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                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

[X] ANNUAL  REPORT  PURSUANT  TO  SECTION  13 OR  15(d)  OF THE  SECURITIES
    EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 2004       Commission file number 1-106
                          -----------------                              ----

                                       OR

[  ]  TRANSITION  REPORT  PURSUANT  TO SECTION  13 OR 15(d) OF THE  SECURITIES
     EXCHANGE ACT OF 1934

For the transition period from                       to
                              -----------------------   -----------

                          LYNCH INTERACTIVE CORPORATION
--------------------------------------------------------------------------------
             (Exact name of Registrant as specified in its charter)

             Delaware                                     06-1458056
             --------                                     ----------
     State of other jurisdiction                        (I.R.S. Employer
    incorporation or organization                      Identification No.)

   401 Theodore Fremd Avenue, Rye, NY                        10580
   ----------------------------------                        -----
 (Address of principal executive offices)                  (Zip Code)

Registrant's telephone number, including area code (914) 921-8821
                                                   --------------

Securities registered pursuant to Section 12(b) of the Act:

          Title of each class                    Name of each exchange
          -------------------                     on which registered
                                                  -------------------
          Common Stock, $.0001                  American Stock Exchange

Securities registered pursuant to section 12(g) of the Act: None

Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by  Section  13 or 15(d) of the  Securities  Act of 1934  during the
preceding 12 months (or for such shorter period that the Registrant was required
to file such reports),  and (2) has been subject to such filing requirements for
the past 90 days. Yes X No

Indicate by mark if  disclosure  of  delinquent  filers  pursuant to Item 405 of
Regulations S-K is not contained herein, and will not be contained,  to the best
of the Registrant's  knowledge,  in definitive  proxy or information  statements
incorporated  by  reference in Part III of this Form 10-K,  or any  amendment to
this Form 10-K. [ ]

Indicate  by check mark  whether  the  Registrant  is an  accelerated  filer (as
defined in Rule 12b-2 of the Act) Yes  No X
                                       --

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
Registrant as of June 30, 2004 (based upon the closing price of the Registrant's
Common  Stock on the  American  Stock  Exchange  of $34.54  per share) was $72.0
million. (In determining this figure, the Registrant has assumed that all of the
Registrant's directors and officers are affiliates. This assumption shall not be
deemed conclusive for any other purpose.)

The number of outstanding shares of the Registrant's  Common Stock was 2,752,251
as of March 25, 2005.

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<PAGE>

DOCUMENTS INCORPORATED BY REFERENCE:

Part III: Certain  portions of Registrant's  Proxy Statement for the 2005 Annual
          Meeting of Shareholders.

FORWARD LOOKING INFORMATION

This Form 10-K contains certain forward looking  information,  including without
limitation Item 1-I.A "Regulatory  Environment" and possible changes thereto and
"Competition,"   Item   1.-I.B   "Cable   Television,"   Item  1-I.C   "Personal
Communications  and other Wireless  Services,"  including without limitation the
risks  described,  "Impairment  of  Assets,"  and "Risk  Management,  Safety and
Insurance," Item 7. "Management's Discussion and Analysis of Financial Condition
and Results of Operations,"  including without limitation  Liquidity and Capital
Resources,  and  Market  Risk.  It should be  recognized  that such  information
contains  estimates or forecasts based upon various  assumptions,  including the
matters,  risks,  and  cautionary  statements  referred to  therein,  as well as
meeting the Registrant's  internal  performance  assumptions  regarding expected
operating  performance and the expected performance of the economy and financial
markets as it impacts Registrant's businesses.  As a result, such information is
subject to uncertainties,  risks and inaccuracies, which could be material.

                                     PART I

ITEM 1. BUSINESS

Lynch Interactive Corporation  ("Interactive" or the "Company") was incorporated
in 1996  under  the  laws of the  State  of  Delaware.  On  September  1,  1999,
Interactive  was spun off by Lynch  Corporation to its  shareholders  (the "Spin
Off") and  became a public  company.  In its first day of  trading,  Interactive
closed at $28.00 (adjusted for stock splits). Prior to the Spin Off, Interactive
had no significant assets,  liabilities or operations. As a successor to certain
businesses of Lynch Corporation, Interactive, at that time, became a diversified
holding  company  with   subsidiaries   primarily   engaged  in  multimedia  and
transportation services. Interactive spun off its ownership interest in Sunshine
PCS to its  shareholders in 2001 and its 63% interest in the Morgan Group,  Inc.
to its shareholders in 2002.  Interactive's executive offices are located at 401
Theodore  Fremd  Avenue,  Rye,  New York  10580-1430.  Its  telephone  number is
914-921-8821.

Interactive's business development strategy is to expand its existing operations
through  internal  growth  and  acquisitions.  It may  also,  from time to time,
consider the  acquisition of other assets or businesses  that are not related to
its present businesses.  The Company currently operates in one business segment,
multimedia, which consists of telecommunications, security, cable television and
broadcasting. The Company is considering the distribution of certain investments
to its shareholders. Such distribution is subject to numerous approvals. As used
herein, Interactive includes subsidiaries.

Lynch  Interactive  Corporation  to consider  delisting,  and going to what Wall
Street refers to as "Pink Sheets", and others refer to as "Going Dark"

The Company's Board of Directors has voted to include in our proxy statement for
the 2005  annual  meeting a  proposal  that the  shareholders  give the Board of
Directors authority to execute a "going dark" transaction, pursuant to which the
company  would reduce its number of  shareholders  of record below 300 through a
reverse  split  and  then  delist  from the  American  Stock  Exchange,  thereby
suspending its reporting  obligations under the Securities Exchange Act of 1934.
If this transaction is consummated,  the Company's common stock would be quoted,
if at all,  in the "pink  sheets".  We point out that not  withstanding  trading
volumes,   the  Company  currently  intends  voluntarily  to  disseminate  press
releases,   quarterly  financial   statements,   and  audited  annual  financial
statements to its stockholders and the investment community generally.

The principal  reason for  considering  this step is the cost required to comply
with  section  404 of the  Sarbanes-Oxley  Act of 2002.  While  the  Company  is
committed to having in place and consistently improving those controls necessary
to generate reliable financial statements, the documentation and testing process
required by section 404 of Sarbanes-Oxley  will likely impose considerable costs
and a staffing strain on the Company and its  subsidiaries  unless the standards
are revised for smaller  companies.  The Company  believes it is  appropriate to
consider ways to mitigate these significant burdens.

I.   MULTIMEDIA OPERATIONS

Wireline Telecommunications

Operations.  Interactive  conducts  its  telecommunications  operations  through
subsidiary companies. The telecommunications group has been expanded through the
selective  acquisition of local exchange telephone companies serving rural areas
and by offering  additional  services such as Internet service,  alarm services,
long distance service and

                                      -2-
<page>
competitive local exchange carrier service. Since 1989, Interactive has acquired
fourteen telephone companies,  four of which have indirect minority ownership of
2% to 19%, whose operations range in size from  approximately 900 to over 10,000
access lines. The Company's  telephone  operations are located in Iowa,  Kansas,
Michigan, New Hampshire, New Mexico, New York, North Dakota, Utah and Wisconsin.
Our service  areas are largely  residential  and not  densely  populated.  As of
December 31, 2004, total lines, including both access and DSL, were 54,901, 100%
of which are served by digital switches.

In March 2004,  the Company  signed an  agreement  to acquire  California-Oregon
Telecommunications Company ("Cal-Ore") located in Dorris, California.  Cal-Ore's
subsidiary  Cal-Ore  Telephone  Company is the incumbent  service provider for a
rural area of about 850 square miles along the Northern  California  border with
Oregon with approximately 2,500 access lines. Cal-Ore's other businesses include
an Internet service  provider,  Competitive Local Exchange Carrier ("CLEC") that
is planning to provide services in the surrounding area and interests in certain
cellular  partnerships.  The  acquisition  price is $21.2  million,  subject  to
certain closing adjustments. In March 2005, the administrative law judge for the
California  Public Utilities  Commission issued a proposed opinion approving the
transaction subject to various conditions. The Company is reviewing the opinion,
which remains subject to the approval of the Commission.

The  principal  business  of  Interactive's  telephone  companies  is to provide
telecommunications services. These services fall into three major categories:

Local  network  services.  We provide  telephone  wireline  access  services  to
residential and  non-residential  customers in our service areas. We provide our
local network customers a number of calling features  including call forwarding,
conference calling, caller identification,  voicemail and call waiting. We offer
packages of  telecommunications  services.  These packages  permit  customers to
bundle their basic telephone line with their choice of enhanced services,  or to
customize a set of selected enhanced features that fit their specific needs.

Network access  services.  We provide  network access  services to long distance
carriers and other  carriers in  connection  with the use of our  facilities  to
originate and terminate interstate and intrastate telephone calls. Such services
are generally  offered on a month-to-month  basis and the service is billed on a
minutes-of-use  basis.  Access  charges  to long  distance  carriers  and  other
customers  are based on  access  rates  filed  with the  Federal  Communications
Commission  ("FCC")  for  interstate  services  and  with the  respective  state
regulatory agency for intrastate services.

Other  Business.  Interactive  also  provides  non-regulated   telephone-related
services,  including Internet access service and long distance resale service in
certain of its telephone service (and adjacent) areas. Interactive also provides
and intends to provide more local telephone and other telecommunications service
outside  certain of its  franchise  areas by  establishing  CLEC  operations  in
certain  nearby  areas.  In  selected  areas,   Interactive   provides  security
installation  and  monitoring   services  to  homes  and  businesses  and  cable
television services ("CATV").

We  expect  future  growth  in  telephone  operations  to be  derived  from  the
acquisition of additional  telephone  companies,  from providing  service to new
customers or additional services to existing customers,  from upgrading existing
customers  to  higher  grades  of  service,  and  from  new  service  offerings.
Interactive is currently  exploring how to best incorporate  Voice over Internet
Protocol ("VoIP") into its business model.

The following  table  summarizes  certain  information  regarding  Interactive's
multimedia operations:

<TABLE>
<CAPTION>
                                                    Years Ended December 31,
                                                  2002        2003        2004
                                                --------------------------------
<S>                                              <C>         <C>         <C>
Telecommunications operations
Access lines (a) ...........................     53,963      52,517      50,803
DSL Lines ..................................      1,466       2,709       4,098
                                                 ------      ------      ------
Total access lines .........................     55,429      55,226      54,901
  % Residential ............................         74%         73%         76%
  % Business ...............................         26%         27%         24%
Internet subscribers (including DSL) .......     21,890      20,853      20,240
Security customers .........................      6,500       6,712       6,667
Cable subscribers ..........................      2,831       2,731       3,630

Total Multimedia Revenues
 Local service .............................         14%        14%         13%
 Network access ............................         61%        62%         63%
 Other businesses ..........................         25%        24%         24%
                                                 ------      ------      ------
   Total multimedia revenues ...............        100%        100%        100%
                                                 ======      ======      ======
</TABLE>
                                      -3-
<page>

(a)  An "access line" is a  telecommunications  circuit  between the  customer's
     establishment and the central switching office.
(b)  Other  Businesses  includes  Internet,   security,  CLEC,  CATV  and  other
     non-regulated revenues.

Telephone  Acquisitions.  Interactive  pursues an active  program  of  acquiring
operating  telephone  companies.   Since  1989,  Interactive  acquired  fourteen
telephone companies serving a total of approximately 45,600 access lines, at the
time  of  these   acquisitions,   for  an   aggregate   consideration   totaling
approximately $153.6 million.  Such acquisitions are summarized in the following
table:
<TABLE>
<CAPTION>



                                                        Number of     Number of
                                                       Access Lines   Access
                                            Year of      Yr. Of        Lines       Ownership
                                          Acquisition     Acq.        12/31/04    Percentage
                                        ----------------------------------------------------

<S>                                           <C>         <C>          <C>         <C>
Western New Mexico Telephone Co. ......       1989        4,200        6,906        83.1(c)
Inter-Community Telephone Co. .........       1991        2,550(a)     2,569       100.0
Cuba City Telephone Co. &
  Belmont Telephone Co. ...............       1991        2,200        2,629        81.0
Bretton Woods Telephone Co. ...........       1993          250          908       100.0
JBN Telephone Co. .....................       1993        2,300(b)     2,653        98.0
Haviland Telephone Co. ................       1994        3,800        3,705       100.0
Dunkirk & Fredonia Telephone Co. ......
  & Cassadaga Telephone Co. ...........       1996       11,100       11,682       100.0
Upper Peninsula Telephone Co. .........       1997        6,200        6,641       100.0
Central Scott Telephone Co. ...........       1999        6,000        5,837       100.0
Central Utah Telephone Co./Skyline
  Telephone Company/Bear Lake
  Telephone Company ...................       2001        7,000        7,273       100.0

</TABLE>

(a) Includes 1,350 access lines acquired in 1996.

(b) Includes 354 access lines acquired in 1996.

(c) Does not include a 36%  interest in a company  that owns the 16.9%  minority
interest.  The Company is in the process of acquiring the remaining 64% interest
subject to final  negotiations.  Closing is  expected  by the second  quarter of
2005.

Interactive  continually evaluates acquisition  opportunities targeting domestic
rural telephone  companies with a strong market position,  good growth potential
and predictable  cash flow. In addition,  Interactive  generally seeks companies
with  excellent  local  management  already in place who will remain active with
their company. At times,  certain large telephone companies have offered certain
of their rural telephone exchanges for sale, often on a statewide or larger area
basis.  Interactive  has and in the future may, bid on such groups of exchanges.
Telephone  holding  companies and others actively compete for the acquisition of
telephone companies and such acquisitions are subject to the consent or approval
of  regulatory  agencies in most states.  While  management  believes it will be
successful in making additional acquisitions, any acquisition program is subject
to various risks,  including being able to find and complete  acquisitions at an
attractive  price and being  able to  integrate  and  operate  successfully  any
acquisition made.

Related  Services  and  Investments.   Affiliates  of  twelve  of  Interactive's
telephone  companies now offer Internet  access  service.  At December 31, 2004,
Internet  access  customers  totaled  20,240  compared to 20,853 at December 31,
2003.  Interactive  companies have increased DSL service offset by a decrease in
dial up service.  Affiliates  of six of  Interactive's  telephone  companies now
offer long distance  service,  and affiliates of two of Interactive's  telephone
companies now offers CLEC services.

An affiliate  of Dunkirk & Fredonia  Telephone  Company  ("DFT")  provides  CLEC
service on a resale basis in  neighboring  Dunkirk,  New York,  certain areas of
Buffalo,  New York, and two other western New York counties.  Some of DFT's CLEC
services are being provided via an unbundled  network elements platform (UNE-P),
which  allows for  increased  margins  over a resale  CLEC  business  model.  In
addition,  DFT is in position  with network  functions  and  agreements to begin
offering  services  through  their own  facilities.  Giant  Communications  also
provides CLEC services to selected areas in Northeast Kansas.

                                      -4-
<page>
Giant  Communications  (formerly CLR Video,  L.L.C.),  a 98% owned subsidiary of
Interactive,  is a  provider  of  cable  television  in  northeast  Kansas  with
approximately 2,400 subscribers.

Central Telcom  Services,  LLC, a 100% owned  subsidiary of the Company based in
Fairview,  Utah,  acquired certain cable television  assets in February 2004 and
has entered  into an  agreement  in January  2005 to acquire a cable  television
system located in nearby counties.  The acquisition  closed in March 2005, after
completion of necessary  regulatory  approvals and other steps.  The acquisition
expanded Lynch  Interactive's  existing customer base by 2,411 cable subscribers
and positions the company to promote additional services to its customer base.

DFT  Security  Systems,  Inc.  (which is 63.6%  owned by  Interactive),  another
affiliate of DFT, acquired American Alarm Company in December 2001. DFT Security
Systems provides alarm services to western New York, including the Buffalo area,
and now serves 6,667 alarm customers. As part of Company's effort to reduce debt
and or monetize certain assets, it is considering selling a portion of its alarm
accounts.

A subsidiary of  Inter-Community  Telephone Company in North Dakota, and Western
New Mexico  Telephone  Company in New  Mexico  have filed with their  respective
state  regulatory  commissions  to provide CLEC services in those states.  Final
plans  to offer  CLEC  service  in areas  adjacent  to  Interactive's  telephone
operations in those states have not been  completed.  There is no assurance that
Interactive  can  successfully  develop  these  businesses  or that these new or
expanded  businesses can be made profitable  within a reasonable period of time.
Such businesses,  in particular any CLEC business,  would be expected to operate
at losses initially and for a period of time.

Regulatory  Environment.  Operating  telephone  companies are regulated by state
regulatory agencies with respect to intrastate  telecommunications  services and
the FCC with respect to interstate telecommunications services.

Telecommunications  Act of 1996. In recent years, various aspects of federal and
state  telephone  regulation  have been subject to  re-examination  and on-going
modification.  In February 1996, the  Telecommunications  Act of 1996 (the "1996
Act"),  which is the most  substantial  revision of  communications  regulations
since the  1930's,  became  law.  The 1996 Act is  intended  generally  to allow
telephone, cable, broadcast and other telecommunications providers to compete in
each other's businesses,  while loosening regulation of those businesses.  Among
other things,  the 1996 Act (i) allows major long distance  telephone  companies
and cable television companies to provide local exchange telephone service; (ii)
allows new local  telephone  service  providers to connect into  existing  local
telephone exchange networks and purchase services at wholesale rates for resale;
(iii) provides for a commitment to universal service for high-cost,  rural areas
and authorizes state regulatory  commissions to consider their status on certain
competition  issues;  (iv) allows the Regional Bell Operating Companies to offer
long  distance  telephone  service and enter the alarm  services and  electronic
publishing businesses; (v) removes rate regulation over non-basic cable service;
and (vi)  increases the number of  television  stations that can be owned by one
party. The 1996 Act had dual goals of fostering local and intrastate competition
while ensuring universal service to rural America.

National Exchange Carrier Association.  For interstate  services,  Interactive's
telephone subsidiaries  participate in the National Exchange Carrier Association
("NECA")  common line and traffic  sensitive  tariffs and access  revenue pools.
Where applicable, Interactive's subsidiaries also participate in similar pooling
arrangements  approved by state regulatory  authorities for intrastate services.
Such  interstate and intrastate  arrangements  are intended to compensate  local
exchange carriers ("LECs"), such as Interactive's operating telephone companies,
for the costs,  including a fair  rate-of-return,  of  facilities  furnished  in
originating and terminating interstate and intrastate long distance services.

In addition to access pool participation,  certain of Interactive's subsidiaries
are  compensated  for  their   intrastate  costs  through  billing  and  keeping
intrastate  access charge revenues  (without  participating  in an access pool).
Intrastate  access charge  revenues are based on  intrastate  access rates filed
with the state regulatory agency.

Intercarrier  Compensation Reform. The FCC released a Further Notice of Proposed
Rulemaking  ("FNPRM")  on March 3, 2005 to examine all  aspects of  intercarrier
compensation including access charges,  reciprocal  compensation,  transport and
transiting  services,  as  well  as,  various  network  interconnection  issues.
Currently, the rate for intercarrier compensation depends on the type of traffic
at  issue,  the  types  of  carriers  involved,   and  the  end  points  of  the
communication.  Many believe these rate differentials  create both opportunities
for  regulatory   arbitrage  and  incentives  for  inefficient   investment  and
deployment  decisions.  The intent of this proceeding is to replace the existing
patchwork of intercarrier compensation rules with a unified approach.

Universal Service Fund. The FCC has completed  numerous  regulatory  proceedings
required to implement the 1996 Act. For certain  issues,  the FCC bifurcated the
proceedings between price-cap and rate-of-return companies or in the case of the
Universal Service Fund ("USF") mechanisms between rural and non-rural companies.
All of Interactive's telephone subsidiaries are rural,  rate-of-return companies
for interstate  regulatory  purposes.  Rate-of-return  companies receive support
based on their costs  while price cap  companies  receive  support  based on the
prices of  communications  services.
                                      -5-
<page>
USF is intended,  among other things,  to provide  special support funds to high
cost rural LECs so that they can provide affordable services to their customers,
notwithstanding their high cost due to low population density.

On  February  25,  2005,  the  FCC  adopted  measures   addressing  the  minimum
requirements  for a  telecommunications  carrier to be designated as an eligible
telecommunications  carrier ("ETC") and thus be eligible to receive federal USF.
All of  Interactive's  companies are already  designated  as ETCs.  New carriers
seeking ETC designation must now:

o    Provide a five-year  plan  demonstrating  how high-cost  universal  service
     support will be used to improve its coverage,  service  quality or capacity
     throughout the service area for which it seeks designation.

o    Demonstrate its ability to remain functional in emergency situations.

o    Demonstrate  that it will satisfy  consumer  protection and service quality
     standards.

o    Offer local usage plans  comparable to those offered by the incumbent local
     exchange carrier ("ILEC") in the areas for which it seeks designation.

o    Acknowledge  that it may be required to provide equal access,  if all other
     ETCs in the designated service area relinquish their designations.

The FCC added that these same  requirements  are  applicable to ETCs  previously
designated by the commission, and these carriers must submit evidence by October
1, 2006,  showing  compliance.  The FCC encourages states that have jurisdiction
over ETC designations to adopt these requirements.

The FCC  adopted  the Rural Task Force  ("RTF")  order  related to USF for rural
carriers in May 2001 that mandates the continued use of actual embedded costs as
the basis for USF support for rural  carriers  through June 2006. In such order,
the FCC emphasized that it would provide predictability, certainty and stability
to rural LECs for five  years,  so as to allow  rural  carriers  to  continue to
provide  supported  telecommunications  services at affordable rates to American
consumers.  On June 28, 2004,  the FCC referred the issue of what  modifications
are needed for rural  carriers for a post-RTF USF  mechanism to a  Federal-State
Joint Board on Universal Service after June 2006.

The federal and state USF mechanisms, including that which the Company receives,
are subject to considerable scrutiny and possible modification by the FCC. It is
not possible to predict what modifications the FCC may adopt regarding USF, the
timing of such modifications or the impact of those modifications on the
Company.

Voice Over Internet  Protocol.  Interactive's  local exchange carrier  telephone
operations do not have  significant  wireline  competition  at the present time.
However,  wireless  usage and VoIP is continuing to increase  across the nation,
including  in the areas  served by  Interactive,  which  could have  substantial
detrimental impact on future revenues and create additional  uncertainty for the
Company.  It is not  possible  to predict  the  extent  these  complimentary  or
substitutable services might impact Interactive's revenues. Because of the rural
nature of their  operations  and related low population  density,  Interactive's
rural LEC  subsidiaries  are  primarily  high  cost  operations,  which  receive
substantial Federal and state support.  However, the regulatory  environment for
LEC operations has begun to change. VoIP usage is increasing as both a transport
facility to haul  traffic  between  switching  centers,  as well as the means to
serve the end user customer's voice telephone needs. As a transport facility, it
is  expected  to  decrease  the  overall  cost of  transport  in the  long  run.
Interactive  is  analyzing  if VoIP could be utilized  for  transport  in a cost
effective manner in the most rural portions of the nation,  such as those served
by the Company.

The  Interexchange  carriers ("IXCs") would like to have access minutes that are
transported  over VoIP  exempt  from  paying  access  charges.  If the IXCs were
exempted from paying access charges on traffic  transported  over VoIP, it would
have a significant  detrimental  impact to the Company's access charge revenues.
While the FCC has initially  determined that  computer-to-computer  VoIP traffic
should not be  considered a  telecommunications  service,  it is not possible to
predict the FCC's actions  regarding  the transport  issue since the FCC has not
issued a  decision  on this  matter.  The FCC has  opened  a more  comprehensive
proceeding to determine the extent VoIP should be subject to regulation.

In addition to transport,  companies are increasing the use of VoIP in providing
voice services to the end user. The VoIP end user traffic  requires the use of a
broadband  service,  such as DSL or cable, in order to receive the low price (or
free) VoIP voice  service.  Since DSL cannot be purchased  from the ILEC without
the customer first purchasing a traditional local access line service,  the ILEC
still  receives  the DSL and the local  service  revenue as long as the end user
purchases  the DSL from the  ILEC.  Obviously,  if the end  user  purchases  the
broadband  service  from a  competitor,  such as a cable or  wireless  broadband
company,  the ILEC loses all revenue  associated with the customer  switching to
VoIP.  Of greater  concern is the fact that the Company  loses the access charge
revenue  associated with intrastate  calls that previously were provided through
the Company's  switched  network.  It is not possible to determine the potential
lost revenue from calls that are handled by VoIP rather than the public switched
network.  This is very  similar to revenue  losses due to  wireless  usage where
minutes of use are being  removed from the Company's  switching  platform to the
wireless carrier's switch thus reducing the Company's access revenues.
                                      -6-
<page>
Competition.  Competition  in the  telecommunications  industry  is  increasing.
Although all of Interactive's current telephone companies have historically been
monopoly  wireline  providers  in  their  respective  area for  local  telephone
exchange  service,  except  to a very  limited  extent in Iowa,  the  regulatory
landscape  has  begun to  change  and we now  experience  competition  from long
distance  carriers,  from cable  companies and internet  service  providers with
respect to internet access and  potentially in the future from cable  telephony,
and from wireless  carriers.  Competition may result in a greater loss of access
lines and minutes of use and the conversion of retail lines to wholesale  lines,
which negatively affects revenues and margins from those lines. Competition also
puts  pressure  on  the  prices  we  are  able  to  charge  for  some  services,
particularly for some non-residential services.

As a result of the 1996 Act, FCC and state regulatory authority  initiatives and
judicial decisions aimed at increasing competition,  certain  telecommunications
providers have attempted to bypass local exchange  carriers to connect  directly
with high-volume toll customers.  For example, in the last few years, the States
of New  Mexico,  New York,  Michigan,  Wisconsin  and  Kansas  passed or amended
telecommunications  bills  intended to reduce  regulations  and  introduce  more
competition  among  providers  of  local  services.   In  addition,   regulatory
authorities  in certain  states,  such as New York,  have taken steps to promote
competition in local telephone  exchange service by requiring  certain companies
to offer wholesale rates to resellers.  To date, no substantial  impact has been
seen on  Interactive's  telephone  subsidiaries,  which do not  consider  this a
significant   near-term   competitive  threat  due  to  the  limited  number  of
high-volume customers they serve.


Other Multimedia Services

Broadcasting

Station  WHBF-TV - Lynch  Entertainment,  L.L.C.  ("Lynch  Entertainment  I"), a
wholly-owned  subsidiary  of  Interactive,  and Lombardo  Communications,  Inc.,
wholly-owned  by  Philip  J.  Lombardo,  are the  general  partners  of  Coronet
Communications Company ("Coronet").  Lynch Entertainment I has a 20% interest in
Coronet and Lombardo  Communications,  Inc. has an 80% interest. In addition, on
the sale of the stations,  Interactive is entitled to an additional fee of 5% of
the Capital  Proceeds (as  defined).  Coronet owns a  CBS-affiliated  television
station  WHBF-TV  serving  Rock Island and Moline,  Illinois and  Davenport  and
Bettendorf, Iowa.

Station WOI-TV - Lynch Entertainment  Corporation II ("LEC-II"),  a wholly-owned
subsidiary of Interactive,  owns 49% of the outstanding common shares of Capital
Communications Corporation which owns Station WOI-TV ("Capital") and convertible
preferred  stock,  which when  converted,  would  bring  LEC-II's  common  share
ownership to 50%.  WOI-TV is an ABC  affiliate  and serves the Ames/Des  Moines,
Iowa market. Lombardo Communications, Inc. II, controlled by Philip J. Lombardo,
has the remaining share interest in Capital.

The Company's investments in broadcasting  investments are carried on the equity
basis and do not materially impact our current operating results.

Based upon a multiple of twelve times broadcast cash flow, plus cash, less debt,
Interactive  estimates  its value in these  stations  at almost  $16  million as
compared to the net book value of these  investments of a negative $0.6 million.
It is not  assured  that the  results of these  stations  will  continue  at the
current level or that they could be sold at twelve times cash flow.

Operations.  Revenues of a local  television  station depend to some extent upon
its  relationship  with  an  affiliated  television  network.  In  general,  the
affiliation  contracts  of WHBF-TV  and WOI-TV  with CBS and ABC,  respectively,
provide  that the network will offer to the  affiliated  station the programs it
generates, and the affiliated station will transmit a number of hours of network
programming  each month.  The programs  transmitted  by the  affiliated  station
generally include advertising  originated by the network,  for which the network
is compensated by its advertisers.

The affiliation contract has historically  provided that the network will pay to
the affiliated station an amount which is determined by negotiation,  based upon
the market size and rating of the affiliated  station.  Recently,  however,  the
networks have begun in some instances to charge affiliated  stations for certain
programming.  Typically,  the affiliated  station also makes available a certain
number of hours each month for network  transmission without compensation to the
local station, and the network makes available to the affiliated station certain
programs,   which  will  be  broadcast  without   advertising,   usually  public
information  programs.  Some network  programs  also include  "slots" of time in
which the local  station  is  permitted  to sell  spot  advertising  for its own
account.  The  affiliate  is  permitted  to sell  advertising  spots  preceding,
following, and sometimes during network programs.
                                      -7-
<page>
A network  affiliation is important to a local station because network programs,
in general,  have higher viewer  ratings than  non-network  programs and help to
establish a solid audience base and  acceptance  within the market for the local
station.  Because  network  programming  often  enhances  a  station's  audience
ratings, a network-affiliated  station is often able to charge higher prices for
its own  advertising  time.  In addition to revenues  derived from  broadcasting
network  programs,  local  television  stations derive revenues from the sale of
advertising  time for spot  advertisements,  which  vary from 10  seconds to 120
seconds in length,  and from the sale of program  sponsorship  to  national  and
local advertisers. Advertising contracts are generally short in duration and may
be canceled  upon  two-weeks  notice.  WHBF-TV and WOI-TV are  represented  by a
national firm for the sale of spot advertising to national  customers,  but have
local  sales  personnel  covering  the  service  area in which each is  located.
National   representatives   are  compensated  by  a  commission  based  on  net
advertising revenues from national customers.

Competition.  WHBF-TV and WOI-TV compete for revenues with local  television and
radio  stations,  cable  television,   and  other  advertising  media,  such  as
newspapers,   magazines,  billboards  and  direct  mail.  Generally,  television
stations  such as  WHBF-TV  and WOI-TV do not  compete  with  stations  in other
markets.

Other sources of  competition  include  cable  television  systems,  which carry
television  broadcast  signals by wire or cable to subscribers who pay a fee for
this service. CATV systems retransmit programming originated by broadcasters, as
well  as  providing  additional  programming  that  is  not  originated  on,  or
transmitted from, conventional  broadcasting stations. Direct Broadcast Services
("DBS") are  satellites  providing  local to local  video  services to a growing
percentage of the population in the United States. In addition, some alternative
media operators provide for a fee and, on a subscription basis, programming that
is not a part of regular  television  service.  Additional  program services are
provided by low-power television stations as well.

Federal  Regulation.  Television  broadcasting is subject to the jurisdiction of
the FCC under the  Communications  Act of 1934, as amended (the  "Communications
Act"). The  Communications  Act, and/or the FCC's rules, among other things, (i)
prohibit the  assignment of a broadcast  license or the transfer of control of a
corporation  holding  a license  without  the prior  approval  of the FCC;  (ii)
prohibit the common  ownership of a television  station and a daily newspaper in
the same market; (iii) restrict the total number of broadcast licenses which can
be held by a single entity or individual or entity with  attributable  interests
in the stations and prohibits  such  individuals  and entities from operating or
having attributable interests in most types of stations in the same service area
(loosened  in the 1996 Act);  and (iv) limit  foreign  ownership of FCC licenses
under certain  circumstances.  In June 2003,  the FCC adopted  substantial  rule
changes  that relax  many of the  prohibitions  on the  ownership  of  broadcast
licenses. Currently, however, these rule changes are being challenged in federal
court. In calculating media ownership interests,  The Company's interests may be
aggregated under certain circumstances with certain other interests of Mr. Mario
J. Gabelli,  Chairman and Chief Executive Officer of the Company, and certain of
his affiliates.

Television  licenses are issued for terms of eight years and are  renewable  for
terms of eight  years.  The current  licenses  for WHBF-TV and WOI-TV  expire on
December 1, 2005 and February 1, 2006, respectively.

Other.

Sunshine  PCS  Corporation.  On December  31,  2003,  Sunshine  PCS  Corporation
("Sunshine")  completed  the sale of its three C-Block  personal  communications
services licenses to Cingular Wireless LLC ("Cingular") for $13,750,000 in cash.
The  licenses,  which are for the provision of C-Block  personal  communications
services  in  the  Florida  cities  of  Tallahassee,   Panama  City  and  Ocala,
represented   substantially   all  of  the  assets  of   Sunshine.   In  related
transactions,  Sunshine  used a portion of the sales  proceeds to acquire all of
its preferred stock and warrants held by Interactive for an aggregate  amount of
$7,587,000  (the  "Preferred  Stock  and  Warrant  Repurchase")  and  all of its
outstanding Class B Common Stock for an aggregate amount of $613,862 (the "Class
B  Stock  Repurchase").  Interactive's  cash  investment  in  Sunshine  and  its
predecessor  companies,  beginning in 1993, was a cumulative  $21.9 million.  In
1997 and in 1999,  Interactive  recorded  impairment  losses of $7.0 million and
$15.4  million,  respectively,  which  included the  impairment  of interest the
Company capitalized on these investments during the development of the licenses.
Following  the  Preferred  Stock and  Warrant  Repurchase  and the Class B Stock
Repurchase,  Interactive owns 294,117 shares of Sunshine's Class A Common Stock,
representing  6.4% of all outstanding  Class A Shares of Sunshine.  During 2004,
the Company received a cash  distribution  from Sunshine equal to $.83 per share
and on March 25, 2005,  Sunshine was quoted at $.12 per share on bulletin  board
market.

Las  Cruces,  NM PCS  License.  Another  subsidiary  of  Interactive,  Lynch PCS
Corporation  G ("LPCSG")  holds a 10 MHz PCS license for the Basic  Trading Area
(BTA) covering Las Cruces,  New Mexico.  Las Cruces is the principal city in the
BTA, which covers a population of approximately 249,902 (as of the 2000 census).
In April 2002,  LPCSG  completed a build-out of the licensed area  sufficient to
meet  the  FCC  requirement  that  it  provide  service  coverage  to  at  least
one-quarter  of the  population  in this BTA. In a February 2005 FCC auction for
similar spectrum,  the price per
                                      -8-
<page>
MHz of population  was materially  lower than the price paid by Interactive  for
this spectrum.  Accordingly,  at December 31, 2004,  Interactive recorded a $0.3
million  impairment  of this  investment,  which  is  included  in  amortization
expense.

Logan,  UT PCS License.  As part of the  acquisition  of Central Utah  Telephone
Company  by  Interactive  in June 2001,  Interactive  acquired  Central  Telecom
Services, LLC, a related entity that now owns a 10 MHz PCS license in the Logan,
Utah, BTA, which has a population of approximately  102,702 (as of 2000 census).
Similar to LPCSG,  Central Telecom Services has completed a build-out sufficient
to meet the FCC  requirement  that  service  coverage be  available  to at least
one-quarter  of the population in this BTA. In respect of the traditions of many
staff members and former owners,  Interactive committed to donate 20% of the net
profits (as defined in the donation  letter) from any sale of the Logan  license
to the Church of Jesus  Christ of Latter  Day  Saints.  In a  February  2005 FCC
auction for similar  spectrum,  the price per MHz of population  was  materially
lower than the price paid by  Interactive  for this  spectrum.  Accordingly,  at
December  31,  2004,  Interactive  recorded a $0.4  million  impairment  of this
investment, which is included in amortization expense.

Iowa PCS  Licenses.  Central  Scott has a 10 MHz PCS  License  for its  wireline
territory   covering  a  population   of  11,470.   Central  Scott  is  also  an
approximately  14% minority owner of an entity that has a 10 MHz PCS license for
portions of Clinton and Jackson  Counties in Iowa,  with a total  population  of
68,470.

RSA Cellular Interests.  Interactive owns minority interests in certain entities
that provide  wireless  cellular  telephone  service in two Rural  Service Areas
("RSAs")  in New Mexico  and two RSA's in North  Dakota,  covering  areas with a
total  population of  approximately  163,000.  Equity in earnings from these two
operations  was $2.9 million in 2004 on a combined  basis and the combined  book
value of these  entities was $6.5  million at December  31, 2004.  Interactive's
proportional share of these operations  combined revenues,  EBITDA and operating
profits were $3.9 million, $1.9 million and $1.6 million  respectively,  for the
year  ended   December  31,  2004,   and  we  received   $0.7  million  in  cash
distributions, net of cash paid to minority interests, from these investments in
2004. An  additional  $0.9 million was received  from these  investments  in the
first quarter of 2005.  The difference  between  EBITDA and operating  profit is
depreciation of plant and equipment.  EBITDA is presented because it is a widely
accepted  financial  indicator of value and ability to incur and service debt in
this  industry.  The Company  utilizes the EBITDA  metric for valuing  potential
acquisitions.  EBITDA is not a substitute  for operating  profit,  in accordance
with generally  accepted  accounting  principles.  The entities have no debt and
Interactive's proportional share of their cash equivalents is $1.1 million.

Other Interests in Wireless  Licenses.  In 1997, LPCSG entered into an agreement
with  Bal/Rivgam  LLC (in  which  an  affiliate  of the  CEO has a 49.9%  equity
interest),  which won  licenses in the FCC's  Wireless  Communications  Services
("WCS")  Auction  in 1997,  to  receive  a fee equal to 5% of the  realized  net
profits  of  Bal/Rivgam  (after an  assumed  cost of  capital),  in  return  for
providing  bidding and certain other services to Bal/Rivgam.  Bal/Rivgam holds 5
WCS licenses covering a population of approximately 42 million with an aggregate
cost of $0.7 million and certain Local Multipoint Distribution Services ("LMDS")
licenses.  Betapage  Communications,  L.L.C.,  in which  Interactive has a 49.9%
equity  interest,  was a winning  bidder in the FCC  auction  for 929 MHz paging
licenses,  which was conducted in 2000. Betapage won 24 paging licenses covering
a population  of 76.7 million at a cost of  approximately  $77,000.  Interactive
also has the right to receive a fee equal to 20% of the  realized net profits of
Betapage (after an assumed cost of capital).

Another  subsidiary  of  Interactive  is a 49.9% owner of PTPMS  Communications,
L.L.C. ("PTPMS"),  which was a winning bidder in the FCC auction of licenses for
fixed point-to-point  microwave services, which was conducted in 2000. PTPMS won
22 licenses  covering a population of 27.6 million for an aggregate cost of $1.5
million.  Interactive's  subsidiary has loaned PTPMS approximately $1.4 million.
Interactive's subsidiary also has the right to receive a fee equal to 20% of the
realized net profits of PTPMS (after an assumed cost of capital).

Another  subsidiary of Interactive is a 49.9% owner of PTPMS  Communications II,
L.L.C  ("PTPMS II"),  which was a winning  bidder in the FCC auction of licenses
for 700 MHz Guard Band  spectrum for  wireless  data  transmission  and wireless
Internet  services,  which was  conducted in 2000.  PTPMS II won three  licenses
covering a population  of 6.4 million in BTAs  including  the cities of Buffalo,
NY,  Des  Moines-Quad-Cities,  IA and El  Paso,  TX,  at an  aggregate  cost  of
approximately  $6.3 million.  Interactive has loaned PTPMS II approximately $6.1
million. Interactive's subsidiary has the right to receive a fee equal to 20% of
the realized  net profits of PTPMS II (after an assumed  cost of capital).  In a
FCC auction conducted in September 2002 for similar  spectrum,  called the Lower
700 MHz Band Auction,  the price per MHz of population was materially lower than
the  price  paid by PTPMS  II in 2000.  Accordingly,  during  2002,  Interactive
provided  a  reserve  for  impairment  for its  investment  in  PTPMS II of $5.5
million.

Another  subsidiary  of  Interactive,   Lynch  3G  Communications   Corporation,
participated in the Lower 700 MHz auction conducted in August 2002. Lynch 3G won
eight 12 MHz licenses in the following areas:  Reno, NV; Santa Barbara,  CA; Des
Moines, IA; Quad Cities area of Davenport and Bettendorf, IA and Rock Island and
Moline,  IL; Las Cruces, NM; Elmira, NY; and two RSAs in the western part of New
Mexico.  The total  population  covered by these licenses is  approximately  1.7
million. Lynch 3G paid $1.1 million for these licenses.
                                      -9-
<page>

In June 2003,  Lynch 3G  participated  in a re-auction of Lower 700 MHz spectrum
that was not licensed in the August 2002 auction and won four 12 MHz licenses in
the following areas: Dubuque, IA, Gogebic, MI, San Juan, NM and Chautauqua,  NY.
The total  population  covered by these licenses is  approximately  1.1 million.
Lynch 3G paid $620,000 for these licenses.

In July 2004,  Lynch 3G  participated in the Auction for 24 GHz Spectrum and was
high bidder for two licenses,  Buffalo - Niagara, NY and Doverport, IA - Maline,
IL, for a total cost of $49,000.

In February 2005,  Lynch 3G  participated in Auction 58 for PCS Spectrum and was
high bidder for two licenses,  Marquette, MI and Kalamath Falls, OR, for a total
cost of $0.5 million.

Interactive  expects to continue to participate  in the spectrum  auctions being
conducted by the FCC in order to have the flexibility to accommodate present and
future  needs  of  existing  and  future  customers  as well as  establish  high
bandwidth opportunities.

In addition to the build out  requirements  for PCS  licenses,  FCC rules impose
build-out requirements for WCS, LMDS, paging licenses,  point-to-point microwave
services  and the  licenses  granted in 700 MHz  (guard  band) and Lower 700 MHz
spectrum.  There are also substantial restrictions on the transfer of control of
licensed spectrum.

There are many risks relating to PCS and other FCC wireless  licenses  including
without  limitation,  the high cost of PCS and certain other licenses,  the fact
that it involves start-up businesses,  raising the substantial funds required to
pay for the licenses and the build out,  determining the best way to develop the
licenses and which technology to utilize,  the small size and limited  resources
of  companies  compared to other  potential  competitors,  existing and changing
regulatory  requirements,  additional  auctions of  wireless  telecommunications
spectrum and actually building out and operating new businesses  profitably in a
highly competitive environment (including already established cellular telephone
operators  and other new PCS  licensees).  There  can be no  assurance  that any
licenses  granted  to  entities  in  which   subsidiaries  of  Interactive  have
interests,  can be successfully sold or financed or developed,  thereby allowing
Interactive's subsidiaries to recover their debt and equity investments.

Morgan Group Holding Company. In January 2002, Interactive spun off its interest
in The Morgan  Group,  Inc.  ("Morgan"),  its only  services  subsidiary,  via a
tax-free dividend to its shareholders.

II.  OTHER INFORMATION

While Interactive holds licenses of various types,  Interactive does not believe
they   are   critical   to  its   overall   operations,   except   for  (1)  the
television-broadcasting  licenses  of  WHBF-TV  and  WOI-TV;  (2)  Interactive's
telephone   subsidiaries'   franchise  certificates  to  provide  local-exchange
telephone  service  within  their  service  areas;  (3) FCC  licenses to operate
point-to-point   microwave  systems;  (4)  licenses  held  by  partnerships  and
corporations  in  which  certain  of  Interactive's  subsidiaries  own  minority
interests to operate cellular  telephone  systems covering various service areas
in New Mexico and North Dakota, (5) Giant Communications'  franchises to provide
cable   television   service   within  its  service   areas  and  (6)   personal
communications  services  and  other  wireless  communication  licenses  held by
companies in which  Interactive's  subsidiaries have investments,  including the
PCS licenses for Las Cruces,  New Mexico,  Logan,  Utah, and portions of Iowa as
described above in more detail.

The capital expenditures,  earnings and competitive position of Interactive have
not been materially  affected by compliance  with current  federal,  state,  and
local  laws and  regulations  relating  to the  protection  of the  environment;
however, Interactive cannot predict the effect of future laws and regulations.

No portion of the business of Interactive is regarded as seasonal.

Interactive  does not believe that its  multimedia  business is dependent on any
single  customer  of local  telephone  service.  Most local  exchange  carriers,
including  Interactive's,  received a significant amount of revenues in the form
of access fees from long distance companies.

Interactive  had a total of 356  employees  at December  31,  2004,  including 6
corporate employees and the remainder  responsible for providing rural telephone
services, compared to 349 employees at December 31, 2003.

                                      -10-
<PAGE>

III. EXECUTIVE OFFICERS OF THE REGISTRANT

Pursuant  to General  Instruction  G (3) of Form  10-K,  the  following  list of
executive officers of the Registrant is included in Part 1 of this Annual Report
on Form  10-K in lieu of being  included  in the  Proxy  Statement  for the 2004
Annual Meeting of  Shareholders.  Such list sets forth the names and ages of all
executive  officers of the Registrant  indicating all positions and offices with
the  Registrant  held by each  such  person  and each  such  person's  principal
occupations or employment during the past five years.

<TABLE>
<CAPTION>


          Name                                   Offices and Positions Held                                Age
          ----                                   --------------------------                                ---
<S>                       <C>                                                                               <C>
Mario J. Gabelli          Chairman and Chief Executive Officer of Lynch Interactive since                   62
                          December 2004 (and also from  September  1999 to December 2002) and Vice
                          Chairman  and Chief  Executive  Officer from  December  2002 to December
                          2004. He is also Chairman,  Chief Executive  Officer,  and a director of
                          Gabelli  Asset  Management  Inc. and its  predecessors  (since  November
                          1976)  (and in  connection  with  those  responsibilities,  he serves as
                          director  or  trustee and/or an officer of registered  investment
                          companies  managed by  subsidiaries  of Gabelli Asset  Management);  and
                          Chairman and Chief Executive Officer of GGCP, Inc., a private company

Robert E. Dolan           Chief Financial Officer (since January 2004); Chief Financial Officer             53
                          and  Controller  from September  1999 to January 2004;  Chief  Financial
                          Officer (1992-2000) and Controller (1990-2000) of Lynch Corporation

Evelyn C. Jerden          Senior Vice President-Operations (since September 2003);    Vice                  47
                          President-Regulatory Affairs (2002-2003); Director of Revenue
                          Requirements of Western New Mexico Telephone Company, Inc. (since 1992)

John A. Cole              Vice President-Corporate Development, Secretary and General Counsel               54
                          (since December 2004);  Counsel at LeBoeuf,  Lamb, Greene & MacRae,  LLP
                          (1994 to 2004)
</TABLE>


The executive  officers of the Registrant  are elected  annually by the Board of
Directors at its meeting in May and hold office until the organizational meeting
in the next subsequent year and until their respective successors are chosen and
qualified.

ITEM 2. PROPERTIES

Interactive  leases  approximately  3,300  square  feet of office  space from an
affiliate of its Chairman  and CEO for its  executive  offices in Rye, New York.
The lease expires at the end of 2007.

Western New Mexico Telephone  Company  ("Western") owns a total of 16.9 acres at
15 sites located in southwestern New Mexico. Its principal operating  facilities
are located in Silver City,  where Western owns one building  comprising a total
of 6,480  square feet  housing its  administrative  offices and certain  storage
facilities and another  building  comprising 216 square feet,  which houses core
network  equipment.  In Cliff,  New Mexico,  Western owns five  buildings with a
total of 14,055 square feet in which are located  additional offices and storage
facilities,  as well as a vehicle shop, a fabrication  shop,  and central office
switching equipment. Smaller facilities, used mainly for storage and for housing
central  office  switching  equipment,  with a total of 9,984 square  feet,  are
located  in  Lordsburg,  Reserve,  Magdalena  and five other  localities  in New
Mexico. In addition,  Western leases 1.28 acres on which it has constructed four
microwave towers and a 120 square-foot  equipment building.  Western has the use
of 46 other sites under permits or easements at which it has  installed  various
equipment either in small  company-owned  buildings (totaling 2,403 square feet)
or under protective cover. Western also owns 3,757 miles of copper cable and 494
miles of fiber  optic  cable  running  through  rights-of-way  within its 15,000
square mile service area. All of these properties are encumbered under mortgages
held  by  the  Rural  Utilities  Service  ("RUS")  and  the  National  Bank  for
Co-Operatives ("Co-Bank").

Inter-Community  Telephone  Company owns 12 acres of land at 10 sites.  Its main
office at Nome, ND,  contains 4,326 square feet of office and storage space.  In
addition,  it has 4,400  square  feet of garage  space  and  5,035  square  feet

                                      -11-
<page>
utilized for its switching facilities. Inter-Community has 2,036 miles of copper
cable and 243 miles of fiber optic cable. All of these properties are encumbered
under mortgages held by Co-Bank.

Cuba City Telephone  Company is located in a 3,800 square foot brick building on
0.4 of an acre of land. The building  serves as the central  office,  commercial
office,  and garage for vehicle and  material  storage.  The company also owns a
cement block  storage  building of 1,490 square feet on 0.1 of an acre.  Belmont
Telephone Company is located in a cement block building of 800 square feet on .5
acre of land in Belmont,  Wisconsin.  The  building  houses the  central  office
equipment for Belmont. The companies own a combined total of 302 miles of copper
cable  and 51  miles of  fiber  optic  cable.  All of Cuba  City  and  Belmont's
properties  described above are encumbered under first mortgages held by the RUS
and Rural Telephone Bank, respectively, and second mortgages held by Co-Bank.

J.B.N.  Telephone  Company owns a total of  approximately  2.25 acres at fifteen
sites located in northeast  Kansas.  Its  administrative  and commercial  office
consisting of 7,000 square feet is located in Holton,  Kansas and a 3,000 square
feet  garage  warehouse  facility is located in Wetmore,  Kansas.  In  addition,
J.B.N.  owns  thirteen  smaller  facilities  housing  central  office  switching
equipment  and over  1,207  miles of copper  cable and 206 miles of fiber  optic
cable. All of these properties are encumbered under mortgages held by the RUS.

Giant  Communications,  LLC (formerly CLR Video) has its headquarters in Holton,
Kansas,  leased from J.B.N.  Telephone Company. It also owns one small parcel of
land and  leases  13 small  sites,  which it uses for its  cable  receiving  and
transmission equipment.  All of these properties are encumbered under a mortgage
to Co-Bank. Also, see under Item 1.I.B. Cable Television.

Haviland  Telephone  Company owns a total of approximately 3.9 acres at 20 sites
located in south  central  Kansas.  Its  administrative  and  commercial  office
consisting  of 4,450  square feet is located in Haviland,  Kansas.  In addition,
Haviland  owns 19 smaller  facilities  housing  garage,  warehouse,  and central
office switching equipment and over 1,503 miles of copper cable and 529 miles of
fiber optic cable.  All of these properties are encumbered under a mortgage held
by the RUS.

Dunkirk & Fredonia  Telephone Company (including its affiliates) owns a total of
approximately 15 acres at five locations in western New York. Its central office
switching equipment,  administrative and commercial offices consisting of 18,297
square feet is located in Fredonia,  New York.  In addition,  Dunkirk & Fredonia
owns four other  properties,  including a service garage, a paging tower site, a
small central office in Cassadaga,  N.Y., sales and service center in Jamestown,
New York.  Dunkirk & Fredonia also owns 358 miles of copper  telephone cable and
96 miles of fiber optic cable.  All of these  properties are encumbered  under a
mortgage held by RUS.

Bretton Woods  Telephone  Co., Inc.  leases  approximately  2,800 square feet of
business  office space and  garage/storage  space located in Bretton Woods,  New
Hampshire.  Bretton  Woods  Telephone  owns a 444  square  foot  central  office
building also located in Bretton  Woods,  New Hampshire  that is built on leased
land.  Bretton Woods Telephone has 28 miles of copper cable and 6 miles of fiber
optic cable.

Upper Peninsula  Telephone  Company owns a total of approximately 25 acres at 19
sites located  principally in the Upper Peninsula of Michigan.  Its host central
office switching equipment,  administrative and commercial offices consisting of
11,200 square feet is located in Carney,  Michigan. In addition, Upper Peninsula
owns 25 other smaller  facilities  housing garage,  warehouse and central office
switching  equipment and over 2,123 miles of copper cable and 198 miles of fiber
optic cable. All properties described herein are encumbered under mortgages held
by the RUS and Co-Bank.

Central Scott Telephone Company owns 3 acres of land at 5 sites. Its main office
in Eldridge,  Iowa  contains  3,104 square feet of office and 341 square feet of
storage space.  In addition,  it has 3,360 square feet of garage space and 2,183
square feet utilized for its switching  facilities.  Central Scott has 357 miles
of copper cable and 34 miles of fiber optic cable.  All of these  properties are
encumbered under mortgages held the First National Bank of Omaha.

Central Utah Telephone,  Inc., and its subsidiaries own a total of 9.76 acres at
sixteen  sites and have an  additional  1.54 acres at fifteen  sites,  which are
under  leases,  permits or  easements.  These sites are located in the  central,
northeastern and mid-western areas of Utah.  Central Utah Telephone's  principal
operating  facilities  are  located  in  Fairview,  Utah,  where  it  owns a new
commercial office building containing 14,400 square feet, and a plant office and
central  office  building  containing  5,200 square feet. In addition it has 720
square feet of office space,  2,455 square feet of warehouse space, 6,595 square
feet of vehicle  maintenance  facilities,  4,252 square feet of protective cover
and 3 rental homes.  Central Utah Telephone owns smaller  facilities used mainly
for housing central office switching equipment with a total of 9,405 square feet
in 25 various locations.  In addition,  Central Utah Telephone owns 897 miles of
copper cable and 199 miles of fiber optic cable  running  through  rights-of-way
within its 6,867  square mile  service  area.  All of Central  Utah  Telephone's
properties  described  herein are encumbered under mortgages held by the RUS and
CoBank.
                                      -12-
<page>

It is  Registrant's  opinion that the  facilities  referred to above are in good
operating condition and suitable and adequate for present uses.

ITEM 3. LEGAL PROCEEDINGS

False Claims Act "Qui Tam"  Litigation.
Interactive and several other parties, including Interactive's CEO, and Fortunet
Communications,     L.P.,     which    was    Sunshine     PCS     Corporation's
predecessor-in-interest,  have been named as defendants in a lawsuit  originally
brought under the so-called "qui tam" provisions of the federal False Claims Act
in the United States District Court for the District of Columbia.  The complaint
was filed under seal with the court on February 14, 2001.  At the  initiative of
one of the defendants,  the seal was lifted on January 11, 2002. Under the False
Claims Act, a private plaintiff,  termed a "relator," may file a civil action on
the U.S. government's behalf against another party for violation of the statute.
In  return,  the  relator  receives a  statutory  bounty  from the  government's
litigation proceeds if he is successful.

The  main  allegation  in the case is that the  defendants  participated  in the
creation  of "sham"  bidding  entities  that  allegedly  defrauded  the  federal
Treasury by improperly participating in certain FCC spectrum auctions restricted
to small  businesses,  as well as obtaining  bidding  credits in other  spectrum
auctions allocated to "small" and "very small"  businesses.  While the complaint
seeks to recover an  unspecified  amount of  damages,  which would be subject to
mandatory  trebling under the statute,  a document filed by the relator with the
Court on February 24, 2004  discloses an initial  computation  of damages of not
less than $88 million  resulting from bidding  credits awarded to the defendants
in FCC  auctions  and $120  million  of unjust  enrichment  through  the sale or
assignment of licenses obtained by the defendants in FCC auctions,  in each case
prior to trebling.  Later  computations have increased this amount. As discussed
below, the bidding credits the defendants  received were  considerably less than
the $88 million amount reported.

Interactive  strongly believes that this lawsuit is completely without merit and
that relator's damage  computations are without basis, and intends to defend the
suit vigorously.  The U.S.  Department of Justice has notified the court that it
has  declined to  intervene  in the case.  Nevertheless,  we cannot  predict the
ultimate  outcome  of the  litigation,  nor can we predict  the effect  that the
lawsuit  or its  outcome  will  have  on our  business  or  plan  of  operation.
Interactive  does not have any  insurance  to cover its cost of  defending  this
lawsuit,  which costs will be material.  Interactive  does have a directors  and
officers  liability  policy but the insurer has  reserved  its rights  under the
policy and, as a result,  any coverage to be provided to any director or officer
of Interactive in connection with a judgment  rendered in this action is unclear
at this time.

Interactive  was  formally  served  with  the  complaint  on July 10,  2002.  On
September  19, 2002,  the  defendants  filed two motions with the United  States
District Court for the District of Columbia: a motion to dismiss the lawsuit and
a motion  to  transfer  the  action to the  Southern  District  of New York.  On
November  25,  2002,  the  relator  filed an  opposition  reply to our motion to
dismiss and on December 5, 2002; the defendants  filed a reply in support of its
motion to  dismiss.  On  September  30,  2003,  the Court  granted our motion to
transfer  the  action  to the  Southern  District  of  New  York.  A  scheduling
conference  was held on February 10, 2004, at which time,  the judge  approved a
scheduling order and discovery commenced.

On July 28,  2004,  the judge  denied in part and  granted in part our motion to
dismiss. Defendant bidding entities that did not win licenses were dismissed and
the "reverse" false claims act count was dismissed as redundant. Interactive and
its subsidiaries remain parties to the litigation.

In December 2004, the  defendants  filed a motion in the United States  District
Court  for the  District  of  Columbia  to  compel  the FCC to  provide  certain
information  subpoenaed  by them in order to enable  them to  conduct a defense.
This motion is still  pending  and  discovery  is  continuing.  See  "History of
Lynch's "C" Block Activities" below.

Also  see  Footnote  4 -  Wireless  Communication  Services  with  regards  to a
potential indemnification obligation of the Company.

History of Lynch's "C" Block Activities.

As part of the Omnibus Budget Resolution of 1993, Congress authorized the FCC to
employ  competitive  bidding  procedures  to  select  among  mutually  exclusive
applicants for certain spectrum licenses. Initially the FCC had an initiative to
include, among others, African Americans,  Native Americans, Asian Americans and
women.  As a result of this,  the FCC  conducted  auctions  beginning in 1995 to
allocate  spectrum in a  competitive  manner.  Interactive  was a  participating
investor and/or service provider to various entities in this "C-Block" auction.

By December 18, 1995, Interactive (through its predecessor Lynch Corporation)
had investments in five entities that participated in the FCC auction for
broadband PCS "C" block spectrum (Auction 5). When the auction closed, on May
                                      -13-
<page>

6,1996,  these five entities,  on a combined basis,  were the higher bidders for
thirty-one  30 MHz licenses at a gross cost of $288.2  million.  These  entities
were initially put together under the FCC's initiative to include, among others,
women, African Americans,  Native Americans and Asian Americans.  As a result of
changes in these  initiatives,  these same  individuals  were qualified as small
businesses and remained eligible as bidders. These entities received $72 million
of bidding credits, and accordingly the net cost was $216.2 million. The federal
government  provided financing for 90% of the cost of these licenses,  or $194.6
million. Interactive's investments in these entities totaled $21 million.

Events during and subsequent to Auction 5, made financing these licenses through
the capital  markets much more difficult than originally  anticipated.  On April
18, 1997, among other reasons,  in order to obtain some economies of scale, such
as financing,  the five entities merged into Fortunet  Communications,  Inc. The
FCC, in partial response to actions by Nextwave and others,  promoted a plan for
refinancing  the "C" block  licenses.  In 1997, many of the license holders from
Auction 5, including Fortunet,  petitioned the FCC for relief in order to afford
these small  businesses the  opportunity to more  realistically  restructure and
build out their systems. The President of Fortunet, Karen Johnson,  participated
in an FCC sponsored  forum on this issue on June 30, 1997. The response from the
FCC,  which was  announced on September 26, 1997 and modified on March 24, 1998,
afforded  license holders four options.  One of these options was the resumption
of current debt payments,  which had been suspended earlier in 1997 for all such
license holders.  Another option,  amnesty, was to return all licenses and forgo
any amounts deposited in exchange for forgiveness of the FCC debt. Other options
included:  disaggregation,  splitting a 30 MHz license  into two 15 MHz licenses
and  forgoing 50% of the amount  deposited;  and  prepayment,  return of certain
licenses and  utilizing 70% of the amount  deposited to acquire other  licenses,
with the other 30% of the deposits to be forfeited.

On June 8, 1998,  Fortunet elected to apply its eligible credits relating to its
original  down  payment  to the  purchase  of three  licenses  for 15 MHz of PCS
spectrum in Tallahassee,  Panama City and Ocala, Florida. Consistent with an FCC
promulgated disaggregation  alternative,  Fortunet surrendered all the remaining
licenses and forfeited 30% of its original down payment in full  satisfaction of
its  government  obligations,  including  forgiveness  of all accrued  interest.
Accordingly,  Fortunet  retained 15 MHz of spectrum in the three Florida markets
covering a population  of  approximately  962,000 at a net auction cost of $15.8
million. As a result of this FCC process, disaggregation resulted in a reduction
of the bidding  credits to $5.3 million.  Fortunet also lost $6.0 million of its
down payment. As a result of this decision,  during 1997, Interactive recorded a
$7.0 million write down of its  investment  in Fortunet.  A lawyer who worked on
many  applications  for FCC licenses,  Mr. Taylor,  the relator in this case, is
aware of the details of these FCC initiated  alternatives  for the "C" Block, as
presumably are his law firms.

On April 15, 1999,  the FCC  completed a reauction  of all the C-Block  licenses
that were  surrendered,  including the 15 MHz of spectrum that Fortunet returned
to the FCC on June 8, 1998 in respect of the Tallahassee, Panama City and Ocala,
Florida markets. In that reauction,  the successful bidders paid a total of $2.7
million for those three 15 MHz  licenses  returned by Fortunet  versus the $15.8
million paid by Fortunet.  As a result of this auction,  Interactive  recorded a
further write down of its  investment of $15.4  million,  including  capitalized
costs, to reflect the amount bid for the similar licenses in the reauction.

In February 2000, Fortunet merged with Sunshine PCS Corporation, which by way of
a spin-off from Lynch Interactive  became a public company.  It traded under the
symbol SUNPA.

On December 31, 2003,  Sunshine,  after  appropriate  corporate  and  regulatory
steps,  sold its three 15 MHz licenses to Cingular  Wireless for $13.75 million.
Interactive  received  $7.6 million as part of the sale  transaction  versus its
cash  investment  of $21.9  million  initially  invested  in the  original  five
entities in 1992.

Other Litigation.  In addition to the litigation described above, Interactive is
a party to routine litigation  incidental to its business.  Based on information
currently  available,  Interactive  believes that none of this ordinary  routine
litigation, either individually or in the aggregate, will have a material effect
on its financial condition and results of operations.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None in the fourth quarter of 2004.

                                      -14-
<PAGE>

                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S  COMMON EQUITY,  RELATED STOCKHOLDER MATTERS
        AND ISSUER PURCHASES OF EQUITY SECURITIES

The Common  Stock of Lynch  Interactive  Corporation  is traded on the  American
Stock  Exchange  under the  symbol  "LIC."  The  market  price  high and lows in
consolidated trading of the Common Stock for the last two years are as follows:

<TABLE>
<CAPTION>

                                  2004
                           Three Months Ended
         March 31      June 30        September 30   December 31
         --------      -------        ------------   -----------
<S>      <C>           <C>            <C>            <C>
High     $   37.90     $    37.95     $   36.50      $   34.75
Low      $   23.50     $    28.00     $   29.50      $   30.45

</TABLE>

<TABLE>
<CAPTION>

                                  2003
                           Three Months Ended
        March 31       June 30         September 30   December 31
        --------       -------         ------------   -----------

<S>     <C>           <C>             <C>            <C>
High    $   28.00     $   24.80       $   27.75      $   27.41
Low     $   21.50     $   19.50       $   23.95      $   21.80

</TABLE>

At March 22, 2005,  Interactive  had 803  shareholders of record and the closing
price of our Common Stock was $25.75.

Neither  Interactive nor Lynch  Corporation,  the company from which Interactive
was spun off,  has paid any cash  dividends  on its  common  stock  since  1989.
Interactive  does not expect to pay cash  dividends  on its common  stock in the
foreseeable  future.  In  addition,  current  and future  financings  may limit,
prohibit, or otherwise affect the payment of such dividends.

Issuer Purchases of Equity Securities

<TABLE>
<CAPTION>

                                                                                     Maximum Number of
                                                              Total Number of     (or Approximate Dollar
                                                            Shares Purchased as    Value) of Shares that
                       Total Number of                       Part of Publicly      May Yet Be Purchased
                      Shares (or Units) Average Price Paid   Announced Plans or      Under the Plans or
      Period            Purchased       per Share (or Unit)     Programs(1)             Programs(1)
      ------            ---------       ------------------      ----------              ----------

<C>                        <C>                <C>                <C>                      <C>
10/1/04 to 10/31/04        3,600              32.36               3,600                   35,300

11/1/04 to 11/30/04        1,000              31.62               1,000                   34,300

12/1/04 to 12/31/04        1,300              31.62               1,300                   33,000
                          ------              -----              ------

Total                      5,900              32.07               5,900
                           =====              =====              ======
</TABLE>


(1)  In September  1999,  the Board of Interactive  approved a stock  repurchase
     program  providing for the purchase of up to 100,000 shares of Common Stock
     in such  manner,  at such times and at such  prices as the Chief  Executive
     Officer or his designee determines.

                                      -15-
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>

                          LYNCH INTERACTIVE CORPORATION
                             SELECTED FINANCIAL DATA
                      (In Thousands, Except Per Share Data)

                                                                        Years Ended December 31, (a)
                                                           -----------------------------------------------------
                                                            2000        2001        2002        2003        2004
                                                           --------------------- -------------------------------

<S>                                                      <C>         <C>         <C>         <C>         <C>
Revenues (h)..........................................   $ 65,789    $ 77,892    $ 84,225    $ 85,392    $ 87,794

Operating profit (b) .................................     15,331      19,985      19,233      18,428      15,731
Interest expense, net of investment income ...........    (10,308)    (11,074)    (11,266)    (10,744)     (9,915)
Equity in earnings of affiliates .....................      2,594       1,456       1,938       2,280       3,564
Impairment of investment in Spinnaker Industries, Inc.       --        (3,194)       --          --          --
Reserve for impairment of investment in spectrum and
  spectrum license holders (c) .......................       --          --        (5,479)       --          --
Gain on sale of subsidiary stock and other
  Assets .............................................      4,187        --         4,965       3,919         185
                                                         --------    --------    --------    --------    --------
Income (loss) before income taxes, minority
  interests, and discontinued operations of Morgan ...     11,804       7,173       9,391      13,883       9,565
(Provision) benefit for income taxes .................     (4,971)     (3,454)     (3,924)     (4,968)     (3,078)
Minority interests ...................................     (1,802)     (1,185)     (1,706)     (1,525)     (2,021)
                                                         --------    --------    --------    --------    --------
  Income (loss) from continuing operations before
    discontinued operations of  Morgan ...............      5,031       2,534       3,761       7,390       4,466
Income (Loss) from operations of Morgan
  distributed to shareholders (g) ....................     (2,666)     (1,386)     (1,888)       --          --
                                                         --------    --------    --------    --------    --------
  Net income (loss) ..................................   $  2,365    $  1,148    $  1,873    $  7,390    $  4,466
                                                         ========    ========    ========    ========    ========
Basic and diluted earnings
Per common share (d)
  Income (loss) from continuing operations before
  operations of Morgan ...............................   $   1.78    $   0.90    $   1.34    $   2.65    $   1.61
  Income (loss) from operations of Morgan
    distributed to shareholders (e) ..................      (0.94)      (0.49)      (0.67)       --          --
                                                         --------    --------    --------    --------    --------
  Net income (loss) ..................................   $   0.84    $   0.41    $   0.67    $   2.65    $   1.61
                                                         ========    ========    ========    ========    ========

</TABLE>
<TABLE>
<CAPTION>

                                                                                   December 31,
                                                           ----------------------------------------------------
                                                           2000        2001        2002        2003        2004
                                                           ----------------------------------------------------
<S>                                                      <C>         <C>         <C>         <C>         <C>

Cash, securities and short-term investments              $ 26,900    $ 31,233    $ 23,356     $ 26,556   $ 27,214
Total assets (g) ..........................              $217,742    $256,350    $249,639     $252,795   $257,080
Long-term debt ............................              $162,304    $193,202    $176,621     $175,783   $168,966
Shareholders' equity (f) ..................              $ 19,391    $ 24,517    $ 22,632     $ 29,887   $ 34,572
</TABLE>


(a)  Includes results of Central Utah Telephone  Company from June 23, 2001, its
     date of acquisition.
(b)  Operating  profit is sales and revenues less Multimedia cost of sales,  and
     selling and administrative expenses. Goodwill amortization was $2.5 million
     in 2000 and $2.8 million in 2001. On January 1, 2002,  the Company  adopted
     the  provisions  of SFAS  142 and  ceased  amortizing  goodwill.  In  2004,
     goodwill of $0.5  million and $0.7  million of  spectrum  investments  were
     written off as a result of the Company's  annual test for impairment.  (See
     note 1 in the accompanying financial statements.)
(c)  See Note 4 "Wireless Communications Services" in the Company's consolidated
     financial statements.
(d)  Adjusted to reflect a 2 for 1 stock split which occurred in September 2000.
(e)  Net of income tax and minority interest.
(f)  No cash dividends have been declared or paid during the 5-year period.
(g)  Amounts do not include assets associated with The Morgan Group, Inc.
(h)  Revenues  for prior  periods  have been  reclassified  to  conform  to 2004
     presentation.


                                      -16-
<page>
ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
       OF OPERATIONS

This  discussion  should  be  read  together  with  the  Consolidated  Financial
Statements  of  Interactive  and the notes  thereto  included  elsewhere in this
Annual Report.

RESULTS OF OPERATIONS

Overview

Interactive has grown primarily through the selective acquisition of rural local
exchange carriers ("RLECs") and by offering additional services such as Internet
service,  alarm services,  long distance service and competitive  local exchange
carrier  ("CLEC")  service.  From 1989  through  the current  reporting  period,
Interactive  (and  its  predecessor  corporation)  acquired  fourteen  telephone
companies,  four of which have indirect  minority  ownership of 2% to 19%, whose
operations range in size from approximately 800 to over 10,000 access lines. The
Company's  telephone  operations  are  located in Iowa,  Kansas,  Michigan,  New
Hampshire, New Mexico, New York, North Dakota, Utah and Wisconsin.

The  telecommunications   industry  in  general  and  the  RLECs  that  comprise
Interactive's  business  face a number of economic or  industry-wide  issues and
challenges.

o    Regulatory- The  Telecommunications Act of 1996 and other federal and state
     legislation and regulations  have a significant  impact on the industry and
     on rural carriers in particular.  Interactive's telephone companies are all
     RLECs  serving  very high cost  areas with a  significant  portion of their
     revenues being derived from federal or state support mechanisms,  which are
     referred to as Universal Service Funds ("USF"). The revenues and margins of
     our RLEC  subsidiaries  are largely  dependent on the  continuation of such
     support mechanisms.

o    Competition- The effects of competition from CLECs,  wireless service, high
     speed cable,  Voice Over  Internet  Protocol  ("VoIP")  and other  internet
     providers is an industry-wide  issue that is felt to varying degrees by our
     rural telephone companies.

o    The economy- Unemployment,  building starts,  business bankruptcies and the
     overall  health of the economy have a significant  effect on demand for our
     services.

o    Telecommunication  bankruptcies-  Interactive's  telephone  companies  have
     significant,  normal  course of  business  receivables  from  interexchange
     carriers,  such as MCI or Global Crossings who filed for bankruptcy and, as
     a result,  have been  written-off.  Additional  bankruptcies  could  have a
     significant  effect on our  financial  condition.  The  Company  expects to
     recover settlements from MCI in 2005.

o    Market  challenges-  Our  phone  companies  are  required  to  comply  with
     industry-wide   initiatives  such  as  local  number  portability  and  the
     requirements  of the  Communications  Assistance for Law  Enforcement  Acto
     ("CALEA")  that are  expensive  to  implement  and that in some  cases have
     limited demand in our markets.

Interactive generates cash and earns telecommunications  revenues primarily from
local network  access,  intrastate and interstate  access revenue and from state
and federal USF support mechanisms. Due to the nature of the Company's regulated
telephone  operations,  revenues and operating  expenses are  relatively  stable
period to period.

o    Local  Revenues - The number of access lines is the primary driver of local
     network access revenues. In addition,  the ratio of business to residential
     lines,  as well as the number of features  subscribed  to by customers  are
     secondary drivers.

o    Intrastate access revenues - Customer usage,  primarily based on minutes of
     use, and the number of access lines are the primary  drivers of  intrastate
     access revenues since the Company's RLECs are on a "bill-and-keep" basis.

o    All of our RLECs participate in the National  Exchange Carrier  Association
     ("NECA") access pools.  Interstate  access revenues depend upon whether the
     RLEC has elected to be "cost-based"  or has remained an "average  schedule"
     carrier. The revenues of our nine cost-based carriers directly correlate to
     the  rate-of-return  on regulated net investment  earned by the NECA access
     pools plus the amount of regulated  operating expenses including taxes. The
     revenues of the Company's five average schedule  subsidiaries  correlate to
     usage based measurements such as access lines,  interstate  minutes-of-use,
     and the number and  mileage of  different  types of  circuits.  The average
     schedule formulas are intended to be a proxy for cost-based recovery.

                                      -17-
<page>

o    USF subsidies  are primarily  driven by  investments  in specific  types of
     infrastructure,  as well as  certain  operating  expenses  and taxes of the
     Company.  Interstate  and  intrastate  USF  subsidies  are  included in the
     respective  interstate  and  intrastate  access  revenue  captions  in  the
     breakdown of revenue and operating expenses which follows.

o    Other business revenue:  Interactive's companies also provide non-regulated
     telecommunications  related  services,  including  Internet access service,
     wireless and long  distance  resale  service,  in certain of its  telephone
     service  and  adjacent  areas.  Interactive  also  provides  and intends to
     provide more local telephone and other  telecommunications  service outside
     certain of its franchise areas by establishing  CLEC operations in selected
     nearby areas. In addition, certain of Interactive's companies have expanded
     into cable and security businesses in the areas in which they operate.

o    Long Distance  revenues are only retained by the Company if it is providing
     the long distance  service to the end user  customer as the toll  provider.
     For unaffiliated  IXCs who contract with Interactive for billing  services,
     the Company  provides  billing  services  and  receives  an  administrative
     handling fee.

The   following   are  material   opportunities,   challenges   and  risks  that
Interactive's  executives are currently  focused on, as well as actions that are
being taken to address the concerns:

o    Universal Service Reform:  Efforts to modify universal  service  mechanisms
     are  currently  underway  at the  FCC.  In June  2004,  the FCC  asked  the
     Federal-State  Joint Board on Universal  Service  ("Joint Board") to review
     the rules relating to the high-cost  universal  service support  mechanisms
     for rural  carriers and to determine  the  appropriate  rural  mechanism to
     succeed  the  five-year  plan  adopted in the Rural Task  Force  Order.  In
     particular,  the FCC  asked the Joint  Board to make  recommendations  on a
     long-term  universal  service  plan that  ensures that support is specific,
     predictable,  and sufficient to preserve and advance universal service. The
     FCC asked the Joint Board to ensure that its recommendations are consistent
     with the goal of ensuring that consumers in rural,  insular,  and high-cost
     areas have access to  telecommunications  and information services at rates
     that are affordable and reasonably  comparable to rates charged for similar
     services in urban areas. The FCC also asked the Joint Board to consider how
     support can be effectively  targeted to rural telephone  companies  serving
     the highest cost areas,  while protecting against excessive fund growth. In
     conducting its review, the Joint Board is supposed to take into account the
     significant  distinctions  among  rural  carriers,  and  between  rural and
     non-rural  carriers and consider  all options for  determining  appropriate
     universal service support.  The Company participated with the RLEC industry
     in comments to the FCC  regarding  the  potential  impact to customers  and
     RLECs in rural  America.  Total USF support  payments  are  material to the
     Company's financial results.

o    Intercarrier Compensation and Access Charge Reform: The Company is actively
     participating in the RLEC industry's  efforts to determine how intercarrier
     compensation  and access  charges  should be  modified  without  sustaining
     revenue losses for RLECs.

o    Loss of Access  Revenues  from VoIP and  wireless  usage:  The  Company  is
     experiencing  revenue  losses  as usage  transfers  from  landline  service
     provided by the Company's subsidiaries to either VoIP or wireless services.
     VoIP  traffic  currently  does not pay  access  charges  or  contribute  to
     universal service.  The FCC has several  proceedings  underway to determine
     whether  VoIP  traffic  should  contribute  for the use of the  network and
     contribute  to USF.  The  Company  is  participating  in the RLEC  industry
     efforts to have VoIP traffic  contribute for use of the underlying  network
     on which the VoIP call travels.  To offset revenue losses from  traditional
     voice services,  Interactive is installing  more broadband  services and is
     exploring how to best incorporate VoIP into its business model.

o    Intrastate revenue at our Michigan telephone company could be substantially
     reduced  in the  future  due to a state  requirement  to  expand  the local
     calling area. The Company intends to file with the state commission recover
     some or all of the revenue deficiency,  however, there is no assurance that
     it will be successful.

In  January  2002,  Interactive  spun off its  investment  in  Morgan,  its only
services subsidiary, via a tax-free dividend to its shareholders of the stock of
Morgan Group Holding Co., a corporation  that was initially formed to serve as a
holding company for Interactive's  controlling interest in Morgan.  Accordingly,
the amounts for Morgan are  reflected  on a one-line  basis in the  consolidated
financial statements as "to be distributed to shareholders."


                                      -18-
<PAGE>

Year 2004 compared to 2003

The  following is a breakdown of revenues and  operating  costs and expenses for
2004 and 2003 (in thousands):

<TABLE>
<CAPTION>


                                      ----------------     Increase
                                       2004      2003     (Decrease)
                                      ------------------------------
                                        (Unaudited)
Revenues:
<S>                                   <C>       <C>       <C>
Local access ......................   $11,851   $11,836   $    15
Interstate access .................    39,644    37,686     1,958
Intrastate access .................    15,263    15,352       (89)
Other business ....................    21,036    20,518       518
                                      -------   -------   -------
  Total ...........................    87,794    85,392     2,402
                                      -------   -------   -------

Operating Cost and Expense:
Cost of revenue ...................    29,992    29,460       532
General and administrative costs at
  operations ......................    13,800    12,693     1,107
Corporate office expenses .........     6,401     4,529     1,872
Depreciation and amortization .....    21,870    20,282     1,588
                                      -------   -------   -------
  Total ...........................    72,063    66,964     5,099
                                      -------   -------   -------
  Operating profit ................   $15,731   $18,428   $(2,697)
                                      =======   =======   =======
</TABLE>


Total  revenues  in 2004  increased  $2.4  million,  or 2.8%,  to $87.8  million
compared to $85.4 million in 2003. Local access revenue  increased by $15,000 in
2004  resulting  from  the  sale of  additional  features  and  rate  increases,
partially  offset by a 3.3%  decrease in access  lines.  The  decrease in access
lines is due to the  increase  in cell  phone  usage and  reduction  in  dial-up
internet  service.  Interstate  access  revenue  increased  $2.0 million in 2004
primarily due to infrastructure  development  undertaken in 2002 and 2003, which
entitled the Company to increased  network  access and USF support  primarily at
the Haviland Telephone Company in Kansas.  Such increase was partially offset by
the loss of a  telecommunications  transport  contract in Utah and by a one-time
NECA  adjustment to our reported rate base,  which reduced  revenue.  Intrastate
network  access revenue  decreased $0.1 million as increases  resulting from the
infrastructure  development  in  Haviland  were  offset by an  increase in local
dial-up access to the internet at our Michigan telephone company. Other business
revenues  increased $0.5 million due to increased DSL  penetration,  the sale of
telecommunications  equipment to an Iowa school district,  revenues from a small
cable company in Utah that the Company  acquired in February 2004, and partially
offset by lower revenues in the Company's security operation.

Total costs and expenses  increased  by $5.1  million to $72.1  million in 2004.
Costs of revenue  increased $0.5 million,  or 1.8%, due to additional  operating
costs related to the  infrastructure  development in Haviland,  costs related to
the sale of equipment to the Iowa school district,  costs generated by the cable
television  operation  acquired in February  2004 and  partially  offset by cost
savings in the Company's security  operation.  General and administrative  costs
incurred at the  operations  increased  $1.1 million  primarily due to increased
staffing,  increased audit and consulting  costs  resulting from  Sarbanes-Oxley
implementation,  increased advertising, and higher professional fees offset by a
$0.1 million decrease in consulting fees relating to the Kansas Commission audit
incurred in 2003.  Corporate  office expenses  increased $1.9 million  resulting
from $3.2 million of legal costs incurred  defending the "qui tam" litigation in
2004,  partially  offset by the  absence  in 2004 of a $1.6  million  management
incentive accrual recorded in 2003. Depreciation and amortization increased $1.6
million  including an increase of $0.5 million in depreciation  and $1.1 million
of amortization  expense. The increase in depreciation was primarily as a result
of the infrastructure  development at Haviland, as well as a regulatory approved
change in depreciable lives, which resulted in increased depreciation expense at
our Michigan telephone company.  The increase in amortization  resulted from the
Company's  2004 annual test of goodwill  and other  indefinite  life  intangible
assets for  impairment in accordance  with SFAS No.142.  Interactive  recorded a
$0.7 million  impairment of its investments in certain 10MHz PCS licenses in Las
Cruces,  NM and Logan,  UT.  Such  impairment  was based on a February  2005 FCC
auction  of  similar  spectrum  in which  the price  per MHz of  population  was
materially lower than the price Interactive paid for such spectrum. In addition,
$0.5  million of goodwill was  considered  to be impaired and was written off in
amortization expense.

As a result of the above,  operating profit in 2004 decreased by $2.7 million to
$15.7 million compared to 2003.

                                      -19-
<page>

EBITDA

EBITDA  represents  the Company's  earnings from  continuing  operations  before
interest,  taxes,  depreciation  and  amortization.  EBITDA is not  intended  to
represent cash flows from  operating  activities and should not be considered as
an alternative to net income or loss as an indicator of the Company's  operating
performance  or to cash  flows  as a  measure  of  liquidity,  in  each  case as
determined in accordance with generally accepted accounting  principles.  EBITDA
from operations is presented  herein because it is a commonly used metric in the
communications   industry  to  analyze  companies  on  the  basis  of  operating
performance  and  liquidity.   The  Company's  senior  management   believes  it
facilitates a standardized  comparison among companies in the telecommunications
industry,   while  minimizing   differences   among  those  companies  based  on
depreciation,  financial  leverage and tax  policies.  In addition,  Interactive
utilizes EBITDA as one of its metrics for valuing  potential  acquisitions.  The
following  table  reconciles  EBITDA to  Operating  profit and to Income  before
income taxes and minority interests (in thousands).

<TABLE>
<CAPTION>


                                                                 Increase
                                           2004       2003      (Decrease)
                                         ----------------------------------
                                                                (Unaudited)

<S>                                      <C>         <C>         <C>
EBITDA from operations ...............   $ 44,002    $ 43,239    $    763
Corporate office expenses:
  Qui Tam and SOX consulting .........      3,501          24       3,477
  Bonus accrual ......................       --         1,600      (1,600)
  Other ..............................      2,900       2,905          (5)
                                         --------    --------    --------
  Corporate office expenses: .........      6,401       4,529       1,872
                                         --------    --------    --------
  Total EBITDA .......................     37,601      38,710      (1,109)
Depreciation and amortization ........     21,870      20,282       1,588
                                         --------    --------    --------
  Operating profit ...................     15,731      18,428      (2,697)
Investment income ....................      1,289       1,120         169
Interest expenses ....................    (11,204)    (11,864)        660
Equity in earnings of affiliates .....      3,564       2,280       1,284
Gain on sale of investment in Sunshine        185       3,919      (3,734)
                                         --------    --------    --------
  Income before income taxes and         $  9,565    $ 13,883    $ (4,318)
    minority  interest
                                         ========    ========    ========
</TABLE>

Other Income (Expense)

In  2004,  investment  income  increased  by $0.2  million  primarily  due to an
increase in CoBank  patronage  refunds offset by a reduction in interest  income
due to lower interest rates.

Interest  expense  decreased  by $0.7  million  in  2004  compared  to 2003  due
primarily to lower  outstanding  borrowings  partially offset by higher interest
rates.

Equity in earnings of affiliates in 2004 increased $1.3 million compared to 2003
due to higher earnings at the Company's New Mexico cellular  investments  (RSA 3
and 5).

Income Tax Provision

The income tax provision includes federal, as well as state and local taxes. The
tax provision for the 2004 and 2003,  represent effective tax rates of 36.8% and
35.8%,  respectively.  The  difference  between  these  effective  rates and the
federal  statutory rate is principally due to state income taxes,  including the
effect of earnings  attributable to different state jurisdictions.  In addition,
in December 2004  Interactive  reversed certain tax reserves that were no longer
required.

Minority Interests

Minority  interests  decreased  earnings by $2.0 million in 2004, as compared to
$1.6 million in 2003.  The change was due to higher  earnings from the Company's
New Mexico cellular investments.

                                      -20-
<PAGE>
Net Income

Net income in 2004,  was $4.5  million,  or $1.61 per share (basic and diluted),
compared to a net income last year of $7.4  million,  or $2.64 per share  (basic
and diluted). The Company has no dilutive instruments outstanding.

Year 2003 compared to 2002

The  following  is a breakdown of revenues  and  operating  expenses for the two
years ended December 31, 2003 and 2002:

<TABLE>
<CAPTION>



                                      -----------------    Increase
                                        2003     2002     (Decrease)
                                      ------------------------------
                                         (Unaudited)
Revenues:
<S>                                   <C>       <C>           <C>
Local access ......................   $11,836   $11,890       (54)
Interstate access .................    37,686    34,830     2,856
Intrastate access .................    15,352    16,723    (1,371)
Other business ....................    20,518    20,782      (264)
                                      -------   -------   -------
  Total ...........................    85,392    84,225     1,167
                                      -------   -------   -------

Operating Cost and Expense:
Cost of revenue ...................    29,460    29,020       440
General and administrative costs at
  operations ......................    12,693    13,285      (592)
Corporate office expenses .........     4,529     3,334     1,195
Depreciation and amortization .....    20,282    19,353       929
                                      -------   -------   -------
  Total ...........................    66,964    64,992     1,972
                                      -------   -------   -------
  Operating profit ................   $18,428   $19,233      (805)
                                      =======   =======   =======
</TABLE>

Total  revenues  in 2003  increased  $1.2  million,  or 1.4%,  to $85.4  million
compared to $84.2 million in 2002. Local access revenue  decreased by $54,000 in
2003  compared  to 2002 as a 2.7%  decrease in the number of access  lines,  due
primarily to additional  DSL lines sold,  offset a 1% increase in the percentage
of  business  lines,  which  typically  generate  higher  revenues,  compared to
residential  access lines.  Interstate  revenues  increased $2.9 million in 2003
compared  to 2002  primarily  due to the effect of  infrastructure  development,
which  entitled the Company to increased  USF support  primarily at the Haviland
Telephone Co. and Central Utah Telephone Co.  ("CUT").  In addition,  interstate
access revenue  increased $0.8 million  primarily due to the recovery in revenue
of  increased  operating   expenditures,   in  accordance  with  our  ratemaking
structure,  associated with the increased infrastructure development.  Under the
rate of return model in which these companies are regulated,  further  increases
in revenue are  expected in 2004,  as the 2003  capital  expenditures  are fully
recognized  by the model.  Intrastate  revenues  decreased  $1.4 million in 2003
compared to 2002 primarily due to state  initiatives in Kansas and New York. The
Kansas  initiative  has been  fully  recognized  in the  regulatory  model,  but
additional  revenue  reductions are expected in New York of  approximately  $0.1
million  per year over the next  four  years.  Other  Business  revenues,  which
include  the  Company's  internet,  CLEC,  wireless,  long-distance,  cable  and
security  operations,  decreased $0.3 million in 2003 compared to 2002. The sale
of a wireless equipment operation in upstate New York with 2002 revenues of $0.8
million was offset by a $0.6 million  increase due to additional  subscribers in
the Company's  63.6% owned  security  business in upstate New York. In addition,
decreased revenue in long-distance  resale and other lines of business offset an
increase of $0.6 million in the Company's CLEC operations in New York.

Total costs and expenses  increased  by $2.0  million to $67.0  million in 2003.
Cost of revenue  increased $0.4 million,  or 1.5%,  due to additional  operating
costs  related  to  the  infrastructure  development  in  Haviland,   additional
bandwidth and system  maintenance costs in 2003, and a $0.8 million reduction in
costs due to the sale of a wireless  business  in upstate New York in late 2002.
General and  administrative  costs at the  operations  decreased $0.6 million in
2003 compared to 2002, primarily due to $0.9 million of bad debt expense in 2002
associated with the bankruptcies of MCI/Worldcom and Global Crossings. Corporate
costs increased $1.2 million in 2003,  primarily due to a $1.2 million  increase
in the bonus  accrual.  The Company  recorded a $1.6 million  accrual in 2003 in
accordance with a shareholder  approved management incentive program compared to
a $0.4  million  bonus  accrual  in 2002.  The gain on the sale of the  Sunshine
Preferred  Stock and warrants  resulted in $0.8 million of such  increase to the
bonus accrual.  Depreciation expense increased by $1.6 million in 2003, of which
$0.8  million was due to  increased  capital  expenditures  at one of our Kansas
operations  and $0.3  million  was due to revised  depreciation  rates that more
accurately reflect asset lives at our Michigan subsidiary.

                                      -21-
<page>
Amortization  expense  decreased by $0.7 million  during 2003,  as the Dunkirk &
Fredonia security operation increased the amortization period for its subscriber
lists from three to ten years in the fourth quarter of 2002.

As a result of the  above,  operating  profit was $18.4  million  in 2003,  $0.8
million less than the $19.2 million recorded in 2002.

EBITDA

The following table  reconciles  EBITDA to Operating profit and to Income before
income taxes, minority interests and operations of Morgan.
<TABLE>
<CAPTION>


                                                             Increase
                                     2003       2002        (Decrease)
                                     ---------------------------------
                                       (Unaudited)

<S>                                <C>         <C>         <C>
EBITDA from operations .........   $ 43,239    $ 41,920    $  1,319
Corporate office expenses:
  Qui Tam and SOX consulting ...         24         515        (491)
  Bonus accrual ................      1,600         463       1,137
  Other ........................      2,905       2,356         549
                                   --------    --------    --------
  Corporate office expenses: ...      4,529       3,334       1,195
                                   --------    --------    --------
  Total EBITDA .................     38,710      38,586         124
Depreciation and amortization ..     20,282      19,353         929
                                   --------    --------    --------
  Operating profit .............     18,428      19,233        (805)
Investment income ..............      1,120       1,765        (645)
Interest expenses ..............    (11,864)    (13,031)      1,167
Equity in earnings of affiliates      2,280       1,938         342
Other gains and losses .........      3,919        (514)      4,433
                                   --------    --------    --------
  Income before income taxes and   $ 13,883    $  9,391    $  4,492
    minority  interest
                                   ========    ========    ========
</TABLE>

Other Income (Expense)

Investment  income was $1.1 million in 2003 as compared to $1.8 million in 2002.
The decrease was  attributed to absence of interest  income  associated  with an
escrow account  securing our previously  outstanding  convertible note which was
repaid in November  2002,  interest on an IRS refund that was  recorded in 2002,
lower  realized  gain on sales of  marketable  securities  and  lower  patronage
capital income associated with our long term borrowings.

Interest  expense was $11.9  million in 2003,  as  compared to $13.0  million in
2002,  primarily  due  to  the  repayment  in  November  2002  of a $10  million
Convertible  Note.  The  company  recorded  $0.7  million  of  interest  expense
associated with the note in 2002. The remaining decrease was the result of lower
interest  rates on the  Company's  variable  rate  borrowings.  The  Company  is
considering  converting a significant  portion of its current variable  interest
rate debt to fixed interest rate debt, which would increase  interest expense in
the future, based on current interest rate levels.

On December 31, 2003,  Sunshine sold its three PCS licenses to Cingular Wireless
for $13.75  million in cash.  As part of this sale,  Interactive  received  $7.2
million in exchange for all its preferred stock in Sunshine and $0.4 million for
its warrants,  resulting in a pre-tax gain of $3.9 million.  Interactive's  cash
investment in Sunshine and its predecessor  companies,  beginning in 1995, was a
cumulative $21.9 million. In 1997 and in 1999,  Interactive  recorded impairment
losses of $7.0  million and $15.4  million,  respectively,  which  included  the
impairment of interest the Company  capitalized on these investments  during the
development of the licenses.

The Company has made loans to and has  investments in PTPMS  Communications  II,
LLC,  totaling $6.2 million.  PTPMS II acquired  wireless spectrum in an auction
conducted by the Federal  Communications  Commission  in 2000 called the 700 MHz
Guard Band  Auction.  In a FCC auction  conducted in September  2002 for similar
spectrum, called the Lower 700 MHz Band Auction, the price per MHz of population
was  materially  lower  than the  price  paid by PTPMS II in 2000.  Accordingly,
during 2002, Interactive provided for the impairment for its investment in PTPMS
II of $5.5 million ($3.6 net of income tax effects).

                                      -22-
<page>

During  2002,  the Company sold its  interest in a cellular  partnership  in New
Mexico RSA # 1 (North)  for $5.5  million  resulting  in a pre-tax  gain of $5.0
million ($2.5 million net of income tax and minority interests effect).

Equity in earning of  affiliates  increased by $0.3 million in 2003  compared to
2002  due to  higher  revenues  and  earnings  of our  investments  in  cellular
telephone affiliates in New Mexico.

Income Tax Provision

The income tax provision includes federal, as well as state and local taxes. The
tax provision in 2003 and 2002,  represent  effective tax rates of 35.8% in 2003
and 41.8% in 2002. The differences from the federal statutory rate are primarily
due to the  effects  of state  income  taxes.  In  addition,  in 2003,  no state
provision was required on the gain on sale of the investment in Sunshine and the
Company reassessed certain tax accruals.

Minority Interests

Minority  interests  decreased earnings by $1.5 million in 2003 and $1.7 million
in 2002. The gain in 2002 from the sale of New Mexico RSA #1 (North) resulted in
a $0.5 million  reduction in minority  interests in 2003 when  compared to 2002.
Such  reduction in minority  interests was offset by higher  earnings in 2003 at
several of our less than 100% owned subsidiaries.

Income from Continuing Operations

As a result of all of the  above,  income  from  continuing  operations  of $7.4
million in 2003,  or $2.65 per share  (basic  and  diluted),  increased  by $3.6
million from the $3.8 million, or $1.34 per share (basic and diluted),  recorded
in 2002.


LIQUIDITY AND CAPITAL RESOURCES

Liquidity

The debt at each of Interactive's  subsidiary companies contains restrictions on
the  amount  of  funds  that  can be  transferred  to  their  respective  parent
companies.   The  Interactive  parent  company  ("Parent  Company")  needs  cash
primarily to pay corporate  expenses,  federal income taxes and to invest in new
opportunities,  including spectrum licenses. The Parent Company receives cash to
meet  its  obligations   primarily  through   management  fees  charged  to  its
subsidiaries, a tax sharing agreement with its subsidiaries,  usage of a line of
credit facility,  and has obtained  additional  liquidity by refinancing certain
subsidiary debt. In addition,  the Parent Company considers various  alternative
long-term  financing  sources:  debt,  equity,  or sale of investments and other
assets.

The Parent Company's  short-term line of credit  facility,  which expires August
31, 2005,  has a maximum  availability  totaling $5.0  million,  $3.8 million of
which was  available  at December  31,  2004.  The  Company is pursuing  various
financing  alternatives  including a replacement  for its current line of credit
with  a  larger  business  base  renewal  of the  line  of  credit,  refinancing
substantially  all or individual  pieces of its currently  outstanding debt, and
sale of certain investments. The Company expects to obtain an additional line of
credit in the next year.  While it is management's  belief that the Company will
have adequate  resources to fund operations  over the next twelve months,  there
can be no assurance that the Company will obtain  financing on terms  acceptable
to  management.  The  obtaining  of a  replacement  line of credit is a critical
element of the Company's financing strategy.

The  Company's  RLECs  and other  businesses  need  cash to fund  their  current
operations, as well as future long-term growth initiatives.  Each RLEC and other
business  finances  its cash  needs  with cash  generated  from  operations,  by
utilizing  existing  borrowing  capacity or by entering into new long-term  debt
agreements.  New business acquisitions are generally financed with a combination
of new long-term debt,  secured by the acquired assets, as well as cash from the
Parent. While management expects that both Parent and the operating subsidiaries
will be able to obtain  adequate  financing  resources  to enable the Company to
meet its obligations, there is no assurance that such can be readily obtained or
at reasonable  costs.  The Company is obligated  under long-term debt provisions
and  lease  agreements  to make  certain  cash  payments  over  the  term of the
agreements.  The  following  table  summarizes,  as of December 31, 2004 for the
periods  shown,  these  contractual  obligations  and  certain  other  financing
commitments from banks and other financial institutions that provide liquidity:

                                      -23-
<PAGE>
<TABLE>
<CAPTION>

                                                                Payments Due by Period
                                                                    (In thousands)
                                                     Less than
                                           Total       1 year      1 - 3 years   4 - 5 years After 5 years
                                         ----------------------------------------------------------------

<S>                                      <C>          <C>          <C>          <C>          <C>
Long-term debt (a) ...................   $168,966     $ 14,364     $ 66,085     $ 35,966     $ 52,551
Operating leases .....................      1,343          283          503          248          309
Notes payable to banks ...............      4,793        4,793         --           --           --
Guarantees ...........................      3,750         --          3,750         --           --
                                         --------     --------     --------     --------     --------
Total contractual cash obligations and
  commitments ........................   $178,852     $ 19,440     $ 70,338     $ 36,214     $ 52,860
                                         ========     ========     ========     ========     ========
</TABLE>

(a)  Does not include interest payments on debt.

A subsidiary of the Company has guaranteed $3.8 million of an equity  investees'
total debt of $10.1 million.  The guarantee is in effect for the duration of the
loan  which  expires  on  December  31,  2005 and would be payable if the equity
investee fails to make such payment in accordance with the terms of the loan.

At December 31, 2004,  total debt (including  notes payable to banks) was $173.8
million,  a decrease of $5.5  million from  December  31, 2003.  At December 31,
2004, there was $106.5 million of fixed interest rate debt outstanding averaging
7.0% and $67.2 million of variable  interest rate debt averaging  5.3%. The debt
at fixed interest rates includes $39.0 million of subordinated notes at interest
rates  averaging 9.5% issued to sellers as part of  acquisitions.  The long-term
debt facilities at certain subsidiaries are secured by substantially all of such
subsidiaries  assets,  while at other  subsidiaries  it is secured by the common
stock of such  subsidiaries.  In addition,  the debt facilities  contain certain
covenants  restricting  distribution to Lynch Interactive.  At December 31, 2003
and 2004, substantially all of the subsidiaries' net assets are restricted.

Interactive  has a high degree of financial  leverage.  As of December 31, 2004,
the ratio of total debt to equity was 5.0 to 1. Certain  subsidiaries  also have
high  debt to equity  ratios.  Management  believes  that it is  currently  more
beneficial  to hold  excess  cash at certain  of our  subsidiaries  rather  than
utilizing the cash to pay-down existing credit facilities.

As of December 31, 2004,  Interactive  had current  assets of $39.4  million and
current  liabilities of $35.5 million  resulting in a working capital surplus of
$3.9 million  compared to a surplus of $7.2  million at December 31, 2003.  This
$3.3 million  reduction in the surplus was  primarily due to the receipt in 2004
of a $2.4 million  federal  income tax refund  included in the December  31,2003
balance  sheet.  In 2004,  net cash  provided by operations of $27.8 million was
used to invest in plant and  equipment,  to invest in cable  assets and to repay
debt.

Sources and Uses of Cash

Cash at December  31,  2004,  was $27.2  million,  an  increase of $0.7  million
compared to 2003. In 2004,  net cash provided by operations of $27.3 million was
used to invest in plant and equipment, to invest in cable assets and repay debt.
In 2003,  net cash  provided by  operations  of $29.1  million and $7.6  million
proceeds  from the sale of  Interactive's  investment  in Sunshine  were used to
invest in plant and  equipment  and repay debt.  In 2002,  the Company used $7.6
million  of  restricted  cash as part of the  repurchase  of  $10.5  million  of
convertible  debt. In addition,  in 2002,  Interactive  received $3.0 million of
cash  proceeds for the sale of a minority  interest in a cellular  operation and
issued $7.1 million in long-term debt.

Capital  expenditures  were $16.5 million in 2004,  $22.7  million in 2003,  and
$23.8  million  in 2002  which is  predominantly  spent at the RLECs and will be
included in their rate bases for rate setting purposes.  Capital expenditures in
2005 are expected to be approximately  $10 million,  most of which will be added
to the RLEC rate bases.

On December 31, 2003,  Sunshine sold its three PCS licenses to Cingular Wireless
for $13.75  million in cash.  As part of this sale,  Interactive  received  $7.2
million in exchange for all its preferred stock in Sunshine and $0.4 million for
its warrants. The cash proceeds were used to repay amounts outstanding under the
$10 million credit facility. As part of this transaction,  Interactive agreed to
provide an  indemnification  to  Cingular  for up to $8  million of losses  that
Cingular  might  incur  in the  event of an  adverse  ruling  in the  "qui  tam"
litigation  (see  Contingencies  below) in which  Interactive  and  Sunshine are
defendants.  Management  believes the probability  that Cingular will incur such
losses is highly remote.

The Company has initiated an effort to monetize certain of its assets, including
selling a portion or all of its investment in certain of its operating  entities
and  equity  investments.  These  initiatives  may  include  the sale of certain
telephone

                                      -24-
<page>

operations  where growth  opportunities  are not readily  apparent.  There is no
assurance  that all or any part of this program can be effectuated on acceptable
terms.

     Subsequent to the spin-off by Lynch Corporation,  the Board of Directors of
Lynch Interactive Corporation authorized the purchase of up to 100,000 shares of
common stock.  Through December 31, 2004, 67,000 shares had been purchased at an
average cost of $32.32 per share including 22,000 shares purchased in 2004 at an
average  investment of $31.05 per share.  Subsequent to year-end,  an additional
5,700 shares have been acquired at an average investment of $31.53 per share.

President  Bush's proposed  Budget for Fiscal Year 2006  establishes the process
and terms to implement  the  dissolution  of the Rural  Telephone  Bank ("RTB").
Under  RTB's  By-Laws,  on  dissolution,  the holders of its Class B and Class C
stock would be paid the par value of their stock.  As of December 31, 2004,  the
total par value of RTB Class B and Class C stock at the  Company's  subsidiaries
was $11.3 million. The net book value and tax basis of this stock, at that date,
was $1.1 million.  The  dissolution of the RTB and payments to the stock holders
is subject to numerous approvals and actions,  including  Congressional approval
of President  Bush's  proposed  Budget for Fiscal Year 2006 and actions by RTB's
Board of Directors. Therefore, the Company cannot predict whether, or when, such
payments will actually be made to the Company's subsidiaries.

Lynch Corporation, the Company's predecessor, has not paid any cash dividends on
its common stock since 1989. The Company has not paid any cash  dividends  since
its  inception  in 1999 and does not expect to pay cash  dividends on its common
stock in the foreseeable  future.  Interactive  currently  intends to retain its
earnings,  if any,  for use in its  business.  Further  financing  may  limit or
prohibit the payment of dividends.

Contingencies

False Claims Act "Qui Tam" Litigation.

Interactive and several other parties, including Interactive's CEO, and Fortunet
Communications,     L.P.,     which    was    Sunshine     PCS     Corporation's
predecessor-in-interest,  have been  named as  defendants  in a lawsuit  brought
under the so-called "qui tam"  provisions of the federal False Claims Act in the
United  States  District  Court for the District of Columbia.  The complaint was
filed under seal with the court on February 14, 2001.  At the  initiative of one
of the  defendants,  the seal was lifted on January  11,  2002.  Under the False
Claims Act, a private plaintiff,  termed a "relator," may file a civil action on
the U.S. government's behalf against another party for violation of the statute.
In  return,  the  relator  receives a  statutory  bounty  from the  government's
litigation proceeds if he is successful.

The  main  allegation  in the case is that the  defendants  participated  in the
creation  of "sham"  bidding  entities  that  allegedly  defrauded  the  federal
Treasury by improperly participating in certain FCC spectrum auctions restricted
to small  businesses,  as well as obtaining  bidding  credits in other  spectrum
auctions allocated to "small" and "very small"  businesses.  While the complaint
seeks to recover an  unspecified  amount of  damages,  which would be subject to
mandatory  trebling under the statute,  a document filed by the relator with the
Court on February 24, 2004  discloses an initial  computation  of damages of not
less than $88 million  resulting from bidding  credits awarded to the defendants
in FCC  auctions  and $120  million  of unjust  enrichment  through  the sale or
assignment of licenses obtained by the defendants in FCC auctions,  in each case
prior to  trebling.  Later  filings have  increased  this amount and the bidding
credits the  defendants  received  were  considerably  less than the $88 million
amount reported.

Interactive  strongly believes that this lawsuit is completely without merit and
that relator's  initial damage  computations  are without basis,  and intends to
defend the suit  vigorously.  The U.S.  Department  of Justice has  notified the
court that it has  declined to intervene  in the case.  Nevertheless,  we cannot
predict the ultimate  outcome of the  litigation,  nor can we predict the effect
that the lawsuit or its outcome will have on our business or plan of  operation.
Interactive  does not have any  insurance  to cover its cost of  defending  this
lawsuit,  which costs will be material.  Interactive  does have a directors  and
officers  liability  policy but the insurer has  reserved  its rights  under the
policy and, as a result,  any coverage to be provided to any director or officer
of Interactive in connection with a judgment  rendered in this action is unclear
at this time.

Interactive  was  formally  served  with  the  complaint  on July 10,  2002.  On
September  19, 2002,  the  defendants  filed two motions with the United  States
District Court for the District of Columbia: a motion to dismiss the lawsuit and
a motion  to  transfer  the  action to the  Southern  District  of New York.  On
November  25,  2002,  the  relator  filed an  opposition  reply to our motion to
dismiss and on December 5, 2002; the defendants  filed a reply in support of its
motion to  dismiss.  On  September  30,  2003,  the Court  granted our motion to
transfer  the  action  to the  Southern  District  of  New  York.  A  scheduling
conference  was held on February 10, 2004, at which time,  the judge  approved a
scheduling order and discovery commenced.

                                      -25-
<page>

On July 28,  2004,  the judge  denied in part and  granted in part the motion to
dismiss. Defendant bidding entities that did not win licenses were dismissed and
the "reverse" False Claims Act count was dismissed as redundant. Interactive and
its subsidiaries remain parties to the litigation.

In December 2004, the  defendants  filed a motion in the United States  District
Court  for the  District  of  Columbia  to  compel  the FCC to  provide  certain
information  subpoenaed  by them in order to enable  them to  conduct a defense.
This motion is still pending and discovery is continuing.

See also "Item 3. Legal  Proceedings  - History of Lynch's  C-Block  Activities"
above for a history of our involvement in Auction 5.

Other Litigation.

In addition to the litigation described above, Interactive is a party to routine
litigation incidental to its business. Based on information currently available,
Interactive  believes  that none of this  ordinary  routine  litigation,  either
individually  or in the aggregate,  will have a material effect on its financial
condition and results of operations.

Critical Accounting Policies and Estimates

The  preparation of consolidated  financial  statements  requires  Interactive's
management to make estimates and judgments  that affect the reported  amounts of
assets, liabilities, revenues and expenses, and related disclosure of contingent
assets  and  liabilities.   On  an  ongoing  basis,  Interactive  evaluates  its
estimates, including those related to revenue recognition, carrying value of its
investments  in  spectrum  entities  and  long-lived   assets,   purchase  price
allocations,  and contingencies and litigation.  Interactive bases its estimates
on historical  experience and on various other  assumptions that are believed to
be reasonable under the  circumstances,  the results of which form the basis for
making  judgments about the carrying  values of assets and liabilities  that are
not readily  apparent from other  sources.  Actual results may differ from these
estimates under different  assumptions or conditions.  Interactive  believes the
following critical accounting policies affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements.

We believe that revenue from interstate  access is based on critical  accounting
estimates  and  judgment.  Such  revenue is derived  from  settlements  with the
National Exchange Carrier Association  ("NECA").  NECA was created by the FCC to
administer  interstate access rates and revenue pooling on behalf of small local
exchange carriers who elect to participate in a pooling environment.  Interstate
settlements are determined based on the various  subsidiaries' cost of providing
interstate  telecommunications service. Interactive recognizes interstate access
revenue as services are  provided  based on an estimate of the current year cost
of  providing  service.  Estimated  revenue  is  adjusted  to  actual  upon  the
completion of cost studies in the subsequent period.

Interactive's business development strategy is to expand its existing operations
through internal growth and acquisition. From 1989 through 2001, the Company has
acquired twelve  telephone  companies.  Significant  judgments and estimates are
required to allocate the  purchase  price of  acquisitions  to the fair value of
tangible  assets  acquired and  identifiable  intangible  assets and liabilities
assumed.  Any excess  purchase  price over the above fair values is allocated to
goodwill.  Additional  judgments  and  estimates  are  required to  determine if
identified intangible assets have finite or indefinite lives.

Annually, the Company tests goodwill and other intangible assets with indefinite
lives  for  impairment.   The  Company  screens  for  potential   impairment  by
determining  fair value for each  reporting  unit. We estimate the fair value of
each  reporting  unit based on a number of subjective  factors,  including:  (a)
appropriate weighting of valuation approaches (income approach,  market approach
and  comparable  public  company  approach),  (b)  estimates  of our future cost
structure,  (c) discount  rates for our estimated  cash flows,  (d) selection of
peer group  companies for the public  company  approach,  (e) required  level of
working  capital,  (f) assumed  terminal value and (g) time horizon of cash flow
forecasts.

We  consider  the  estimate of fair value to be a critical  accounting  estimate
because (a) a potential goodwill  impairment could have a material impact on our
financial  position and results of operations and (b) the estimate is based on a
number of highly  subjective  judgments  and  assumptions,  the most critical of
which is that the regulatory  environment  will continue in its current form. In
2004, $0.5 million of goodwill was considered impaired and was charged to income
as amortization expense.

Interactive  tests its  investments  and other  long-term  non-regulated  assets
annually whenever events or changes in circumstances  indicate that the carrying
value of such assets may not be recoverable. Significant judgment is required to
determine if an  impairment  has occurred and whether such  impairment is "other
than temporary." In 2004,  Interactive recorded a $0.7 million impairment of its
investment in certain 10 MHz spectrum based on a materially lower price paid for
similar spectrum in a 2005 auction. In 2002,  Interactive  provided $5.5 million
for the  impairment  of an investment  in wireless  spectrum  purchased in 2001,
based on a materially lower price paid for similar spectrum in 2002. In 2001, we

                                      -26-
<page>

wrote down the investment in Spinnaker Industries to zero, based on our judgment
that the decline in the quoted value was "other than temporary."

The  calculation  of  depreciation  and  amortization  expense  is  based on the
estimated economic useful lives of the underlying property,  plant and equipment
and intangible  assets.  Although  Interactive  believes it is unlikely that any
significant  changes to the useful  lives of its tangible or  intangible  assets
will occur in the near term, rapid changes in technology,  the discontinuance of
accounting under SFAS No. 71 by the Company's wireline subsidiaries,  or changes
in market  conditions  could result in revisions  to such  estimates  that could
materially  affect the carrying  value of these assets and the Company's  future
consolidated operating results.

Recently Issued Accounting Pronouncements

The   Financial   Accounting   Standards   Board   ("FASB")   issued   Financial
Interpretation  No.  46,   "Consolidation  of  Variable  Interest  Entities,  an
Interpretation  of ARB No.  51"  (FIN 46) in  January  2003  and  revised  it in
December 2003 (FIN 46R). FIN 46 requires certain variable  interest  entities to
be consolidated by the primary beneficiary of the entity if the equity investors
in the  entity  do not  have  the  characteristics  of a  controlling  financial
interest or do not have sufficient  equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The provisions of FIN 46R were applicable for the first interim or annual period
ending  after  March  15,  2004  for  both new and  existing  variable  interest
entities.   Certain  less  than  50%  owned  investments  in  limited  liability
companies,  which were considered to be variable interest entities, needed to be
consolidated  as a  result  of the  implementation  of FIN  46.  The  effect  of
consolidating  such  operations  resulted in  increasing  intangible  assets and
decreasing  investments in and advances to affiliated companies by approximately
$2 million and had no other  significant  effect on the  Company's  consolidated
financial statements.

In November 2002, the Emerging Issues Task Force of the FASB reached a consensus
on  EITF  No.  00-21,   "Accounting  for  Revenue   Arrangements  with  Multiple
Deliverables"  ("EITF No.  00-21").  EITF No. 00-21 addresses how to account for
arrangements  that  may  involve  multiple  revenue-generating  activities.  The
Company adopted this guidance on January 1, 2003,  which did not have a material
effect  on  our  consolidated  results  of  operations,  consolidated  financial
position or consolidated cash flows.

In December  2003,  the SEC issued Staff  Accounting  Bulletin  ("SAB") No. 104,
"Revenue  Recognition,"  which revises or rescinds  certain  sections of SAB No.
101,  "Revenue  Recognition,"  in  order  to  make  this  interpretive  guidance
consistent with current  authoritative  accounting and auditing guidance and SEC
rules and regulations.  The changes noted in SAB No. 104 did not have a material
effect  on  the  Company's  consolidated  results  of  operations,  consolidated
financial position or consolidated cash flows.

In December  2004,  the FASB  issued  SFAS  No.153,  "Exchanges  of  Nonmonetary
Assets",  which  eliminates the exception for  nonmonetary  exchanges of similar
productive  assets and  replaces it with a general  exception  for  exchanges of
nonmonetary  assets that do not have commercial  substance.  SFAS No.153 will be
effective for nonmonetary asset exchanges  occurring in fiscal periods beginning
after June 15,  2005.  The Company  does not believe the adoption of SFAS No.153
will have a material impact on its consolidated financial statements.

In December 2004, the FASB issued SFAS No.123(R),  "Share-Based Payment",  which
establishes  standards for  transactions in which an entity exchanges its equity
instruments  for goods or services.  This  standard  requires a public entity to
measure the cost of  employee  services  received  in  exchange  for an award of
equity  instruments  based  on the  grant-date  fair  value of the  award.  This
eliminates  the exception to account for such awards using the intrinsic  method
previously  allowable under APB Opinion No.25.  SFAS No.123(R) will be effective
for interim or annual reporting periods beginning on or after June 15, 2005. The
Company is currently  evaluating  the impact of the  adoption of SFAS  No.123(R)
will have on its consolidated financial statements.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed to market risks  relating to changes in the general level
of U.S. interest rates.  Changes in interest rates affect the amount of interest
earned  on  the  Company's   cash   equivalents   and   short-term   investments
(approximately  $27.2 million at December 31, 2004 and $26.6 million at December
31,  2003).  The  majority of the  Company's  debt is fixed rate and the Company
generally  finances the acquisition of long-term  assets by borrowing on a fixed
long-term basis. The Company does not use derivative  financial  instruments for
trading or speculative  purposes.  Management  does not foresee any  significant
changes in the strategies  used to manage interest rate risk in the near future,
although the strategies may be reevaluated as market conditions  dictate.  As of
December  31,  2004,  the  fair  value of debt  was  approximately  equal to its
carrying value.

                                      -27-
<page>

At December 31, 2004 and 2003,  approximately  $67.2 million and $56.4  million,
respectively,  or 39% and 31% of Interactive's  long-term debt and notes payable
bears interest at variable rates.  Accordingly,  the Company's earnings and cash
flows are affected by changes in interest  rates.  Assuming the current level of
borrowings for variable rate debt and assuming a one percentage  point change in
the 2004 average  interest  rate under these  borrowings,  it is estimated  that
Interactive's  2004 interest  expense would have changed by  approximately  $0.7
million.  In the event of an adverse change in interest rates,  management would
likely  take  actions to further  mitigate  its  exposure.  However,  due to the
uncertainty  of the actions that would be taken and their possible  effects,  no
such  actions are  assumed.  As of December  31,  2004,  if the Company  were to
convert a  significant  portion of its  variable  interest  rate debt into fixed
interest  rates,  such conversion  could increase 2004 interest  expense by $2.0
million  assuming that variable rates remain  constant.  Further,  such analysis
does not  consider  the  effects of the change in the level of overall  economic
activity that could exist in such an environment.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

See Item 15(a).

ITEM 9.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of  disclosure  controls and  procedures.  As required by Rule 13a-15
under the Securities Exchange Act of 1934, the Company's  management carried out
an evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures as of December 31, 2004. This evaluation was carried out
under the  supervision  and with the  participation  of our principal  executive
officer as well as our  principal  financial  officer,  who  concluded  that our
disclosure controls and procedures are effective.

Disclosure  controls and procedures are controls and other  procedures  that are
designed to ensure that  information  required  to be  disclosed  in our reports
filed or submitted  under the Securities  Exchange Act are recorded,  processed,
summarized and reported, within the time periods specified in the Securities and
Exchange  Commission's  rules and  forms.  Disclosure  controls  and  procedures
include,  without  limitation,  controls and procedures  designed to ensure that
information required to be disclosed in our reports filed under the Exchange Act
are  accumulated  and  communicated  to management,  including the our principal
executive officer and the our principal  financial officer,  as appropriate,  to
allow timely decisions regarding required disclosure.

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

The  information  required  by  this  Item  10 is  included  under  the  caption
"Executive  Officers of the  Registrant" in Item 1 hereof and included under the
captions "Governance of Lynch Interactive," "Proposal 3 - Election of Directors"
and "Section 16(a) Beneficial  Ownership  Reporting  Compliance" in Registrant's
Proxy  Statement  for  its  Annual  Meeting  of  Shareholders  for  2005,  which
information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION

The  information  required  by  this  Item 11 is  included  under  the  captions
"Governance  of Lynch  Interactive  -  Compensation  of  Directors,"  "Executive
Compensation,"   "Executive   Compensation  and  Benefits  Committee  Report  on
Executive  Compensation" and "Performance Graph" in Registrant's Proxy Statement
for  its  Annual  Meeting  of  Shareholders  for  2005,  which   information  is
incorporated herein by reference.

ITEM 12.  SECURITY  OWNERSHIP OF CERTAIN  BENEFICIAL  OWNERS AND  MANAGEMENT AND
          RELATED STOCKHOLDER MATTERS

The information required by this Item 12 is included under the caption "Security
Ownership of Certain  Beneficial  Owners and  Management,"  in the  Registrant's
Proxy  Statement  for  its  Annual  Meeting  of  Shareholders  for  2005,  which
information is included herein by reference.

                                      -28-
<PAGE>

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

The  information  required  by  this  Item  13 is  included  under  the  caption
"Executive Compensation",  and "Transactions with Certain Affiliated Persons" in
the  Registrant's  Proxy  Statement for its Annual Meeting of  Shareholders  for
2005, which information is included herein by reference.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

The  information  required  by  this  Item  14 is  included  under  the  caption
"Independent  Public  Accountants" in the  Registrant's  Proxy Statement for its
Annual Meeting of Shareholders for 2005, which information is included herein by
reference.

                                     PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K

(a)(1) The  following  documents  are  filed as part of this  Form  10-K  Annual
     Report: Financial Statements:

     Reports of Independent Registered Public Accounting Firms and the following
     Financial Statements of the Company are included herein:

          Consolidated Balance Sheets - December 31, 2003 and 2004
          Consolidated Statements of Operations - Years ended December 31, 2002,
          2003 and 2004
          Consolidated Statements of Shareholders' Equity - Years ended December
          31, 2002, 2003 and 2004
          Consolidated Statements of Cash Flows - Years ended December 31, 2002,
          2003 and 2004
          Notes to Consolidated Financial Statements

(a)(2) Financial Statement Schedules:

          Schedule I - Condensed Financial Information of Registrant
          Schedule II - Valuation and Qualifying Accounts

(a)(3) Exhibits: See the Exhibit Index on pages xx through xx

All other  schedules for which  provision is made in the  applicable  accounting
regulation of the Securities and Exchange  Commission are not required under the
related instructions, or are inapplicable, and therefore have been omitted.

See Page 2 above re Forward Looking Information.

(b)  Reports on Form 8-K:

     Current Report on Form 8-K filed on November 15, 2004.

(c)  Exhibits: The following Exhibits listed in the Exhibit Index are filed with
     this Form 10-K Annual Report:

          21 Subsidiaries of Registrant

          23.1 Consent of Ernst & Young LLP

          23.2 Consent of Deloitte & Touche LLP

          23.3  Consents of Siepert & Co., L.L.P. for use of:

               -    Report of Siepert & Co., L.L.P. on the financial  statements
                    of Cuba City Telephone  Exchange  Company for the year ended
                    December 31, 2002
               -    Report of Siepert & Co., L.L.P. on the financial  statements
                    of Belmont Telephone Company for the year ended December 31,
                    2002
               -    Report of Siepert & Co., L.L.P. on the financial  statements
                    of Upper  Peninsula  Telephone  Company  for the year  ended
                    December 31, 2002

                                      -29-
<page>

          24   Powers of Attorney

          31.1 Rule 13a-14(a) Certification of the Chief Executive Officer

          31.2 Rule 13a-14(a) Certification of the Chief Financial Officer

          32.1 Section 1350 Certification of the Chief Executive Officer

          32.2 Section 1350 Certification of the Chief Financial Officer

          99.1  Reports of Independent Registered Public Accounting Firm

               -    Report of Siepert & Co., L.L.P. on the financial  statements
                    of Cuba City Telephone  Exchange  Company for the year ended
                    December 31, 2002

               -    Report of Siepert & Co., L.L.P. on the financial  statements
                    of Belmont Telephone Company for the year ended December 31,
                    2002

               -    Report of Siepert & Co., L.L.P. on the financial  statements
                    of Upper  Peninsula  Telephone  Company  for the year  ended
                    December 31, 2002

(d)  Financial Statement Schedules:  Financial Statement Schedules are listed in
     response to Item 15(a)(2)

                                      -30-
<page>

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Board of Directors and Stockholders of
Lynch Interactive Corporation
Rye, New York

     We have  audited  the  accompanying  consolidated  balance  sheets of Lynch
Interactive Corporation and subsidiaries (the "Company") as of December 31, 2004
and 2003, and the related consolidated  statements of operations,  stockholders'
equity,  and cash flows for the years then ended.  Our audit also  includes  the
2004 financial  statement schedules listed in the Index at Item 15(a) (2). These
consolidated  financial  statements  and financial  statement  schedules are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these  consolidated  financial  statements  and  financial  statement
schedules based on our audit

     We conducted our audit in accordance  with  standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements  are free of material  misstatement.  The Company is not  required to
have,  nor were we engaged to perform,  an audit of its  internal  control  over
financial reporting.  Our audits included consideration of internal control over
financial  reporting  as  a  basis  for  designing  audit  procedures  that  are
appropriate  in the  circumstances,  but not for the  purpose of  expressing  an
opinion on the  effectiveness  of the Company's  internal control over financial
reporting.  Accordingly,  we express  no such  opinion.  An audit also  includes
examining,  on a test basis,  evidence supporting the amounts and disclosures in
the  financial   statements,   assessing  the  accounting  principles  used  and
significant  estimates  made by  management,  as well as evaluating  the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for our opinion.

     In our opinion,  such consolidated  financial statements present fairly, in
all material respects,  the financial position of Lynch Interactive  Corporation
and  subsidiaries  as of December  31,  2004 and 2003,  and the results of their
operations  and their cash flows for the years  then  ended in  conformity  with
accounting principles generally accepted in the United States of America.  Also,
in our opinion,  such 2004 financial  statement  schedules,  when  considered in
relation  to the  basic  consolidated  financial  statements  taken  as a whole,
present fairly in all material respects the information set forth therein.



/s/ DELOITTE & TOUCHE LLP

New York, New York
March 31, 2005

                                      -31-

<PAGE>

             REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Shareholders of Lynch Interactive Corporation

We  have  audited  the  accompanying   consolidated  statements  of  operations,
shareholders'  equity,  and cash  flows of Lynch  Interactive  Corporation  (the
"Company") and subsidiaries for the year ended December 31, 2002. Our audit also
included  the 2002  financial  statement  schedules  listed in the index at Item
15(a).  These financial  statements and schedules are the  responsibility of the
Company's  management.  Our  responsibility  is to  express  an opinion on these
financial  statements  and  schedules  based on our audit.  We did not audit the
following:  the financial statements of Cuba City Telephone Exchange Company and
Belmont  Telephone  Company,   indirect   wholly-owned   subsidiaries  of  Lynch
Interactive  Corporation,  which statements reflect total revenues of $2,117,000
for the year ended  December 31, 2002;  and the  financial  statements  of Upper
Peninsula  Telephone  Company,  an  indirect  wholly-owned  subsidiary  of Lynch
Interactive Corporation,  which statements reflect total revenues of $10,986,000
for the year ended December 31, 2002. Those financial statements were audited by
other auditors whose reports have been furnished to us, and our opinion, insofar
as it relates to the amounts included in the consolidated  financial  statements
and financial  statement  schedules for Cuba City Telephone Exchange Company and
Belmont Telephone Company and Upper Peninsula Telephone Company, is based solely
on the reports of the other auditors.

We conducted  our audit in accordance  with the standards of the Public  Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements.  An audit also includes assessing the accounting principles used and
significant  estimates  made by  management,  as well as evaluating  the overall
financial statement  presentation.  We believe that our audit and the reports of
other auditors provide a reasonable basis for our opinion.

In our  opinion,  based on our  audit and the  reports  of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the  consolidated  results of  operations  and cash  flows of Lynch  Interactive
Corporation and subsidiaries for the year ended December 31, 2002, in conformity
with U.S. generally accepted accounting principles.  Also, in our opinion, based
on our audit and the  reports of other  auditors,  the  related  2002  financial
statement  schedules,  when  considered  in  relation  to  the  basic  financial
statements  taken  as a whole,  present  fairly  in all  material  respects  the
information set forth therein.




                                                           /s/ Ernst & Young LLP
Stamford, Connecticut
March 14, 2003

                                      -32-
<page>
<TABLE>
<CAPTION>


                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

                                                                              December 31,
                                                                        ------------------------
                                                                            2003         2004
                                                                        ------------------------

ASSETS

Current assets:
<S>                                                                      <C>          <C>
  Cash and cash equivalents ..........................................   $  26,556    $  27,214
  Receivables, less allowances of $262 and $260, respectively ........       8,183        8,225
  Material and supplies ..............................................       2,597        2,314
  Prepaid expenses and other current assets ..........................       1,272        1,685
                                                                         ---------    ---------
Total current assets .................................................      38,608       39,438

Property, plant and equipment:
  Land ...............................................................         840          983
  Buildings and improvements .........................................      13,336       17,640
  Machinery and equipment ............................................     213,939      216,429
                                                                         ---------    ---------
                                                                           228,115      235,052
  Accumulated depreciation ...........................................    (102,556)    (114,724)
                                                                         ---------    ---------
                                                                           125,559      120,328

Excess of cost over fair value of net assets acquired, net (goodwill)       60,580       60,042
Other intangibles ....................................................       8,168       10,026
Investments in and advances to affiliated entities ...................       7,223       12,340
Other assets .........................................................      12,657       14,906
                                                                         ---------    ---------

Total assets .........................................................   $ 252,795    $ 257,080
                                                                         =========    =========
</TABLE>


See accompanying Notes to Consolidated Financial Statements.

                                      -33-
<PAGE>
<TABLE>
<CAPTION>

                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)

                                                           December 31,
                                                     ------------------------
                                                         2003         2004
                                                     ------------------------

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
 <S>                                                   <C>          <C>
  Notes payable to banks ..........................   $   3,456    $   4,793
  Trade accounts payable ..........................       5,336        4,326
  Accrued interest payable ........................         697          825
  Accrued liabilities .............................       8,732       11,238
  Current maturities of long-term debt ............      13,162       14,364
                                                      ---------    ---------
     Total current liabilities ....................      31,383       35,546

Long-term debt ....................................     162,621      154,602
Deferred income taxes .............................      15,517       17,549
Other liabilities .................................       3,624        3,268
                                                      ---------    ---------
   Total liabilities ..............................     213,145      210,965

Minority interests ................................       9,763       11,543

Commitments and contingencies (Note 12)

Shareholders' equity
  Common stock, $0.0001 par value-10,000,000
     shares authorized; 2,824,766 issued; 2,779,951
     and 2,757,951 outstanding ....................        --           --
  Additional paid-in capital ......................      21,406       21,406
  Retained earnings ...............................       9,269       13,735
  Accumulated other comprehensive income ..........         686        1,588
  Treasury stock, 44,815 and 66,815 shares, at cost      (1,474)      (2,157)
                                                      ---------    ---------
                                                         29,887       34,572
                                                      ---------    ---------

Total liabilities and shareholders' equity ........   $ 252,795    $ 257,080
                                                      =========    =========

</TABLE>

See accompanying Notes to Consolidated Financial Statements.


                                      -34-
<PAGE>
<TABLE>
<CAPTION>

                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (in thousands, except per share data)

                                                                        Years Ended December 31,
                                                                   --------------------------------
                                                                     2002         2003        2004
                                                                   --------------------------------

<S>                                                                <C>          <C>         <C>
Revenues .......................................................   $ 84,225    $ 85,392     $87,794

Operating costs:
  Cost of revenue ..............................................     29,020      29,460      29,992
  General and administrative costs at operations ...............     13,285      12,693      13,800
  Unallocated corporate costs ..................................      3,334       4,529       6,401
  Depreciation and amortization ................................     19,353      20,282      21,870
                                                                   --------    --------    --------
Operating profit ...............................................     19,233      18,428      15,731

Other income (expense):
  Investment income ............................................      1,765       1,120       1,289
  Interest expense .............................................    (13,031)    (11,864)    (11,204)
  Equity in earnings of affiliated companies ...................      1,938       2,280       3,564
  Impairment of investment in spectrum license holders .........     (5,479)       --          --
  Gain on sale of investment in cellular partnership ...........      4,965        --          --
  Gain on sale of investments in Sunshine PCS ..................       --         3,919         185
                                                                   --------    --------    --------
                                                                     (9,842)     (4,545)     (6,166)
                                                                   --------    --------    --------

Income before income taxes, minority  interests, and operations
   of The Morgan Group, Inc. ("Morgan") distributed to .........      9,391      13,883       9,565
   Shareholders
Provision for income taxes .....................................     (3,924)     (4,968)     (3,078)
Minority interests .............................................     (1,706)     (1,525)     (2,021)
                                                                   --------    --------    --------

Income from continuing operations before operations of Morgan
distributed to shareholders ....................................      3,761       7,390       4,466

Loss from operations of Morgan to be distributed to shareholders
net of income taxes of $0 and minority interests of $868 .......     (1,888)       --          --
                                                                   --------    --------    --------
Net income .....................................................   $  1,873    $  7,390    $  4,466
                                                                   ========    ========    ========


Basic and diluted weighted average shares outstanding ..........      2,805       2,786       2,769
                                                                   ========    ========    ========


Basic and diluted earnings (loss) per share:

Income before operations of  Morgan to be distributed to .......   $   1.34    $   2.65    $   1.61
Shareholders
Loss from operations of Morgan distributed to Shareholders .....      (0.67)       --          --
                                                                   --------    --------    --------

Net income per share ...........................................   $   0.67    $   2.65    $   1.61
                                                                   ========    ========    ========
</TABLE>


See accompanying Notes to Consolidated Financial Statements.

                                      -35-
<PAGE>

<TABLE>
<CAPTION>

                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIAIRES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (in thousands, except share data)


                                                                                     Accumulated
                                  Shares of                                            Other
                                   Common                 Additional                   Compre-
                                    Stock      Common      Paid-in      Retained       hensive       Treasury
                                 Out-standing   Stock      Capital      Earnings       Income          Stock       Total
                                 ------------------------------------------------------------------------------------------
<S>                             <C>          <C>          <C>          <C>           <C>           <C>           <C>
Balance at December 31, 2001    2,820,051    $        0   $   21,406   $    1,800    $    1,542    $     (231)   $   24,517
Dividend of shares of Morgan
Group Holding Inc. .........         --            --           --         (1,794)         --            --          (1,794)
Net income for the period ..         --            --           --          1,873          --            --           1,873
Unrealized loss on available
for ........................         --            --           --           --            (780)         --            (780)
  sale securities, net
 Reclassification adjustment         --            --           --           --            (228)         --            (228)
                                                                                                                 ----------
    Comprehensive income ...         --            --           --           --            --            --             865
                                                                                                                 ----------
Purchase of Treasury Stock .      (27,400)         --           --           --            --            (956)         (956)
                               ----------    ----------   ----------   ----------    ----------    ----------    ----------
Balance at December 31, 2002    2,792,651             0       21,406        1,879           534        (1,187)       22,632
Net income for the period ..         --            --           --          7,390          --            --           7,390
Unrealized gain on available
for ........................         --            --           --           --             322          --             322
  sale securities, net
 Reclassification adjustment         --            --           --           --            (170)         --            (170)
                                                                                                                 ----------
    Comprehensive income ...         --            --           --           --            --            --           7,542
                                                                                                                 ----------
Purchase of Treasury Stock .      (12,700)         --           --           --            --            (287)         (287)
                               ----------    ----------   ----------   ----------    ----------    ----------    ----------
Balance at December 31, 2003    2,779,951             0      21,406         9,269           686        (1,474)       29,887
Net income for the period ..         --            --           --          4,466           --            --          4,466
Unrealized gain on available
for sale securities, net ...         --            --           --           --             902           --            902
 Reclassification adjustment         --            --           --           --             --            --             --
                                                                                                                 ----------
    Comprehensive income ...         --            --           --           --             --            --          5,368
                                                                                                                 ----------
Purchase of Treasury Stock .      (22,000)         --           --           --             --          (683)         (683)
                               ----------    ----------   ----------   ----------    ----------    ----------    ----------
Balance at December 31, 2004    2,757,951    $       0    $  21,406    $  13,735     $   1,588     $  (2,157)    $  34,572
                               ==========    ==========   ==========   ==========    ==========    ==========    ==========
</TABLE>


See accompanying  Notes to Consolidated Financial Statements.


                                      -36-
<PAGE>

<TABLE>
<CAPTION>

                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (in thousands)

                                                                              Years Ended December 31,
                                                                        ----------------------------------
                                                                           2002        2003         2004
                                                                        ----------------------------------

OPERATING ACTIVITIES
<S>                                                                      <C>         <C>         <C>
Net income ...........................................................   $  1,873    $  7,390    $  4,466
Depreciation and amortization ........................................     19,353      20,282      21,870
Minority interests ...................................................      1,706       1,525       2,021
Equity in earnings of affiliated companies ...........................     (1,938)     (2,280)     (3,564)
Provision for impairment of investment in spectrum license holders ...      5,479        --          --
Gain on sale of investment in cellular partnership ...................     (4,965)       --          --
Gain on sale of investment in Sunshine PCS ...........................       --        (3,919)       (185)
Gain on sale of securities ...........................................       (228)       (171)       --
Deferred income taxes ................................................        398       8,869       1,598
Non-cash items and changes in operating assets and liabilities
  from operations of Morgan Group Holding Co. to be distributed to
  shareholders .......................................................      1,888        --          --
Changes in operating assets and liabilities, net of effects of
  acquisitions:
    Trade accounts receivable (increase) decrease ....................      1,047         733           5
    Trade accounts payable and accrued liabilities increase (decrease)        563      (4,219)      1,779
Other ................................................................        328         893        (660)
                                                                          --------     ------    --------
Net cash provided by operating activities ............................     25,504      29,103      27,330
                                                                          --------     ------    --------

INVESTING ACTIVITIES
Acquisitions (net of debt assumed and cash
  equivalents acquired) ..............................................       --          --          (377)
Capital expenditures .................................................    (23,785)    (22,740)    (16,468)
Acquisition of subscriber lists ......................................       (301)       (372)       (305)
Investment in affiliated companies ...................................       --          --        (4,688)
Returns from spectrum partnerships ...................................        333        --          --
Acquisition of spectrum licenses .....................................     (1,121)       (617)        (49)
Proceeds from sale of cellular partnership ...........................      2,958        --          --
Proceeds from sale of investment in Sunshine PCS .....................       --         7,587         244
Proceeds from sale of securities .....................................        398         285           2
Distributions received from investments ..............................       --         1,500       1,229
Other ................................................................        516        (382)        776
                                                                         --------     -------    --------
Net cash used in investing activities ................................    (21,002)    (14,739)    (19,636)
                                                                         --------     -------    --------

FINANCING ACTIVITIES
Issuance of long-term debt ...........................................      7,087      11,772       5,973
Payments to reduce long-term debt ....................................    (21,056)    (12,610)    (13,345)
Net borrowings (payments) related to lines of credit .................      2,546      (9,426)      1,337
Purchase of Treasury stock ...........................................       (956)       (287)       (683)
Other ................................................................       --          (613)       (318)
                                                                         --------     -------    --------
Net cash used in financing activities ................................    (12,379)    (11,164)     (7,036)
                                                                         --------     -------    --------
Net increase (decrease) in cash and cash equivalents .................     (7,877)      3,200         658
Cash and cash equivalents at beginning of year .......................     31,233      23,356      26,556
                                                                         --------    -------     --------
Cash and cash equivalents at end of year .............................   $ 23,356    $ 26,556    $ 27,214
                                                                         ========    ========    ========
</TABLE>

See accompanying Notes to Consolidated Financial Statements.

                                      -37-
<PAGE>

                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 2004

1.   Accounting and Reporting Policies

Organization

Lynch Interactive  Corporation,  (the "Company" or "Interactive")  was formed on
September 1, 1999, when Lynch Corporation  ("Lynch")  distributed 100 percent of
the  outstanding  shares  of  common  stock  of  Interactive,  its  wholly-owned
subsidiary,  to the then holders of record of Lynch's common stock ("Spin-Off"),
in the form of a tax-free  distribution.  As part of the  Spin-Off,  Interactive
received  one  million  shares of common  stock of  Spinnaker  Industries,  Inc.
representing  an  approximately   13.6%  equity   ownership   interest  (and  an
approximate   2.5%  voting   interest)  and  Interactive  also  assumed  certain
short-term and long-term debt obligations of Lynch Corporation.

Interactive  and Lynch have entered into certain  agreements  governing  various
ongoing  relationships,  including the  provision of support  services and a tax
allocation  agreement.  The tax allocation agreement provides for the allocation
of  tax  attributes  to  each  company  as if it had  actually  filed  with  the
respective tax authority.

The Company's  long term debt  facilities  contain  covenants  that restrict the
distribution of cash and other net assets between  subsidiaries or to the parent
company.

In January 2002,  Interactive  spun off its interest in The Morgan  Group,  Inc.
("Morgan"),  its  only  services  subsidiary,  via a  tax-free  dividend  to its
shareholders  of the stock of Morgan Group Holding Co., a  corporation  that was
initially  formed  to serve as a  holding  company  for,  among  other  business
purposes, Interactive's controlling interest in Morgan.

Basis of Presentation

The accompanying  consolidated  financial  statements  represent the accounts of
Interactive and its majority owned  subsidiaries which primarily consists of its
telephone  (81%-100%  owned),  cable television (100% owned) and security (63.6%
owned  from  date of  acquisition  of  American  Alarm  on  November  30,  2001)
subsidiaries.  All material  intercompany  transactions  and balances  have been
eliminated.  Investments  in  affiliates  in which the  Company  does not have a
majority voting control but has the ability to significantly influence financial
and operating  policies are accounted for in accordance  with the equity method.
The Company accounts for the following  affiliated companies on the equity basis
of accounting:

     o    Coronet Communications Company (20% owned),
     o    Capital  Communications  Company, Inc. (49% of common equity owned and
          100% of convertible preferred owned, when converted, equals 50% of all
          equity),
     o    KMG Holdings Group, Inc. (37% owned from May 2004),
     o    Two cellular telephone providers in New Mexico, both 33% owned,
     o    Telecommunications  operations in North Dakota,  Iowa and New York (5%
          to 14% owned through partnerships).

The Company's telephone  subsidiaries are public utilities that are regulated by
both the Federal Communications  Commission (FCC) and various state commissions.
These  subsidiaries  follow the  accounting  prescribed by the Uniform System of
Accounts  of the  FCC and the  state  commissions  and  Statement  of  Financial
Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types
of  Regulation."  Where  applicable,  this  accounting  recognizes  the economic
effects of rate regulation by recording costs and a return on investment as such
amounts are recovered through rates authorized by regulatory authorities.

Use of Estimates/Reclassifications

The  preparation  of  consolidated   financial  statements  in  conformity  with
accounting   principles   generally  accepted  in  the  United  States  requires
management to make estimates and assumptions that effect the amounts reported in
the financial  statements and  accompanying  notes.  Actual results could differ
from  those   estimates.   Certain  prior  year  amounts  in  the   accompanying
consolidated  financial  statements have been reclassified to conform to current
year presentation.

                                      -38-
<PAGE>

Cash and Cash Equivalents

Cash  equivalents  consist of highly liquid  investment with a maturity of three
months or less when purchased.

Marketable Securities

Marketable securities, included in other assets, consist principally of publicly
traded common stocks. At December 31, 2003 and 2004, Interactive's investment in
marketable  securities,  which  had  carrying  values of $2.5  million  and $3.9
million,  respectively,  were entirely  classified as  available-for-sale.  Such
carrying values include  Interactive's 4.8% investment in Hector  Communications
(AMEX:HCT)  valued at $2.3  million and $3.6  million at  December  31, 2003 and
2004, respectively.  Available-for-sale securities are stated at fair value with
unrealized  gains or losses  included in equity as a component of  comprehensive
income (loss).  Unrealized (losses) gains on available-for-sale  securities were
($1.3 million),  ($0.4  million),  and $1.4 million for the years ended December
31, 2002, 2003 and 2004, respectively and have been included in the Consolidated
Statements of Shareholder's Equity, as "Accumulated other comprehensive income."

The  cost  of  marketable   securities   sold  is  determined  on  the  specific
identification  method.  Realized gains included in investment  income were $0.4
million,  $0.3  million and $0 million for the years ended  December  31, 2002,
2003 and 2004, respectively.

Investment income - Patronage

CoBank,  from which the Company has loans totaling $51.9 million at December 31,
2004, is a cooperative,  owned and  controlled by its  customers.  Each customer
borrowing  from the bank  shares in the  bank's net  income  through  payment of
patronage refunds.  Approximately 50% of patronage refunds are received in cash,
with the balance in CoBank  stock.  Patronage  stock is  redeemable  at its face
value for cash when the related debt is paid off. Total  patronage  refunds were
$0.6 million, $0.4 million and $0.8 million in 2002, 2003 and 2004, respectively
and were included as investment income in the Company's statement of operations.
The Company cannot predict what patronage refunds might be in future years.

Fair Value of Financial Instruments

Cash and cash equivalents,  trade accounts  receivable,  short-term  borrowings,
trade  accounts  payable  and  accrued  liabilities  are  carried  at cost which
approximates fair value due to the short-term maturity of these instruments. The
carrying amount of the Company's  borrowings  under its revolving line of credit
approximates  fair value, as the  obligations  bear interest at a floating rate.
The fair value of other long-term obligations  approximates carrying value based
on borrowing rates for similar instruments.

Accounts Receivable

Accounts  receivable  are  recorded  at the  invoiced  amount  and  do not  bear
interest.  The allowance for doubtful accounts is the Company's best estimate of
the  amount  of  probable  credit  losses  in the  Company's  existing  accounts
receivable.  The Company  establishes  an allowance for doubtful  accounts based
upon  factors  surrounding  the credit  risk of specific  customers,  historical
trends, and other information. Receivable balances are reviewed on an aged basis
and account  balances are charged off against the  allowance  after all means of
collection  have been exhausted and the potential for recovery is doubtful.  Due
to dispersed  geographic nature of the Company operations and residential nature
of its  customers,  no customer  account  for  significant  amount of  Company's
receivable  balances,  other than from the National Exchange Carrier Association
discussed below.

Property, Plant and Equipment

Property,  plant and equipment are recorded at cost and include expenditures for
additions and major  improvements  and, for our regulated  telephone  companies,
include an allowance for funds used during construction (AFUDC). Maintenance and
repairs are charged to operations as incurred.  Depreciation  of telephone plant
is  computed on the  straight-line  method  using  class or overall  group rates
acceptable to regulatory authorities.  Depreciation of non-telephone property is
computed on the  straight-line  method over the  estimated  useful  lives of the
assets.   Depreciable  lives  for  the  Company's  telephone  and  non-telephone
properties,  excluding  land,  range from 19 to 45 years for  building,  3 to 50
years for machinery  and  equipment  and 4 to 20 years for other assets.  During
2003, a Michigan  subsidiary  revised its depreciation  rates to more accurately
reflect asset lives. For income tax purposes,  accelerated  depreciation methods
are used.

                                      -39-
<page>

When a portion  of the  Company's  depreciable  property,  plant  and  equipment
relating to its telephone  operations  business is retired,  the gross  carrying
value of the assets, including cost of disposal and net of any salvage value, is
charged to accumulated  depreciation,  in accordance  with regulated  accounting
procedures.

The Company adopted SFAS No. 143 "Accounting for Asset  Retirement  obligations"
on  January  1, 2003.  This  standard  provides  accounting  guidance  for legal
obligations associated with the retirement of long-lived assets that result from
the  acquisition,  construction or development and (or) normal operation of that
asset.  According  to the  standard,  the  fair  value  of an  asset  retirement
obligation  (ARO  liability)  should be  recognized in the period in which (1) a
legal  obligation to retire a long-lived  asset exists and (2) the fair value of
the  obligation  based on  retirement  cost and  settlement  date is  reasonably
estimable.  In  accordance  with  federal  and state  regulations,  depreciation
expense for the  Company's  wireline  operations  has  historically  included an
additional  provision  for  cost of  removal.  The  additional  cost of  removal
provision does not meet the recognition  and measurement  principles of an asset
retirement  obligation under SFAS No. 143. In connection with SFAS No. 143, $1.6
million and $1.7 million at December 31, 2003 and 2004,  respectively,  for cost
of removal has been classified as a regulatory  liability  included in long term
liabilities.

Goodwill and other Intangible Assets

The Company tests goodwill and other intangible assets with indefinite lives for
impairment  using the two-step  process  prescribed in SFAS No. 142 Goodwill and
Other Intangible Assets. The first step is a screen for potential impairment, in
which we determine the fair value for each reporting  unit. We estimate the fair
value of each reporting unit based on a number of subjective factors, including:
(a)  appropriate  weighting of valuation  approaches  (income  approach,  market
approach and comparable  public company  approach),  (b) estimates of our future
cost structure,  (c) discount rates for our estimated cash flows,  (d) selection
of peer group companies for the public company  approach,  (e) required level of
working  capital,  (f) assumed  terminal value and (g) time horizon of cash flow
forecasts.

If such tests  indicate  potential  impairment,  then a second step measures the
amount of impairment,  if any. The Company performed its annual impairment tests
of  goodwill  as of October 1, 2003 and 2004 and  determined  that there were no
impairments  in 2003,  but in 2004,  $0.5  million of  goodwill  was  considered
impaired and was charged to income as amortization expense.

In addition to goodwill,  intangible  assets with  indefinite  lives  consist of
cellular  licenses,  with a carrying  value of $3.3  million and $4.9 million at
December 31, 2003 and 2004 respectively.  The increase in 2004 includes the $2.0
million effect of implementing FIN 46 in the first quarter of 2004 (See Recently
Issued Accounting Pronouncements).  At December 31, 2004, Interactive recorded a
$0.7 million  impairment of its investment in certain 10 MHz spectrum,  which is
included in amortization  expense.  This impairment was based on a February 2005
FCC auction for similar  spectrum in which the price per MHz of  population  was
materially lower than the price paid by Interactive for this spectrum.

The  Company's  subscriber  lists are generally  amortized  over a 10 to 15-year
life.  Subscriber  lists had a gross value of $8.0  million and $7.9 million and
accumulated  amortization  of $3.2 million and $3.6 million at December 31, 2003
and 2004, respectively. Amortization expense was $1.5 million, $0.7 million, and
$0.6 million for the years ended December 31, 2002,  2003 and 2004  respectively
and is estimated to be between $0.6 and $0.9 million  annually for the next five
years.

Impairment of Long-lived Assets

Long-lived  assets,  such as  property,  plant,  and  equipment,  and  purchased
intangibles subject to amortization, are reviewed for impairment whenever events
or changes in  circumstances  indicate that the carrying  amount of an asset may
not be recoverable.  Recoverability of assets to be held and used is measured by
a comparison of the carrying amount of an asset to estimated undiscounted future
cash flows expected to be generated by the asset.  If the carrying  amount of an
asset  exceeds  its  estimated  future  cash  flows,  an  impairment  charge  is
recognized  by the amount by which the carrying  amount of the asset exceeds the
fair value of the asset.  Assets to be disposed of are  reported at the lower of
the carrying amount or fair value less costs to sell, and depreciation ceases.

Revenues

Telephone service revenue is primarily derived from regulated local,  intrastate
and  interstate  access  services and is  recognized  as services are  provided.
Revenues are based upon the Company's cost for providing services.


Local access revenue comes from providing local telephone exchange services and
is billed to local end users in advance in accordance with tariffs approved by
each state's Public Utilities Commission. Such advance billings are initially
deferred and recognized as revenue when earned.

                                      -40-
<page>

Revenue  that  is  billed  in  arrears  includes  nonrecurring   intrastate  and
interstate  network  access  services,  nonrecurring  local  services  and  long
distance services. The earned but unbilled portion of this revenue is recognized
as revenue in the period that the services are provided.

Revenue  from  intrastate  access is based on tariffs  approved by each  state's
Public  Utilities  Commission.  Revenue from  interstate  access is derived from
settlements with the National  Exchange  Carrier  Association  (NECA).  NECA was
created by the FCC to administer  interstate access rates and revenue pooling on
behalf of small local  exchange  carriers who elect to  participate in a pooling
environment.  Interstate settlements, including amounts received under Universal
Service  Funds,  are  determined  based  on  the  Company's  cost  of  providing
interstate  telecommunications  service, including investments in specific types
of infrastructure and operating expenses and taxes.

Other  businesses  revenues  include the  Company's  internet,  CLEC,  wireless,
long-distance,  cable and security  operations  all of which are  recognized  as
services are provided.

Alarm system  installation  revenues,  sales revenues on equipment  upgrades and
direct incremental costs of installations and sales are deferred for residential
customers with monitoring services contracts. Revenues from monitoring contracts
are recognized in the period such services are provided.

Deferred alarm system  installation  revenues are  recognized  over the expected
life of the monitoring  contracts of the customer for residential and commercial
customers.  Deferred costs in excess of deferred revenue are recognized over the
initial  contract term,  typically three years. To the extent deferred costs are
less than or equal to  deferred  revenues,  such costs are  recognized  over the
estimated life of the customer.

Earnings (Loss) Per Share

Basic  earnings  (loss) per common share amounts are based on the average number
of common shares outstanding during each period,  excluding the dilutive effects
of options,  warrants,  and convertible  securities.  Diluted earnings per share
reflect  the  effect,  where  dilutive,  of options,  warrants  and  convertible
securities, using the treasury stock and if converted methods as applicable.

Comprehensive Income

The Company  follows the  provisions of SFAS No. 130,  "Reporting  Comprehensive
Income"  that  requires   unrealized  gains  or  losses,  net  of  tax,  on  the
Registrant's   available-for-sale  securities  to  be  included  as  a  separate
component of Shareholder Equity and in other comprehensive income (loss).

Minority Interest

The Company consolidates certain subsidiaries that are less than 100% owned. The
portion  of such  subsidiaries  not owned by the  Company  is shown as  Minority
Interests in the Consolidated Statements of Operations and Balance Sheets.

Issuance of Stock by Subsidiary and Investees

Changes  in the  Company's  equity  in a  subsidiary  or an  investee  caused by
issuances of the  subsidiary's or investees' stock are accounted for as gains or
losses where such issuance is not part of a broader reorganization.

Recently Issued Accounting Pronouncements

The   Financial   Accounting   Standards   Board   ("FASB")   issued   Financial
Interpretation  No.  46,   "Consolidation  of  Variable  Interest  Entities,  an
Interpretation  of ARB No.  51"  (FIN 46) in  January  2003  and  revised  it in
December 2003 (FIN 46R). FIN 46 requires certain variable  interest  entities to
be consolidated by the primary beneficiary of the entity if the equity investors
in the  entity  do not  have  the  characteristics  of a  controlling  financial
interest or do not have sufficient  equity at risk for the entity to finance its
activities without additional subordinated financial support from other parties.
The provisions of FIN 46R were applicable for the first interim or annual period
ending  after  March  15,  2004  for  both new and  existing  variable  interest
entities.   Certain  less  than  50%  owned  investments  in  limited  liability
companies,  which were considered to be variable interest entities, needed to be
consolidated  as a  result  of the  implementation  of FIN  46.  The  effect  of
consolidating  such  operations  resulted in  increasing  intangible  assets and
decreasing  investments in and advances to affiliated companies by approximately
$2 million and had no other  significant  effect on the  Company's  consolidated
financial statements.

                                      -41-
<page>

In November 2002, the Emerging Issues Task Force of the FASB reached a consensus
on  EITF  No.  00-21,   "Accounting  for  Revenue   Arrangements  with  Multiple
Deliverables"  ("EITF No.  00-21").  EITF No. 00-21 addresses how to account for
arrangements  that  may  involve  multiple  revenue-generating  activities.  The
Company adopted this guidance on January 1, 2003,  which did not have a material
effect  on  our  consolidated  results  of  operations,  consolidated  financial
position or consolidated cash flows.

In December  2003,  the SEC issued Staff  Accounting  Bulletin  ("SAB") No. 104,
"Revenue  Recognition,"  which revises or rescinds  certain  sections of SAB No.
101,  "Revenue  Recognition,"  in  order  to  make  this  interpretive  guidance
consistent with current  authoritative  accounting and auditing guidance and SEC
rules and regulations.  The changes noted in SAB No. 104 did not have a material
effect  on  the  Company's  consolidated  results  of  operations,  consolidated
financial position or consolidated cash flows.

In December  2004,  the FASB  issued  SFAS  No.153,  "Exchanges  of  Nonmonetary
Assets",  which  eliminates the exception for  nonmonetary  exchanges of similar
productive  assets and  replaces it with a general  exception  for  exchanges of
nonmonetary  assets that do not have commercial  substance.  SFAS No.153 will be
effective for nonmonetary asset exchanges  occurring in fiscal periods beginning
after June 15,  2005.  The Company  does not believe the adoption of SFAS No.153
will have a material impact on its consolidated financial statements.

In December 2004, the FASB issued SFAS No.123(R),  "Share-Based Payment",  which
establishes  standards for  transactions in which an entity exchanges its equity
instruments  for goods or services.  This  standard  requires a public entity to
measure the cost of  employee  services  received  in  exchange  for an award of
equity  instruments  based  on the  grant-date  fair  value of the  award.  This
eliminates  the exception to account for such awards using the intrinsic  method
previously  allowable under APB Opinion No.25.  SFAS No.123(R) will be effective
for interim or annual reporting periods beginning on or after June 15, 2005. The
Company is currently  evaluating  the impact of the  adoption of SFAS  No.123(R)
will have on its consolidated financial statements.

2.   Spin-off of Morgan

In January 2002,  Interactive  spun off its interest in The Morgan Group,  Inc.,
its only services subsidiary, via a tax-free dividend to its shareholders of the
stock of Morgan Group Holding Co., a  corporation  that was formed to serve as a
holding company for Interactive's controlling interest in The Morgan Group, Inc.
Morgan Group Holding Co. is now a public company. Accordingly, operating results
of Morgan have been  segregated  from  continuing  operations  and reported as a
separate line item in the Statements of Operations for 2002.

3.   Acquisitions

In March 2004,  the Company  signed an  agreement  to acquire  California-Oregon
Telecommunications Company ("Cal-Ore") located in Dorris, California.  Cal-Ore's
subsidiary  Cal-Ore  Telephone  Company is the incumbent  service provider for a
rural area of about 850 square miles along the Northern  California  border with
Oregon with approximately 2,500 access lines. Cal-Ore's other businesses include
an Internet service provider, a CLEC that is planning to provide services in the
surrounding area and interests in certain cellular partnerships. The acquisition
price is $21.2 million,  subject to certain closing adjustments.  In March 2005,
the  administrative  law judge for the California  Public  Utilities  Commission
issued  a  proposed  opinion  approving  the  transaction   subject  to  various
conditions.  The Company is reviewing the opinion,  which remains subject to the
approval of the Commission.

In February 2004, Central Telecom Services,  LLC, a 100% owned subsidiary of the
Company  completed the acquisition of cable television  assets at a cost of $0.4
million.  The acquisition  was accounted for a purchase,  and  accordingly,  the
assets  acquired and  liabilities  assumed  were  recorded  using a  preliminary
estimate  of fair market  values on the date of  acquisition  including  $50,000
allocated to other  intangible  assets for the  subscriber  list.  The operating
results of the acquired asset are included in the Statements of Operations  from
their  acquisition  date.  The  Company  has not  provided  pro forma  financial
information for such acquisition because it is not significant.

On April 30, 2004, the Company  acquired a 37% interest in an entity (KMG) whose
principal  asset  consist of a $6.0 million  subordinated  note and a 17% equity
interest in Lynch Telephone Corporation,  a 83% owned subsidiary of the Company.
The  remaining  63%  ownership  of KMG is held by the members or  management  of
Western New Mexico  Telephone  Company,  Inc. The Company issued a $4.5 million,
8.5%  five-year  amortizing  subordinated  note and assumed an  additional  $0.5
million note from the seller to acquire such interest.  In addition to the above
mentioned  assets,  KMG also owns a lumber  yard in  Andrews,  Texas,  and other
investments.

                                      -42-
<PAGE>

4.   Wireless Communications Services

On February 22, 2001,  Interactive spun-off to its shareholders 2,800,000 shares
of Sunshine PCS  Corporation  ("Sunshine")  Class A Common  Stock.  Sunshine was
formed just prior to the spin-off  through the merger of Sunshine  with Fortunet
Communications Limited Partnership.  Interactive converted its 49.9% partnership
interest in Fortunet into  3,000,000  shares of Class A Common Stock of Sunshine
representing 49.9% of Sunshine's common equity interest.  As part of the merger,
Interactive  exchanged $85 million of subordinated  notes of Fortunet into $16.1
million (face value) of subordinated notes in Sunshine,  Interactive's  carrying
value in these notes was $3.4 million at December 31, 2001. In addition prior to
the spin-off,  in exchange for $250,000,  Interactive  acquired 10,000 shares of
preferred  stock in Sunshine with an aggregate  liquidation  preference of $10.0
million and  warrants to purchase  4,300,000  shares of Sunshine  Class A Common
Stock at $0.75 per share.  Sunshine  owns three 15 MHz  personal  communications
services ("PCS") licenses in Tallahassee,  Panama City and Ocala, Florida, areas
covering a total population of 960,000 (based on 2000 census data). During 2002,
as part of a  rights  offering  to its  shareholders  by  Sunshine,  Interactive
acquired an additional 58,824 shares of Sunshine's Class A Common Stock at $1.00
per share.  Prior to the rights offering,  Interactive loaned Sunshine $550,000.
This amount, plus interest of $12,000,  was repaid by Sunshine with a portion of
the proceeds of the rights offering.

Also during 2002,  Interactive  exchanged  subordinated notes of Sunshine with a
principal  amount  of  $18.5  million  into  two  classes  of  preferred  stock.
Interactive received 12,500 shares of Sunshine's A-1 preferred stock which has a
total  liquidation  value of $12.5  million and 2,000 shares of  Sunshine's  A-2
convertible preferred stock which has a liquidation value of $2.0 million and is
convertible into 2.0 million shares of Sunshine Class A Common Stock.  Since the
book value of Interactive's  investment in the notes was $3.4 million, there was
no impact on the  carrying  value of the  investment  in Sunshine as a result of
this restructuring.

On December 31, 2003,  Sunshine sold its three PCS licenses to Cingular Wireless
for $13.75  million in cash.  As part of this sale,  Interactive  received  $7.2
million in exchange for all its preferred stock in Sunshine and $0.4 million for
its warrants,  resulting in a pre-tax gain of $3.9  million.  Due to the ongoing
lawsuit in which Interactive and Sunshine are defendants (see Note 12), Cingular
would not  complete  the sale  without  indemnification  from  losses that could
result  from an  adverse  ruling.  As a result,  Interactive  agreed to  provide
Cingular an  indemnification  for up to $8 million of losses that Cingular might
incur  in the  event of an  adverse  ruling.  Interactive  considers  it  highly
unlikely  that  Cingular will incur  losses,  however,  in  accordance  with the
provisions  of FIN 45,  the  Company  recorded  an  immaterial  liability  which
represented   the   Company's   best   estimate   of  the  fair  value  of  such
indemnification.

During  2000,  Interactive  invested  in  limited  liability  companies,   which
participated  in  various  auctions.  In  the  Guard  Band  auction,   PTPMS  II
Communications,  L.L.C.  acquired  three licenses at a net cost of $6.3 million;
Interactive has loans to PTPMS II of $6.1 million,  and owns 49.9% of PTPMS II's
equity.  In a FCC auction  conducted  in  September  2002 for similar  spectrum,
called  the Lower 700 MHz Band  Auction,  the  price per MHz of  population  was
materially  lower than the price paid by PTPMS II in 2000.  Accordingly,  during
2002,  Interactive provided $5.5 million for the impairment of its investment in
PTPMS II,  resulting in a net  carrying  value,  at December  31, 2002,  of $0.7
million.

At December  31, 2004 as part of the  Company's  annual test for  impairment  of
intangible  assets with indefinite  lives,  Interactive  recorded a $0.7 million
impairment of its  investments  in certain 10 MHz PCS licenses in Logan,  UT and
Las  Cruces,  NM. The  impairment  was based on a February  2005 FCC auction for
similar  spectrum in which the price per MHz of population was materially  lower
than the price paid by the Company.

5.   Investments in Affiliated Companies

Interactive has equity  investments in both broadcasting and  telecommunications
companies.


                                      -43-
<PAGE>
Summarized financial information for broadcasting companies accounted for by the
equity method as of and for the years ended December 31, is as follows:
<TABLE>
<CAPTION>

                                                   Broadcasting Combined
                                                  ---------------------
                                                     2003       2004
                                                  ---------------------
                                                     (in thousands)
<S>                                                <C>         <C>
Current assets .................................   $  5,330    $  6,896
Property, plant & equipment, intangibles & other      9,615       9,558
                                                   --------    --------

Total Assets ...................................   $ 14,945    $ 16,454
                                                   ========    ========

Current liabilities ............................   $  3,182    $  3,383
Long term liabilities ..........................     16,483      16,751
Equity .........................................     (4,720)     (3,680)
                                                   --------    --------

Total liabilities & equity .....................   $ 14,945    $ 16,454
                                                   ========    ========
</TABLE>
<TABLE>
<CAPTION>
                                         2002
                                        -------
<S>                                     <C>        <C>         <C>
Revenues ............................   $ 14,261   $ 13,155    $ 14,007
Gross profit.........................   $  4,748   $  3,167    $  4,965
Net income..........................    $    779   $   (292)   $  1,246
</TABLE>
A wholly  owned  subsidiary  of the  Company  has a 20%  investment  in  Coronet
Communications Company ("Coronet"), which operates television station WHBF-TV, a
CBS affiliate in Rock Island,  Illinois. A second wholly owned subsidiary of the
Company  has  a  49%  investment  in  Capital   Communications   Company,   Inc.
("Capital"),  which operates  television station WOI-TV, an ABC affiliate in Des
Moines,  Iowa.  At December  31, 2003 and 2004,  the  investment  in Coronet was
carried at a negative $0.8 million and a negative  $0.6  million,  respectively,
due to the subsidiary's guarantee of $3.8 million of Coronet's third party debt.
The  guarantee  is in effect  for the  duration  of the loan  which  expires  on
December 31, 2005 and would be payable if the equity investee fails to make such
payment in accordance with the terms of the loan.  Long-term debt of Coronet, at
December 31, 2004,  totaled $9.5 million payable  quarterly through December 31,
2005 to a third party lender.

At December 31, 2003 and 2004,  the  investment in Capital is carried at zero as
its share of net losses  recognized to date have exceeded its net investment and
the  Company  has no further  commitment  to Capital.  The  Company's  shares in
Capital have been pledged as security for Capital's long term debt.

Summarized financial information for telecommunications companies which includes
the  cellular  telephone   providers,   spectrum  license  holders,   and  other
telecommunication  operations  accounted  for by the equity method as of and for
the years ended December 31, is as follows:
<TABLE>
<CAPTION>
                                                   Telecommunications Combined
                                                   ----------------------------
                                                    2003         2004
                                                   ----------------------------
                                                        (in thousands)

<S>                                                <C>       <C>
Current assets .................................   $30,347   $36,080
Property, plant & equipment, intangibles & other    29,320    33,087
                                                   -------   -------

Total Assets ...................................   $59,667   $69,167
                                                   =======   =======

Current liabilities ............................   $23,086   $22,745
Long term liabilities ..........................    22,614     5,900
Equity .........................................    13,967    40,522
                                                   -------   -------

Total liabilities & equity .....................   $59,667   $69,167
                                                   =======   =======
</TABLE>
<TABLE>
<CAPTION>
                                          2002
                                         -------
<S>                                      <C>       <C>       <C>
Revenues .............................   $43,476   $47,392   $53,751
Gross profit .........................   $13,781   $16,746   $25,618
Net income ............................  $ 4,710   $12,710   $15,247
                                      -44-
</TABLE>
In January  2002,  the  Company  sold its  interest  in RSA #1 (North)  for $5.5
million ($3.0 million in cash and $2.5 million in satisfaction of a note payable
to the acquiror), and recorded a pre-tax gain of approximately $5.0 million.

Interactive owns a one-third interest in two cellular telephone providers in New
Mexico:  New Mexico RSA #3 and RSA #5. The  Company's  net  investment  in these
partnerships  was $4.6  million and $6.5  million at December 31, 2003 and 2004,
respectively and included in Investment in and Advances to Affiliates.

Undistributed  earnings of companies  accounted for using the equity method that
are included in consolidated retained earnings are $2.0 million and $3.1 million
at December 31, 2003 and 2004, respectively.

6.   Notes Payable to Banks and Long-term and Convertible Debt

Long-term  debt   represents   borrowings  by  specific   entities,   which  are
subsidiaries of Interactive.

<TABLE>
<CAPTION>
                                                                                      December 31,
                                                                                    2003          2004
                                                                                  ----------------------
                                                                                     (in thousands)
<S>                                                                               <C>         <C>
Long-term debt consists of (all interest rates are at December 31, 2003):

Rural Electrification Administration (REA) and Rural Telephone Bank (RTB) notes
payable in equal quarterly installments through 2027 at fixed interest rates
ranging from 2% to 7.5% (5.1% weighted average), secured by
assets of the telephone companies of $150 million .............................   $  59,917    $  57,129

Bank credit facilities utilized by certain telephone and telephone holding
companies through 2016, $9.4 million at fixed interest rates averaging
8.3% and $61.0 million at variable interest rates averaging 5.2% ..............      78,646       70,402

Unsecured notes issued in connection with acquisitions through 2008, all at
fixed interest rates averaging 9.75% (primarily held by management of
telephone company's) ..........................................................      34,389       38,983

Other .........................................................................       2,831        2,452
                                                                                  ---------    ---------
                                                                                    175,783      168,966
Current maturities ............................................................     (13,162)     (14,364)
                                                                                  ---------    ---------
                                                                                  $ 162,621    $ 154,602
                                                                                  =========    =========
</TABLE>

REA debt of $8.0  million  which  bears  interest  at 2% has been  reduced  by a
purchase  price  adjustment  of $1.7  million to discount the debt to an imputed
interest rate of 5%. Such  discount is being  amortized  into  interest  expense
based on the effective interest method over the remaining life of the notes.

Interactive  maintains  a  short-term  line of  credit  facility  totaling  $7.0
million,  on December 31, 2004, which was reduced to $5.0 million on January 31,
2005 and will  remain  at that  level  until it  expires  on  August  31,  2005.
Borrowings  under this  facility were zero and $1.1 million at December 31, 2003
and 2004,  respectively.  Borrowings  outstanding  under this facility and other
lines of credit are  classified  as notes  payable in the  consolidated  balance
sheet.  During 2004, the average  balance of notes payable  outstanding was $5.7
million,  the  highest  amount  outstanding  was $7.8  million  and the  average
interest rate was 4.6%.

In general,  the long-term debt facilities are secured by  substantially  all of
the Company's  property,  plant and equipment,  receivables  and common stock of
certain subsidiaries and contain certain covenants restricting  distributions to
Lynch Interactive. A subsidiary of the Company with a $3.0 million debt facility
received a waiver for a covenant violation at December 31, 2003. At December 31,
2004, the Company is in compliance with all covenants.  At December 31, 2003 and
2004,  substantially  all the  subsidiaries'  net  assets  are  restricted  from
distribution to Lynch Interactive.

The Company has a need for resources  primarily to fund future  long-term growth
initiatives.  The Company  considers  various  alternative  long-term  financing
sources:  debt, equity, or sale of an investment asset. While management expects
to obtain  adequate  financing  resources  to  enable  the  Company  to meet its
obligations,  there is no  assurance  that such can be  readily  obtained  or at
reasonable costs.

                                      -45-
<page>
Cash payments for interest were $14.0  million,  $12.0 million and $11.1 million
for the years ended  December 31,  2002,  2003 and 2004,  respectively  and $0.2
million,  $0.2 million and $0.2 million of interest was capitalized  during such
respective periods.

Aggregate  principal  maturities of long-term debt at December 31, 2004 for each
of the next five years are as follows: 2005--$14.4 million, 2006--$41.1 million,
2007--$25.0 million, 2008--$24.2 million, 2009--$11.8 million, and the remaining
$52.5 million thereafter.

7.   Related Party Transactions

Interactive  leases its  corporate  headquarters  from an affiliate of its Chief
Executive Officer ("CEO"). The lease was renewed in December 2002 for five years
and calls for an annual  payment of $103,000  including  utilities.  In 2004, an
additional $8,000 was paid due to escalation clauses.  Prior to the renewal, the
annual payment was $70,000.  In addition,  expenses  relating to  administrative
support,   transportation   (includes  charges  for  a  leased  airplane),   and
communications (approximately $104,000, $98,000 and $102,000 for the years ended
December 31, 2002, 2003 and 2004,  respectively) are paid to an affiliate of its
CEO. See Note 4 for additional references to related party transactions.

Expenditures  for legal fees that the  company is  incurring  with regard to the
Qui-tam litigation are based on allocations among defendents, and are subject to
negotiation. It is expected that the final allocation may be adjusted subject to
final conclusion of the litigation.

At December 31, 2003 and 2004, assets of $15.1 million and $15.2 million,  which
are  classified  as cash and cash  equivalents,  are  invested in United  States
Treasury  money market funds for which  affiliates of the Company's CEO serve as
investment managers to the respective funds.

In 1999,  to assist the  Company in  obtaining  the private  placement  of a $25
million  unsecured note to Cascade  Investment LLC  ("Cascade"),  the CEO of the
Company  agreed to give Cascade an option to sell the note to him at 105% of the
principal  amount thereof.  The CEO received no compensation  for providing this
option to sell. In 2001,  Cascade exercised this option to demand payment on $15
million of the notes. In November 2002,  Cascade  exercised its option to demand
payment on the  remaining  $10 million in notes and the Company paid such amount
plus the $0.5 million  premium.  During the year ended  December  31, 2002,  the
Company's total expense,  interest and fees, associated with the $10 million was
$0.7 million and of this amount $0.1 was paid to an affiliate of the CEO.

8.   Shareholder's Equity

In 1999,  Interactive's  Board of  Directors  authorized  the  purchase of up to
100,000  shares of its common stock.  Through  December 31, 2004,  67,000 shares
have been purchased at an average investment of $32.32 per share.  Subsequent to
year-end,  the Company has  purchased an  additional  5,700 shares at an average
investment of $31.53 per share.

9.   Income Taxes

Interactive  files a consolidated  income tax return with its  subsidiaries  for
federal  income tax purposes.  Certain  entities  file separate  state and local
income tax returns, while others file on a combined or consolidated basis.


Deferred  income  taxes  for  2003  and  2004  are  provided  for the  temporary
differences  between  the  financial  reporting  bases  and the tax bases of the
Company's assets and liabilities.  Cumulative temporary  differences at December
31, 2003 and 2004 are as follows:
<TABLE>
<CAPTION>

                                                     Dec. 31, 2003      Dec. 31, 2004
                                                      Deferred Tax      Deferred Tax
                                                   Asset   Liability  Asset   Liability
                                                  -------------------------------------
                                                             (in thousands)
<S>                                               <C>       <C>       <C>       <C>
Fixed assets revalued under purchase
   accounting and tax over book depreciation ..   $  --     $ 9,852   $  --     $11,029
Discount on long term debt ....................      --         550      --         488
Unrealized gains on marketable securities .....      --       1,441      --       1,827
Partnership tax losses in excess of book losses     1,863     2,274     1,863     2,669
Other reserves and accruals ...................      --       1,400      --       1,536
Other .........................................       800      --       1,216        --
                                                  -------   -------   -------   -------
    Total deferred income taxes ...............     2,663    15,517     3,079    17,549

</TABLE>
                                      -46-
<page>
<TABLE>
<CAPTION>
                                                      Dec. 31, 2003      Dec. 31, 2004
                                                      Deferred Tax      Deferred Tax
                                                   Asset   Liability  Asset   Liability
                                                  -------------------------------------
                                                             (in thousands)

<S>                                               <C>       <C>       <C>       <C>
Valuation Allowance                              $(2,663)   $   --    $ (3,079) $     --
                                                 --------   --------  --------  --------
                                                 $   --      $ 15,517 $   --    $ 17,549
                                                  ========   ========  ======== ========
</TABLE>
Due  to  uncertainty  regarding  its  realization,   a  valuation  allowance  of
approximately  $1.9 million exists against certain reserves for impairment.  The
Company  had  approximately  $16.6  million  of  state  tax net  operating  loss
carryforwards,  expiring  between 2005 and 2024. A full valuation  allowance has
been recorded against these net operating loss carryforwards.

The provision (benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>

                            2002       2003      2004
                         -----------------------------
                              (in thousands)
<S>                      <C>        <C>        <C>
Current payable taxes:
  Federal ............   $ 3,016    $(4,775)   $   831
       State and local       510        874        649
                         -------    -------    -------
                           3,526     (3,901)     1,480
Deferred taxes:
 Federal .............        15      8,529      1,470
 State and local .....       383        340        128
                         -------    -------    -------
                             398      8,869      1,598
                         -------    -------    -------
                         $ 3,924    $ 4,968    $ 3,078
                         =======    =======    =======
</TABLE>

A  reconciliation  of the  provision  (benefit)  for income taxes and the amount
computed by applying  the  statutory  federal  income tax rate to income  before
income taxes, minority interest, and operations of Morgan follows:
<TABLE>
<CAPTION>
                           2002       2003      2004
                          ---------------------------
                               (in thousands)

<S>                      <C>       <C>        <C>
Tax at statutory rate .. $ 2,963   $ 4,720    $ 2,847
Increases (decreases):
State and local taxes,
 net of federal benefit      589       801        513
Other ................       372      (553)      (282)
                         -------   -------    -------
                         $ 3,924   $ 4,968    $ 3,078
                         =======   =======    =======
</TABLE>

Net cash payments  (refunds)  for income taxes were $3.2 million,  $1.0 million,
and ($1.2) million for the three years ended  December 31, 2002,  2003 and 2004,
respectively.

10.  Accumulated Other Comprehensive Income

Balances of accumulated other  comprehensive  income, net of tax, which consists
of unrealized  gains  (losses) on available for sale  securities at December 31,
2003 and 2004 are as follows:
<TABLE>
<CAPTION>
                                           Unrealized
                                           Gain (Loss)   Tax Effect   Net
                                           -----------------------------
                                                (in thousands)
<S>                                        <C>          <C>          <C>
Balance at December 31, 2002 ...........   $   915      $  (381)     $   534
Reclassification adjustment ............      (280)         110         (170)
Change in unrealized gains (losses), net       405          (83)         322
                                           -------      -------      -------
Balance at December 31, 2003 ...........     1,040         (354)         686
Change in unrealized gains (losses), net     1,370         (468)         902
                                           -------      -------      -------
Balance at December 31, 2004 ...........   $ 2,410      $  (822)     $ 1,588
                                           =======      =======      =======
</TABLE>
                                      -47-
<page>
Reclassification  adjustment  represents  realized  gains  (losses)  on sales of
available for sale securities.

11.  Employee Benefit Plans

Interactive  maintains  several  defined  contribution  plans  at its  telephone
subsidiaries  and  corporate  office.  Interactive's  contributions  under these
plans,  which  vary  by  subsidiary,   are  based  primarily  on  the  financial
performance of  thebusiness  units and employee  compensation.  Total expense of
these plans was $1.0 million,  $1.1 million and $1.2 million for 2002,  2003 and
2004, respectively.

The Company has a Principal  Executive  Bonus Plan that has been approved by the
shareholders,  for which $0.3  million,  $1.3  million,  and $0.3  million  were
recorded in 2002, 2003, and 2004, respectively.

In addition,  three of the Company's  telephone  subsidiaries  participate  in a
multi-employer  defined  benefit  plan,  which is  administrated  by a telephone
industry  association.  Under this plan accumulated benefits and plan assets are
not  determined or allocated  separately by individual  employees.  Accordingly,
such data is not currently  available.  Total  expenses of these plans were $0.1
million for 2002 and 2003 and $0.2 million in 2004.

12.  Commitments and Contingencies

Leases.
The  Company  leases  certain  land,  buildings,  computer  equipment,  computer
software,  and network services equipment under non-cancelable  operating leases
that expire in various years through 2028. Rental expense under operating leases
was $0.3  million,  $0.5 million and $0.3  million for years ended  December 31,
2002,   2003  and  2004   respectively.   Minimum   lease   payments  due  under
non-cancelable  operating  leases at  December  31,  2004 are as  follows:  $0.3
million in 2005;  $0.3 million in 2006;  $0.2  million in 2007;  $0.1 million in
2008, $0.1 million in 2009 and $0.3 million thereafter.

Litigation.
False Claims Act "Qui Tam"  Litigation.  Interactive  and several other parties,
including  Interactive's  CEO,  and  Fortunet  Communications,  L.P.,  which was
Sunshine  PCS   Corporation's   predecessor-in-interest,   have  been  named  as
defendants  in a  lawsuit  originally  brought  under  the  so-called  "qui tam"
provisions of the federal False Claims Act in the United States  District  Court
for the District of Columbia.  The complaint was filed under seal with the court
on February 14, 2001. At the initiative of one of the  defendants,  the seal was
lifted on January 11,  2002.  Under the False  Claims Act, a private  plaintiff,
termed a  "relator,"  may file a civil  action on the U.S.  government's  behalf
against  another  party for  violation  of the statute.  In return,  the relator
receives a statutory bounty from the government's  litigation  proceeds if he is
successful.

The  main  allegation  in the case is that the  defendants  participated  in the
creation  of "sham"  bidding  entities  that  allegedly  defrauded  the  federal
Treasury  by  improperly   participating   in  certain  Federal   Communications
Commission (FCC) spectrum auctions  restricted to small  businesses,  as well as
obtaining  bidding credits in other spectrum  auctions  allocated to "small" and
"very small"  businesses.  While the complaint  seeks to recover an  unspecified
amount of  damages,  which  would be subject  to  mandatory  trebling  under the
statute,  a document  filed by the relator  with the Court on February  24, 2004
discloses  an  initial  computation  of  damages  of not less  than $88  million
resulting  from bidding  credits  awarded to the  defendants in FCC auctions and
$120 million of unjust  enrichment  through the sale or  assignment  of licenses
obtained by the  defendants  in FCC  auctions,  in each case prior to  trebling.
Later  computations  have increased this amount. As discussed below, the bidding
credits the  defendants  received  were  considerably  less than the $88 million
amount reported.

Interactive  strongly believes that this lawsuit is completely without merit and
that relator's damage  computations are without basis, and intends to defend the
suit vigorously.  The U.S.  Department of Justice has notified the court that it
has  declined to  intervene  in the case.  Nevertheless,  we cannot  predict the
ultimate  outcome  of the  litigation,  nor can we predict  the effect  that the
lawsuit  or its  outcome  will  have  on our  business  or  plan  of  operation.
Interactive  does not have any  insurance  to cover its cost of  defending  this
lawsuit,  which costs will be material.  Interactive  does have a directors  and
officers  liability  policy but the insurer has  reserved  its rights  under the
policy and, as a result,  any coverage to be provided to any director or officer
of Interactive in connection with a judgment  rendered in this action is unclear
at this time.

Interactive  was  formally  served  with  the  complaint  on July 10,  2002.  On
September  19, 2002,  the  defendants  filed two motions with the United  States
District Court for the District of Columbia: a motion to dismiss the lawsuit and
a motion  to  transfer  the  action to the  Southern  District  of New York.  On
November  25,  2002,  the  relator  filed an  opposition  reply to our motion to
dismiss and on December 5, 2002; the defendants  filed a reply in support of its
motion to  dismiss.  On  September  30,  2003,  the Court  granted our motion to
transfer  the  action  to the  Southern  District  of  New  York.  A  scheduling
conference  was held on February 10, 2004, at which time,  the judge  approved a
scheduling order and discovery commenced.
                                      -48-
<page>
On July 28, 2004, the judge denied in part and granted in part our motion to
dismiss. Defendant bidding entities that did not win licenses were dismissed and
the "reverse" false claims act count was dismissed as redundant. Interactive and
its subsidiaries remain parties to the litigation.

In December 2004, the  defendants  filed a motion in the United States  District
Court  for the  District  of  Columbia  to  compel  the FCC to  provide  certain
information  subpoenaed  by them in order to enable  them to  conduct a defense.
This motion is still  pending  and  discovery  is  continuing.  See  "History of
Lynch's "C" Block Activities" below.

Also  see  Footnote  4 -  Wireless  Communication  Services  with  regards  to a
potential indemnification obligation of the Company.

History of Lynch's "C" Block Activities.

As part of the Omnibus Budget Resolution of 1993, Congress authorized the FCC to
employ  competitive  bidding  procedures  to  select  among  mutually  exclusive
applicants for certain spectrum licenses. Initially the FCC had an initiative to
include, among others, African Americans,  Native Americans, Asian Americans and
women.  As a result of this,  the FCC  conducted  auctions  beginning in 1995 to
allocate  spectrum in a  competitive  manner.  Interactive  was a  participating
investor and/or service provider to various entities in this "C-Block" auction.

By December 18, 1995,  Interactive  (through its predecessor Lynch  Corporation)
had  investments  in five  entities  that  participated  in the FCC  auction for
broadband PCS "C" block spectrum (Auction 5). When the auction closed, on May 6,
1996,  these five  entities,  on a combined  basis,  were the higher bidders for
thirty-one  30 MHz licenses at a gross cost of $288.2  million.  These  entities
were initially put together under the FCC's initiative to include, among others,
women, African Americans,  Native Americans and Asian Americans.  As a result of
changes in these  initiatives,  these same  individuals  were qualified as small
businesses and remained eligible as bidders. These entities received $72 million
of bidding credits, and accordingly the net cost was $216.2 million. The federal
government  provided financing for 90% of the cost of these licenses,  or $194.6
million. Interactive's investments in these entities totaled $21 million.

Events during and subsequent to Auction 5, made financing these licenses through
the capital  markets much more difficult than originally  anticipated.  On April
18, 1997, among other reasons,  in order to obtain some economies of scale, such
as financing,  the five entities merged into Fortunet  Communications,  Inc. The
FCC, in partial response to actions by Nextwave and others,  promoted a plan for
refinancing  the "C" block  licenses.  In 1997, many of the license holders from
Auction 5, including Fortunet,  petitioned the FCC for relief in order to afford
these small  businesses the  opportunity to more  realistically  restructure and
build out their systems. The President of Fortunet, Karen Johnson,  participated
in an FCC sponsored  forum on this issue on June 30, 1997. The response from the
FCC,  which was  announced on September 26, 1997 and modified on March 24, 1998,
afforded  license holders four options.  One of these options was the resumption
of current debt payments,  which had been suspended earlier in 1997 for all such
license holders.  Another option,  amnesty, was to return all licenses and forgo
any amounts deposited in exchange for forgiveness of the FCC debt. Other options
included:  disaggregation,  splitting a 30 MHz license  into two 15 MHz licenses
and  forgoing 50% of the amount  deposited;  and  prepayment,  return of certain
licenses and  utilizing 70% of the amount  deposited to acquire other  licenses,
with the other 30% of the deposits to be forfeited.

On June 8, 1998,  Fortunet elected to apply its eligible credits relating to its
original  down  payment  to the  purchase  of three  licenses  for 15 MHz of PCS
spectrum in Tallahassee,  Panama City and Ocala, Florida. Consistent with an FCC
promulgated disaggregation  alternative,  Fortunet surrendered all the remaining
licenses and forfeited 30% of its original down payment in full  satisfaction of
its  government  obligations,  including  forgiveness  of all accrued  interest.
Accordingly,  Fortunet  retained 15 MHz of spectrum in the three Florida markets
covering a population  of  approximately  962,000 at a net auction cost of $15.8
million. As a result of this FCC process, disaggregation resulted in a reduction
of the bidding  credits to $5.3 million.  Fortunet also lost $6.0 million of its
down payment.  A lawyer who worked on many  applications  for FCC licenses,  Mr.
Taylor, the relator in this case, is aware of the details of these FCC initiated
alternatives  for the "C" Block, as presumably are his law firms. As a result of
this decision,  during 1997,  Interactive  recorded a $7.0 million write down of
its investment in Fortunet.

On April 15, 1999,  the FCC  completed a reauction  of all the C-Block  licenses
that were  surrendered,  including the 15 MHz of spectrum that Fortunet returned
to the FCC on June 8, 1998 in respect of the Tallahassee, Panama City and Ocala,
Florida markets. In that reauction,  the successful bidders paid a total of $2.7
million for those three 15 MHz  licenses  returned by Fortunet  versus the $15.8
million paid by Fortunet.  As a result of this auction,  Interactive  recorded a
further write down of its  investment of $15.4  million,  including  capitalized
costs, to reflect the amount bid for the similar licenses in the reauction.

In February 2000, Fortunet merged with Sunshine PCS Corporation, which by way of
a spin-off from Lynch Interactive  became a public company.  It traded under the
symbol SUNPA.

                                      -49-
<page>

On December 31, 2003,  Sunshine,  after  appropriate  corporate  and  regulatory
steps,  sold its three 15 MHz licenses to Cingular  Wireless for $13.75 million.
Interactive  received  $7.6 million as part of the sale  transaction  versus its
cash investment of $21 million initially  invested in the original five entities
in 1992.

Other Litigation.
In addition to the litigation described above, Interactive is a party to routine
litigation incidental to its business. Based on information currently available,
Interactive  believes  that none of this  ordinary  routine  litigation,  either
individually  or in the aggregate,  will have a material effect on its financial
condition and results of operations.

13.  Quarterly Results of Operations (Unaudited)
<TABLE>
<CAPTION>


                                              2003-Three Months Ended
                                        ----------------------------------------
                                         March 31 June 30   Sept. 30   Dec. 31
                                        ----------------------------------------
                                        (in thousands, except per share amounts)

<S>                                     <C>       <C>       <C>       <C>
Revenues ............................   $20,773   $20,928   $21,827   $21,864
Operating profit ....................     4,774     4,693     5,379     3,582
Net Income ..........................     1,413     1,156     1,432     3,389(a)
Basic and diluted earnings per share:   $   .51   $   .41   $   .51   $  1.22
</TABLE>
<TABLE>
<CAPTION>
                                                2004-Three Months Ended
                                         ---------------------------------------
                                         March 31  June 30  Sept. 30   Dec. 31
                                         ---------------------------------------
                                        (in thousands, except per share amounts)

<S>                                     <C>       <C>       <C>       <C>
Revenues ............................   $21,401   $21,141   $22,865   $22,387
Operating profit ....................     4,888     3,227     5,087     2,529
Net Income ..........................     1,603       384     1,542       937
Basic and diluted earnings per share:   $   .58   $   .14   $   .56   $   .33
</TABLE>


(a)  Includes a $3.9 million gain on the sale of investments in Sunshine PCS.

14.  Earnings (Loss) Per Share

Basic and dilutive  earnings per share are based on the average  weighted number
of shares  outstanding.  On December 13, 1999,  Lynch  Interactive  issued a $25
million 6%  convertible  promissory  note,  which was  convertible  into 588,235
shares of the Company's  common stock.  In January 2001, $15 million of the note
was repaid.  The remaining $10 million  convertible  note was  convertible  into
235,294 shares of the Company's common stock. In November 2002 the remaining $10
million was repaid.  This security was excluded from the calculation of dilutive
earnings  per  share  in  2002,  since  assuming   conversion  would  have  been
anti-dilutive.

15.  Segment Information

The Company is engaged in one business segment: multimedia.

16.  Subsequent Events

In February 2005,  Lynch 3G  participated in Auction 58 for PCS Spectrum and was
high bidder for two licenses,  Marquette, MI and Kalamath Falls, OR, for a total
cost of $0.5 million.

On March 18, 2005, a subsidiary of the Company,  Central Telcom  Services,  LLC,
has closed on an agreement with Precis  Communications,  LLC, to acquire a cable
television  system for a purchase  price of $3.5  million.  The system has 2,411
cable subscribers located in Sanpete and Sevier Counties, Utah.

                                      -50-

<PAGE>

ITEM 15(a)(2)
<TABLE>
<CAPTION>


           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                          LYNCH INTERACTIVE CORPORATION
                        CONDENSED STATEMENT OF OPERATIONS


                                                                     Years Ended December 31,
                                                                  ------------------------------
                                                                    2002        2003      2004
                                                                  ------------------------------
                                                                        (in thousands)
<S>                                                                <C>        <C>        <C>
Income:
 Interest and dividend income ..................................   $   326    $    12    $    15
 Gain on sale of investment in Sunshine PCS and other securities      --        3,919        185
 Equity in earnings of affiliated companies ....................      --         --           83
                                                                   -------    -------    -------
                                                                       326      3,931        283

Cost and expenses:
  Unallocated corporate administrative expense .................     1,994      3,095      4,790
  Interest expense .............................................     1,620        827        881
                                                                   -------    -------    -------
      Total cost and expenses ..................................     3,614      3,922      5,671
                                                                   -------    -------    -------

Loss before income taxes and equity in
income (loss) of subsidiaries ..................................    (3,288)         9     (5,388)

Income tax benefit .............................................     1,117         (3)     1,828
Equity in income (loss) of subsidiaries ........................     5,932      7,384      8,026
Loss from operations of Morgan - net ...........................    (1,888)      --         --
                                                                   -------    -------    -------
Net income .....................................................   $ 1,873    $ 7,390    $ 4,466
                                                                   =======    =======    =======
</TABLE>



                                      -51-
<PAGE>
<TABLE>
<CAPTION>


           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                          LYNCH INTERACTIVE CORPORATION
                            CONDENSED BALANCE SHEETS

                                                                           December 31,
                                                                        -----------------
                                                                         2003      2004
                                                                        -----------------
                                                                         (in thousands)
Assets

<S>                                                                     <C>       <C>
Current assets
   Cash and cash equivalents ........................................   $ 1,087   $   198
   Deferred income taxes ............................................        85        85
   Other current assets .............................................       194       183
                                                                        -------   -------
                                                                          1,366       466

Office equipment (net) ..............................................        18        24

Marketable securities ...............................................     2,494     3,724

Investment in affiliated companies ..................................      --       5,270

Other assets (principally investment in and advances to subsidiaries)    39,589    44,980
                                                                        -------   -------

Total assets ........................................................   $43,467   $54,464
                                                                        =======   =======

Liabilities and shareholders' equity

Current liabilities .................................................   $ 2,725   $ 4,429

Long term debt ......................................................     8,475    13,084

Deferred credits ....................................................     2,380     2,380

Total shareholders' equity ..........................................    29,887    34,570
                                                                        -------   -------

Total liabilities and shareholders' equity ..........................   $43,467   $54,464
                                                                        =======   =======
</TABLE>
                                      -52-
<PAGE>

<TABLE>
<CAPTION>

           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                          LYNCH INTERACTIVE CORPORATION
                        CONDENSED STATEMENT OF CASH FLOWS


                                                             Years Ended December 31,
                                                         -------------------------------
                                                           2002        2003       2004
                                                         -------------------------------
                                                                (in thousands)

<S>                                                     <C>         <C>         <C>
Operating activities:
  Net income ........................................   $  1,873    $  7,390    $  4,466
  Depreciation ......................................         14           4           7
  Equity in earnings of affiliated companies ........       --          --           (83)
  Gain on sale of investment in Sunshine PCS ........       --        (3,919)       (185)
  Changes in current assets and liabilities .........     (3,147)      1,683        (282)
                                                        --------    --------    --------
Cash provided by (used in) operating activities .....     (1,260)      5,158       3,923
                                                        --------    --------    --------

Investing activities:
   Investment and advances to Brighton communications      2,479      (1,891)     (5,805)
   Purchase of securities ...........................       (158)        (84)       --
   Investment in affiliates .........................       --          --        (4,688)
   Proceeds from sale of investment in Sunshine PCS .       --         7,587         244
   Capital expenditures .............................         (3)         (9)        (13)
                                                        --------    --------    --------

Net cash provided by (used in) investing activities .      2,318       5,603     (10,262)
                                                        --------    --------    --------

Financing activities:
  Net borrowings under:
    Lines of credit .................................      2,400     (10,000)      1,124
    Issuance of long term debt ......................       --           480       4,500
    Repayment of long term debt .....................    (10,000)       --          --
    Purchase of treasury stock ......................       (956)       (287)       (683)
    Other ...........................................       --          --          --
                                                        --------    --------    --------

Net cash provided by (used in) financing activities .     (8,556)     (9,807)      4,941
                                                        --------    --------    --------

Total increase (decrease) cash and cash equivalents .     (7,498)        954        (889)

Cash and cash equivalents at beginning of year ......      7,631         133       1,087
                                                        --------    --------    --------

Cash and cash equivalents at end of year ............   $    133    $  1,087    $    198
                                                        ========    ========    ========
</TABLE>


NOTES TO CONDENSED FINANCIAL STATEMENTS

Note A - Basis Of  Presentation.  The Company's  investment in  subsidiaries  is
     stated at cost plus equity in undistributed  earnings of the  subsidiaries.
     Income taxes are computed at the federal statutory rate of 34%.

Note B -No dividends were received from subsidiaries in any period.

Note C - Long-Term Debt. Interactive has a note payable to a subsidiary,  with a
     principal  amount of $8.5 million at December 31, 2004, at a fixed interest
     rate  of 6% per  annum,  due in  2005.  The  note  is  convertible,  at the
     subsidiary's  option,  into common stock of Lynch Corporation (1 share) and
     Interactive (2 shares) with a combined exercise price of $120 per share.

     In  2004,  Interactive  issued a $4.5  million  8.5%  five-year  amortizing
     subordinated  note payable and assumed an  additional  $0.5 million note in
     connection  with the  acquisition of a 37% interest in KMG. KMG's principal
     asset  consists  of a  $6.0  million  subordinated  note  and a 17%  equity
     interest in Lynch  Telephone  Corporation,  an 83% owned  subsidiary of the
     Corporation.

Note D  -  See  notes  to  consolidated   financial  statements  for  additional
     information.

Note E - Prior reporting  periods amounts have been reclassified to conform with
     current year reporting presentations.

                                      -53-
<PAGE>
<TABLE>
<CAPTION>


                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                          LYNCH INTERACTIVE CORPORATION
                  YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004


COLUMN A                                 COLUMN  B          COLUMN C - ADDITIONS    COLUMN D      COLUMN E
                                                                      CHARGED TO
DESCRIPTION                             BALANCE AT       CHARGED TO     OTHER                    BALANCE AT
                                         BEGINNING       COSTS AND     ACCOUNTS     DEDUCTIONS    END OF
                                         OF PERIOD        EXPENSES     DESCRIBE      DESCRIBE     PERIOD
                                      ---------------------------------------------------------------------

<S>                                      <C>         <C>                 <C>      <C>             <C>
Year ended December 31, 2004
Allowance for uncollectible accounts     $ 262,00    $  222,000          --       $ 224,000(A)    $   262,000

Year ended December 31, 2003
Allowance for uncollectible accounts      316,000   $  223,000           --        $  277,000(A)   $  262,000

Year ended December 31, 2002
Allowance for uncollectible accounts     $424,000   $1,037,000           --        $1,145,000(A)   $  316,000
</TABLE>


(A)  UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES.


                                      -54-
<PAGE>




                                   SIGNATURES

     Pursuant to the  requirements  of Section 13 or 15(d) of the Securities and
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

LYNCH INTERACTIVE CORPORATION


By:  /s/ Robert E. Dolan
     -------------------
        ROBERT E. DOLAN
        Chief Financial Officer (Principal
        Financial and Accounting Officer)

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

     Signature                      Capacity                           Date

/s/ Mario J. Gabelli       Chairman of the Board of               March 31, 2005
-------------------
   MARIO J. GABELLI        Directors and Chief Executive
                           Officer (Principal Executive Officer)

/s/ Morris Berkowitz       Director                               March 31, 2005
--------------------
   MORRIS BERKOWITZ

/s/ Paul J. Evanson        Director                               March 31, 2005
--------------------
   PAUL J. EVANSON

/s/ John C. Ferrara        Director                               March 31, 2005
--------------------
   JOHN C. FERRARA

/s/ Daniel R. Lee          Director                               March 31, 2005
-------------------
   DANIEL R. LEE

 /s/Lawrence R. Moats      Director                               March 31, 2005
 ------------------
LAWRENCE R. MOATS

/s/ Salvatore Muoio       Director                                March 31, 2005
-------------------
   SALVATORE MUOIO

/s/ Robert E. Dolan       Chief Financial Officer                 March 31, 2005
-------------------
   ROBERT E. DOLAN        (Principal Financial
                          and Accounting Officer)

 /s/ Robert E. Dolan
-------------------
    ROBERT E. DOLAN
    Attorney-in-fact

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<PAGE>

                                  EXHIBIT INDEX

     Exhibit No.                                                     Description
     -----------                                                     -----------

2    Separation Agreement(1)

3.1  Amended and Restated Certificate of Incorporation of Registrant (1)

3.2  Amended By-laws of Registrant(2)

4.1  Mortgage,   Security  Agreement  and  Financing  Statement  among  Haviland
     Telephone  Company,  Inc.,  the  United  States  of  America  and the Rural
     Telephone Bank(1)

4.2  Restated  Mortgage,  Security  Agreement  and Financing  Statement  between
     Western  New  Mexico  Telephone  Company,  Inc.  and the  United  States of
     America(1)

10   (a)  Partnership   Agreement  dated  March  11,  1987,   between   Lombardo
     Communications,  Inc. and Lynch Entertainment  Corporation (incorporated by
     reference  to Exhibit  10(e) of the Lynch  Corporation  ("Lynch")'s  Annual
     Report on Form 10-K for the year ended December 31, 1987).

10   (b) Lynch  Corporation  401(k) Savings Plan  (incorporated  by reference to
     Exhibit 10(b) to Lynch's Form 10-K for the year ended December 31, 1995).

10   (c)  Shareholders  Agreement among Capital  Communications  Company,  Inc.,
     Lombardo  Communications,  Inc.  and  Lynch  Entertainment  Corporation  II
     (incorporated  by reference to Exhibit 10 of Lynch's Form 8-K,  dated March
     14, 1994).

10   (d)(i) Loan  Agreement,  dated as of November  6, 1995,  between  Lynch PCS
     Corporation A and Aer Force  Communications  L.P.  (now Fortunet  Wireless,
     L.P.) (plus four similar loan  agreements  with  Fortunet  Wireless,  L.P.)
     (incorporated  by reference  to Exhibit  10(w) to Lynch's Form 10-K for the
     year ended December 31, 1995.

10   (d)(ii)  Amendment  No. 1 to the Loan  Agreement,  dated as of  November 6,
     1995, referred to in 10(d)(i) incorporated by reference to Exhibit 10(a) to
     Lynch's Form 10-Q for quarter ended March 31, 1996).

10   (e)(i)  Letter  Agreement,  dated as of August  12,  1996,  between  Rivgam
     Communicators,   L.L.P.  and  Lynch  PCS  Corporation  G  (incorporated  by
     reference  to Exhibit  10(u)(ii)  to  Lynch's  Form 10-K for the year ended
     December 31, 1996).

10   (f)(ii)  Letter  Agreement  dated as of December 16, 1998,  between  Rivgam
     Communicators,   L.L.P.  and  Lynch  PCS  Corporation  G  (incorporated  by
     reference  in Exhibit  10(u)(iv)  to  Lynch's  Form 10-K for the year ended
     December 31, 1998).

10   (f) Letter Agreement between Lynch PCS Corporation G and Bal/Rivgam, L.L.C.
     (incorporated  by reference  to Exhibit  10(x) to Lynch's Form 10-Q for the
     Quarter ended September 30, 1997).

10   (g) Letter Agreement, dated January 20, 1998, between Lynch PCS Corporation
     G and  BCK/Rivgam,  L.L.C.  (incorporated  by reference to Exhibit 10(y) to
     Lynch's Form 10-K for the year ended December 31, 1997).

10   (h) 2000 Stock  Option Plan  (incorporated  by  reference to the Exhibit to
     Registrant's Proxy Statement dated April 18, 2000).

10   (i) Lease Agreement between Lynch and Gabelli Funds, Inc.  (incorporated by
     reference to Exhibit  10(a)(a) to Lynch's  Form 10-Q for the Quarter  ended
     March 31, 1998).

10   (j) Letter  Agreement  dated  November 11,  1998,  between  Registrant  and
     Gabelli & Company,  Inc.  (incorporated by reference to Exhibit 10(c)(c) to
     Lynch Form 10-K for the year ended December 31, 1998).

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10   (l)  Agreement  and Plan of Merger dated as of May 25, 1999,  among Central
     Scott Telephone Company,  Brighton Communications  Corporation and Brighton
     Iowa Acquisition Corporation (schedules omitted) (incorporated by reference
     to Exhibit 10.1 to Lynch's Form 8-K dated July 16, 1999).

10   (m) Separation and Distribution Agreement, dated as of January 18, 2002, by
     and among Lynch Interactive  Corporation,  Morgan Group Holding Co. and The
     Morgan Group, Inc.(2)

10   (n) Agreement  for Purchase and Sale of Licenses  dated August 18, 2003, by
     and  between  Sunshine  PCS  Corporation,  Cingular  Wireless  LLC  and for
     purposes  of  Articles  X and XII,  certain  stockholders  including  Lynch
     Interactive Corporation. (3)

10   (o) Stock Purchase  Agreement by and among Lynch Telephone  Corporation XI,
     Lynch  Interactive   Corporation,   Brighton  Communications   Corporation,
     California-Oregon  Telecommunications Company ("COTC") and the Shareholders
     of COTC dated as of March 22, 2004.(3)

14.1 Lynch Interactive Corporation Code of Ethics(3)

14.2 Lynch Interactive Corporation Conflicts of Interest Policy(3)

21   Subsidiaries of Registrant+

23.1 Consent of Ernst & Young LLP+

23.2 Consent of Deloitte & Touche LLP+

23.3 Consents of Siepert & Co., L.L.P. for use of:+

     -    Report of Siepert & Co.,  L.L.P.  on the financial  statements of Cuba
          City Telephone Exchange Company for the year ended December 31, 2002
     -    Report of Siepert & Co., L.L.P. on the financial statements of Belmont
          Telephone Company for the year ended December 31, 2002
     -    Report of Siepert & Co., L.L.P.  on the financial  statements of Upper
          Peninsula Telephone Company for the year ended December 31, 2002

24   Powers of Attorney+

31.1 Rule 13a-14(a) Certification of the Chief Executive Officer+

31.2 Rule 13a-14(a) Certification of the Chief Financial Officer+

32.1 Section 1350 Certification of the Chief Executive Officer+

32.2 Section 1350 Certification of the Chief Financial Officer+

99.1 Reports of Independent Auditors+

     -    Report of Siepert & Co.,  L.L.P.  on the financial  statements of Cuba
          City Telephone Exchange Company for the year ended December 31, 2002
     -    Report of Siepert & Co., L.L.P. on the financial statements of Belmont
          Telephone Company for the year ended December 31, 2002
     -    Report of Siepert & Co., L.L.P.  on the financial  statements of Lynch
          Michigan Telephone Holding Corporation for the year ended December 31,
          2002

+    Filed herewith.

(1)  Incorporated by reference to the exhibits to the Registrant's  Registration
     Statement on Form 10A-1.

(2)  Incorporated by reference to the exhibits to the Registrant's Annual Report
     on Form 10-K for the fiscal year ended December 31, 2002.

(3)  Incorporated by reference to the exhibits to the Registrant's Annual Report
     on Form 10-K for the fiscal year ended December 31, 2003.

The Exhibits  listed above have been filed  separately  with the  Securities and
Exchange  Commission in conjunction with this Annual Report on Form 10-K or have
been  incorporated  by  reference  into this Annual  Report on Form 10-K.  Lynch
Interactive  Corporation  will furnish to each of its shareholders a copy of any
such Exhibit for a fee equal to Lynch

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Interactive  Corporation's  cost in furnishing such Exhibit.  Requests should be
addressed to the Office of the Secretary,  Lynch  Interactive  Corporation,  401
Theodore Fremd Avenue, Rye, New York 10580.


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