange Commission (the “SEC”) and to furnish the Company with copies of such reports. Specific due dates for these reports have been established and the Company is required to report in this Proxy Statement any failure to file on a timely basis by such persons. To the Company’s knowledge, based solely upon a review of copies of such reports received by the Company which were filed with the SEC from January 1, 2006 through the Record Date, and upon written representations from such persons that no other reports were required, the Company has been advised that all reports required to be filed under Section 16(a) have been timely filed with the SEC.


MANAGEMENT DISCUSSION FROM LATEST 10K

Executive Overview
2006 marked a historic year for us as we achieved net income of $1.8 million for the full year. We continued to execute on our strategic plan focused on growth, profitability and the generation of net free cash flow, a non-GAAP measure, which we define as cash provided by operating activities less cash used for investing activities, including growth-related capital, which is capital used for new room installations. We increased our digital room base during the year by more than 100,000 net digital rooms. As of December 31, 2006, approximately 73% of our Guest Pay interactive room base, or 733,000 rooms, were equipped with a digital system. In addition, we continued to make progress with respect to our profitability goal, achieving net income for the year. During the year, we had net income of $1.8 million, an $8.8 million improvement from a net loss of $(7.0) million in 2005. Our operating income was up 18.7% to $26.9 million in 2006 from $22.7 million in 2005. During 2006, we generated $21.7 million of net free cash flow, representing an $8.9 million improvement over last year.
We continue to build upon our corporate strategy of expanding our networks and integrating additional market-valued solutions. The recent acquisition by our subsidiary, LodgeNet StayOnline, Inc., of substantially all of the assets of StayOnline, Inc., a leading provider of high-speed Internet access solutions focused on the lodging industry, presents an excellent opportunity to drive additional revenue streams through our customer base by providing high-speed Internet access solutions and services – one of the most highly demanded services of the traveling business person. The combination of StayOnline’s expertise and industry relationships, with our significant resources will allow us to enhance the array of IP-based solutions we can deliver to our customers, all backed by our nationwide customer service organization. With the closing of this acquisition, we now provide Internet access services to more than 175,000 hotel rooms nationwide.

Another significant step forward in the execution of our strategy to expand our networks and integrate a broader range of solutions for our customers is our pending acquisition of On Command Corporation. In December 2006, we announced that we had entered into a definitive agreement with Liberty Media Corporation to purchase all of the capital stock of Ascent Entertainment Group, Inc., the owner of 100% of the capital stock of On Command Corporation for $380.0 million. The purchase price will be paid at closing by the issuance of 2.05 million shares of our common stock and $332.0 million in cash. The acquisition holds the promise of creating significant new benefits for our lodging customers and shareholders as we combine the technologies and talents of the two organizations. On Command Corporation, based in Denver, Colorado, provides interactive media services to approximately 832,000 hotel rooms throughout the United States, Canada, and Mexico. It also owns 80% of the capital stock of The Hotel Networks, Inc., a distributor of advertising-supported, satellite-delivered television programming to approximately 300,000 rooms throughout the United States. Subject to regulatory approval, we expect the acquisition to close mid-2007.
During 2006, total revenue increased 4.5%, or $12.4 million, compared to 2005. The growth was driven in part by our diversification into healthcare and travel centers, which together produced $3.6 million of revenue, or approximately 30% of our revenue growth during the year. Our expanding digital room base and a 1.4% increase in revenue per average Guest Pay room contributed the balance of the incremental revenue. On a per room basis, monthly Guest Pay revenue increased to $23.02 in 2006 compared to $22.53 in 2005. In addition, movie revenue per room increased 1.6% to $17.27 this year as compared to $17.00 in the prior year. Revenue per room from other interactive services increased 4.0%, from $5.53 per month in 2005 to $5.75 in the current year. This change was primarily due to revenue increases associated with basic cable services, TV on-demand, music products and high-speed Internet access (HSIA) services, offset in part by a decrease in revenue from on demand video games and TV Internet.
For 2006, our Guest Pay direct costs increased to $10.51 per room as compared to $10.03 per room in 2005. The increase was primarily due to an increase in royalties for content, which varies with changes in the mix of movies and other products; higher costs associated with basic cable services; and higher hotel commissions resulting from our “pay for performance” commission structure. Guest Pay operations expenses decreased to $2.92 per average Guest Pay room per month in 2006 compared to $2.96 per month in the prior year. Selling, general, and administrative expenses increased to 10.1% of revenue for 2006 compared to 9.2% in 2005. Per average Guest Pay room, SG&A expenses increased to $2.41 per month in 2006 from $2.14 per month in the prior year. The increase was primarily due to increases in compensation expense, including the expensing of share-based compensation required under Financial Accounting Standard 123(R), and an increase in professional and consulting fees. Share-based compensation expenses were $1.7 million in 2006, compared to $288,000 in 2005. Professional and consulting fees were $2.9 million this year, compared to $1.9 million in 2005. A large part of that increase was related to the various strategic initiatives explored by the company. Depreciation and amortization expenses decreased 5.1% to $66.3 million in 2006 versus $69.9 million in 2005. The decrease was primarily attributable to a reduction in depreciation for Guest Pay systems as higher-cost assets became fully depreciated while the cost basis of more recently installed Guest Pay systems were relatively lower. Amortization expense also decreased due to intangible assets becoming fully amortized. Depreciation and amortization expenses per average Guest Pay room decreased 6.5% to $5.50 in 2006 compared to $5.88 in the prior year.
We continued to improve our financial position with the reduction of our investment of equipment into hotels through market and product segmentations and engineering development, reduction of interest costs by prepaying on our long-term debt, and prudent management of working capital. Cash at December 31, 2006 was $22.8 million compared to $20.7 million at December 31, 2005. The increase in cash was due to cash from operations offset by $20.0 million in discretionary pre-payments made on our term loan during 2006.
We continued to develop and secure the rights to use technologies that enable us to deliver high-definition television programming. In order to secure distribution rights for HD and other digital content, we are required to demonstrate appropriate security measures to protect that content. We have agreements or other arrangements with DIRECTV, ESPN, Paramount, Universal, MGM, DreamWorks, Lion’s Gate, Magnolia and First Independent Pictures to provide high-definition guest room entertainment content to the hotels we serve that are equipped to receive and display HDTV.

We continued to explore revenue growth opportunities within our core lodging business. These include, but are not limited to, new content and products such as Hotel SportsNET SM service, which provides guests the ability to purchase daily subscriptions to certain professional and college sports television packages. During 2006, our Hotel SportsNET SM line up included NFL SUNDAY TICKET, NHL CENTER ICE, NBA LEAGUE PASS, MLB EXTRA INNINGS and college sports programming including ESPN’s GamePlan, ESPN’s Full Court and College Sports TV (CSTV). As of December 31, 2006, Hotel SportsNET SM was installed in approximately 76,000 rooms. We expect to have 140,000 to 150,000 rooms installed by the end of 2007.
Also, we continued to expand our efforts to develop linear and on-demand advertising and promotional messages. We are able to selectively place these messages at properties and to record the number of views and the viewing time per view using our LMMS. This business model has the potential of generating revenue from the advertiser in contrast to the hotel or the guest.
Guest Pay Interactive Services. Our primary source of revenue is providing in-room, interactive television services to the lodging industry, for which the hotel guest pays on a per-view, hourly or daily basis. Our services include on-demand movies, network-based video games, music and music videos, Internet on television (which does not require a laptop), and television on-demand programming.
Our total guest generated revenue depends on a number of factors, including:
• The number of rooms on our network. We can increase revenue over time by increasing the number of rooms served by our interactive systems. Our ability to expand our room base is dependent on a number of factors, including the attractiveness of our technology, service and support to hotels currently operating without an interactive television system, newly constructed hotel properties, and hotels with expiring contracts currently served by our competitors.
• The variety of services offered at the hotel. Rooms equipped with our digital system generate higher revenue than rooms equipped with our tape-based system primarily because they offer a greater variety of services and content choices. We plan to continue to grow the revenue we generate per average room by the installation of our digital system in all newly contracted rooms and by converting selected tape-based rooms to our digital system in exchange for long-term contract extensions.
• The popularity, timeliness and amount of content offered at the hotel. Our revenues vary to a certain degree with the number, timeliness and popularity of movie content available for viewing. Historically, a decrease in the availability of popular movie content has adversely impacted revenue. Although not completely within our control, we seek to program and promote the most popular available movie content and other content to maximize revenue and gross profit.
• 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 gross profit. We establish pricing based on such things as the demographics of the property served, the popularity of the content and overall economic conditions. Our technology enables us to measure popularity of our content and make decisions to best position such content and optimize revenue from such content.
• 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 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.
The primary direct costs of providing Guest Pay interactive services are:
Ø license fees paid to major motion picture studios, which are 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 based on a percent of guest-generated revenue;

Ø fixed monthly programming charges paid primarily to DIRECTV for satellite-delivered basic and premium television programming;

Ø Internet connectivity costs;

Ø license fees, which are based on a percent of guest-generated revenue, for television on demand, music, music video, 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.
Other Products and Services. Our revenue from other services continued to expand and was $10.8 million in 2006, an increase of $2.8 million or 34.5%, compared to 2005. The increase was driven by our new revenue streams related to the sale of systems and service to healthcare facilities and travel centers. Components of our other revenue sources are as follows:
Healthcare System Sales and Support. We provide our interactive television infrastructure and content to the healthcare industry. We generate revenue from the sale and installation of system equipment and long-term agreements with the healthcare facility to provide software maintenance, programming and system maintenance. During 2006, we continued to focus on developing our healthcare business and had 18 facilities under contract as of December 31, 2006. Revenue comes from the initial sale of system hardware, software licensing, and implementation services, and we additionally earn recurring revenues, under long-term contracts, by providing entertainment content, software maintenance and technical field service. During 2006, we generated $2.3 million in healthcare related revenue, compared to $201,000 in 2005, and had 12 interactive systems installed as of December 31, 2006. In 2007, we expect to continue expanding our presence in the healthcare market.
High Speed Internet Access System Sales, Service and Support. We generate revenue through the sale and installation of high-speed Internet access equipment. In addition, we provide ongoing maintenance, service and call center support services to hotel properties that have been installed by us and also to hotel properties that have been installed by other providers. We provide, in some cases, the hotel property with the portal to access the Internet. We receive monthly service fees from such hotel properties for our maintenance services and Internet access. In 2006, we generated $4.1 million of HSIA related revenue compared to $4.4 million in 2005. During 2007, we expect to greatly expand our HSIA market based on our purchase of substantially all of the assets of StayOnline, Inc. and the increase in our HSIA room base from approximately 38,000 rooms to more than 175,000 rooms at the acquisition closing date. We expect that the expertise acquired from StayOnline, together with access to our significantly larger room base will result in significant growth in our HSIA business in 2007.
System Sales and Support to Travel Centers. We also market and sell our interactive systems to IdleAire Technologies Corp. We generate revenue from three sources: 1) the sale of the interactive system, which includes equipment and a non-exclusive, non-transferable right to use the initial software package 2) extended service and maintenance agreements, which include future software upgrades as they become available and 3) entertainment programming.
Other. Revenue generated from other sources includes the following:
Ø Revenue generated from the sale of our Guest Pay interactive systems to hotels, along with recurring support for interactive content, software maintenance and technical field service for a fixed fee;

Ø Revenue from the sale of miscellaneous system equipment such as television remotes and service parts and labor;

Ø Revenues from the sale of equipment to our international markets;

Ø Revenues from the installation of master antenna wiring and related infrastructure;

Ø Revenues from the sale and installation of DirecTV satellite systems; and

Ø Revenue generated from delivery of satellite basic and premium television programming for which the hotel pays us a fixed monthly charge per room.

Results of Operations — Years Ended December 31, 2006 and 2005
Metrics are calculated based on reduced room counts due to the impact of Hurricane Katrina. As of December 31, 2006, 4,053 rooms remained out of service.
Revenue Analysis
Total revenue for 2006 was $288.2 million, an increase of $12.4 million, or 4.5%, compared to 2005. New revenue streams, including healthcare facilities and travel centers, produced revenue of $3.6 million, which was approximately 30% of our revenue growth during the year.

Guest Pay Interactive Services. Revenue from Guest Pay services was $277.4 million, an increase of $9.7 million or 3.6%, resulting in part from a 2.2% increase in revenue realized per average Guest Pay room and a 1.4% increase in the average number of rooms in operation. Guest Pay revenue per room increased to $23.02 per month in 2006 from $22.53 per month in 2005.

Movie revenue per room increased 1.6% to $17.27 during 2006 as compared to $17.00 in the prior year. The revenue growth was driven in part by our expanding digital room base and in part by price variations, which are dependent upon product mix and guest purchase patterns. Revenue per room from other interactive services increased to $5.75 per month in 2006 as compared to $5.53 during 2005. The increase was primarily due to revenue increases associated with basic cable services, TV on-demand, music products, and high-speed Internet access (HSIA) services, offset in part by a decrease in revenue from on demand games and TV Internet.
Other revenue includes revenue from sales of system equipment and service parts and labor, free-to-guest (FTG) services provided to hotels not receiving Guest Pay services, and other revenue. Other revenue increased $2.8 million, or 34.5%, in comparison to 2005, primarily driven by our new revenue streams related to the sale of systems and service to healthcare facilities and travel centers. The increase was offset in part by a decrease in high-speed Internet equipment sales and FTG only revenue. FTG services revenue is expected to decrease as we continue to eliminate our FTG only business and related room base.

Expense Analysis
Direct Costs (exclusive of operating expenses and depreciation and amortization discussed separately below). Guest Pay direct costs increased $7.5 million or 6.3% to $126.6 million in 2006 as compared to $119.2 million in the prior year. As a percentage of Guest Pay revenue, Guest Pay direct costs increased to 45.6% for 2006 as compared to 44.5% last year. The increase was due to an increase in royalties for content, which varies with changes in the mix of movies and other products; higher costs associated with basic cable services; and higher hotel commissions resulting from our “pay for performance” commission structure.
Other direct costs include costs related to system sales, FTG only programming fees, and international royalties. Other direct costs increased $1.3 million to $5.3 million in 2006 as compared to $4.0 million in the prior year. The change was driven by our new revenue streams related to the sale of systems and service to healthcare facilities and travel centers offset in part by the decrease in high-speed Internet equipment sales and FTG only revenue.
Total direct costs were $132.0 million, an increase of $8.7 million as compared to $123.2 million in 2005. As a percentage of revenue, total direct costs increased to 45.8% in 2006 as compared to 44.7% last year. Per average Guest Pay room, total monthly direct costs increased to $10.95, or 5.6%, in 2006 compared to $10.37 in the prior year.

Guest Pay operations expenses consist of costs directly related to the operation and maintenance of systems at hotel sites. Guest Pay operations expenses remained level at $35.2 million in 2006 compared to $35.1 million last year. As a percentage of revenue, Guest Pay operations expenses were 12.2% in 2006 as compared to 12.7% in 2005. Per average installed room, Guest Pay operations expense decreased to $2.92 per month in 2006 as compared to $2.96 per month in 2005.

Selling, general and administrative expenses (“SG&A”) were $29.0 million, an increase of $3.6 million compared to $25.4 million in 2005. The increase was primarily due to increases in compensation expense, including the expensing of share-based compensation required under the new Financial Accounting Standard 123(R), and an increase in professional and consulting fees. Share-based compensation expenses were $1.7 million in 2006, compared to $288,000 last year. Professional and consulting fees were $2.9 million during 2006, compared to $1.9 million last year. A large part of that increase was related to various strategic initiatives of the Company. SG&A as a percentage of revenue was 10.1% in 2006 compared to 9.2% in 2005. Per average Guest Pay room, SG&A expenses were $2.41 in 2006, compared to $2.14 in the prior year.
Depreciation and amortization expenses decreased 5.1% to $66.3 million in 2006 versus $69.9 million in 2005. The decrease was primarily attributable to a reduction in depreciation for Guest Pay systems as higher-cost assets became fully depreciated while the cost basis of more recently deployed Guest Pay systems is lower. Amortization expense also decreased due to intangible assets becoming fully amortized. The decrease was partially offset by a $667,000 increase in system removal costs due to increased de-installations. Depreciation and amortization expenses per average Guest Pay room decreased 6.5% to $5.50 in 2006 compared to $5.88 in the prior year. As a percentage of revenue, depreciation and amortization expenses decreased to 23.0% in 2006 from 25.3% in 2005.
Other operating income of $1.2 million includes $817,000 of proceeds received from the Company’s insurance carrier for business interruption insurance and property damage related to Hurricane Katrina. In addition, we realized $390,000 in recoveries related to early contract terminations. In 2005, other operating income of $508,000 included insurance proceeds associated with the Hurricane Katrina recovery of $788,000 offset by a $280,000 charge for equipment impairment.
In August 2005, Hurricane Katrina swept through the Gulf of Mexico region, causing severe damage to properties located in Louisiana, Alabama, Mississippi, and Florida. LodgeNet sustained property damage to its systems installed at the hotels located within those states. The damage included 121 hotels or approximately 21,000 rooms served by the LodgeNet interactive systems. As of December 31, 2006, 4,053 rooms remain out of service, and no amounts had been recognized for future recoveries.
Operating Income. As a result of the factors described above, operating income increased to $26.9 million in 2006 as compared to $22.7 million in the prior year.
Write-Off of Debt Issuance Costs. During 2006, we incurred charges of $227,000 as a result of the early retirement of $20.0 million of our Term B notes as compared to charges of $272,000 as a result of the early retirement of $19.0 million of our Term B notes under our bank Credit Facility in 2005.
Interest Expense. Interest expense was $25.7 million in the 2006 versus $29.4 million in 2005. The decrease was driven in part by a 9.1% reduction of our average outstanding long-term debt, which was $278.4 million during 2006 compared to $306.5 million in 2005, along with the expiration of our interest rate swaps in March 2006. The swaps were previously required under our bank Credit Facility. During 2006, we made payments of $21.5 million on our long-term debt, of which $20.0 million were discretionary pre-payments on our term loan. The average interest rate on our outstanding debt decreased to 9.2% in 2006 versus 9.6% for 2005.
Other Income (Expense). During 2006, we recorded a $238,000 recovery related to the settlement of the Chapter 7 liquidation of Gamet Technology, Inc. In 2003, we advanced $1.0 million to Gamet Technology, Inc. pursuant to a written promissory note in connection with our effort to support the development of technology, which could utilize our interactive system. We had fully reserved for the $1.0 million promissory note in the fourth quarter of 2004. In addition, we recorded $846,000 of interest income in 2006. During 2005, we recorded $864,000 of interest income, which was offset by a charge of $248,000 for a Canadian music rights settlement and a $236,000 provision for state use tax.
Taxes. During 2006, we incurred federal income and state franchise tax of $299,000 versus $450,000 during 2005.
Net Income (Loss). As a result of the factors described above, net income was $1.8 million for 2006, an improvement of $8.8 million as compared to a net loss of $(7.0) million in 2005.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

Discussion and Analysis of Results of Operations
Three Months Ended September 30, 2007 and 2006
Revenue Analysis. Total revenue for the third quarter of 2007 was $142.6 million, an increase of $66.1 million or 86.4%, compared to the third quarter of 2006. The growth was primarily driven by the integration of our On Command and StayOnline acquisitions, which contributed $63.1 million to revenue.

The decline was driven by the addition of the On Command room base, which generates lower revenue per room for both movie revenue and basic cable programming.
Other revenue was $11.2 million during the third quarter of 2007 versus $2.6 million in the third quarter of 2006. The increase is attributed to higher HSIA equipment sales, interactive television system equipment sales to hotels and travel centers and the addition of advertising revenue. The advertising revenue was generated primarily by The Hotel Networks, a subsidiary acquired as part of the On Command acquisition.
Direct Costs (exclusive of operating expenses and depreciation and amortization discussed separately below). Direct costs related to Guest Pay services include movie license fees, license fees for other interactive services, commission paid to the hotel and HSIA customer support expenses. Guest Pay direct costs increased $33.5 million, to $68.2 million primarily due to the incremental costs attributed to the On Command products and services.
Direct costs related to other revenue include costs related to system sales, FTG only programming fees, and international royalties. Direct costs related to other revenue increased $6.4 million as a result of increased equipment sales and other acquired lines of business.
Total direct costs increased $39.9 million to $75.9 million in the third quarter of 2007. Total direct costs increased to 53.2% of revenue, as a result of the acquisitions, for the third quarter of 2007 as compared to 47.1% in the third quarter of 2006. In addition, a portion of the increase was driven by lower margin HSIA equipment sales and service and higher programming costs from our acquired businesses.

Guest Pay operations expenses increased to $15.4 million in the third quarter of 2007 as compared to $8.9 million in the third quarter of 2006. Guest Pay operations expenses include $637,000 of integration related costs. Guest Pay operations expenses as a percentage of revenue were 10.8% this year as compared to 11.6% in the third quarter of 2006. Per average installed room, Guest Pay operations expenses decreased to $2.78 per room per month compared to $2.96 in the prior year quarter.
Selling, general and administrative (SG&A) expenses increased $9.0 million to $16.1 million in the current quarter. The On Command and StayOnline SG&A accounted for $6.3 million of the increase. We also incurred approximately $1.9 million of expenses related to the integration of the two acquisitions. As a percentage of revenue, SG&A expenses were 11.3% in the current quarter compared to 9.2% in the third quarter of 2006.
Depreciation and amortization expenses increased to $31.0 million in the current year quarter versus $16.1 million in the third quarter of 2006. The increase was attributable to the $15.5 million of depreciation related to fixed assets of acquired companies. Depreciation and amortization expenses per average Guest Pay room increased to $5.59 in the third quarter of 2007 compared to $5.35 in the prior year quarter. As a percentage of revenue, depreciation and amortization expenses increased to 21.8% in the third quarter of 2007 from 21.0% in the third quarter of 2006.
As a result of our post acquisition activities, we incurred restructuring costs of $2.3 million in the third quarter of 2007. On Command restructuring expenses of $2.3 million consisted of $1.8 million in employee severance and $455,000 of other restructuring costs. Employee severance costs related to the consolidation of administrative, sales, engineering, marketing, programming and technical operations departments. At September 30, 2007, we had a restructuring accrual for severance in the amount of approximately $2.2 million.

Operating Loss. As a result of the factors described above, operating loss was $1.4 million in the third quarter of 2007 compared to operating income of $8.4 million in the third quarter of 2006.
Interest Expense. Interest expense was $11.7 million in the current quarter versus $6.4 million in the third quarter of 2006. The increase was driven by the increase in average outstanding long-term debt, which increased to $627.4 million during the third quarter of 2007 from $277.0 million in the third quarter of 2006. As a result of our April 2007 refinancing, the average interest rate was 7.5% this quarter as compared to 9.24% during the third quarter of 2006.
Other (Expense) Income. In the third quarter of 2007, we recorded $317,000 of interest income and $408,000 of other income primarily related to the reversal of a tax provision. In the third quarter of 2006, we recorded $234,000 of interest.
Taxes. During the third quarter of 2007, we incurred state franchise taxes of $325,000 and reversed a $1.4 million tax provision. The reversal was made as the statute of limitations expired. For the third quarter of 2006, we incurred state franchise taxes of $104,000 which was offset by the $104,000 refund received for overpayments of 2005 Canada income tax.
Net Loss. As a result of the factors described above, net loss was $11.4 million for the third quarter of 2007 compared to a net income of $2.2 million in the prior year quarter.

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