† competition from providers of similar services and from alternative sources;

† changes in demand for our products and services, programming costs, availability, timeliness, and quality;

† technological developments by competitors;

† developmental costs, difficulties, and delays;

† relationships with clients and property owners;

† the availability of capital to finance growth;

† the impact of government regulations;

† potential effects of litigation;

† risks of expansion into new markets;

† risks related to the security of our data systems; and

† other factors detailed, from time to time, in our filings with the SEC.

With respect to any proposed or completed acquisition, we are subject to risks that integration costs will exceed expectations, that synergies we anticipate will not be realized, or will take longer than anticipated to realize, that our management and management systems will encounter difficulties in dealing with a bigger, more diversified enterprise, and that the financial results we expect from the acquisition will not be realized. Executive Overview
We are the largest provider of interactive media and connectivity solutions to the hospitality industry in the United States, Canada, and Mexico. We also provide interactive television solutions in select international markets, primarily through local or regional licensees. As of March 31, 2008, we provided interactive television and other services to approximately 9,900 hotel properties serving over 1.9 million hotel rooms. Within that customer base, we also provide television programming, broadband Internet, and advertising media solutions in approximately 1.1 million, 220,000 and 400,000 hotel rooms respectively. In addition, we sell and operate interactive television systems that provide on-demand patient education, information and entertainment to healthcare facilities throughout the United States.
Following our strategic acquisitions in 2007 in the areas of interactive television, broadband Internet and advertising media, we now offer our customers an expanded suite of services and solutions that connect, inform and entertain guests and patients. This strategic transformation has placed us in a unique position to broaden our customer relationships and drive meaningful new revenues and cash flows. We also continue to focus on controlling operating expenses and capital investment levels to drive cash flow generation as we finalize the post merger activities from our acquisitions.

With our expanded suite of products and services, we are establishing new product categories that we believe will become increasingly important contributors to our financial performance. The criteria for establishing these new products and services include minimal capital investment on our part and with the same prudent financial approach we have historically applied to our Company. We intend to manage our business and capital investment plans to ensure we can capture our most promising growth opportunities.
Our revenue for the first quarter of 2008 was $139.8 million, an increase of $64.5 million or 85.7%, compared to the first quarter of 2007. The growth in revenue was primarily driven by the 2007 acquisition of On Command, which contributed $56.2 million to revenue in the first quarter of 2008. The average monthly total revenue per room was $25.12 for the first quarter of 2008 compared to $24.93 for the first quarter of 2007. Guest Entertainment revenue, which includes on-demand entertainment such as movies, games, music, time-shifted television, Internet access through the television, and sports programming, increased $43.8 million or 78.9% to $99.2 million. On a per-room basis, monthly Guest Entertainment revenue for the first quarter of 2008 declined 2.9%, which was essentially unchanged when compared to the decline in occupancy of approximately 3.2% quarter over quarter. Hotel Services revenue, which includes revenue from hotels for television programming and broadband Internet service and support, increased $14.2 million or 93.1% to $29.5 million during the first quarter of 2008 versus $15.3 million in the first quarter of 2007. On a per-room basis, monthly Hotel Services revenue for the first quarter of 2008 increased 4.7% to $5.30 compared to $5.06 for the first quarter of 2007. This increase resulted primarily from the continued installation of high definition television systems and related services. Revenue from the sales of broadband, healthcare and other interactive systems, and advertising and media services (primarily from The Hotel Networks), increased to $11.1 million during first quarter of 2008 versus $4.6 million in the first quarter of 2007. The increase in revenue resulted directly from an increase in the sale of interactive television and Internet access systems to hotels and the incorporation of the revenue from The Hotel Networks.
Total direct costs (exclusive of operating expenses and depreciation and amortization discussed separately below) increased to $75.9 million in the first quarter of 2008 as compared to $36.5 million in the first quarter of 2007. The increase in total direct costs was primarily due to the direct costs associated with the operations of On Command. For the first quarter of 2008, direct costs as a percentage of revenue were 54.3% as compared to 48.4% for the first quarter of 2007. The increase as a percentage of revenue was primarily due to the revenue and direct costs associated with the On Command TV programming service, which represented approximately 85% of the increase to total direct costs, quarter over quarter, or 490 basis points. The relationship of direct costs to revenue for the On Command TV programming service was known prior to the acquisition and a contract amendment with a major On Command customer is in place. We expect the margins on this service to improve significantly over the next two years as we convert this customer to high definition television programming as provided by the amended contract.
For the first quarter of 2008, total operating costs and expenses increased $33.0 million, primarily due to the acquisition of On Command and StayOnline. System operations expenses increased to $15.4 million in the first quarter of 2008 as compared to $8.5 million in the first quarter of 2007. As a percentage of revenue, system operations expenses decreased to 11.0% this quarter as compared to 11.3% in the first quarter of 2007. Per average installed room, system operations expenses also decreased to $2.77 per room per month compared to $2.83 in the prior year quarter. Selling, general and administrative (SG&A) expenses increased as a result of the 2007 acquisitions from $7.8 million in the first quarter of 2007 to $15.2 million in the current quarter. Included within this quarter's SG&A expenses were approximately $717,000 of integration costs. Integration expenses are defined as incremental costs associated with activities to combine or merge an operation that is not being closed, exited, or disposed of. Since we will realize certain future benefits, these costs are accounted for within our operating expenses as components of continuing operations. As a percentage of revenue, SG&A expenses were 10.9% in the current quarter compared to 10.4% in the first quarter of 2007.
For the first quarter of 2008, we also incurred restructuring costs of $2.0 million to complete the personnel reduction phases of our post merger activities. The restructuring expenses were primarily related to employee severance costs for the remaining administrative functions and the consolidation of our corporate systems infrastructure.

Guest Entertainment and Hotel Services (includes guest entertainment purchases and revenue from hotels for services such as free-to-guest television channels and recurring broadband Internet service and support to the hotels). Our primary source of revenue is providing in-room, interactive guest 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 television 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 that may not meet our return on investment requirement and may select programming from a local cable provider.

• The variety of services offered at the hotel. Rooms equipped with our high-definition or standard 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 HDTV system in all newly contracted rooms and by converting selected rooms to our HDTV 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 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.

• 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.

The primary direct costs of providing Guest Entertainment and Hotel Services are:
† 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;

† commissions paid to our hotel customers, which are also based on a percent of guest-generated revenue;

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

† broadband Internet connectivity costs and call center support;

† 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

† one-time license fees paid for independent films, most of which are non-rated and intended for mature audiences.

System Sales, Advertising and Other Services. Our revenue from other products and services, primarily within the hotel and lodging industry, increased $6.5 million to $11.1 million during the first quarter of 2008 versus $4.6 million in the prior year quarter. The increase was a direct result of our initiatives to diversify our revenue including the expansion of our advertising and media services within the hotels, increased broadband equipment and interactive television system equipment sales to hotels, and increased systems and equipment sales to healthcare facilities and travel centers. The advertising and media revenue was generated primarily by The Hotel Networks, a subsidiary acquired as part of the On Command acquisition.
Revenue generated from other products and services includes the following:
† revenue generated from our advertising and media services within the hotels;

† revenue generated from the sale of our interactive systems to healthcare facilities, along with recurring support for interactive content, software maintenance and technical field service for a fixed fee;

† revenue generated from the sale of our interactive systems to hotels, along with recurring support for interactive content, software maintenance and technical field service for a fixed fee;

† revenue from the sale of miscellaneous system equipment such as multi-service connection equipment, television remotes and service parts and labor to the hotels;

† revenues from the sale of equipment to our international licensees within the hotel or lodging industry;

† revenues from the installation of master antenna low voltage wiring and related infrastructure to the hotels;

† revenues from the sale and installation of DIRECTV satellite systems to the hotels; and

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

Key Metrics:
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 net free cash flow, a non-GAAP measure that is 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 net free cash flow, a non-GAAP measure, as cash provided by operating activities less cash used for certain investing activities and excluding consideration paid for acquisitions. Net 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 net 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. However, GAAP cash flow from operations is reduced by the amount of interest and tax payments and also takes into account changes in net current liabilities (e.g., changes in working capital) that do not impact net income. Because changes in working capital can reverse in subsequent periods, and because we want to provide information about cash available to satisfy interest and income tax expense (by showing our cash flows before deducting interest and income tax expense), we are also presenting net free cash flow information. Our definition of net free cash flow does not take into account our working capital requirements, debt service requirements or other commitments. Accordingly, net free cash flow is not necessarily indicative of amounts of cash that may be available to us for discretionary purposes. Our method of computing net free cash flow may not be comparable to other similarly titled measures of other companies. A reconciliation of net free cash flow to cash provided by operating activities is provided as follows (in thousands of dollars):

                                                          Three Months Ended
                                                               March 31,
                                                          2008          2007
      Net free cash flow                                $  (7,038 )   $ (12,739 )
      Add:
      Cash used for property and equipment additions       18,935        15,897
      Cash used for acquisitions and other activities           -        14,869

      Cash provided by operating activities             $  11,897     $  18,027

Rooms Served
One of the metrics we monitor is the growth, net of de-installations, of our interactive television network. Over the last five years, de-installation activity averaged approximately 3% of our total installed room base. As lower revenue tape-based systems come up for contract renewal the overall economics may not support upgrading the site to our HDTV system. In these situations, many properties decide to switch to their local cable provider or we may elect to remove a certain number of these sites from our interactive television room base. We expect this trend to continue as we focus on the quality of rooms installed and upgraded with greater returns when investing our capital dollars. We installed our systems in the following number of net new rooms and had the following total rooms installed as of March 31:

                                                                                   March 31,
                                                                           2008                 2007
Total rooms served (1)                                                   1,968,000            1,136,411
Total Guest Entertainment rooms (2)                                      1,863,599            1,010,975
Total HD rooms (3)                                                         109,980               37,343
Total Television Programming (FTG) rooms (4)                             1,076,894              546,516
Total Broadband Internet rooms (5)                                         221,906              178,430
Net new Guest Entertainment rooms for the three months ended (6)             9,156                6,038

(1) Total rooms served include rooms receiving one or more of our services including rooms served by international licensees. The increase from 2007 is due to the addition of the On Command room base of approximately 830,000 rooms.

(2) Guest Entertainment rooms are equipped with our interactive television systems.

(3) HD rooms are equipped with high-definition capabilities.

(4) Television programming (FTG) rooms receiving basic or premium television programming.

(5) Represents rooms receiving high-speed Internet service included in total rooms served.

(6) Amounts shown are net of de-installations during the period. The gross number of new rooms installed was 17,331 and 17,664 for the three months ended March 31, 2008 and 2007, respectively.

High Definition and Digital Room Growth
We continue to expand our digital base, including high-definition television (HDTV), as we install our HDTV system in newly contracted rooms and convert select rooms to the HDTV system in exchange for long-term contract extensions. Rooms equipped with our digital or HDTV system typically generate higher revenue since the range of services is greater than rooms equipped with our tape-based systems.

                                                                                 March 31,
                                                                          2008                2007
Net new digital rooms for the three months ended                           18,191             26,017
Net new HDTV rooms for the three months ended (1)                          23,582             13,841
Total HDTV rooms installed (2)                                            109,980             37,343
Total digital rooms installed                                           1,483,522            759,379
Digital rooms as a percent of total Guest Pay interactive rooms              79.6 %             75.1 %

(1) HDTV rooms are equipped with high-definition capabilities and are included in total digital rooms.

(2) HDTV rooms are included in the total digital rooms installed.

                   LodgeNet Interactive Corporation    Form 10-Q


Capital Investment Per Room
The average investment per-room associated with a digital installation can
fluctuate due to engineering efforts, component costs, product segmentation,
cost of assembly and installation, average property size, certain fixed costs,
hotel capital contributions and the expanding number of high-definition
installations, which have a higher cost per room. The following table sets forth
our average installation and conversion investment cost per room during the
periods ended:

                                                      Three Months Ended                        Years Ended
                                                  March 31,        March 31,         December 31,         December 31,
                                                    2008              2007               2007                 2006
Average cost per room - new installation          $   390           $   366           $      399           $      354
Average cost per room - conversion                $   301           $   285           $      309           $      252

Average cost per HD room - new installation       $   413           $   430           $      460           $      438
Average cost per HD room - conversion             $   304           $   316           $      312           $      289

The increase in the average cost per new and converted rooms from 2007 to 2008 is primarily driven by the change in average room size of the property and the increase in high definition installations, which have a higher cost per room. The incremental cost for a high-definition installation ranges from approximately $50 to $100 per room depending upon the average room size, the mix of high-definition services and the amount of hotel capital contributions. Revenue Per Room
Guest Entertainment revenue can fluctuate based on several factors including occupancy, the popularity of movie content, mix of services purchased and the availability of alternative programming. During the quarter, occupancy was down approximately 3.2% as compared to the first quarter of 2007. The following table sets forth the components of our Guest Entertainment revenue per room for the three months ended March 31:

                                                    Three Months Ended
                                                         March 31,
                                                     2008          2007
             Average monthly revenue per room:
             Movie revenue                        $    16.51      $ 17.13
             Other interactive service revenue          1.32         1.23

             Total per Guest Entertainment room   $    17.83      $ 18.36

Direct Costs
Guest Entertainment and hotel services direct costs (exclusive of operating expenses and depreciation and amortization discussed separately below) for interactive services include movie license fees, license fees for other interactive services, the commission retained by the hotel, and programming and other related costs. As previously noted, the increase in direct costs as a percentage of revenue was primarily driven by the On Command television programming service. The following table sets forth our Guest Entertainment and hotel services direct expenses per room and as a percent of revenue during the three months ended March 31:

                                                                       Three Months Ended
                                                                            March 31,
                                                                      2008             2007
Guest Entertainment and hotel services direct costs per room       $  12.11          $ 10.96
Guest Entertainment and hotel services direct costs as a
percent of total revenue                                               48.2 %           44.0 %

Operating Expenses
We continue to monitor and manage the operating expenses per room in order to increase the level of cash flow our business generates. System operations expenses consist of costs directly related to the operation and maintenance of . . .