† the economic condition of the lodging industry, which can be particularly affected by the financial conditions referenced above, as well as by high gas prices, levels of unemployment, consumer confidence, acts or threats of terrorism and public health issues;

† decreases in hotel occupancy, whether related to economic conditions or other causes;

† 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 customers and property owners;

† the availability of capital to finance growth;

† the impact of covenants contained in our credit agreement, compliance with which could adversely affect capital available for other business purposes, and the violation of which would constitute an event of default;

† the impact of governmental regulations;

† potential effects of litigation;

† risks of expansion into new markets and territories;

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

† other factors detailed, from time to time, in our filings with the Securities and Exchange Commission.

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 September 30, 2009, we provided interactive media and connectivity solutions to approximately 9,800 hotel properties serving over 1.9 million hotel rooms. Within that customer base, we also provide on-demand guest entertainment services, advertising media services, cable television programming and broadband Internet access in approximately 1.8 million, 1.2 million, 1.1 million and 207,000 hotel rooms, respectively. In addition, we sell and maintain interactive television systems which provide on-demand patient education, information and entertainment to healthcare facilities throughout the United States. As of September 30, 2009, our system was installed in 39 healthcare facilities, representing approximately 8,400 beds. We had 12 additional hospitals under contract, scheduled to be installed in future periods, representing approximately 2,100 beds.

Our strategic initiatives, focused on diversified revenue growth and cost control, continued to drive free cash flow and improve our profitability metrics during the third quarter of 2009. Our diversified revenue growth initiatives, which include our non-Guest Entertainment products and services, generated $44.8 million of revenue this quarter, or approximately 36.9% of total revenue, with the related gross profit up 30.4% over the third quarter of 2008. Our system operations and selling, general and administrative (SG&A) expenses were reduced 19.5%, to $22.0 million in the current quarter as compared to $27.4 million in the prior year quarter. As a result, our income from operations increased 14.5% quarter over quarter, from $4.6 million in 2008 to $5.3 million in 2009. Our proactive plan to manage the level of capital investment activity resulted in a decrease of 69.6%, from $14.7 million in the third quarter of 2008 to $4.5 million in the third quarter of 2009. Our free cash flow demonstrated a significant increase, to $16.1 million in the current quarter compared to $6.2 million in the prior year quarter, an improvement of 158.4%. While we did see marginal signs of improvement during the quarter related to Guest Entertainment revenue, business travel and capital spending by our hotel customers continues to be soft; therefore, we will continue to take a conservative approach with our capital investments and operating strategy in this uncertain economic environment. The integration of our 2007 strategic acquisitions has resulted in a more efficient operating structure and operational leverage, which will continue to produce benefits as consumer confidence returns and hotel occupancies increase.
Our total revenue for the third quarter of 2009 was $121.1 million, a decrease of $14.2 million or 10.5%, compared to the third quarter of 2008. The decrease in revenue was primarily from Guest Entertainment services, partially offset by increases in revenue from Hotel Services and System Sales and Related Services. Hospitality revenue, which includes Guest Entertainment, Hotel Services and System Sales and Related Services, decreased $14.2 million or 10.7%, to $118.3 million for the third quarter of 2009 as compared to $132.5 million for the prior year quarter. Due to continued softness in the travel industry, occupancy declined by approximately 7.6% during the third quarter 2009 compared to the same period last year. Average monthly Hospitality revenue per room was $21.70 for the third quarter of 2009, a decrease of 8.8% as compared to $23.79 per room in the third quarter of 2008.
Guest Entertainment revenue, which includes on-demand entertainment such as movies, games, music and other services delivered through the television, decreased $17.4 million or 18.6%, to $76.4 million in the third quarter of 2009. Impacted by the decline in occupancy rates and a conservative consumer buying pattern, average monthly Guest Entertainment revenue per room for the third quarter of 2009 declined 16.9% to $14.01 compared to $16.85 for the third quarter of 2008. Sequentially, the 16.9% decline during the third quarter of 2009 was less than the declines during the first and second quarters of 2009, which were 23.0% and 20.4%, respectively. Average monthly movie revenue per room was $13.11 for the third quarter of 2009, a 16.2% reduction as compared to $15.65 per room in the prior year quarter. Hotel Services revenue, which includes revenue paid by hotels for television programming and broadband Internet service and support, increased $1.9 million or 6.2%, to $32.6 million during the third quarter of 2009 versus $30.7 million in the third quarter of 2008. On a per-room basis, monthly Hotel Services revenue for the third quarter of 2009 increased 8.3% to $5.98 compared to $5.52 for the third quarter of 2008. Monthly television programming revenue per room increased 9.6% to $5.47 for the third quarter of 2009 as compared to $4.99 for the third quarter of 2008. This increase resulted primarily from the continued installation of high definition television systems and related television programming services. Recurring broadband Internet revenue per room decreased to $0.51 for the third quarter of 2009 compared to $0.53 for the same period of 2008. System Sales and Related Services revenue, which includes the sale of broadband Internet equipment, television programming reception equipment, Internet conference services and HDTV installation services to hotels, increased $1.4 million or 17.1%, to $9.3 million during the third quarter of 2009 versus $7.9 million in the third quarter of 2008. Television programming system sales accounted for $1.1 million of this growth and the balance was derived from sales of equipment and professional services to hotels.
Other Revenue, including the sale of interactive systems and services to Healthcare facilities and revenue from Advertising and Media Services, was $2.8 million for both periods. Healthcare revenue was $1.2 million, while Advertising and Media revenue remained stable at $1.6 million, despite the continued softness in the general economy.

Total direct costs (exclusive of operating expenses and depreciation and amortization discussed separately below) were $69.3 million in the third quarter of 2009, a decrease of $4.7 million or 6.3%, as compared to $74.0 million in the third quarter of 2008. The decrease in total direct costs was primarily due to decreased hotel commissions and programming royalties of $5.5 million, which vary with revenue, and a reduction in recurring connectivity and other Internet support costs of $1.7 million, a result of our cost reduction initiatives. Partially offsetting these reductions were increases in incremental television programming costs of $1.5 million, which vary with the number of rooms served and the services provided, and incremental system sales, equipment and service direct costs of $1.4 million. For the third quarter of 2009, total direct costs as a percentage of revenue were 57.3% as compared to 54.7% for the third quarter of 2008. The increase in direct costs as a percentage of revenue was driven by a change in the composition of our revenue and product mix, quarter over quarter, primarily from the increased percentage of revenue generated by television programming and systems sales, which generally have a lower margin than Guest Entertainment revenues.
System operations expenses and selling, general and administrative (SG&A) expenses were $22.0 million in the third quarter of 2009 compared to $27.4 million in the prior year quarter. As a percentage of total revenue, system operations expenses were 9.0% this quarter as compared to 11.0% in the third quarter of 2008. Per average installed room, system operations expenses decreased to $1.99 per room per month this quarter as compared to $2.67 in the prior year quarter. As a percentage of total revenue, SG&A expenses were flat at 9.2% in both the current quarter and the third quarter of 2008. SG&A expenses per average installed room were $2.05 this quarter as compared to $2.24 in the third quarter of 2008. The decreases in total operating expenses were the result of achieving the expected synergies related to the consolidation of duplicative general and administrative functions of the acquired companies and related operations, our expense reduction initiatives implemented during 2008 and 2009, lower system service costs, a reduction in facilities costs and lower travel-related expenses.
Despite the revenue decline, we generated $20.6 million of cash from operating activities as compared to $20.9 million in the third quarter of 2008. In July, we utilized $27.7 million of the proceeds from the sale of convertible preferred stock to repay a portion of the Term B, as required. In September, we made the required Term B quarterly payment of $1.4 million and also made an optional payment of $25.0 million. During the third quarter of 2008, we made the required Term B repayment of $1.6 million and made an optional payment of $5.0 million against the Term B portion of the Credit Facility. The leverage ratio at the end of this quarter, calculated on a consolidated debt basis, was 3.92 times versus the covenant of 4.00 times. Cash as of September 30, 2009 was $26.1 million compared to $14.9 million on September 30, 2008. Hospitality
Guest Entertainment (includes purchases for on-demand movies, network-based video games, music andmusic videos and television on-demand programming). Our primary source of revenue is providing in-room, interactive guest entertainment, for which the hotel guest pays on a per-view, hourly or daily basis. Our total guest generated revenue depends on a number of factors, including:
• The number of rooms on our network. We can increase revenue over time by increasing the number of rooms served by our interactive television systems. Our ability to expand our room base is dependent on a number of factors, including newly constructed hotel properties and the attractiveness of our technology, service and support to hotels currently operating without an interactive television system.

• 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 profitability.

• The price of the service purchased by the hotel guest. Generally, we control the prices charged for our products and services and manage pricing in an effort to maximize revenue and overall profitability. We establish pricing based on such things as the demographics of the property served, the popularity of the content and overall general economic conditions. Our technology enables us to measure the popularity of our content and make decisions to best position such content and optimize revenue from such content.

• 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 availability of alternative programming. We compete directly for customers with a variety of other interactive service providers, including other interactive television service providers, cable television companies, direct broadcast satellite companies, television networks and programmers, Internet service providers and portals, companies offering web sites which provide on-demand movies, rental companies which provide videocassettes and DVDs that can be viewed in properly equipped hotel rooms or on other portable viewing devices and hotels which offer in-room laptops with Internet access or other types of Internet access systems. We also compete, in varying degrees, with other leisure-time activities such as movie theaters, the Internet, radio, print media, personal computers and other alternative sources of entertainment and information.

• Consumer sentiment. The willingness of guests to purchase our entertainment services is also impacted by the general economic environment and its impact on consumer sentiment. Historically, such impacts were not generally material to our revenue results; however, during the last half of 2008 and the first nine months of 2009, the deteriorating economic conditions did have a significant, negative impact on our revenue levels. As economic conditions improve in the future, guest purchase activity may increase to levels previously experienced by the Company.

The primary direct costs of providing Guest Entertainment are:
• license fees paid to major motion picture studios, which are variable and based on a percent of guest-generated revenue, for non-exclusive distribution rights of recently released major motion pictures;

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

• license fees, which are based on a percent of guest-generated revenue, for television on-demand, music, music videos, video games and sports programming; and

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

Hotel Services (includes revenue from hotels for services such as television channels and recurring broadband Internet service and support to the hotels). Another major source of our revenue is providing cable television programming and Internet services to the lodging industry, for which the hotel pays a fixed monthly fee.
• Cable Television Programming. We offer a wide variety of satellite-delivered cable television programming paid for by the hotel and provided to guests at no charge. The cable television programming is delivered via satellite, pursuant to an agreement with DIRECTV®, and distributed to approximately 61% 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. With the launch of the high-definition configuration of our interactive television system, we also began offering high-definition cable television programming to the extent available from broadcast sources and DIRECTV.

• Broadband Internet Access, Service and Support. We also design, install and operate wired and wireless broadband Internet access systems at hotel properties. These systems control access to the Internet, provide bandwidth management tools and allow hotels to charge or provide the access as a guest amenity. Post-installation, we generate recurring revenue through the ongoing maintenance, service and call center support services to hotel properties installed by us and also to hotel properties installed by other providers. While this is a highly competitive area, we believe we have important advantages as a result of our existing hotel customer relationships and our nationwide field service network.

System Sales and Related Services. We also generate revenue from other products and services within the hotel and lodging industry, including sales of Internet access and other interactive television systems and equipment, television programming reception equipment, Internet conference services, and professional design, project management and installation services. 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 free cash flow, a non-GAAP measure derived from results based on GAAP. The presentation of this additional information is not meant to be considered superior to, in isolation of, or as a substitute for, results prepared in accordance with GAAP.
We define free cash flow, a non-GAAP measure, as cash provided by operating activities less cash used for certain investing activities, including growth related capital, and consideration paid for acquisitions. Free cash flow is a key liquidity measure but should not be construed as an alternative to cash flows from operating activities or as a measure of our profitability or performance. We provide information about free cash flow because we believe it is a useful way for us, and our investors, to measure our ability to satisfy cash needs, including interest payments on our debt, taxes and capital expenditures. GAAP requires us to provide information about cash flow generated from operations. 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 (i.e., changes in working capital) which 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 free cash flow information. Our definition of free cash flow does not take into account our working capital requirements, debt service requirements or other commitments. Accordingly, free cash flow is not necessarily indicative of amounts of cash which may be available to us for discretionary purposes. Our method of computing free cash flow may not be comparable to other similarly titled measures of other companies.

Rooms Served
One of the metrics we monitor within our Hospitality business is the number of
rooms we serve for our various services. As of September 30, we had the
following number of rooms installed with the designated service:

                                                                                 September 30,
                                                                           2009                 2008
Total rooms served (1)                                                   1,934,229            1,970,752
Total Guest Entertainment rooms (2) (8)                                  1,807,933            1,862,885
Total Cable Television Programming (FTG) rooms (3) (8)                   1,095,719            1,098,687
Total THN SuperBlock rooms (4) (8)                                         370,583              362,325
Total THN VOD rooms (5) (8)                                              1,156,175              533,458
Total Broadband Internet rooms (6) (8)                                     206,914              227,880
Net new Guest Entertainment rooms for the three months ended (7)           (19,703 )              9,167
Net new Guest Entertainment rooms for the nine months ended (7)            (58,420 )             27,367

(1) Total rooms served include rooms receiving one or more of our services, including rooms served by international licensees.

(2) Guest Entertainment rooms are equipped with our interactive television systems. Digital rooms were 84.6% of total Guest Entertainment rooms as of September 30, 2009.

(3) Cable television programming (FTG) rooms receive basic or premium television programming.

(4) Includes rooms receiving satellite-delivered television channels.

(5) Includes rooms receiving server-based channels.

(6) Represents rooms receiving high-speed Internet service.

(7) Amounts shown are net of de-installations during the period. The gross number of new rooms installed was 5,174 and 15,917 for the three months ended September 30, 2009 and 2008, respectively, and 16,252 and 47,924 for the nine months ended September 30, 2009 and 2008, respectively.

(8) Included in total rooms served.

Net new Guest Entertainment rooms for the three and nine months ended September 30, 2009 are negative due to the de-installation of rooms we consider to be unprofitable to maintain and fewer new rooms installed as result of our reduced capital investment activity.
High Definition Room Growth
We also track the increasing penetration of our high-definition television (HDTV) system, since rooms equipped with HDTV services typically generate higher revenue, in a stable economic environment, from Guest Entertainment and Hotel Services than rooms equipped with our other VOD systems. HDTV room growth is occurring 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. We installed our systems in the following number of net new rooms and had the following total rooms installed as of September 30:

                                                                    September 30,
                                                                 2009          2008
 Net new HDTV rooms for the three months ended                   11,371        26,206
 Net new HDTV rooms for the nine months ended                    29,917        76,848
 Total HDTV rooms installed                                     221,633       163,768
 HDTV rooms as a percent of total Guest Entertainment rooms        12.3 %         8.8 %

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

Capital Investment Per Installed Room
The average investment per room associated with an installation can fluctuate
due to the type of interactive television system installed, engineering efforts,
component costs, product segmentation, cost of assembly and installation,
average property size, certain fixed costs and hotel capital contributions. The
following table sets forth our average installation and conversion investment
cost per room on a comparable room base during the periods ended:

                                                           Three Months Ended                            Years Ended
                                                  September 30,         September 30,         December 31,         December 31,
                                                      2009                  2008                  2008                 2007
Average cost per room - new installation           $      234            $       400           $      389           $      399
Average cost per room - conversion                 $      205            $       298           $      295           $      309

Average cost per HD room - new installation        $      237            $       400           $      398           $      460
Average cost per HD room - conversion              $      217            $       299           $      320           $      329

The decrease in the average cost per new and converted HD rooms from 2007 to 2009 was primarily driven by a larger average room size per hotel, engineering efforts, lower allocated overhead costs and hotels contributing a greater share of total installation costs.
Average Revenue Per Room
We closely monitor the revenue we generate per average Hospitality room. Guest Entertainment revenue can fluctuate based on several factors, including occupancy, the popularity of movie content, consumer sentiment, the mix of services purchased, mix of travelers, the availability of alternative programming and the overall economic environment. During the quarter, occupancy decreased approximately 7.6% as compared to the third quarter of 2008. Hotel Services revenue can fluctuate based on the percentage of our hotels purchasing cable television programming services from us, the type of services provided at each site, as well as the number of hotels purchasing broadband service and support from us. System Sales and Related Services revenue can fluctuate based . . .