sec document
                                  UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

                                   FORM 10-K/A

                                 AMENDMENT NO. 2

/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
                                                  -----------------

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

                      For the transition period from ______ to ______

                         Commission file number 1-15097
                                                -------

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

         Delaware                                       06-1458056
         --------                                       ----------
   (State or other jurisdiction of                    (I.R.S. employer
   incorporation or organization)                    identification no.)

                            401 Theodore Fremd Avenue
                               Rye, New York 10580
               (Address of principal executive offices) (Zip code)

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

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

       Title of Each Class             Name of each Exchange on which Registered
       -------------------             -----------------------------------------
 Common Stock, $.0001 par value              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 Exchange 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 check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of 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 Exchange Act Rule 12b-20). Yes / / No / X /

<PAGE>

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 July 25, 2005.



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<PAGE>

EXPLANATORY NOTE

This Report on Form 10-K/A amends Lynch Interactive's Annual Report on Form 10-K
for the year ended  December 31, 2004,  initially  filed with the Securities and
Exchange  Commission on April 1, 2005 as amended by Form 10-K/A,  filed with the
Securities  and Exchange  Commission on May 2, 2005.  This Form 10-K/A  includes
Part I, Item 1, Business;  Part I, Item 7, Management's  Discussion and Analysis
of Financial  Conditions and Results of Operations;  and the Company's Financial
Statements  and  Financial  Statement  Schedules.  The  Company  has revised its
business  description  to expand several  sections,  add captions to more easily
locate certain information and add a paragraph discussing  government contracts.
Additionally,  the Company has re-named the non-GAAP financial measure,  "EBITDA
from   operations"   as   "Adjusted   Operating   Profit"  and  has  provided  a
reconciliation  to net income.  The Company has also revised its  disclosure  to
indicate  that  management  uses  Adjusted  Operating  Profit as an indicator of
operating  performance  and that it believes  this  non-GAAP  financial  measure
provides useful information to investors.

                                     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. 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 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

                                        3
<PAGE>


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.

PRINCIPAL  PRODUCTS  AND  SERVICES.  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").

PRODUCT  STATUS.  The Company is always trying to roll out new services based on
technological  advances.  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:

                                                     Years Ended December 31,
                                                  2002         2003       2004
                                           ------------- ---------- ----------
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                                   24%         24%        25%
                                           ------------ ----------- ----------
   Total multimedia revenues                      100%        100%       100%
                                           ============ =========== ==========

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<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        ACCESS
                                                  YEAR OF        LINES YR.      LINES           OWNERSHIP
                                              ACQUISITION         OF 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


                                        5
<PAGE>


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.

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.

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<PAGE>


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.  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


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<PAGE>


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.

COMPETITION.  Competition  in the  telecommunications  industry  is  increasing.
Competition in our specific wireline telecommunications markets is becoming more
significant in the areas closest to larger towns or metropolitan areas. 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.  The total  number of  competitors  is  difficult  to
estimate since many of the companies do not have a local  presence but,  instead
compete for services via the internet using Vo IP or wireless operations.

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


                                        8
<PAGE>


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.

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.

                                        9
<PAGE>


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 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.

                                       10
<PAGE>


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 $6.3  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.

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.

                                       11
<PAGE>


In July 2004,  Lynch 3G  participated in the Auction for 24 GHz Spectrum and was
high bidder for two licenses,  Buffalo - Niagara, NY and Davenport, IA - Moline,
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 Klamath 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

PATENTS,  LICENSES,  FRANCHISES.  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.

COMPLIANCE.  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.

SEASONALITY.  No portion of the business of Interactive is regarded as seasonal.
While  Interactive's  New Hampshire and Michigan  operations usage varies during
the year due to tourism and vacation homes in their areas,  this is not material
for Interactive's telephone operations as a whole.

DEPENDENCE  ON  CUSTOMERS.  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  which are
referred to as interexchange carriers (IXCs). Bankruptcy of a significant IXC or
of several  IXCs in the same  period  could have a  material  adverse  effect on
Interactive.  Interactive  cannot predict which, if any, IXCs may go bankrupt in
the future.

                                       12
<PAGE>


GOVERNMENT  CONTRACTS.  Interactive  provides  service to the  government  under
tariff  or  special  contract.   Interactive's   government  contracts  are  not
significant and it would not adversely  impact its operations if those contracts
were eliminated.

EMPLOYEES.  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.

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.


    Name                       Offices and Positions Held                  Age

Mario J. Gabelli     Chairman  and Chief  Executive  Officer  of Lynch      62
                     Interactive  since  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);      53
                     Chief  Financial  Officer  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      47
                     2003);    Vice    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        54
                     and  General   Counsel  (since   December 2004);
                     Counsel  at  LeBoeuf, Lamb, Greene & MacRae, LLP
                     (1994 to 2004).

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 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.

                                  13
<PAGE>


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 Act
          ("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


                                       14
<PAGE>


          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.

     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.

                                       15
<PAGE>


     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."

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)
<S>                                     <C>             <C>           <C>

Revenues:
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, excluding depreciation       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


                                       16
<PAGE>


from $3.2  million  of legal  costs  incurred  defending  the False  Claims  Act
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.

ADJUSTED OPERATING PROFIT

Adjusted operating profit is used by our management as a supplemental  financial
measure to evaluate the operating  performance of our business that, when viewed
with our GAAP results and the accompanying reconciliations,  we believe provides
a more complete  understanding of factors and trends affecting our business than
the GAAP results alone.  We also regularly  communicate  our adjusted  operating
profit to the public through our earnings  releases  because it is the financial
measure commonly used by analysts that cover the telecommunications industry and
our  investor  base to evaluate  our  operating  performance.  In  addition,  we
routinely  use  adjusted  operating  profit as a metric  for  valuing  potential
acquisitions.  We  understand  that  analysts and  investors  regularly  rely on
non-GAAP  financial  measures,  such as adjusted  operating profit, to provide a
financial  measure by which to compare a company's  assessment  of its operating
performance against that of other companies in the same industry.  This non-GAAP
financial  measure  is  helpful  in more  clearly  reflecting  the  sales of our
products and services,  as well as highlighting trends in our core business that
may not otherwise be apparent when relying  solely on GAAP  financial  measures,
because this non-GAAP financial measure eliminates from earnings financial items
that have less bearing on our performance.

Interactive's  management  believes  strongly  in growing  intrinsic  value as a
long-term  prescription for managing an enterprises health. Our local management
teams run their respective businesses as stand-alone,  entrepreneurial units. We
believe that  adjusted  operating  profit is the clearest  indicator of the cash
flow generating  ability and long-term  health of such units. We value potential
acquisitions on the same basis.

The term "adjusted  operating profit" as used in this Form 10-K/A refers to, for
any period,  net income (loss) before all components of "Other income (expense)"
(consisting  of  investment  income,  interest  expense,  equity in  earnings of
affiliates,  gains and losses on disposition of or impairment of assets), income
taxes,  depreciation,  amortization,  minority interests and income or loss from
discontinued operations.

Set forth below are  descriptions of the financial items that have been excluded
from net income (loss) to calculate  adjusted  operating profit and the material
limitations associated with using this non-GAAP financial measure as compared to
the use of the most directly comparable GAAP financial measure:

     o    The amount of interest expense we incur is significant and reduces the
          amount  of  funds  otherwise  available  to use in our  business  and,
          therefore, is important for investors to consider. However, management
          does not consider the amount of interest  expense when  evaluating our
          core operating performance.

     o    Investment  income is  considered  to be similar to interest  expense.
          Although it is important  for investors to consider,  management  does
          not consider the amount of investment  income when evaluating our core
          operating performance.

                                       17
<PAGE>


     o    Management does not consider  income tax expense when  considering the
          profitability  of our core  operations.  Nevertheless,  the  amount of
          taxes we are  required to pay  reduces  the amount of funds  otherwise
          available  for use in our  business  and  thus  may be  useful  for an
          investor to consider.

     o    Depreciation and amortization are important for investors to consider,
          even  though  they  are  non-cash  charges,   because  they  represent
          generally  the wear and tear on our  property,  plant  and  equipment,
          which  produce  our  revenue.  We do not  believe  these  charges  are
          indicative of our core operating performance.

     o    Income from equity investments  relates to our proportionate  share of
          income or loss from the entities in which we hold minority  interests.
          We do not control  these  entities  and,  as such,  do not believe the
          income  we  receive  from  such  entities  is  indicative  of our core
          operating performance.

     o    Minority  interest in  (income)  loss of  subsidiaries  relates to our
          minority  investors'  proportionate  share of  income or losses in our
          non-wholly owned subsidiaries, which generated non-cash charges to our
          operating  results.  Operating results  attributable to these minority
          investors' investments do not necessarily result in any actual benefit
          or detriment to us and, therefore, we believe it would be more helpful
          for an investor to exclude such items as being more  reflective of our
          core operating performance.

     o    Gain  or  losses  on  the  disposition  of  assets  or  impairment  of
          investments may increase or decrease the cash available to us and thus
          may be  important  for an  investor  to  consider.  We are  not in the
          business of  acquiring  or  disposing  of assets and,  therefore,  the
          effect  of the  dispositions  of  assets  may not be  comparable  from
          year-to-year.  We  believe  such  gains  or  losses  recorded  on  the
          disposition of an asset do not reflect the core operating  performance
          of our business.

Management  compensates for the above-described  limitations of using a non-GAAP
financial  measure by using this non-GAAP  financial  measure only to supplement
our GAAP  results to provide a more  complete  understanding  of the factors and
trends  affecting  our  business.   Adjusted  operating  profit  should  not  be
considered  to be a  substitute  for net income or (loss) as an indicator of the
Company's operating performance.

The following  table  provides the components of Adjusted  Operating  Profit and
reconciles it to net income:


                                        ---------------------------    Increase
                                              2004          2003      (Decrease)
                                        ---------------------------    ---------
Adjusted operating profit from:            $ 44,002      $ 43,239      $    763
   Operating units
   Corporate expense:
      False Claims Act litigation
         and SOX consulting                  (3,501)          (24)       (3,477)
      Bonus accrual                            --          (1,600)        1,600
      Other                                  (2,900)       (2,905)            5
                                           --------      --------      --------
      Total corporate expenses               (6,401)       (4,529)       (1,872)
                                           --------      --------      --------
Adjusted operating profit                  $ 37,601      $ 38,710      $ (1,109)
                                           ========      ========      ========



RECONCILIATION TO NET INCOME:
Adjusted operating profit                  $ 37,601      $ 38,710      $ (1,109)
Depreciation and amortization               (21,870)      (20,282)       (1,588)
Investment income                             1,289         1,120           169
Interest expense                            (11,204)      (11,864)          660
Equity in income of affiliates                3,564         2,280         1,284
Gains/ losses/ impairments, net                 185         3,919        (3,734)
Income tax                                   (3,078)       (4,968)        1,890
Minority interests                           (2,021)       (1,525)         (496)
                                           --------      --------      --------
Net income                                 $  4,466      $  7,390      $ (2,924)
                                           ========      ========      ========


                                       18
<PAGE>


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.


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.

                                       19
<PAGE>



YEAR 2003 COMPARED TO 2002

The  following is a breakdown of revenues and  operating  costs and expenses for
2003 and 2002:

                                          ---------------------   Increase
                                             2003       2002     (Decrease)
                                          ---------------------------------
                                                  (Unaudited)
Revenues:
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, excluding depreciation,    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)
                                          ========    ========        ====


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.

                                       20
<PAGE>


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.  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.

ADJUSTED OPERATING PROFIT

The following  table  provides the components of Adjusted  Operating  Profit and
reconciles it to net income:


                                     ----------------------      Increase
                                         2003       2002        (Decrease)
                                     ----------------------   ------------
Adjusted operating profit from:
   Operating units                    $ 43,239    $ 41,920    $  1,319
   Corporate expense:
      False Claims Act litigation
        and SOX consulting                 (24)       (515)        491
      Bonus accrual                     (1,600)       (463)     (1,137)
      Other                             (2,905)     (2,356)       (549)
                                      --------    --------    --------
      Total corporate expenses          (4,529)     (3,334)     (1,195)
                                      --------    --------    --------
Adjusted operating profit             $ 38,710    $ 38,586    $    124
                                      ========    ========    ========


Reconciliation to net income:
Adjusted operating profit             $ 38,710    $ 38,586    $    124
Depreciation and amortization          (20,282)    (19,353)       (929)
Investment income                        1,120       1,765        (645)
Interest expense                       (11,864)    (13,031)      1,167
Equity in income of affiliates           2,280       1,938         342
Gains/losses/impairments, net            3,919        (514)      4,433
Income tax                              (4,968)     (3,924)     (1,044)
Minority Interests                      (1,525)     (1,706)        181
                                      --------    --------    --------
Loss from Morgan (discontinued)              -      (1,888)      1,888
Net income                            $  7,390    $  1,873    $  5,517
                                      ========    ========    ========


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.

                                       21
<PAGE>


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).

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


                                       22
<PAGE>


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:

<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
                                                 ============================================================================

(a) Does not include interest payments on debt.
</TABLE>


                                       23
<PAGE>




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.

                                       24
<PAGE>


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 False Claims Act
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 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 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.

                                       25
<PAGE>


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.

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  was denied in May 2005 and the  defendants  have filed a notice of
appeal with the United States Court of Appeals for the D.C. Circuit.

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.

                                       26
<PAGE>


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
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.

                                       27
<PAGE>


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.




                                       28
<PAGE>




ITEM 15.  EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)       The  following  documents are filed as part of this Form 10-K/A 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

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

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.

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

         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



                                       29
<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 audits.

            We conducted our audits 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  audits  provide  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 and 2003 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




                                       30
<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



                                       31
<PAGE>




                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

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

ASSETS
<S>                                                                   <C>          <C>

Current assets:
   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.



                                       32
<PAGE>




                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>

                                                                December 31,
                                                       ----------------------------
                                                           2003              2004
                                                       ----------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
<S>                                                   <C>               <C>

Current liabilities:
   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.



                                       33
<PAGE>




                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>

                                                                       Years Ended December 31,
                                                           -----------------------------------------------
                                                              2002               2003               2004
                                                           -----------------------------------------------
<S>                                                       <C>                <C>                <C>

Revenues                                                   $ 84,225           $ 85,392           $ 87,794

Operating costs:
   Cost of revenue, excluding depreciation                   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           9,391             13,883              9,565
  operations of The Morgan Group, Inc. ("Morgan")
  distributed to 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           3,761              7,390              4,466
  of Morgan distributed to shareholders

Loss from operations of Morgan to be distributed to          (1,888)              --                   --
  shareholders net of income taxes of $0 and minority
  interests of $868
                                                           -----------------------------------------------
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                 (0.67)              --                   --
  Shareholders
                                                           -----------------------------------------------

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


SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.



                                       34
<PAGE>


                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIAIRES
                 CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>

                                       Shares of                                            Accumulated
                                         Common                  Additional                   Other
                                       Stock Out-      Common     Paid-in      Retained    Comprehensive     Treasury
                                        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            --           --           --       (1,794)           --            --        (1,794)
Holding Inc.
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 sale         --           --           --           --           322            --           322
  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         --           --           --           --           902            --           902
  securities, net
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.




                                       35
<PAGE>




                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>

                                                                                     Years Ended December 31,
                                                                               ----------------------------------
                                                                                  2002        2003        2004
                                                                               ----------------------------------
<S>                                                                           <C>         <C>         <C>

OPERATING ACTIVITIES
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               1,888        --          --
 operations of Morgan Group Holding Co. to be distributed to shareholders
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.


                                       36
<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.

                                       37
<PAGE>


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.

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 $-- 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


                                       38
<PAGE>


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.

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.

                                       39
<PAGE>


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.

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.

                                       40
<PAGE>


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.

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.



                                       41
<PAGE>


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.

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.

                                       42
<PAGE>


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.

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>                 <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
                                                                      =================================

                                                     2002
                                                 -----------------
Revenues                                          $   14,261          $   13,155          $    14,007
Gross profit                                      $    4,748          $    3,167          $     4,965
Net income                                        $      779          $     (292)         $     1,246

</TABLE>


                                       43
<PAGE>


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>             <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
                                                                                =============================
                                                                      2002
                                                               ---------------
Revenues                                                        $    43,476      $   47,392      $    53,751
Gross profit                                                    $    13,781      $   16,746      $    25,618
Net income                                                      $     4,710      $   12,710      $    15,247

</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.

                                       44
<PAGE>

<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                   $   59,917         $    57,129
(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

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.

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.

                                       45
<PAGE>


Expenditures  for fees that the  Company is  incurring  with regard to the False
Claims Act litigation are based on allocations among defendants, 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>

                                                                 2003 Deferred Tax                          2004 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

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.

                                       46
<PAGE>


The provision (benefit) for income taxes is summarized as follows:

                                    2002             2003            2004
                              ---------------------------------------------
                                              (In Thousands)
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
                              =============================================


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>


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 the business 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.

                                       47
<PAGE>


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 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.

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.

                                       48
<PAGE>


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  was denied in May 2005 and the  defendants  have filed a notice of
appeal  with the  United  States  Court of  Appeals  for the D.C.  Circuit.  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.

                                       49
<PAGE>


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 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

                                                                          2004-Three Months Ended
                                              ----------------------------------------------------------------------
                                                  March 31               June 30        Sept. 30             Dec. 31
                                              ----------------------------------------------------------------------
                                                                 (In Thousands, Except Per Share Amounts)

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 Klamath 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>





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

<TABLE>
<CAPTION>

                                                                                     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>




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

<TABLE>
<CAPTION>

                                                                                            December 31,
                                                                                  ----------------------------
                                                                                        2003            2004
                                                                                  ----------------------------
                                                                                           (In Thousands)
<S>                                                                             <C>             <C>

Assets

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         $4,430

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>



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


<TABLE>
<CAPTION>

                                                                            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            5,009
      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)           5,450
                                                               ----------------------------------------------

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>




                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                          LYNCH INTERACTIVE CORPORATION
                  YEARS ENDED DECEMBER 31, 2002, 2003 AND 2004
<TABLE>
<CAPTION>


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

Year ended December 31, 2004 Allowance for
uncollectible accounts                                     $  262,000       $  222,000       --       $  224,000(A)       $  260,000

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>




                                  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).



                                       55
<PAGE>


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


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).

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(4)

23.1        Consent of Ernst  & Young LLP(4)

23.2        Consent of Deloitte  & Touche LLP(4)

23.3        Consents of Siepert  & Co., L.L.P. for use of:(4)
               -  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(4)

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+




                                       56
<PAGE>


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

99.1          Reports of Independent Auditors(4)
                 -  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.

(4) Incorporated by reference to the exhibits to the Registrant's  Annual Report
on Form 10-K for the fiscal year ended December 31, 2004.


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  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.





                                       57
<PAGE>




                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
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


Dated:  September 7, 2005


Signature                 Capacity                           Date

/s/ Mario J. Gabelli      Chairman of the Board of Officer   September 7, 2005
--------------------      (Principal Executive Officer)
MARIO J. GABELLI          Directors and Chief Executive

/s/ Morris Berkowitz      Director                           September 7, 2005
--------------------
MORRIS BERKOWITZ

/s/ Paul J. Evanson       Director                           September 7, 2005
-------------------
PAUL J. EVANSON

/s/ John C. Ferrara       Director                           September 7, 2005
-------------------
JOHN C. FERRARA

/s/ Daniel R. Lee         Director                           September 7, 2005
-----------------
DANIEL R. LEE

/s/ Lawrence R. Moats     Director                           September 7, 2005
---------------------
LAWRENCE R. MOATS

/s/ Salvatore Muoio       Director                           September 7, 2005
-------------------
SALVATORE MUOIO

/s/ Robert E. Dolan       Chief Financial Officer            September 7, 2005
-------------------       (Principal Financial and
ROBERT E. DOLAN            Accounting Officer)

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


                                       58