† 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 clients 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;

† 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 March 31, 2009, we provided interactive media and connectivity solutions to approximately 10,100 hotel properties serving over 1.9 million hotel rooms. Within that customer base, we also provide on-demand guest entertainment services, cable television programming, advertising media services and broadband Internet access in approximately 1.8 million, 1.1 million, 1.1 million and 229,000 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 March 31, 2009, our system was installed in 33 healthcare facilities. We had 10 additional hospitals under contract, scheduled to be installed in future periods.

While there have been some signs of stabilization in the travel industry, the current operating environment remains challenging and we will continue to take a very conservative approach to operating expenses and capital expenditures. During the next two quarters, we anticipate we will maintain systems operations and SG&A expenses within the $21.0 to $23.0 million per quarter range, and we will hold our quarterly capital investment program to the $5.0 to $6.0 million level, pending a further rebound in the economy. As a result, we will continue to be in a position to allocate a substantial majority of our cash flow from operations to reducing our debt and debt leverage ratios. We remain committed to reducing debt and will take actions we believe are necessary and reasonable to remain in compliance with our debt leverage covenants throughout 2009. Our total revenue for the first quarter of 2009 was $128.1 million, a decrease of $11.7 million or 8.4%, compared to the first quarter of 2008. The decrease in revenue was primarily from Guest Entertainment services offset, in part, by increases in revenue from Hotel Services, System Sales, and Professional Services to hotels and System Sales to hospitals. The average monthly total revenue per room per month was $22.99 for the first quarter of 2009 compared to $25.12 for the first quarter of 2008, a decrease of 8.5%.
Hospitality revenue, which includes Guest Entertainment, Hotel Services and System Sales and Related Services, decreased $13.0 million or 9.5%, to $124.0 million for the first quarter of 2009 as compared to $137.0 million for the prior year quarter. As a result of the current state of the economy, hotel occupancy declined by approximately 12.2% during the first quarter 2009 compared to the same period last year. Average monthly Hospitality revenue per room was $22.26 for the first quarter of 2009, a decrease of 9.6% as compared to $24.62 per room in the first quarter of 2008.
Guest Entertainment revenue, which includes on-demand entertainment such as movies, games, music and Internet access through the television, decreased $22.7 million or 22.9%, to $76.5 million in the first quarter of 2009. The decline resulted from a reduction in occupancy rates and a cautious consumer environment. On a per-room basis, monthly Guest Entertainment revenue for the first quarter of 2009 declined 23.0% to $13.73 compared to $17.83 for the first quarter of 2008. Average monthly movie revenue per room was $12.93 for the first quarter of 2009, a 21.7% reduction as compared to $16.51 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 $3.5 million or 11.8%, to $32.9 million during the first quarter of 2009 versus $29.4 million in the first quarter of 2008. On a per-room basis, monthly Hotel Services revenue for the first quarter of 2009 increased 11.5% to $5.90 compared to $5.29 for the first quarter of 2008. Monthly television programming revenue per room increased 12.8% to $5.37 for the first quarter of 2009 as compared to $4.76 for the first quarter of 2008. This increase resulted primarily from the continued installation of high definition television systems and related television programming services. System Sales and Related Services, which includes the sale of broadband Internet equipment, television programming reception equipment, Internet conference services and HDTV installation services to hotels, increased $6.3 million or 74.9%, to $14.7 million during the first quarter of 2009 versus $8.4 million in the first quarter of 2008. During the quarter, we completed a large HDTV equipment conversion contract, which contributed approximately $4.2 million of the increase.
Other Revenue, including the sale of interactive systems and services to Healthcare facilities and revenue from Advertising and Media Services, increased $1.3 million or 45.2%, to $4.1 million during the first quarter of 2009 versus $2.8 million in the first quarter of 2008. For the first quarter of 2009, Healthcare revenue increased by $1.6 million and Advertising and Media revenue decreased by $0.3 million, or 16.1%, versus the prior year quarter. Total direct costs (exclusive of operating expenses and depreciation and amortization discussed separately below) were $73.1 million in the first quarter of 2009, a decrease of $2.8 million or 3.6%, as compared to $75.9 million in the first quarter of 2008. The decrease in total direct costs was primarily related to decreased hotel commissions and royalties of $8.5 million, which varies with revenue, offset, in part, by increases in the amount paid for television programming of $2.5 million, which varies with the number of rooms served, and incremental equipment and service direct costs of $4.4 million, which varies with revenue. For the first quarter of 2009, total direct costs as a percentage of revenue were 57.1% as compared to 54.3% for the first quarter of 2008. The increase in direct costs as a percentage of revenue was driven by a change in the composition of our revenue, quarter over quarter, by the increased percentage of revenue derived from television programming and system sales, which generally have a lower margin.

System operations expenses and selling, general and administrative (SG&A) expenses were $20.8 million in the first quarter of 2009 compared to $30.6 million in the prior year quarter. As a percentage of total revenue, system operations expenses were 8.1% this quarter as compared to 11.0% in the first quarter of 2008. Per average installed room, system operations expenses decreased to $1.85 per room per month this quarter as compared to $2.77 in the prior year quarter. As a percentage of total revenue, SG&A expenses were 8.1% in the current quarter compared to 10.9% in the first quarter of 2008. SG&A expenses per average installed room were $1.87 this quarter as compared to $2.74 in the first quarter of 2008. There were no integration costs included within this quarter's operating expenses, compared to approximately $0.8 million in the prior year quarter. The decreases were the result of achieving the expected synergies related to the consolidation of duplicative general and administrative functions of acquired companies and related operations, as well as our expense reduction initiatives taken during the fourth quarter of 2008 and the first quarter of 2009.
Hospitality
Guest Entertainment (includes purchases for on-demand movies, network-based video games, music and music 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 quarter 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 60% 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, allow hotels to charge or provide the access as a guest amenity and provide bandwidth management tools. 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, our nationwide field service network and a 24-hour call center to support calls from hotel customers.

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, 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. Free cash flow is defined by the Company as cash provided by operating activities less cash used for investing activities, including growth related capital. 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 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 (e.g., 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 March 31, we had the following number of rooms installed with the designated service:

                                                                                   March 31,
                                                                           2009                 2008
Total rooms served (1)                                                   1,973,472            1,968,000
Total Guest Entertainment rooms (2)                                      1,849,304            1,863,599
Total Cable Television Programming (FTG) rooms (3)                       1,106,833            1,076,894
Total THN SuperBlock rooms (4)                                             372,489              357,104
Total THN VOD rooms (5)                                                  1,144,633              543,794
Total Broadband Internet rooms (6)                                         229,184              221,906
Net new Guest Entertainment rooms for the three months ended (7)           (17,049 )              9,156

(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.

(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 and are included in total rooms served.

(7) Amounts shown are net of de-installations during the period. The gross number of new rooms installed was 5,960 and 17,331 for the three months ended March 31, 2009 and 2008, respectively.

Net new Guest Entertainment rooms for 2009 is 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 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 March 31:

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

Capital Investment Per VOD 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
                                                  March 31,        March 31,         December 31,         December 31,
                                                    2009              2008               2008                 2007
Average cost per room - new installation          $   459           $   390           $      389           $      399
Average cost per room - conversion                $   357           $   340           $      295           $      309
Average cost per HD room - new installation       $   465           $   413           $      398           $      460
Average cost per HD room - conversion             $   357           $   348           $      320           $      329

The decrease in the average cost per new and converted HD rooms from 2007 to 2008 was primarily driven by the change in average room size of the property, engineering efforts and hotel capital contributions. As a result of our reduction in capital expenditures in the first quarter of 2009, the increase in the average cost per new and converted HD rooms from 2008 to 2009 was primarily driven by a smaller room base to absorb certain fixed overhead costs and a smaller average room size to absorb the fixed equipment 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 12.2% as compared to the first 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 on the number of system and equipment sales, including broadband system sales. The following table sets forth the components of our Hospitality revenue per room for the three months ended March 31:

Total Hospitality revenue per room $ 22.26 $ 24.62

Certain contracts within our acquired On Command customer base included substantial discounts for satellite-delivered basic and premium television programming, which negatively impacted Hotel Services revenue. We expect to eliminate these discounts as these sites are upgraded to high-definition television capabilities.
Direct Costs
Guest Entertainment direct costs vary based on content license fees, the mix of Guest Entertainment products purchased and the commission earned by the hotel. Hotel Services direct costs include the cost of cable television programming and the cost of broadband Internet support services. The cost of System Sales and Related Services primarily includes the cost of the systems and equipment sold to hotels. The overall direct cost margin primarily varies based on the composition of revenue. The following table sets forth our Hospitality direct expenses per room and as a percentage of total revenue during the three months ended March 31:

                                                   Three Months Ended                  Three Months Ended
                                                     March 31, 2009                      March 31, 2008
                                                                  Percent                             Percent
                                                                 of Total                            of Total
                                                Amount            Revenue           Amount            Revenue
Direct costs per room:
. . .