The following discussion should be read in conjunction with our Consolidated Financial Statements, including the notes thereto, appearing elsewhere herein.

Special Note Regarding Forward-Looking Statements

Certain statements in this report or documents incorporated herein by reference constitute "forward-looking statements." When used in this report, the words "intends," "expects," "anticipates," "estimates," "believes," "goal," "no assurance" and similar expressions, and statements which are made in the future tense or refer to future events or developments, are intended to identify such forward-looking statements. Such forward-looking statements are subject to risks, uncertainties and other factors which could cause the actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. In addition to the risks and uncertainties discussed elsewhere in this Report and in Item 1A of our most recent Annual Report on Form 10-K for the year ended December 31, 2011 and filed on March 15, 2012, in any prospectus supplement or any report or document incorporated herein by reference, such factors include, among others, the following:

† our ability to remain in compliance with the terms of our agreements with our lenders;

† our ability to make timely payments to our vendors, as required by our forbearance agreements and our agreements with them (as described below);

† our ability to successfully refinance our outstanding debt or restructure the Company;

†        our ability to continue as a going concern;

†        our ability to maintain adequate liquidity levels; and

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

These forward-looking statements speak only as of the date of this report. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

Executive Overview

During 2012, the Company experienced a significant decrease in total revenue, driven by a major decline in its Guest Entertainment revenue and room base. The declines in Guest Entertainment revenue and in our room base during 2012 have occurred at a rate greater than what we previously estimated. Although significant declines were experienced in the first six months of 2012, the decline in revenue experienced during the third quarter of 2012 was even greater than what we had previously estimated. At the same time, two of our major vendors required us to enter into payment plans. Therefore, during September 2012, we entered into forbearance agreements with these two major vendors. The decline in revenue during the third quarter of 2012 and the payment terms of our vendor forbearance agreements created considerable liquidity constraints to our operations and related financial results during the third quarter of 2012. These liquidity constraints and our non-compliance with certain of our debt covenants have resulted in there being substantial doubt about our ability to continue as a going concern. Our third quarter results are as follows:

In the third quarter, the Company experienced a 14.6% decrease in total revenue, to $91.2 million for the third quarter of 2012, a decrease of $15.6 million compared to the third quarter of 2011. The decrease was primarily due to an 11.6% decline in the average number of Guest Entertainment rooms served and also by a 4.2% decline in Hospitality and Advertising Services revenue per room. Guest Entertainment revenue per room decreased 13.9% quarter over quarter, while revenue generated from non-Guest Entertainment services increased 7.4%. Revenue generated from non-Guest Entertainment services comprised 52.7% of total revenue for the current quarter.

Guest Entertainment revenue decreased $13.5 million or 23.9%. The decrease was driven by the 11.6% reduction in the average number of Guest Entertainment rooms served period over period and a 13.4% decline in movie revenue per room.

Hotel Services revenue was $31.2 million in the current quarter, a decline of 6.9% over the prior year quarter, primarily due to an 8.5% decline in the number of rooms receiving cable television programming services. On a per-room basis, Hotel Services revenue increased 5.4% quarter over quarter, driven primarily by an increase in the number of rooms receiving high definition ("HD") cable television programming services and the expiration of contracts with unfavorable terms. System Sales and Related Services revenue per room improved 21.0%, related to television programming systems sales. Our advertising services subsidiary generated revenue of $1.5 million, a decrease of 37.5% compared to the third quarter of 2011, as we continue the transition of our advertising platform from analog to an expanded HD platform. Our healthcare subsidiary revenue was $3.0 million in the current quarter, an increase of 12.7% over the prior year quarter.

Our total direct costs decreased $4.8 million or 8.0%, to $55.2 million in the third quarter of 2012 as compared to $60.0 million in the third quarter of 2011. The decrease in total direct costs was driven by lower sales volume in Guest Entertainment and Hotel Services, resulting in lower hotel commissions, royalties and programming fees. Advertising Services direct costs were lower due to the transition to our new advertising platform. Total direct costs as a percentage of revenue increased to 60.5% for the third quarter of 2012, compared to 56.2% for the prior year period, due primarily to a change in the mix of products and services sold.

System operations expenses and selling, general and administrative ("SG&A") expenses decreased $3.0 million or 15.0% quarter over quarter, to $17.1 million in the third quarter of 2012 compared to $20.1 million in the prior year quarter. Factors driving the improvement period over period include reduced payroll-related and facilities costs as a result of expense reduction initiatives, as well as reduced travel, content distribution and system repair costs. Depreciation and amortization expenses were $13.8 million in the third quarter of 2012 versus $17.1 million in the third quarter of 2011.

We generated $1.0 million of cash from operating activities as compared to $13.4 million in the third quarter of 2011. Cash used for capital investments was $6.7 million in the third quarter of 2012, compared to $6.1 million in the third quarter of 2011. In September 2012, we made the required quarterly payment of $2.5 million on our term loan.

As of September 30, 2012, we were in violation of the leverage covenant in our Credit Facility, as well as certain other non-financial covenants. Effective October 15, 2012, we entered into a Forbearance Agreement and Second Amendment to the Credit Facility, as more fully described in Note 6, pursuant to which the lenders have agreed not to exercise their default-related rights and remedies through the period ending December 17, 2012. There is no assurance we can remain in compliance with the Forbearance Agreement or other covenants in the Credit Facility. Consequently, we have classified our outstanding debt obligations, contractually due in April 2014, as current in our consolidated balance sheet as of September 30, 2012, as the lenders could require payment of amounts outstanding under our Credit Facility on December 17, 2012 or at an earlier date if we cannot remain in compliance with the Forbearance Agreement.

Liquidity and Capital Resources



At September 30, 2012, we were in violation of the leverage covenant in our
Credit Facility.  Our leverage and interest coverage ratios were as follows for
the periods ended September 30:



                                                      2012   2011

Actual consolidated leverage ratio (1) (3)            4.52   3.50
Maximum per covenant                                  4.00   4.00

Actual consolidated interest coverage ratio (2) (3)   2.60   2.69
Minimum per covenant                                  2.25   2.25

(1) Our maximum consolidated leverage ratio is the total amount of all indebtedness of the Company, determined on a consolidated basis in accordance with GAAP, divided by operating income exclusive of depreciation and amortization and adjusted (plus or minus) for certain other miscellaneous cash items, non-cash items and non-recurring items, as defined by the terms of the Credit Facility and the First Amendment.

(2) Our minimum consolidated interest coverage ratio is a function of operating income exclusive of depreciation and amortization and adjusted (plus or minus) for certain other miscellaneous cash items, non-cash items and

non-recurring items divided by interest expense and preferred dividends, as defined by the terms of the Credit Facility and the First Amendment.

(3) Maximum consolidated leverage ratio and minimum consolidated interest coverage ratios are defined terms of the Credit Facility and the First Amendment.

Effective October 15, 2012, we entered into a Forbearance Agreement and Second Amendment to the Credit Facility. Under the terms of the Forbearance Agreement, the lenders agreed to forbear from exercising their respective default-related rights and remedies under the Credit Facility until the earlier of December 17, 2012, or the occurrence of further defaults under the Credit Facility. The principal and interest due under the Credit Facility on September 30, 2012, were paid. However, as a result of our non-compliance with our leverage covenant, combined with uncertainty over our ability to regain compliance with this covenant, as well as other, non-financial covenants, and the ability of the lenders to require payment of amounts outstanding under our Credit facility on December 17, 2012, we have classified our outstanding debt obligations, contractually due in April 2014, as current in our consolidated balance sheet as of September 30, 2012.

In consideration of the forbearance, we agreed to certain additional terms and conditions, including the following: (a) the retention of a strategic planning officer, (b) the provision of certain specific information regarding the Company and required management conference calls and meetings, as well as monthly and weekly reports, (c) the elimination of certain available baskets for incurring debt, disposing of property, and making investments, and a limitation of $5,000,000 on indebtedness outstanding and secured by permitted liens to finance the acquisition of fixed or capital assets, (d) the limitation on making capital expenditures to only those made in the ordinary course and not in excess of $10.5 million annually, and (e) the requirement that the Company maintain Consolidated EBITDA of at least $4,543,000 for the period beginning October 1, 2012 and ending October 31, 2012 and Consolidated EBITDA of at least $8,701,000 for the period beginning October 1, 2012 and ending November 30, 2012. There is no assurance that we will be able to achieve these EBITDA targets. In addition, the Forbearance Agreement adjusts certain other covenants and definitions of the Credit Agreement. The Company is also required to pay certain fees and expenses in connection with the Forbearance Agreement. If we default under the Forbearance Agreement, or under any other provision of the Credit Facility, the Forbearance Agreement will terminate and our lenders will have the ability to accelerate the maturity of the entire principal amount of the indebtedness owed to them. If such an event were to occur, we would not be able to satisfy our financial obligations.

During the first nine months of 2012, cash provided by operating activities was $52.3 million. Excluding the cash contribution from increased accounts payable, cash provided by operating activities would have been $39.3 million. The Company used $26.7 million of the cash we generated for property and equipment additions. During the same period, we prepaid $32.0 million against our Credit Facility, in addition to the required payments totaling $7.5 million. We also used $4.3 million for preferred stock dividends. During the first nine months of 2011, cash provided by operating activities was $41.0 million. Excluding the negative impact from accounts payable, cash provided by operating activities would have been $52.1 million, and we used cash for property and equipment additions of $16.7 million. During the same period, we prepaid $2.0 million against our Credit Facility, in addition to the required payments totaling $6.0 million. We also used $4.3 million for the preferred stock dividend payments. Cash as of September 30, 2012 was $18.7 million versus $14.0 million as of December 31, 2011.

During the third quarter of 2012, the Company began to experience significant liquidity constraints. Our cash provided by operating activities declined $12.4 million to $1.0 million compared to $13.4 million in the third quarter of 2011, resulting in negative cash flow (see table below) for the quarter. On October 15, 2012 the Company announced that it was neither declaring nor paying the $1.4 million preferred stock dividend.

Special Note Regarding the Use of Non-GAAP Financial Information

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

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

Free Cash Flow

We manage our free cash flow by seeking to maximize the amount of cash we generate from our operations and managing the level of our investment activity. In addition, we can manage capital expenditures by varying the number of rooms we install in any given period.

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

                                          Three Months Ended       Nine Months Ended
                                            September 30,            September 30,
                                           2012         2011        2012        2011
Cash provided by operating activities   $       956   $ 13,406   $   52,334   $  41,020
Property and equipment additions            (6,651)    (6,117)     (26,732)    (16,712)
                                        $   (5,695)   $  7,289   $   25,602   $  24,308

The Company's increasing liquidity challenges have been a result of several business trends and debt servicing issues that have negatively impacted our liquidity position. During 2012, the Company experienced a significant decrease in total revenue. The rate of decline in our movie revenue per room for 2011 was approximately 6% versus 2010. The decline accelerated in 2012 and the year-to-date rate of decline has more than doubled to approximately 13% versus the prior year. Although significant declines were experienced in the first six months of 2012, the decline in revenue experienced during the third quarter of 2012 was greater than what we had previously estimated. At the same time, two of our major vendors required us to enter into payment plans. Therefore, during September 2012, we entered into forbearance agreements with two of our major vendors. The decline in revenue during the third quarter of 2012 and the payment terms of our vendor forbearance agreements created liquidity constraints on our operations and related financial results. The decrease in revenue resulted primarily from an 11.9% reduction in the average number of Guest Entertainment rooms served and a 12.9% decline in Guest Entertainment revenue per room.

Historically, the Company followed a practice of reducing outstanding debt under our Credit Facility by making prepayments on our debt. These additional debt payments contributed to our historical debt covenant compliance. However, during 2012, our practice of making additional debt payments was achieved in part by delaying certain payments to our vendors, including major vendors such as DirecTV and HBO. During the third quarter of 2012, each of these vendors required us to enter into payment plans. In order to maintain continued service from these two vendors, we entered into forbearance agreements with each of them which require payments to both vendors between September and December 2012. According to the agreements, our next payments of $10.0 million and $4.0 million to DirecTV and HBO, respectively, would have been due on November 15, 2012. We did not expect to have the necessary liquidity to make such payments and maintain our operations. Consequently, we have negotiated a revision to our forbearance agreement with DirecTV, whereby our November payment has been deferred to December 17, 2012, at which time we will be obligated to pay them $20.0 million. We have also negotiated a revision to our forbearance agreement with HBO, whereby we will make a current payment of $1.5 million to them, representing a partial payment of our November obligation, defer the balance to December and owe them a payment of $6.0 million on December 17, 2012. The Company has obtained the consent of the requisite lenders to revise such forbearance agreements. If we are unable to obtain sufficient liquidity to make such payments, which is likely, or such payments are not further deferred, we would be forced to file under Chapter 11 of the U.S. Bankruptcy Code in December. The Company is in active negotiations with its lenders and a potential investor in an effort to structure an orderly bankruptcy process.

From October 1 to November 8, 2012, we have made aggregate payments to our vendors of approximately $28 million, in addition to the aggregate payments of approximately $24 million made between September 15 and September 30, 2012, to address the extended payment terms many of our vendors were operating under and to comply with the forbearance agreements negotiated with DirecTV and HBO. Additionally, the Company has retained legal and financial advisors and paid fees of $3.5 million to them to assist in the restructuring of our Credit Facility and exploring strategic alternatives. Also, as required by the Forbearance Agreement with our lenders, we have also paid more than $500,000 to the financial and legal advisors retained by the lenders' Steering Committee.

As a consequence of our liquidity situation, our Board of Directors did not declare a dividend on the preferred stock, with respect to the third quarter and does not expect to declare or pay any further dividends on the preferred stock.

The issues outlined above have contributed to a situation where the Company is having difficulties meeting its ongoing financial obligations. Our ability to continue as a going concern is dependent upon maintaining adequate liquidity levels and satisfying our vendor obligations, a successful refinancing or restructuring of our existing Credit Facility, or finding alternative financing through a potential sale transaction with a third-party. There can be no assurance that the Company will be successful in achieving such refinancing or restructuring, obtaining acceptable financing or maintaining adequate liquidity to satisfy vendor obligations. Consequently, the Company is exploring all other options available including filing under Chapter 11. In the event the Company was to make such a filing, there can be no assurance that the common equity or the preferred equity would have any value. As a result, the common equity might be cancelled without the holders thereof receiving any distribution in a Chapter 11 case, and the preferred equity might also be cancelled without any assurance that the holders thereof would receive any distributions. If the preferred shareholders were to receive a distribution, there can be no assurance as to the value of any such distribution.

Please refer to "Part I. Item 1A. Risk Factors" in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011 and "Part II Item 1A Risk Factors" in this Form 10-Q for further details regarding risks relating to our sufficiency of cash flows, indebtedness and covenants.

We are currently engaged in negotiations with a group of lenders and with certain third parties regarding restructuring options, including a potential sale transaction to a third-party that would restructure our existing Credit Facility with a combination of extended maturity dates and a new equity contribution which would involve a change in control of the Company, and likely would include a filing under Chapter 11.

Obligations and commitments as of September 30, 2012 were as follows (dollar amounts in thousands):

                                                          Payments due by period
                                            Less than         2 - 3         4 - 5        Over
                               Total          1 year          years         years      5 years
Contractual obligations:
Long-term debt(s)             $ 347,386     $    346,741     $     536      $   109      $     -
Interest on long-term debt
(1)                               7,749            7,731            17            1            -
Operating lease payments          2,519              965         1,313          241            -
Purchase obligations and
royalties (2)                    50,617           48,586         1,809          222            -
Total contractual
obligations                   $ 408,271     $    404,023     $   3,675      $   573      $     -

                                                Amount of commitment expiration per period
                                            Less than         2 - 3         4 - 5        Over
                               Total          1 year          years         years      5 years
Other commercial
commitments:
Standby letters of credit     $     350     $        350     $       -      $     -      $     -

(1) Interest payments are estimates based on current LIBOR, Forbearance Agreement interest rates and scheduled debt amortization.

(2) Consists of open purchase orders and commitments and programming-related minimum guarantees for specific periods or individual programming content.

Hospitality and Advertising Services Businesses

Our Hospitality and Advertising Services businesses include television content sold to hotels and/or the respective hotels' guests. The products can include interactive video-on-demand ("VOD"), cable television programming, Internet services or advertising services, and have an analogous consumer base. All products and services are delivered through a proprietary system platform having related satellite communication technology, and are geared towards the hotels and their guests.

Guest Entertainment (includes purchases for on-demand movies, network-based video games, music and music videos and television on-demand programming). One of our main sources of revenue, generating 47.3% of total revenue for the quarter ended September 30, 2012, 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. Our ability to maintain our room base is dependent on a number of factors, including the number of newly constructed hotel properties or properties serviced by a competitor, and the attractiveness of our technology, service and support to hotels currently serviced by us.

†

† 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 buy rate of hotel guests. This is impacted by a number of issues, some of which are not under our control. Specific issues impacting buy rate include:

† The number of rooms equipped with our interactive high-definition television ("iHDTV") systems. We typically earn higher revenue from a property when we convert it to our iHDTV platform. Our ability to expand our iHDTV room base is dependent on a number of factors, including availability of capital resources from the hotels and us to invest in HD televisions and equipment. We are focused on accelerating the installation of our iHDTV systems as hotels increase their purchase of HD televisions.

† The popularity, timeliness and amount of content offered at the hotel. Our revenues vary, to a certain degree, with the number, timeliness and popularity of movie content available for viewing, and whether the content is presented in digital or analog format. Historically, a decrease in the availability of popular movie content has adversely impacted revenue, and the availability of high definition content has increased revenue. Although not completely within our control, we seek to program and promote the most popular available movie content and other content to maximize our 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 . . .