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                                    FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

For the fiscal year ended December 31, 2003         Commission file number 1-106
                          -----------------                                -----

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

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

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

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

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

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

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

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

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

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

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

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

The  aggregate  market  value of  voting  stock  held by  non-affiliates  of the
Registrant as of June 30, 2003 (based upon the closing price of the Registrant's
Common  Stock on the  American  Stock  Exchange  of $24.01  per share) was $50.8
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 2,774,651
as of March 25, 2004.


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<PAGE>
DOCUMENTS INCORPORATED BY REFERENCE:

Part III: Certain  portions of Registrant's  Proxy Statement for the 2004 Annual
Meeting of Shareholders.

FORWARD LOOKING INFORMATION
---------------------------

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

                                      PART I

ITEM 1. BUSINESS
----------------

Lynch Interactive Corporation  ("Interactive" or the "Company") was incorporated
in 1996  under  the  laws of the  State  of  Delaware.  On  September  1,  1999,
Interactive  was spun off by Lynch  Corporation to its  shareholders  (the "Spin
Off") and became a public  company.  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. 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. 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.


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.  From 1989
through 2003,  Interactive has 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.   Our  service  areas  are  largely
residential  and not densely  populated.  As of December 31, 2003,  total access
lines were 53,145, 100% of which are served by digital switches.

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

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.
                                      -2-
<page>
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 FCC for  interstate  services
and with the respective state regulatory agency for intrastate services.


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

We  expect  future  growth  in  telephone  operations  to be  derived  from  the
acquisition of additional  telephone  companies,  from providing  service to new
customers or additional services to existing customers,  from upgrading existing
customers to higher grades of service, and from new service offerings.

The following  table  summarizes  certain  information  regarding  Interactive's
multimedia operations:
<TABLE>
<CAPTION>

                                                    Years Ended December 31,
                                                 2001         2002        2003
                                               ---------------------------------
<S>                                            <C>          <C>          <C>
Telecommunications operations
Access lines (a) ........................      53,964       53,963       53,145
  % Residential .........................          74%          74%          73%
  % Business ............................          26%          26%          27%
Internet subscribers ....................      22,373       21,395       19,640
Security customers ......................       5,597        6,500        6,712
Cable subscribers .......................       2,934        2,831        2,731

Total Multimedia Revenues
Telephone operations
 Local service ..........................          14%          15%          14%
 Network access .........................          58%          59%          60%
                                                ------       ------       ------
   Total telephone operations ...........          72%          74%          74%
                                                ------       ------       ------
Other businesses ........................          28%          26%          26%
                                                ------       ------       ------
   Total multimedia revenues ............        100%         100%         100%
                                                ======       ======       ======
</TABLE>

(a) An "access line" is a telecommunications circuit between the customer's
establishment and the central switching
       office.

(b) Other Businesses includes Internet, security, PCS, CLEC, CATV and other
non-regulated revenues.

Telephone  Acquisitions.  Interactive  pursues an active  program  of  acquiring
------------------------
operating telephone  companies.  From January 1, 1989 through December 31, 2003,
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        Lines          Ownership
                                            Acquisition     Yr. of Acq.   12/31/03         Percentage
                                           ----------------------------------------------------------
<S>                                            <C>             <C>          <C>              <C>
Western New Mexico Telephone Co. .......       1989            4,200        6,974             83.1
Inter-Community Telephone Co. ..........       1991            2,550(a)     2,746            100.0
Cuba City Telephone Co. &
  Belmont Telephone Co. ................       1991            2,200        2,699             81.0
Bretton Woods Telephone Co. ............       1993              250          855            100.0
JBN Telephone Co. ......................       1993            2,300(b)     2,697             98.0
Haviland Telephone Co. .................       1994            3,800        3,815            100.0
Dunkirk & Fredonia Telephone Co. .......
  & Cassadaga Telephone Co. ............       1996           11,100       12,412            100.0
</TABLE>
                                      -3-
<page>
<TABLE>
<CAPTION>
                                                            Number of    Number of
                                                             Access       Access
                                              Year of        Lines        Lines            Ownership
 Continued                                  Acquisition    Yr. of Acq.   12/31/03          Percentage
                                            ---------------------------------------------------------
<S>                                            <C>             <C>          <C>              <C>
Upper Peninsula Telephone Co. ..........       1997            6,200        7,252            100.0
Central Scott Telephone Co. ............       1999            6,000        6,209            100.0
Central Utah Telephone Co./Skyline
  Telephone Company/Bear Lake
  Telephone Company ....................       2001            7,000        7,486            100.0
</TABLE>

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

(b)  Includes 354 access lines acquired in 1996.

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.  Recently, 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, 2003,
Internet  access  customers  totaled  19,184  compared to 20,939 at December 31,
2002.  Affiliates of four 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 the
Buffalo,  New York, and two other western New York counties.  Some of DFT's CLEC
services are now being provided via an "unbundled network elements platform", or
UNEP,  which allows for increased  margins over a resale CLEC business model. In
addition,  facilities-based  services are  continuing  to be evaluated for DFT's
CLEC  business.  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 2,600 subscribers.

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 6,712 alarm customers.

Affiliates of Inter-Community Telephone Company in North Dakota, and Western New
Mexico  Telephone  Company  in New Mexico  have filed with the 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  Federal  Communications  Commission  ("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
                                      -4-
<page>
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.

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.

In May 2001,  the FCC adopted an order  related to USF for rural  carriers  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.  We
anticipate that the FCC will open a proceeding related to USF for rural carriers
to consider  modifications  needed for the USF  mechanisms  after June 2006 (see
"Uncertain Future of USF" below).

Uncertain  Future of USF. The federal and state USF  mechanisms,  including that
which the Company  receives,  are subject to considerable  scrutiny and possible
modification   by  the  FCC.  In  November  2002  the  FCC  requested  that  the
Federal-State  Joint Board on Universal  Service (Joint Board) review certain of
the FCC rules relating to the high-cost  universal service support mechanisms to
ensure  that the dual  goals  of  preserving  universal  service  and  fostering
competition continue to be fulfilled. In February 2004, the Joint Board released
its  Recommended  Decision  concerning  the process for  designation of eligible
telecommunications  carriers (ETCs) (i.e.,  non-rural carriers that are entitled
to USF  support)  and the FCC's  rules  regarding  high-cost  universal  service
support.  The Joint  Board  recommended  that the FCC adopt  permissive  federal
guidelines for states to consider in proceedings to designate ETCs. As more ETCs
are designated,  and due to political and economic  pressure not to increase the
overall size of the USF, it is likely that rural  carriers such as our telephone
companies will receive less support.

The Joint  Board  also  recommended  that the FCC  limit the scope of  high-cost
support  to one  primary  line in an effort to reduce  the total size of the USF
mechanisms.  Limiting  USF  support to only one primary  line could  result in a
significant  decrease in the Company's USF revenues depending on the methodology
the FCC adopts.  The Joint Board  recommended that the FCC seek comment on three
different proposals as a means of preventing or mitigating reductions in the USF
support available to rural carriers.

In conjunction with these measures,  the Joint Board  recommended that high-cost
support in areas served by rural  carriers be capped on a per-line basis where a
competitive  carrier is designated as an ETC, and adjusted  annually by an index
factor.  The Joint Board  declined to recommend that the FCC modify the basis of
support (i.e.  the  methodology  used to calculate  support) in study areas with
multiple ETCs.  Instead,  they  recommended  that the Joint Board and Commission
consider  possible  modifications  to the basis of support as part of an overall
review of the high-cost support mechanisms for rural and non-rural carriers. The
FCC will  consider  the  Joint  Board's  recommendation  and  comments  of other
interested  parties,  including the RLEC industry,  and make a final decision in
the coming months. 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.

Effect on USF of Regional Bell Operating Company ("RBOC") Sales of Access Lines.
SBC and Verizon have announced  their intention to sell some of their more rural
access lines. SBC intends to sell approximately 650,000 access lines in Michigan
and Texas. Verizon announced plans to sell lines in upstate New York and Hawaii.
In addition,
                                      -5-
<page>
Citizens  Communications  announced it has engaged J.P.  Morgan  Securities  and
Morgan  Stanley  as  its  financial   advisors  following  their  December  2003
announcement that they were reviewing strategic alternatives.

The buyers of these  access  lines will be limited to receive  the amount of USF
which  the  seller  was  receiving  prior  to the  sale  unless  they  invest  a
significant amount for capital expenditures for network infrastructure or unless
the FCC provides a waiver of these rules. Although it is not possible to predict
whether the buyers will substantially  invest in these properties or whether the
FCC will grant waivers,  if either of these  circumstances  occurs,  Interactive
could be adversely effected due to the additional pressure on USF.

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

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

In addition to transport,  companies are increasing the use of VoIP in providing
voice services to the end user. The VoIP end user traffic  requires the use of a
broadband  service,  such as DSL or cable, in order to receive the low price (or
free) VoIP voice  service.  Since DSL cannot be purchased  from the ILEC without
the customer first purchasing a traditional local access line service,  the ILEC
still  receives the DSL and the local  service  revenue as long, as the end user
purchases  the DSL from the  ILEC.  Obviously,  if the end  user  purchases  the
broadband service from a competitor, such as a cable 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.
------------
Although all of Interactive's current telephone companies have historically been
monopoly  wireline  providers  in  their  respective  area for  local  telephone
exchange  service,  except  to a very  limited  extent in Iowa,  the  regulatory
landscape  has  begun to  change  and we now  experience  competition  from long
distance  carriers,  from cable  companies and internet  service  providers with
respect to internet access and  potentially in the future from cable  telephony,
and from wireless  carriers.  Competition may result in a greater loss of access
lines and minutes of use and the conversion of retail lines to wholesale  lines,
which negatively affects revenues and margins from those lines. Competition also
puts  pressure  on  the  prices  we  are  able  to  charge  for  some  services,
particularly for some non-residential services.

As a result of the 1996 Act, FCC and state regulatory authority  initiatives and
judicial  decisions,  competition  has been introduced into certain areas of the
toll network wherein  certain  providers are attempting to bypass local exchange
facilities 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 introduce  more
competition among providers of local services and reduce regulation.  Regulatory
authorities in certain  states,  including New York, have taken steps to promote
competition in local telephone exchange service,  by requiring certain companies
to offer wholesale rates to resellers. A substantial impact is yet to be seen on
Interactive's  telephone  companies.  Interactive's  subsidiaries  do not expect
bypass  to pose a  significant  near-term  competitive  threat  due to a limited
number of high-volume customers they serve.

                                      -6-
<PAGE>
Other Telecommunication Services.
---------------------------------
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.

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.

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
donated 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.

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  at
December  31,  2002 of 68,470,  of which  Interactive's  proportionate  share is
9,781.

RSA  Cellular  Interests.  At December  31,  2003,  Interactive  owned  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 $2.0 million in 2003 on a combined basis
and the combined  book value of these  entities was $4.6 million at December 31,
2003.  Interactive's  proportional share of these operations  combined revenues,
EBITDA and operating  profits were $2.8  million,  $1.4 million and $1.1 million
respectively, for the year ended December 31, 2003, and we received $0.9 million
in cash  distributions,  net of cash  paid to  minority  interests,  from  these
investments  in 2003.  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 $1.0 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.
                                      -7-
<page>
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, $5.0 million of which was loaned in 2001.  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.

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.

Other Multimedia Services
-------------------------

Broadcasting
------------

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

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

The Company's investments in broadcasting  investments are carried on the equity
basis and do not materially impact our current operating results.
                                      -8-
<page>
Based upon a multiple of fourteen  times  broadcast cash flow,  plus cash,  less
debt, Interactive estimates its value in these stations at almost $11 million as
compared to the net book value of these  investments of a negative $0.8 million.
It is not  assured  that the  results of these  stations  will  continue  at the
current level or that they could be sold at fourteen 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  community  antenna  television  ("CATV")
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 are  satellites  providing  local to local video services to a
growing  percentage of the  population in the United States.  In addition,  some
alternative  media  operators  provide for a fee and, on a  subscription  basis,
programming that is not a part of regular television service. Additional program
services are provided by low-power television stations as well.

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

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

                                      -9-
<PAGE>

II.  OTHER INFORMATION
----------------------

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

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

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

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

Interactive  had a total of 349 employees at December 31, 2003,  compared to 369
employees at December 31, 2002.

III. EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------

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

<TABLE>
<CAPTION>

          Name                                  Officers and Positions Held                                Age
          ----                                  ---------------------------                                ---
<S>                       <C>                                                                              <C>
Mario J. Gabelli          Vice  Chairman  since  December 2002 and Chief  Executive  Officer since         61
                          September  1999.  From  September  1999 to December  2002,  Mr.  Gabelli
                          served as our  Chairman.  He is also the Vice Chairman (and from 1986 to
                          August 2001 Chairman and Chief Executive  Officer) of Lynch Corporation;
                          Chairman,  Chief  Executive  Officer,  Chief  Investment  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 Gabelli Group
                          Capital Partners, Inc., a private company.
Robert E. Dolan           Chief Financial  Officer (since January 2004);  Chief Financial  Officer         52
                          and  Controller  from September  1999 to January 2004;  Chief  Financial
                          Officer (1992-2000) and Controller (1990-2000) of Lynch Corporation.

Evelyn C. Jerden          Senior  Vice   President-Operations   (since   September   2003);   Vice         46
                          President-Regulatory   Affairs   (2002-2003);    Director   of   Revenue
                          Requirements of Western New Mexico Telephone Company, Inc. (since 1992).

John Fikre                Vice President--Corporate  Development,  General Counsel   and Secretary         39
                          (since August 2001);  Associate,  Willkie Farr & Gallagher  (1994-2001).

</TABLE>

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

                                      -10-
<page>
ITEM 2. PROPERTIES
------------------

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

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

Inter-Community  Telephone  Company owns 12 acres of land at 10 sites.  Its main
office at Nome, ND,  contains 4,326 square feet of office and storage space.  In
addition,  it has 4,400  square  feet of garage  space  and  5,035  square  feet
utilized for its switching facilities. Inter-Community has 2,028 miles of copper
cable and 226 miles of fiber optic cable. All of these properties are encumbered
under mortgages held by Co-Bank.

Cuba City Telephone  Company is located in a 3,800 square foot brick building on
0.4 of an acre of land. The building  serves as the central  office,  commercial
office,  and garage for vehicle and  material  storage.  The company also owns a
cement  block  storage  building  of 1,490  square  feet on 0.1 of an  acre.  In
Madison,  Wisconsin,  Cuba  City  leases  900  square  feet  for  administrative
headquarters and financial functions.  Belmont Telephone Company is located in a
cement  block  building  of 800  square  feet on .5  acre  of  land in  Belmont,
Wisconsin.  The building  houses the central office  equipment for Belmont.  The
companies  own a  combined  total of 302 miles of  copper  cable and 51 miles of
fiber optic cable. All of Cuba City and Belmont's properties described above are
encumbered  under  first  mortgages  held by the RUS and Rural  Telephone  Bank,
respectively, and second mortgages held by Co-Bank.

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

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

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

Dunkirk & Fredonia  Telephone Company  (including its subsidiaries) owns a total
of approximately 16 acres at six locations in western New York. Its host central
office switching equipment,  administrative and commercial offices consisting of
18,297  square feet is located in Fredonia,  New York.  In  addition,  Dunkirk &
Fredonia owns five other properties,  including a service garage, a paging tower
site, a small central  office  housing  switching  equipment,  sales and service
center in Jamestown,  New York, and one rental  property in Ashville,  New York.
Dunkirk & Fredonia also owns 357 miles of copper telephone cable and 79 miles of
fiber optic cable.  All of these properties are encumbered under a mortgage held
by RUS.

Bretton Woods  Telephone  Co., Inc.  leases  approximately  2,800 square feet of
business  office space and  garage/storage  space located in Bretton Woods,  New
Hampshire. Bretton Woods Telephone owns a 444 square foot central office

                                      -11-
<page>

building also located in Bretton  Woods,  New Hampshire  that is built on leased
land.  Bretton Woods Telephone has 28 miles of copper cable and 6 miles of fiber
optic cable.

Upper Peninsula  Telephone  Company owns a total of approximately 25 acres at 19
sites located  principally in the Upper Peninsula of Michigan.  Its host central
office switching equipment,  administrative and commercial offices consisting of
11,200 square feet is located in Carney,  Michigan. In addition, Upper Peninsula
owns 25 other smaller  facilities  housing garage,  warehouse and central office
switching  equipment and over 2,121 miles of copper cable and 157 miles of fiber
optic cable. All properties described herein are encumbered under mortgages held
by the RUS and Co-Bank.

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

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

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

ITEM 3.  LEGAL PROCEEDINGS
--------------------------

Interactive and several other parties,  including our Chief  Executive  Officer,
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 relator in this lawsuit is R.C.  Taylor III, an individual  who, to the best
of our knowledge, has no relationship to any of the entities and affiliates that
have been named parties in this  litigation.  Indeed at the time of his filings,
and to the best of our knowledge,  Mr. Taylor was a lawyer at Gardner,  Carton &
Douglas. Thereafter, we believe he was a lawyer with Mintz, Levin, Cohn, Ferris,
Glovsky and Popeo. We do not know his current status.  We issued a press release
dealing with this litigation on January 16, 2002.

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  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 prior to trebling.

Interactive  strongly believes that this lawsuit is completely without merit and
that  relator's  initial damage  computation  is 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 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.

                                      -12-
<page>
Interactive  was  formally  served  with  the  complaint  on July 10,  2002.  On
September  19,  2002,  Interactive  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,  Interactive  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  the  judge  approved  a
scheduling  order.  Discovery has now commenced as the parties await a ruling on
the defendants' motion to dismiss the case.

Interactive first  participated in FCC sponsored  wireless auctions with the PCS
"C Block"  Auction in 1995.  In that auction,  Interactive  invested $22 million
into five separate  partnerships that acquired 31 licenses.  These  partnerships
were  eventually  merged and,  subsequently,  returned 28 licenses  under an FCC
sponsored   restructuring   program  and,   ultimately,   became   Sunshine  PCS
Corporation.  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.  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.

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

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

None in the fourth quarter of 2003.

                                     PART II
                                     -------

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

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


<TABLE>
<CAPTION>
                           2003
                     Three Months Ended
       March 31      June 30     September 30    December 31
       --------      -------     ------------    -----------

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

                           2002
                    Three Months Ended
       March 31      June 30     September 30    December 31
       --------      -------     ------------    -----------

<S>    <C>          <C>           <C>            <C>
High   $   70.50    $   54.50     $   31.58      $   28.50
Low    $   39.00    $   24.50     $   24.50      $   22.80
</TABLE>


At March 25, 2004,  Interactive  had 837  shareholders of record and the closing
price of our Common Stock was $33.55.


Neither  Interactive nor Lynch  Corporation,  the company from which Interactive
was spun off,  has paid any cash  dividends  on its  common  stock  since  1989.
Interactive  does not expect to pay cash  dividends  on its common  stock in the
foreseeable  future.  Interactive  currently intends to retain its earnings,  if
any,  for use in its  business.  Current  and  future  financings  may  limit or
prohibit the payment of dividends.

                                      -13-
<PAGE>

Issuer Purchases of Equity Securities
<TABLE>
<CAPTION>


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


                           <C>                     <C>                       <C>                         <C>
10/1/03 to 10/31/03             --                       --                       --                        57,385


11/1/03 to 11/30/03             --                       --                       --                        57,385


12/1/03 to 12/31/03            2,200                   22.27                    2,200                       55,185
                               -----------------------------------------------------------------------------------
Total                          2,200                   22.27                    2,200
                               ======================================================
</TABLE>


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

                                      -14-
<PAGE>

ITEM 6. SELECTED FINANCIAL DATA

                          LYNCH INTERACTIVE CORPORATION
                             SELECTED FINANCIAL DATA
                      (In Thousands, Except Per Share Data)
<TABLE>
<CAPTION>

                                                                          Years Ended December 31, (a)(b)
                                                           ------------------------------------------------------
                                                              1999        2000      2001        2002        2003
                                                           ------------------------------------------------------

<S>                                                      <C>         <C>         <C>         <C>         <C>
Revenues .............................................   $ 59,011    $ 66,983    $ 79,352    $ 86,304    $ 87,453

Operating profit(c) ..................................     12,299      15,331      19,985      19,233      18,428
Net financing activities (d) .........................     (8,789)    (10,308)    (11,074)    (11,266)    (10,744)
Equity in earnings of affiliates .....................      1,585       2,594       1,456       1,938       2,280
Impairment of investment in Spinnaker Industries, Inc.       --          --        (3,194)       --          --
Reserve for impairment of investment in spectrum
  license holders (e) ................................    (15,406)       --          --        (5,479)       --
Gain on sale of subsidiary stock and other

  Assets .............................................       --         4,187        --         4,965       3,919
                                                         --------    --------    --------    --------    --------
Income (loss) before income taxes, minority
  interests, extraordinary item and discontinued
  operations of Morgan ...............................    (10,311)     11,804       7,173       9,391      13,883
(Provision) benefit for income taxes .................      2,478      (4,971)     (3,454)     (3,924)     (4,968)
Minority interests ...................................     (1,214)     (1,802)     (1,185)     (1,706)     (1,525)
                                                         --------    --------    --------    --------    --------
  Income (loss) from continuing operations before
    discontinued operations of
    Morgan and Extraordinary item ....................     (9,047)      5,031       2,534       3,761       7,390
Income (Loss) from operations of Morgan
  distributed to shareholders (h) ....................         (9)     (2,666)     (1,386)     (1,888)       --
 Extraordinary item (f) ..............................       (160)       --          --          --          --
                                                         --------    --------    --------    --------    --------
  Net income (loss) ..................................   $ (9,216)   $  2,365    $  1,148    $  1,873    $  7,390
                                                         ========    ========    ========    ========    ========
Basic and diluted earnings
Per common share (g)
  Income (loss) from continuing operations before
    Extraordinary item and operations of Morgan ......   $  (3.21)   $   1.78    $   0.90    $   1.34    $   2.65
  Extraordinary item .................................      (0.06)       --          --          --          --
  Income (loss) from operations of Morgan
    distributed to shareholders (h) ..................   $  (0.00)   $  (0.94)   $  (0.49)   $  (0.67)       --
  Net income (loss) ..................................   $  (3.27)   $   0.84    $   0.41    $   0.67    $   2.65
</TABLE>

<TABLE>
<CAPTION>

                                                                            December 31, (a)
                                                       ----------------------------------------------------------
                                                          1999            2000      2001        2002        2003
                                                       ----------------------------------------------------------

<S>                                                      <C>         <C>         <C>         <C>         <C>
Cash, securities and short-term investments              $  29,094   $ 26,900    $ 31,233    $  23,356   $ 26,556
Total assets (j) .....................................   $ 221,705   $217,742    $256,350    $ 249,639   $252,186
Long-term debt .......................................   $ 164,736   $162,304    $193,202    $ 176,621   $175,783
Shareholders' equity (i) .............................   $  20,211   $ 19,391    $ 24,517    $  22,632   $ 29,887
</TABLE>

(a)  On September  1, 1999,  Interactive  was spun off to the Lynch  Corporation
     ("Lynch")  shareholders (the "Spin Off") and became a public company. Prior
     to the Spin Off,  Interactive  had no  significant  assets,  liabilities or
     operations.  The above financial data represented the consolidated accounts
     of  Interactive  since  September 1, 1999.  Prior to September 1, 1999, the
     financial data has been prepared  using the historical  basis of assets and
     liabilities  and  historical  results of operations of the  multimedia  and
     services   businesses  and  other  assets  and   liabilities,   which  were
     contributed to Interactive,  on a combined basis. Accordingly,  the results
     for  the  year  ended  December  31,  1999,   represent  a  combination  of
     consolidated and combined financial information for the respective periods.
     As the historical  financial  information prior to September 1, 1999 herein
     reflects periods during which the Company did not operate as an independent
     public company,  certain  assumptions were made in preparing such financial
     information.  Such information,  therefore, may not necessarily reflect the
     results of operations,  financial condition or cash flows of the Company in
     the future or what they would have been had the Company been an independent
     public company during the reporting  periods.  Morgan has been treated as a
     discontinued  operation for all periods presented.

                                      -15-
<page>
(b)  Includes results of Central Scott Telephone Company from July 16, 1999, and
     Central Utah Telephone  Company from June 23, 2001,  their respective dates
     of acquisition.
(c)  Operating  profit is sales and revenues less Multimedia cost of sales,  and
     selling and administrative expenses. Goodwill amortization was $2.2 million
     in 1999, $2.5 million in 2000 and $2.8 million in 2001. On January 1, 2002,
     the  Company  adopted  the  provisions  of SFAS 142 and  ceased  amortizing
     goodwill. (See note 1 in the accompanying financial statements.)
(d)  Consists of investment income and interest expense.
(e)  See Note 4 "Wireless Communications Services" in the Company's consolidated
     financial statements.
(f)  Loss from Early Extinguishment of Debt.
(g)  Adjusted to reflect a 2 for 1 stock split which  occurred on September  11,
     2000.
(h)  Net of income tax and minority interest.
(i)  No cash dividends have been declared or paid during the 5-year period.
(j)  Amounts do not include assets associated with The Morgan Group, Inc.

ITEM 7. MANAGEMENT'S  DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
--------------------------------------------------------------------------------
        OF OPERATIONS
        -------------

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

RESULTS OF OPERATIONS
---------------------

Overview
--------

Interactive has grown primarily through the selective acquisition of rural local
exchange carriers (RLECs) and by offering  additional  services such as Internet
service,  alarm services,  long distance service and competitive  local exchange
carrier (CLEC) service.  From 1989 through 2003,  Interactive  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  dependant 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.

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

Interactive generates cash and earns telecommunications  revenues primarily from
local network  access,  intrastate and interstate  access revenue and from state
and federal USF support mechanisms.


                                      -16-
<page>
o    Local  Revenues - The number of access lines is the primary driver of local
     network  access  revenues.  In  addition,  the ratio of  business  lines to
     residential,  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    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 ten cost-based  carriers  directly  correlate to their approved rate of
     return on regulated net investment  plus the amount of regulated  operating
     expenses  including  taxes.  The  revenues of the  Company's  four  average
     schedule subsidiaries  correlate to usage based measurements such as access
     lines, interstate minutes-of-use, the number and mileage of different types
     of circuits, etc. The average schedule method is 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 the 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 we are providing
     the long distance  service to the end user  customer as the toll  provider.
     For  unaffiliated  IXCs,  we  provide  a billing  service  and  receive  an
     administrative handling fee.

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

o    Universal  Service  Reform:  The  Federal-State  Joint  Board on  Universal
     Service (Joint Board) issued a  recommendation  that the FCC modify the USF
     support  mechanisms  for  RLECs  such as those  owned by the  Company.  The
     Company will  participate  with the RLEC  industry to analyze the potential
     impact of the Joint Board's  recommendation and provide the FCC information
     with the potential  impact to customers and RLECs in rural  America.  Total
     USF support payments are material to theCompany'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.
     The Company is trying to install more  broadband  service to offset revenue
     losses from traditional voice services.

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.  Morgan Group
Holding  Co. is now a public  company.  Accordingly,  the amounts for Morgan are
reflected on a one-line basis in the consolidated financial statements as "to be
distributed to shareholders."


                                      -17-
<PAGE>
Year 2003 compared to 2002
--------------------------

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

<TABLE>
<CAPTION>
                                                                   Increase
                                           2002         2003      (Decrease)
                                          --------------------------------------
                                                   (in thousands)
<S>                                      <C>         <C>         <C>
Revenues:
    Local access .....................   $ 12,315    $ 12,302    $    (13)
  Interstate access ..................     34,403      37,030       2,627
  Intrastate access ..................     16,776      15,388      (1,388)
                                         --------    --------    --------
    Total telephone ..................     63,494      64,720       1,226
  Other businesses ...................     22,810      22,733         (77)
                                         --------    --------    --------
                                           86,304      87,453       1,149
                                         --------    --------    --------
Operating expenses:
  Plant costs ........................     11,223      12,117         894
  Customer operations ................      4,428       4,495          67
  Other telephone related (1) ........     13,396      13,014        (382)
                                         --------    --------    --------
    Total telephone (excluding
      depreciation and amortization) .     29,047      29,626         579
  Other business (1) .................     15,337      14,588        (749)
  Unallocated corporate costs ........      3,334       4,529       1,195
                                         --------    --------    --------
     Operating expenses (excluding
       depreciation and  amortization)     47,718      48,743       1,025
                                         --------    --------    --------
EBITDA ...............................     38,586      38,710         124
  Depreciation .......................     17,890      19,524       1,634
  Amortization .......................      1,463         758        (705)
                                         --------    --------    --------
Operating profit .....................     19,233      18,428        (805)
Other income (expense) ...............     (9,842)     (4,545)      5,297
                                         --------    --------    --------
Income before income taxes, minority
   interests, and operations of Morgan      9,391      13,883       4,492
Provision for income taxes ...........     (3,924)     (4,968)     (1,044)
Minority interests ...................     (1,706)     (1,525)        181
                                         --------    --------    --------
Income before operations of Morgan ...   $  3,761    $  7,390    $  3,629
                                         ========    ========    ========
</TABLE>

(1)  General  and   administrative   costs  at   operations   in  the  Company's
     Consolidated  Statement of Operations includes $11,176 and $10,836 included
     herein as Other  Telephone  Related and $2,133 and $986 included  herein as
     Other Business as of December 31, 2002 and 2003, respectively.

Revenues:
---------

Local access  revenue  decreased  by $13,000 in 2003  compared to 2002 as a 1.5%
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  $2.6 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  $0.1 million in 2003
compared to 2002. The sale of a wireless equipment operation in upstate New York
with 2002 revenues of $0.8 million more than offset a $0.6 million  increase due
to additional subscribers in
                                      -18-
<page>
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.

Operating and Other Expenses:
-----------------------------

Total operating expenses,  excluding  depreciation and amortization,  were $48.7
million in 2003,  an increase of $1.0 million over the prior year.  Plant costs,
which  include all direct and indirect  costs of operating and  maintaining  the
physical plant, increased $0.9 million, or 8%, due to various factors, including
additional  bandwidth and system  maintenance  costs,  in 2003 compared to 2002.
Customer operations, which include all costs of servicing existing customers and
obtaining  new  customers,  were flat  between  the two years.  Other  telephone
related costs, including executive, administrative and plant overhead, operating
taxes and bad debt  expense,  decreased  $0.4 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.  Other  business  costs,
including costs of the security, cable, internet,  wireless and CLEC businesses,
decreased  $0.7 million.  Such  reduction  includes a $0.8 million  reduction in
costs due to the sale of a wireless  business  in upstate New York in late 2002,
partially  offset  by  increased  costs  of  the  security,  CLEC  and  internet
businesses due to the overall expansion of those businesses.

Unallocated  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.

EBITDA
------

EBITDA represents the Company's  earnings before interest,  taxes,  depreciation
and amortization.  EBITDA is not intended to represent cash flows from operating
activities  and should not be considered as an alternative to net income or loss
(as determined in conformity with generally accepted accounting principles),  as
an  indicator  of the  Company's  operating  performance  or to cash  flows as a
measure of liquidity.  EBITDA from  operations is presented  herein  because the
Company's  chief  operating  decision maker evaluates and measures each business
unit's  performance  based on their EBITDA  results.  The Company  believes that
EBITDA from operations is the most accurate  indicator of the Company's results,
because it  focuses on revenue  and  operating  cost items  driven by  operating
managers'  performance,  and  excludes  non-recurring  items and  items  largely
outside of  operating  managers'  control.  EBITDA  from  operations  may not be
available for the Company's discretionary use as there are requirements to repay
debt,  among other  payments.  EBITDA from  operations  as presented  may not be
comparable to similarly  titled  measures  reported by other companies since not
all  companies  necessarily  calculate  EBITDA from  operations  in an identical
manner,  and therefore,  is not  necessarily  an accurate  measure of comparison
between  companies.  See the  above  table  for a  reconciliation  of  EBITDA to
Operating  profit and to Income  before  income  taxes,  minority  interests and
operations of Morgan.

<TABLE>
<CAPTION>
                                                                        Increase
                                                     2002      2003    (Decrease)
                                                   -----------------------------
                                                          (in thousands)
<S>                                                <C>       <C>       <C>
Telephone:
  Revenues .....................................   $63,494   $64,720   $ 1,226
  Operating expenses (excluding depreciation and
      amortization) ............................    29,047    29,626       579
                                                   -------   -------   -------
                                                    34,447    35,094       647

Other business:
  Revenues .....................................    22,810    22,733       (77)
  Operating expenses (excluding depreciation and
    amortization) ..............................    15,337    14,588      (749)
                                                   -------   -------   -------
                                                     7,473     8,145       672
                                                   -------   -------   -------
</TABLE>
                                      -19-
<page>
<TABLE>
<CAPTION>
                                                                        Increase
                                                     2002     2003    (Decrease)
                                                   -----------------------------
                                                           (in thousands)
<S>                                                <C>       <C>       <C>
EBITDA from operations .........................    41,920    43,239     1,319
Unallocated corporate costs ....................     3,334     4,529     1,195
                                                   -------   -------   -------
EBITDA .........................................   $38,586   $38,710   $   124
                                                   =======   =======   =======
</TABLE>

EBITDA (earnings before interest,  taxes, depreciation and amortization) for the
year ended  December 31, 2003 was $38.7  million,  which was up  slightly,  $0.1
million, from the 2002 amount. EBITDA generated by operations grew $1.3 million,
or  3.1%,  to  $43.2  million  from  the  previous  year.  Higher  revenues  and
essentially  flat  operating  costs and  expenses,  excluding  depreciation  and
amortization,  were the cause of the higher  EBITDA.  Corporate  office  expense
increased to $4.5 million from $3.3 million due to the $1.2 million  increase in
incentive  compensation that was determined under a formula that was approved by
the Company's shareholders in 2000.

Other Income (Expense)
----------------------

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

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

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

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

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.

                                      -20-
<page>
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.

Year 2002 compared to 2001
--------------------------

The  acquisitions of CUT in June 2001 and the acquisition of a 63.6% interest in
American Alarm Company in November 2001 (referred to  collectively  as the "2001
Acquisitions")  had a  significant  effect  on the  comparison  of 2002 and 2001
revenues and operating costs.  Both acquisitions were accounted for based on the
purchase  method of  accounting  and the  results of  operations  reflect  these
acquisitions  from the  acquisition  dates in 2001  compared with a full year in
2002.  The following is a breakdown of our revenues and  operating  expenses for
the two years ended December 31, 2002 and 2001:

<TABLE>
<CAPTION>

                                                                  Increase      Effect of
                                            2001         2002    (Decrease)  Acquisitions(1)
                                          --------------------------------------------------
                                                         (in thousands)

<S>                                       <C>         <C>         <C>         <C>
Revenues:
  Local access ........................   $ 10,817    $ 12,315    $  1,498    $  1,041
  Interstate access ...................     29,542      34,403       4,861       2,746
  Intrastate access ...................     16,649      16,776         127       1,290
                                          --------    --------    --------    --------
    Total telephone ...................     57,008      63,494       6,486       5,077
  Other businesses ....................     22,344      22,810         466       2,963
                                          --------    --------    --------    --------
                                            79,352      86,304       6,952       8,040
                                          --------    --------    --------    --------

Operating Expenses:
  Plant costs .........................      9,920      11,223       1,303       1,103
  Customer operations .................      4,583       4,428        (155)        163
  Other telephone related (2) .........     11,085      13,396       2,311         946
                                          --------    --------    --------    --------
    Total telephone (excluding ........     25,588      29,047       3,459       2,212
      depreciation and amortization)
  Other business (2) ..................     12,490      15,337       2,847       2,171
 Unallocated corporate costs ..........      3,006       3,334         328        --
                                          --------    --------    --------    --------
  Operating expenses (excluding
      depreciation and amortization) ..     41,084      47,718       6,634       4,383
                                          --------    --------    --------    --------
EBITDA ................................     38,268      38,586         318       3,657
  Depreciation ........................     15,521      17,890       2,369       1,118
  Amortization ........................      2,762       1,463      (1,299)      1,255
                                          --------    --------    --------    --------
Operating profit ......................     19,985      19,233        (752)   $  1,284
                                                                              ========
Other income (expense) ................    (12,812)     (9,842)      2,970
                                          --------    --------    --------
Income before income taxes, minority
    interests, and operations of Morgan      7,173       9,391       2,218
Provision for income taxes ............     (3,454)     (3,924)       (470)
Minority interests ....................     (1,185)     (1,706)       (521)
                                          --------    --------    --------
Income before operations of Morgan ....   $  2,534    $  3,761    $  1,227
                                          ========    ========    ========
</TABLE>


(1)  Represents  management's estimate of the portion of the increase (decrease)
     between 2001 and 2002 that was attributable to the inclusion of the results
     of the 2001 Acquisitions for a full year in 2002 compared to a partial year
     in 2001.


(2)  General  and   administrative   costs  at   operations   in  the  Company's
     Consolidated  Statement of Operations  includes $8,901 and $11,176 included
     herein as Other Telephone  Related and $1,425 and $2,133 included herein as
     Other Business as of December 31, 2001 and 2002, respectively.

                                      -21-
<page>
Revenues:
---------

Local access  revenue  increased by $1.5  million in 2002  compared to 2001,  of
which  the CUT  acquisition  resulted  in $1.0  million  of  such  increase.  An
additional  increase  of  $0.3  million  resulted  from  a  change  in  Michigan
regulatory rules that  re-categorized a portion of intrastate  access revenue to
local in 2002 and in future periods.

Interstate access revenue increased by $4.9 million in 2002 compared to 2001, of
which the CUT  acquisition  resulted in $2.7 million of such  increase.  The USF
support portion of interstate  revenue increased $1.5 million resulting from the
effect of  infrastructure  development  at several of our  telephone  companies,
which entitles such companies to additional USF support. In addition, interstate
access revenue  increased $0.6 million  primarily due to the recovery in revenue
of  increased  operating   expenditures,   in  accordance  with  our  ratemaking
structure, associated with the increased infrastructure development.

Intrastate  access  revenue  increased by $0.1 million in 2002 compared to 2001.
Revenues in  Michigan  were down by $0.7  million  resulting  from a  negotiated
structural  change  in the  reporting  of  access  minutes  with the  intrastate
carrier,  including $0.3 million  reclassification to local revenue (see above).
In addition,  the continuing  reductions in intrastate  access minutes caused by
competition from other providers, primarily wireless, resulted in a $0.5 million
reduction in revenue. Such revenue reductions were offset by an increase of $1.3
million due to the effect of the CUT acquisition.

Other Business revenue in 2001 includes $2.8 million of one-time  contingent fee
relating to  administrative  fee services that it had performed for an affiliate
in an auction for wireless spectrum.  In 2002, other business revenues increased
$2.5 million in security operations,  resulting from the acquisition of American
Alarm  Company  (63.6%  owned) in November  2001 and $0.5 million due to the CUT
acquisition.

Operating and Other Expenses:
-----------------------------

Operating expenses, excluding depreciation and amortization,  were $47.7 million
in 2002,  an increase  of $6.6  million  over the prior year,  of which the 2001
Acquisitions  accounted for $4.4 million of the increase.  Excluding the effects
of the 2001 Acquisitions,  plant costs and customer operations were flat between
the two years.  Other  telephone  related costs  increased  $2.3 million in 2002
compared  to 2001,  of which $0.9  million  was due to the CUT  acquisition.  In
addition,  $0.9 million of bad debt expense was incurred in 2002 associated with
the  bankruptcies of  MCI/Worldcom  and Global  Crossings.  Other business costs
increased $2.8 million of which $2.2 million was due to the 2001 Acquisitions.

Unallocated  corporate costs increased $0.3 million to $3.3 million in 2002. The
increase   resulted  from  a  $0.4  million   increase  in  the  bonus  accrual.
Approximately  $0.6  million in legal  costs  incurred  defending  the "qui tam"
litigation  in 2002,  see  Contingencies  below,  were offset by $0.7 million in
litigation costs incurred in 2001.

Depreciation  expense  increased $2.4 million,  of which $1.1 million was due to
the 2001  Acquisitions  and $1.1  million  was due to  increased  infrastructure
development  at  several  of  the  telephone  companies.   Amortization  expense
decreased $1.3 million due to a $2.8 million  reduction in the  amortization  of
goodwill,  offset by an increase in the  amortization  of  subscriber  lists due
almost entirely to the American Alarm acquisition.  In accordance with Financial
Accounting  Standards  ("SFAS") No. 142,  Goodwill and Other Intangible  Assets,
effective  January 1, 2002, the Company no longer  amortized  goodwill and other
intangible  assets,  deemed to have  indefinite  lives.  In November  2001,  the
Company  acquired  American Alarm. At that time, $4.0 million of the acquisition
price was  allocated to customer  contracts,  which for nine months of 2002 were
amortized  over 3 years.  During  the fourth  quarter of 2002,  based on Company
specific  experience,  the amortization  period was changed to 10 years.  During
2002, the Company recorded $1.2 million of amortization  expense associated with
these contracts.

As a result of the  above,  operating  profit was $19.2  million  in 2002,  $0.8
million less than the $20.0 million recorded in 2001.


                                   -22-
<PAGE>
EBITDA
------

See the above table for a  reconciliation  of EBITDA to Operating  profit and to
Income before income taxes, minority interest and operations of Morgan.

<TABLE>
<CAPTION>
                                                            Increase     Effect of
                                        2001       2002    (Decrease)  Acquisitions(1)
                                      -----------------------------------------------
                                                     (in thousands)
<S>                                   <C>        <C>         <C>         <C>
Telephone:
  Revenues ........................   $ 57,008   $ 63,494    $  6,486    $  5,077
  Operating expenses (excluding
     depreciation  and amortization     25,588     29,047       3,459       2,212
                                      --------   --------    --------    --------
                                        31,420     34,447       3,027       2,865

Other business:
  Revenues ........................     22,344     22,810         466       2,963
  Operating expenses (excluding
     depreciation and amortization)     12,490     15,337       2,847       2,171
                                      --------   --------    --------    --------
                                         9,854      7,473      (2,381)        792
                                      --------   --------    --------    --------

EBITDA from operations ............     41,274     41,920         646       3,657
Unallocated corporate costs .......      3,006      3,334         328        --
                                      --------   --------    --------    --------
EBITDA ............................   $ 38,268   $ 38,586    $    318    $  3,657
                                      ========   ========    ========    ========
</TABLE>

     (1)  Represents  management's  estimate  of the  portion  of  the  increase
(decrease)  between 2001 and 2002 that was  attributable to the inclusion of the
results of the 2001  Acquisitions  for a full year in 2002 compared to a partial
year in 2001.

EBITDA  (earnings  before  interest,   taxes,   depreciation  and  amortization)
increased by $0.3 million to $38.6 million in 2002 when compared to 2001. EBITDA
from operations increased $0.6 million in 2002. The 2001 Acquisitions  increased
EBITDA by $3.7 million, which was partially offset by the absence in 2002 of the
$2.8 million of one-time contingent fee revenue earned in 2001.

Other Income (Expense)
----------------------

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 of 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).

In 2001, the Company  provided a $3.2 million  impairment  loss to write down to
zero its investment in Spinnaker Industries Inc. On November 13, 2001, Spinnaker
announced that it had commenced  voluntary  proceedings  under Chapter 11 of the
U.S.  Bankruptcy  Code for the  purpose of  facilitating  and  accelerating  its
financial  restructuring.  In late March 2002, all assets of Spinnaker were sold
and equity holders received no value.

In 2002 investment income was down by $1.1 million from the previous year due to
lower levels of treasury  rates,  in which the Company  invests the  predominant
amount of its liquid assets.  In addition,  2001's  investment  income  included
approximately $1.0 million of gains in connection with the Company's  investment
in Tremont Advisers,  Inc. All of the Company's  interest in Tremont was sold in
October 2001 when Tremont was acquired by Oppenheimer  Funds, Inc. at a price of
$19.00 per share.  Offsetting these 2001 gains, there was higher dividend income
in 2002 from the Company's ownership of bank stocks.

Interest  expense  decreased  from 2001 to 2002 by $0.9 million due primarily to
reduced interest rates, lower levels of borrowings and the absence,  in 2002, of
a collateral fee $0.6 million associated with a Put on the Company's convertible
debt outstanding.  Offsetting these decreases, interest expense increased during
2002 from 2001 due to the full year effect of debt incurred for the acquisitions
of Central Utah and American Alarm. In November 2002, the Company

                                      -23-
<page>
reacquired its  Convertible  Note issued to Cascade  Investments  LLC, there was
$0.7 million of interest  expense and other costs  associated  with this note in
2002.

Income Tax Provision
--------------------

The income tax provision  includes federal as well as state and local taxes. The
tax  provision  in 2002 and  2001,  represent  effective  tax rates of 41.8% and
48.2%,  respectively.  The  differences  from  the  federal  statutory  rate are
principally  the effect of state income taxes,  and in 2001 the  amortization of
goodwill, which is not deductible for tax purposes.

Minority Interests
------------------

Minority  interests  decreased earnings by $1.7 million in 2002 and $1.2 million
in 2001. The change was principally due to minority interest associated with the
gain from the 2002 sale of New  Mexico  RSA 1  (North)  offset by net  losses at
American Alarm for which there is a 36.4% minority ownership.

Income From Continuing Operations
---------------------------------

The Company recorded income from continuing  operations in 2002 of $3.8 million,
$1.34 per share  (basic and  diluted),  as compared  to income  from  continuing
operations in 2001 of $2.5 million, or $0.90 per share (basic and diluted).  The
following were the  significant  causes of the variance:  (1) the absence of the
administrative  fee in 2002 reduced net income by $1.7 million,  (2) the absence
of the reserve for impairment in Spinnaker increased net income by $2.1 million,
(3) the gain in 2002 on the sale of New  Mexico  RSA # 1 (North)  increased  net
income by $2.5 million,  (4) the provision  for  impairment of spectrum  license
holders  reduced net income in 2002 by $3.6 million and (5) the  amortization of
goodwill prior to the adoption by the Company of the non-amortization  provision
SFAS 142 which decreased 2001 net income by $2.4 million.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------

Cash Requirements
-----------------

The debt at each of Interactive's  subsidiary companies contains restrictions on
the  amount  of  funds  that  can be  transferred  to  their  respective  parent
companies.   The  Interactive  parent  company  ("Parent  Company")  needs  cash
primarily to pay corporate  expenses,  federal income taxes and to invest in new
opportunities,  including spectrum licenses. The Parent Company receives cash to
meet  its  obligations   primarily  through   management  fees  charged  to  its
subsidiaries,  a tax sharing  agreement  with its  subsidiaries,  usage of a $10
million  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  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, 2003 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) ...................   $175,783   $ 13,162   $ 52,458     $ 46,551     $ 63,612
Operating leases .....................      2,259        504        919          510          326
Notes payable to banks ...............      3,456      3,456       --           --           --
Guarantees ...........................      3,750       --        3,750         --           --
                                         --------   --------   --------     --------     --------
Total contractual cash obligations and
  commitments ........................   $185,248   $ 17,122   $ 57,127     $ 47,061     $ 63,938
                                         ========   ========   ========     ========     ========
</TABLE>
(a) Does not include interest payments on debt.

                                      -24-
<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.

The Parent  Company has a  short-term  line of credit  facility,  which  expires
August 31, 2004, with maximum availability  totaling $10.0 million, all of which
was available at December 31, 2003. At December 31, 2002, the entire $10 million
of such credit line was utilized;  $2.5 million of which was repaid in the first
quarter of 2003 by refinancing a subsidiary's debt obligation.  The remainder of
the credit line was repaid in the fourth  quarter of 2003 with proceeds from the
sale of the Company's  investment in Sunshine.  The Company is pursuing  various
financing  alternatives  including  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  that  this line of credit
facility will be renewed in August 2004.  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 renewal of the line of credit is a critical
element of the Company's financing strategy.

At December 31, 2003,  total debt (including  notes payable to banks) was $179.2
million,  a decrease of $10.3  million from  December 31, 2002.  At December 31,
2003, there was $122.8 million of fixed interest rate debt outstanding averaging
6.9% and $56.4 million of variable  interest rate debt averaging  4.3%. The debt
at fixed interest rates includes $34.4 million of subordinated notes at interest
rates  averaging 9.6% 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, 2002
and 2003, substantially all of the subsidiaries' net assets are restricted.

Interactive  has a high degree of financial  leverage.  As of December 31, 2003,
the ratio of total debt to equity was 6.0 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, 2003,  Interactive  had current  assets of $38.6  million and
current  liabilities of $31.4 million  resulting in a working capital surplus of
$7.2 million  compared to a deficit of $13.0 million at December 31, 2002.  This
$20.2 million improvement in the deficit was primarily due to the repayment of a
$10 million line of credit in 2003, the current  recognition of certain deferred
tax assets  associated  with the  Sunshine  investments  of $7.0 million and the
extension of $6.4 million of long-term  debt from current  maturities,  where it
was  classified  at December  31, 2002.  During  2003,  the holders of the notes
agreed to rollover $6.3 million of the notes for five years.

Sources and Uses of Cash
------------------------

Cash at December  31,  2003,  was $26.6  million,  an  increase of $3.2  million
compared to 2002.  During 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 $22.7 million in 2003,  $23.8  million in 2002,  and
$20.5  million  in 2001  which is  predominantly  spent at the RLECs and will be
included in their rate bases for rate setting purposes.  Capital expenditures in
2004 are expected to be approximately  $21 million,  of which  approximately $19
million will be added to the RLEC rate bases. External financing is currently in
place for approximately $7 million of these expenditures.  The remainder will be
financed from internal sources.

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

On November 29, 2002, Interactive repurchased from Cascade Investment,  LLC, the
remaining  outstanding $10 million in principal amount of its convertible  notes
pursuant to a previously negotiated put arrangement. The repurchase price was at
105% of the  principal  amount and was funded by the  balance in the  restricted
cash account.

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
                                      -25-
<page>
operations  where growth  opportunities  are not readily  apparent.  There is no
assurance  that all or any part of this program can be effectuated on acceptable
terms.  In March  2002,  the Company  sold its 20.8%  interest in the New Mexico
cellular  property,  RSA #1  (North)  to  Verizon  Wireless  for  $5.5  million,
including  $3.0  million  in cash and $2.5  million  in  satisfaction  of a note
payable  to  Verizon,  resulting  in a $5.0  million  gain.  (See  Note 5 in the
consolidated financial statements)

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, 2003, 44,815 shares had been purchased at an
average cost of $32.87 per share including 12,700 shares purchased in 2003 at an
average cost of $22.57 per share.  Subsequent to year-end,  an additional  5,300
shares have been acquired at an average cost of $26.11 per share.

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
-------------

Interactive  and  several  other  parties,   including  the  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  Federal   Communications
Commission  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 prior to trebling.

Interactive  strongly believes that this lawsuit is completely without merit and
that  relator's  initial damage  computation  is 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,  Interactive  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,  Interactive  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  the  judge  approved  a
scheduling  order.  Discovery has now commenced as the parties await a ruling on
the defendants' motion to dismiss the case.

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 carryingvalues of assets and liabilities that are not
readily apparent from other sources. Actual results may differ from these
                                      -26-
<page>
estimates under different  assumptions or conditions.  Interactive  believes the
following critical accounting policies affect its more significant judgments and
estimates used in the preparation of its consolidated financial statements.

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

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

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

We  consider  the  estimate of fair value to be a critical  accounting  estimate
because (a) a potential goodwill  impairment could have a material impact on our
financial  position and results of operations and (b) the estimate is based on a
number of highly  subjective  judgments  and  assumptions,  the most critical of
which is that the regulatory environment will continue in its current form.

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 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
-----------------------------------------

In November 2002, the FASB issued Interpretation No. 45 ("FIN 45"), "Guarantor's
Accounting and Disclosure Requirements".  FIN 45 expands the disclosures made by
a guarantor in its  financial  statements  about its  obligations  under certain
guarantees  and  requires the  guarantor  to recognize a liability  for the fair
value of the obligation assumed under certain  guarantees.  FIN 45 clarifies the
requirements  of  SFAS  No.  5,  "Accounting  for  Contingencies,"  relating  to
guarantees.   In  general,  FIN  45  applies  to  contracts  or  indemnification
agreements  that  contingently  require the  guarantor  to make  payments to the
guaranteed party based on changes in a specified interest rate,  security price,
foreign  exchange rate or other variable that is related to an asset,  liability
or equity  security  of the  guaranteed  party,  or failure of another  party to
perform  under an obligating  agreement  (performance  guarantees).  Interactive
adopted FIN 45 effective  January 1, 2003. Such adoption did not have a material
effect  on  the  Company's  consolidated  results  of  operations,  consolidated
financial position or consolidated cash flows.

The FASB  issued  FIN 46,  "Consolidation  of  Variable  Interest  Entities,  an
Interpretation  of ARB No. 51" in January 2003 and revised it in December  2003.
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 46 must be applied  for the first  interim  or annual  period  ending  after
December  15,  2003  for  both  new and  existing  variable  interest  entities.
Interactive adopted
                                      -27-
<page>
FIN 46 effective for December 31, 2003 financial reporting. Such adoption had no
effect  on  the  Company's  consolidated  results  of  operations,  consolidated
financial position or consolidated cash flows.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB Statements No.
4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical  Corrections,"
or SFAS No. 145. SFAS No. 145 provides for the rescission of several  previously
issued  accounting  standards,  new  accounting  guidance for the accounting for
certain  lease  modifications  and various  technical  corrections  that are not
substantive in nature to existing  pronouncements.  The Company adopted SFAS No.
145 on January 1, 2003.  The adoption of this  statement did not have a material
effect  on  our  consolidated  results  of  operations,  consolidated  financial
position or consolidated cash flows.

In July 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or  Disposal  Activities"  ("SFAS No.  146").  SFAS No.  146  replaces
Emerging  Issues Task Force Issue No. 94-3,  "Liability  Recognition for Certain
Employee  Termination  Benefits  and Other Costs to Exit an Activity  (including
Certain Costs Incurred in a Restructuring)."  SFAS No. 146 requires companies to
recognize  costs  associated  with  exit or  disposal  activities  when they are
incurred  rather than at the date of a commitment  to an exit or disposal  plan.
Examples of costs  covered by SFAS No. 146 include lease  termination  costs and
certain  employee  severance  costs that are  associated  with a  restructuring,
discontinued operation,  plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied  prospectively to exit or disposal activities initiated
after December 31, 2002, with early application encouraged. The adoption of this
statement had no effect on the  Company's  consolidated  results of  operations,
consolidated financial position or consolidated cash flows.

In April 2003,  the FASB issued SFAS No. 149,  "Amendments  of Statement  133 on
Derivative  Instruments and Hedging  Activities"  ("SFAS No. 149"). SFAS No. 149
serves as an amendment  and  clarifies  financial  accounting  and reporting for
derivative  instruments,  including  derivative  instruments  embedded  in other
contracts  and for  hedging  activities  under  SFAS No.  133,  "Accounting  for
Derivative  Instruments and Hedging  Activities." The Company does not engage in
hedging activities and therefore, this statement does not apply.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments  with  Characteristics  of Both  Liabilities  and Equity" ("SFAS No.
150").  SFAS No. 150  establishes  standards  for how an issuer  classifies  and
measures certain financial  instruments with characteristics of both liabilities
and equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances). The
Company has not issued such  instruments and this statement has had no effect on
the Company's financial position.

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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
-------------------------------------------------------------------

The Company is exposed to market risks  relating to changes in the general level
of U.S. interest rates.  Changes in interest rates affect the amount of interest
earned  on  the  Company's   cash   equivalents   and   short-term   investments
(approximately  $26.6 million at December 31, 2003 and $23.4 million at December
31,  2002).  The  majority of the  Company's  debt is fixed rate and the Company
generally  finances the acquisition of long-term  assets by borrowing on a fixed
long-term basis. The Company does not use derivative  financial  instruments for
trading or speculative  purposes.  Management  does not foresee any  significant
changes in the strategies  used to manage interest rate risk in the near future,
although the strategies may be reevaluated as market conditions  dictate.  As of
December  31,  2003,  the  fair  value of debt  was  approximately  equal to its
carrying value.

At December 31, 2003 and 2002,  approximately  $56.4 million and $64.8  million,
respectively,  or 31% and 34% of Interactive's  long-term debt and notes payable
bears interest at variable rates.  Accordingly,  the Company's earnings and cash
flows are affected by changes in interest  rates.  Assuming the current level of
borrowings for variable rate debt and assuming a one percentage  point change in
the 2003 average  interest  rate under these  borrowings,  it is estimated  that
Interactive's  2003 interest  expense would have changed by  approximately  $0.6
million.  In the event of an adverse change in interest rates,  management would
likely take actions to further mitigate its exposure. However, due to the
                                      -28-
<page>
uncertainty  of the actions that would be taken and their possible  effects,  no
such  actions are  assumed.  As of December  31,  2003,  if the Company  were to
convert a  significant  portion of its  variable  interest  rate debt into fixed
interest  rates,  such conversion  could increase 2004 interest  expense by $1.5
million  assuming that variable rates remain  constant.  Further,  such analysis
does not  consider  the  effects of the change in the level of overall  economic
activity that could exist in such an environment.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
---------------------------------------------------

See Item 15(a).

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

Not applicable.

ITEM 9A. CONTROLS AND PROCEDURES
--------------------------------

     Evaluation  of  disclosure  controls  and  procedures.  As required by Rule
13a-15 under the  Securities  Exchange  Act of 1934,  the  Company's  management
carried out an  evaluation of the  effectiveness  of the design and operation of
our disclosure  controls and procedures as of December 31, 2003. This evaluation
was  carried  out  under  the  supervision  and  with the  participation  of our
principal  executive  officer as well as our principal  financial  officer,  who
concluded that our disclosure controls and procedures are effective.

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

                                    PART III
                                    --------

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------------------------

The  information  required  by  this  Item  10 is  included  under  the  caption
"Executive  Officers of the  Registrant" in Item 1 hereof and included under the
captions  "Governance of the Corporation,"  "Proposal 1 - Election of Directors"
and "Section 16(a) Beneficial  Ownership  Reporting  Compliance" in Registrant's
Proxy  Statement  for  its  Annual  Meeting  of  Shareholders  for  2004,  which
information is incorporated herein by reference.

ITEM 11. EXECUTIVE COMPENSATION
-------------------------------

The  information  required  by  this  Item 11 is  included  under  the  captions
"Governance  of  the  Corporation  -  Compensation  of  Directors,"   "Executive
Compensation,"   "Executive   Compensation  and  Benefits  Committee  Report  on
Executive  Compensation" and "Performance Graph" in Registrant's Proxy Statement
for  its  Annual  Meeting  of  Shareholders  for  2004,  which   information  is
incorporated herein by reference.

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

The information required by this Item 12 is included under the caption "Security
Ownership of Certain  Beneficial  Owners and  Management,"  in the  Registrant's
Proxy  Statement  for  its  Annual  Meeting  of  Shareholders  for  2004,  which
information is included herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
-------------------------------------------------------

The  information  required  by  this  Item  13 is  included  under  the  caption
"Executive Compensation",  and "Transactions with Certain Affiliated Persons" in
the  Registrant's  Proxy  Statement for its Annual Meeting of  Shareholders  for
2004, which information is included herein by reference.

                                      -29-
<page>
ITEM 14.  PRINCIPAL ACCOUNTANT FEES AND SERVICES

The information required by this Item 14 is included under the caption
"Independent Auditors" in the Registrant's Proxy Statement for its Annual
Meeting of Shareholders for 2004, which information is included herein by
reference.

                                     PART IV
                                     -------

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

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

     Reports of Independent  Auditors and the following Financial  Statements of
     the Company are included herein:

     Consolidated Balance Sheets - December 31, 2002 and 2003
     ConsolidatedStatements  of Operations - Years ended December 31, 2001, 2002
     and 2003
     Consolidated  Statements of Shareholders' Equity - Years ended December 31,
     2001, 2002 and 2003
     Consolidated Statements of Cash Flows - Years ended December 31, 2001, 2002
     and 2003
     Notes to Consolidated Financial Statements

(a)(2)  Financial  Statement   Schedules:
     Schedule I - Condensed Financial Information of Registrant
     Schedule II - Valuation and Qualifying Accounts

(a)(3) Exhibits: See the Exhibit Index on pages 58 through 60

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

See Page 2 above re Forward Looking Information.
------------------------------------------------

(b)  Reports on Form 8-K:
                Current Report on Form 8-K filed on November 14, 2003.
                Current Report on Form 8-K filed on November 21, 2003.

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

         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.


         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.

          14.1  Lynch Interactive Corporation Code of Ethics

          14.2  Lynch Interactive Corporation Conflicts of Interest Policy

            21  Subsidiaries of Registrant

          23.1  Consent of Ernst & Young LLP

          23.2  Consent of Deloitte & Touche LLP

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

                                      -30-
<page>
               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

          -    Report of Siepert & Co.,  L.L.P.  on the financial  statements of
               Lynch  Michigan  Telephone  Holding  Company  for the year  ended
               December 31, 2001

            24  Powers of Attorney

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

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

          32.1  Section 1350 Certification of the Chief Executive Officer

          32.2  Section 1350 Certification of the Chief Financial Officer

          99.1  Report of Independent Auditors
          -    Report of Siepert & Co.,  L.L.P.  on the financial  statements of
               Cuba City Telephone  Exchange Company for the year ended December
               31, 2002
          -    Report of Siepert & Co.,  L.L.P.  on the financial  statements of
               Belmont Telephone Company for the year ended December 31, 2002
          -    Report of Siepert & Co.,  L.L.P.  on the financial  statements of
               Upper Peninsula 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  Company  for the year  ended
               December 31, 2001


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


                                      -31-
<PAGE>


INDEPENDENT AUDITORS' REPORT

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

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

     We conducted our audit in  accordance  with  auditing  standards  generally
accepted in the United States of America.  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  provides  a
reasonable basis for our opinion.

In our opinion,  such consolidated  financial  statements present fairly, in all
material respects,  the financial position of Lynch Interactive  Corporation and
subsidiaries  as of December 31, 2003,  and the results of their  operations and
their  cash  flows  for the  year  then  ended  in  conformity  with  accounting
principles  generally  accepted in the United  States of America.  Also,  in our
opinion, such 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
April 14, 2004


                                      -32-
<PAGE>



                         REPORT OF INDEPENDENT AUDITORS



Shareholders and Board of Directors
Lynch Interactive Corporation

We have audited the accompanying consolidated balance sheet of Lynch Interactive
Corporation  (the  "Company") and  subsidiaries as of December 31, 2002, and the
related consolidated  statements of operations,  shareholders'  equity, and cash
flows for each of the two years in the  period  ended  December  31,  2002.  Our
audits also included the 2002 and 2001 financial  statements 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 audits. 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
assets of  $4,372,000  as of December 31, 2002 and total  revenues of $2,139,000
and  $2,117,000 for each of the two years in the period ended December 31, 2002;
the  financial  statements of Upper  Peninsula  Telephone  Company,  an indirect
wholly-owned  subsidiary  of Lynch  Interactive  Corporation,  which  statements
reflect total assets of  $26,720,000  as of December 31, 2002 and total revenues
of  $10,986,000  for the year then ended and the  financial  statements of Lynch
Michigan Telephone Holding Corporation,  an indirect wholly-owned  subsidiary of
Lynch  Interactive  Corporation,  which  statements  reflect  total  revenues of
$11,246,000  for the year ended December 31, 2001.  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 in 2001 and 2002, Upper Peninsula
Telephone Company in 2002 and Lynch Michigan  Telephone  Holding  Corporation in
2001, is based solely on the reports of the other auditors.

We conducted our audits in accordance with auditing standards generally accepted
in the 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 audits  and the  reports of other  auditors
provide a reasonable basis for our opinion.

In our  opinion,  based on our audits and the  reports  of other  auditors,  the
financial statements referred to above present fairly, in all material respects,
the  consolidated  financial  position  of  Lynch  Interactive  Corporation  and
subsidiaries  at  December  31,  2002,  and the  consolidated  results  of their
operations  and their cash  flows for each of the two years in the period  ended
December 31, 2002, in conformity with accounting  principles  generally accepted
in the United States. Also, in our opinion,  based on our audits and the reports
of other auditors, the related 2002 and 2001 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.

As discussed in Note 1 to the consolidated  financial  statements,  in 2002, the
Company  changed its method of  accounting  for  goodwill  and other  intangible
assets.



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

                                      -33-
<PAGE>



                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                                              December 31,
                                                                       --------------------------
                                                                          2002            2003
                                                                       --------------------------
<S>                                                                      <C>          <C>
ASSETS

Current assets:
  Cash and cash equivalents ..........................................   $  23,356    $  26,556
  Receivables, less allowances of $316 and $262, respectively ........       8,916        8,183
  Material and supplies ..............................................       3,351        2,597
  Prepaid expenses and other current assets ..........................       1,451        1,272
                                                                         ---------    ---------
Total current assets .................................................      37,074       38,608

Property, plant and equipment:
  Land ...............................................................         807          840
  Buildings and improvements .........................................      12,741       13,336
  Machinery and equipment ............................................     197,245      213,939
                                                                         ---------    ---------
                                                                           210,793      228,115
  Accumulated depreciation ...........................................     (88,174)    (102,556)
                                                                         ---------    ---------
                                                                           122,619      125,559

Excess of cost over fair value of net assets  acquired, net (goodwill)      60,580       60,580
Other intangibles ....................................................       7,659        8,168
Investments in and advances to affiliated entities ...................      10,158        7,223
Other assets .........................................................      11,549       12,048
                                                                         ---------    ---------

Total assets .........................................................   $ 249,639    $ 252,186
                                                                         =========    =========

</TABLE>


See accompanying Notes to Consolidated Financial Statements.


                                      -34-
<PAGE>




                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                                 (in thousands)
<TABLE>
<CAPTION>

                                                            December 31,
                                                      --------------------------
                                                          2002         2003
                                                      --------------------------

<S>                                                   <C>          <C>
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
  Notes payable to banks ..........................   $  12,882    $   3,456
  Trade accounts payable ..........................       5,015        5,336
  Accrued interest payable ........................         384          697
  Accrued liabilities .............................      13,560        8,732
  Current maturities of long-term debt ............      18,272       13,162
                                                      ---------    ---------
     Total current liabilities ....................      50,113       31,383

Long-term debt ....................................     158,349      162,621
Deferred income taxes .............................       6,621       15,517
Other liabilities .................................       3,074        3,015
                                                      ---------    ---------
   Total liabilities ..............................     218,157      212,536

Minority interests ................................       8,850        9,763

Commitments and contingencies (Note 12)

Shareholders' equity
  Common stock, $0.0001 par value-10,000,000
     shares authorized; 2,824,766 issued; 2,792,651
     and 2,779,951 outstanding ....................        --           --
  Additional paid-in capital ......................      21,406       21,406
  Retained earnings ...............................       1,879        9,269
  Accumulated other comprehensive income                    534          686
  Treasury stock, 32,115 and 44,815 shares, at cost      (1,187)      (1,474)
                                                      ---------    ---------
                                                         22,632       29,887
                                                      ---------    ---------
Total liabilities and shareholders' equity ........   $ 249,639    $ 252,186
                                                      =========    =========

</TABLE>

See accompanying Notes to Consolidated Financial Statements.



                                      -35-
<PAGE>




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

                                                                        Years Ended December 31,
                                                                   ----------------------------------
                                                                     2001        2002        2003
                                                                   ----------------------------------

<S>                                                                <C>         <C>         <C>
Revenues:
  Telephone ....................................................   $ 57,008    $ 63,494    $ 64,720
  Other business ...............................................     22,344      22,810      22,733
                                                                   --------    --------      ------
                                                                     79,352      86,304      87,453
Operating costs:
  Direct telephone operating costs .............................     16,687      17,871      18,790
  Direct other business operating costs ........................     11,065      13,204      13,602
  General and administrative costs at operations ...............     10,326      13,309      11,822
  Unallocated corporate costs ..................................      3,006       3,334       4,529
  Depreciation and amortization ................................     18,283      19,353      20,282
                                                                   --------    --------      ------
Operating profit ...............................................     19,985      19,233      18,428

Other income (expense):
  Investment income ............................................      2,862       1,765       1,120
  Interest expense .............................................    (13,936)    (13,031)    (11,864)
  Equity in earnings of affiliated companies ...................      1,456       1,938       2,280
  Impairment of investment in Spinnaker Industries, Inc. .......     (3,194)       --          --
  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
                                                                    --------    --------     ------
                                                                    (12,812)     (9,842)     (4,545)
                                                                    --------    --------     ------

Income before income taxes, minority  interests, and operations
   of The Morgan Group, Inc. ("Morgan") distributed to .........      7,173       9,391      13,883
   Shareholders

Provision for income taxes .....................................     (3,454)     (3,924)     (4,968)
Minority interests .............................................     (1,185)     (1,706)     (1,525)
                                                                    --------    --------      ------

Income from continuing operations before operations of Morgan
distributed to shareholders ....................................      2,534       3,761       7,390

Loss from operations of Morgan to be distributed to shareholders
net of  income taxes of $(166) and $0, respectively, and
minority interests of$603 and $868, respectively                     (1,386)    (1,888)         --
                                                                    --------    --------    ------

Net income .....................................................   $  1,148    $  1,873    $  7,390
                                                                   ========    ========    ========

Basic and diluted weighted average shares outstanding ..........      2,821       2,805       2,786
                                                                   ========    ========    ========

Basic and diluted earnings (loss) per share:

Income before operations of  Morgan to be distributed to
Shareholders....................................................    $   0.90     $   1.34    $  2.65
Loss from operations of Morgan distributed to Shareholders .....       (0.49)       (0.67)       --
                                                                    --------    --------      ------

Net income per share ...........................................    $   0.41    $   0.67     $  2.65
                                                                    ========    ========     =======
</TABLE>


See accompanying Notes to Consolidated Financial Statements.

                                      -36-
<PAGE>



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


                                                                                  Accumulated
                                  Shares of                                          Other
                                   Common                 Additional                Compre-
                                    Stock      Common       Paid-in    Retained      hensive       Treasury
                                 Out-standing   Stock      Capital     Earnings      Income          Stock        Total
                                 ------------ ---------- ------------- ------------ -------------- ------------ ----------
<S>                <C>          <C>          <C>          <C>          <C>           <C>           <C>           <C>
Balance at January 1, 2001 .    2,821,666    $        0   $   21,404   $      652    $    1,495    $     (152)   $   23,399
Net income for the period ..         --            --           --          1,148          --            --           1,148
Unrealized loss on available
for sale securities ..........       --            --           --           --          (1,688)         --          (1,688)
 Reclassification adjustment         --            --           --           --           1,735          --           1,735
                                                                                                                 ----------
    Comprehensive income ...         --            --           --           --            --            --           1,195
                                                                                                                 ----------
Issuance of Treasury Shares           185          --              2         --            --               9            11
Purchase of Treasury Stock .       (1,800)         --           --           --            --             (88)          (88)
                               ----------    ----------   ----------   ----------    ----------    ----------    ----------
Balance at December 31, 2001    2,820,051             0       21,406        1,800         1,542          (231)       24,517
Dividend of shares of Morgan
Group Holding Inc. .........         --            --           --         (1,794)         --            --          (1,794)
Net income for the period ..         --            --           --          1,873          --            --           1,873
Unrealized loss on available
for sale securities, net....         --            --           --           --            (780)         --            (780)
  Reclassification adjustment        --            --           --           --            (228)         --            (228)
                                                                                                                 ----------
    Comprehensive income ...         --            --           --           --            --            --             865
                                                                                                                 ----------
Purchase of Treasury Stock .      (27,400)         --           --           --            --            (956)         (956)
                               ----------    ----------   ----------   ----------    ----------    ----------    ----------
Balance at December 31, 2002    2,792,651                    21,406         1,879           534        (1,187)       22,632
                                                                                                                          0

Net income for the period ..         --            --           --          7,390          --            --           7,390
Unrealized gain on available
for sale securities, net....         --            --           --           --             322          --             322
  sale securities, net
 Reclassification adjustment         --            --           --           --            (170)         --            (170)
                                                                                                                 ----------
    Comprehensive income ...         --            --           --           --            --            --           7,542
                                                                                                                 ----------
Purchase of Treasury Stock .      (12,700)         --           --           --            --            (287)         (287)
                               ----------    ----------   ----------   ----------    ----------    ----------    ----------
Balance at December 31, 2003    2,779,951    $        0   $   21,406   $    9,269    $      686    $   (1,474)   $   29,887
                               ==========    ==========   ==========   ==========    ==========    ==========    ==========

</TABLE>

See accompanying  Notes to Consolidated Financial Statements.


                                      -37-
<PAGE>

<TABLE>
<CAPTION>


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

                                                                            Years Ended December 31,
                                                                        ---------------------------------
                                                                           2001        2002         2003
                                                                        ---------------------------------
<S>                                                                      <C>         <C>         <C>

OPERATING ACTIVITIES
Net income ...........................................................   $  1,148    $  1,873    $  7,390
Depreciation and amortization ........................................     18,283      19,353      20,282
Net proceeds from sale of trading securities .........................      2,066        --          --
Minority interests ...................................................      1,185       1,706       1,525
Equity in earnings of affiliated companies ...........................     (1,456)     (1,938)     (2,280)
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)
Impairment of investment in Spinnaker Industries, Inc. ...............      3,194        --          --
Gain on sale of securities ...........................................       (198)       (228)       (171)
Deferred income taxes ................................................       (724)        398       8,869
Non-cash items and changes in operating assets and liabilities
  from operations of Morgan Group Holding Co. to be distributed to
  shareholders .......................................................      1,032       1,888        --
Assets transferred in settlement of litigation .......................        415        --          --
Changes in operating assets and liabilities, net of effects of
  acquisitions:

    Trade accounts receivable (increase) decrease ....................     (1,082)      1,047         733
    Trade accounts payable and accrued liabilities increase (decrease)       (629)        563      (4,219)
    Other ............................................................      1,326         328         893

Other ................................................................       (212)       --          --
                                                                         --------     --------   --------
Net cash provided by operating activities ............................     24,348      25,504      29,103
                                                                         --------     --------   --------

INVESTING ACTIVITIES
Acquisitions (net of debt assumed and cash
  equivalents acquired) ..............................................     (9,999)       --          --
Capital expenditures .................................................    (20,533)    (23,785)    (22,740)
Acquisition of subscriber lists ......................................       --          (301)       (372)
Investment in spectrum partnerships ..................................       (186)       --           (16)
Returns from spectrum partnerships ...................................       --           333        --


Acquisition of spectrum licenses .....................................       --        (1,121)       (617)
Proceeds from sale of cellular partnership ...........................       --         2,958        --
Proceeds from sale of investment in Sunshine PCS .....................       --          --         7,587
Proceeds from sale of securities .....................................        494         398         285
Cash received from liquidation of partnership ........................        550        --          --
Investing activities of operations of Morgan Group Holding Co. .......

   to be distributed to shareholders .................................     (2,718)       --          --
Distributions received from investments ..............................       --          --         1,500
Other ................................................................      1,276         516        (366)
                                                                         --------    --------    --------
Net cash used in investing activities ................................    (31,116)    (21,002)    (14,739)
                                                                         --------    --------    --------

FINANCING ACTIVITIES

Issuance of long-term debt ...........................................     30,847       7,087      11,772
Payments to reduce long-term debt ....................................    (24,499)    (21,056)    (12,610)
Net borrowings (payments) related to lines of credit .................      6,003       2,546      (9,426)
Purchase of Treasury stock ...........................................        (88)       (956)       (287)
Financing activities of operations of Morgan Group Holding Co.
    to be distributed to shareholders ................................        439        --          --
Other ................................................................        465        --          (613)
                                                                         --------    --------    --------

Net cash provided by (used in) financing activities ..................     13,167     (12,379)    (11,164)
                                                                         --------    --------    --------
Net increase (decrease) in cash and cash equivalents .................      6,399      (7,877)      3,200
Cash and cash equivalents at beginning of year .......................     24,834      31,233      23,356
                                                                         --------    --------    --------
Cash and cash equivalents at end of year .............................   $ 31,233    $ 23,356    $ 26,556
                                                                         ========    ========    ========
</TABLE>


See accompanying Notes to Consolidated Financial Statements.


                                      -38-
<PAGE>




                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                   Notes to Consolidated Financial Statements
                                December 31, 2003

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.  At the time of the  Spin-Off,  the employees of the
corporate  office of Lynch became the employees of Interactive  and for a period
of time  thereafter,  Interactive  began providing  certain support  services to
Lynch.  The  Company  charged  a  management  fee for  these  services  to Lynch
Corporation  amounting to $0.2 million in 2001. In September  2001,  Interactive
stopped  charging this management fee to Lynch since the services were no longer
being provided.

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    Fortunet Communications, L.P. (49.9% owned through February 2001),
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 at December 31, 2003) owned through partnerships and
o    Spectrum license holders (49.9% owned).

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

Use of Estimates/Reclassifications

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

                                      -39-
<page>
Cash and Cash Equivalents

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

Marketable Securities

Marketable securities, included in other assets, consist principally of publicly
traded common stocks. At December 31, 2002 and 2003, Interactive's investment in
marketable  securities,  which  had  carrying  values of $2.3  million  and $2.5
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 $2.1  million and $2.3  million at  December  31, 2002 and
2003, 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
($3.0 million),  ($1.3  million),  and $0.4 million for the years ended December
31, 2001, 2002 and 2003, respectively and have been included in the Consolidated
Statements of Shareholder's Equity, as "Accumulated other comprehensive income."
In 2001,  the Company sold its  investment  in certain  common  stocks that were
classified as trading  securities.  Trading  securities are stated at fair value
with unrealized gains or losses included in earnings.

The  cost  of  marketable   securities   sold  is  determined  on  the  specific
identification  method.  Realized gains included in investment  income were $1.4
million,  $0.4 million and $0.3  million for the years ended  December 31, 2001,
2002 and 2003, respectively.

In November 2001, Spinnaker Industries, Inc., in which the company owned 2.5% of
the voting power and 13.6% of the common equity, filed for Chapter 11 Bankruptcy
for the purpose of facilitating and accelerating its financial restructuring. In
January 2002, both classes of Spinnaker's stock were de-listed from the American
Stock Exchange.  The Company  believed at December 31, 2001, that the decline in
quoted value was other than temporary and, accordingly,  recorded a loss of $3.2
million  during  2001 to  write  down its  investment  in  Spinnaker  to zero at
December 31, 2001. In late March 2002, all assets of Spinnaker were sold and the
equity holders received no value.

Investment income - Patronage

CoBank,  from which the Company has loans  totaling  $59 million at December 31,
2003, 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 30% 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
$0.4 million, $0.6 million and $0.2 million in 2003, 2002 and 2001, respectively
and were included as investment income in the Company's statement of operations.
The Company cannot predict what patronage refunds might be in future years.

Fair Value of Financial Instruments

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

Accounts Receivable

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

Property, Plant and Equipment

Property,  plant and equipment are recorded at cost and include expenditures for
additions and major  improvements  and, for our regulated  telephone  companies,
include an allowance for funds used during construction (AFUDC). Maintenance

                                      -40-
<page>
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. Consequently,  for 2002, approximately
$2.0 million of amounts collected in depreciation rates for cost of removal have
been  classified as accrued  removal costs in other  long-term  liabilities.  In
2003,  in  connection  with the  adoption  of SFAS No.  143,  such $2.0  million
liability for cost of removal has been  reclassified  as a regulatory  liability
also included in long term liabilities.

Goodwill and other Intangible Assets

In June 2001,  the Financial  Accounting  Standards  Board issued  Statements of
Financial  Accounting  Standards No. 141,  Business  Combinations,  and No. 142,
Goodwill and Other Intangible Assets, effective for fiscal years beginning after
December 15, 2001.  SFAS No. 141 required that the purchase method of accounting
be used for all business  combinations  initiated after September 30, 2001. SFAS
No. 141 also includes  guidance on the initial  recognition  and  measurement of
goodwill  and  other  intangible  assets  arising  from  business   combinations
completed  after June 30,  2001.  SFAS No. 142  prohibits  the  amortization  of
goodwill  and assets with  indefinite  lives,  but instead  requires  that these
assets be reviewed for  impairment  at least  annually.  Intangible  assets with
finite lives will continue to be amortized over their estimated useful lives.

The Company tests goodwill and other intangible assets with indefinite lives for
impairment using the two-step process prescribed in SFAS No. 142. 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 transitional impairment
tests of goodwill and indefinite lived  intangible  assets as of January 1, 2002
and its required annual tests as of October 1, 2002 and 2003 and determined that
there were no impairments at those times.

In addition to goodwill,  intangible  assets with  indefinite  lives  consist of
cellular  licenses,  with a carrying  value of $2.7  million and $3.3 million at
December  31, 2002 and 2003  respectively.  During 2002 and 2003, a wholly owned
subsidiary  of  Interactive  acquired 12 spectrum  licenses  for a total of $1.7
million in two separate Lower 700MHz auctions.

The Company's  subscriber lists are amortized over a 10 to 15-year life.  During
2002,  Dunkirk & Fredonia security operation  increased the amortization  period
for its subscriber  lists from three to ten years.  Subscriber lists had a gross
value of $6.9  million and $7.3  million and  accumulated  amortization  of $1.7
million  and  $2.3  million  at  December  31,  2002  and  2003,   respectively.
Amortization  expense was $0.2  million,  $1.5  million and $0.7 million for the
years ended December 31, 2001, 2002 and 2003 respectively and is estimated to be
between $0.6 and $0.7 million annually for the next five years.

                                      -41-
<page>
The following table discloses what the effects of not amortizing  goodwill would
have been for 2001 income and per share amounts:
<TABLE>
<CAPTION>

                                                   Continuing
                                                   Operations    Morgan     Net Income
                                                            (in thousands)
                                                   -----------------------------------
<S>                                                <C>         <C>          <C>
Income as reported .............................   $   2,534   ($  1,386)   $   1,148
  Add back: goodwill amortization, net of income
    taxes and minority interest ................       2,392         287        2,679
                                                   ---------   ---------    ---------
Income as adjusted .............................   $   4,926   ($  1,099)   $   3,827
                                                   =========   =========    =========
Basic and diluted Earnings per share
  Income as reported ...........................   $   0.90    ($   0.49)   $    0.41
  Add back: goodwill amortization, net of income
     taxes and minority interest................       0.85         0.10         0.95
                                                   ---------   ---------    ---------
Income as adjusted .............................   $   1.75    ($   0.39)   $    1.36
                                                   =========   =========    =========
</TABLE>

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 is 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.

                                      -42-
<page>
Earnings (Loss) Per Share

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

    Comprehensive Income

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

Minority Interest

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

Issuance of Stock by Subsidiary and Investees

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

Recently Issued Accounting Pronouncements

In November  2002, the Financial  Accounting  Standards  Board  ("FASB")  issued
Interpretation  No.  45  ("FIN  45"),  "Guarantor's  Accounting  and  Disclosure
Requirements".  FIN 45  expands  the  disclosures  made  by a  guarantor  in its
financial statements about its obligations under certain guarantees and requires
the  guarantor  to  recognize a liability  for the fair value of the  obligation
assumed under certain guarantees.  FIN 45 clarifies the requirements of SFAS No.
5, "Accounting for Contingencies,"  relating to guarantees.  In general,  FIN 45
applies to contracts or indemnification agreements that contingently require the
guarantor  to make  payments  to the  guaranteed  party  based on  changes  in a
specified interest rate, security price, foreign exchange rate or other variable
that is related to an asset,  liability  or equity  security  of the  guaranteed
party,  or failure of another  party to perform  under an  obligating  agreement
(performance guarantees).  Interactive adopted FIN 45 effective January 1, 2003.
Such  adoption  did not have a  material  effect on the  Company's  consolidated
results of operations,  consolidated  financial  position or  consolidated  cash
flows.

In  January  2003,  the  FASB  issued  FASB  Interpretation  No.  46  (FIN  46),
"Consolidation of Variable Interest  Entities",  an Interpretation of Accounting
Research Bulletin No. 51, which addressed  consolidation by business enterprises
of variable  interest  entities either:  (1) that do not have sufficient  equity
investment  at risk to permit  the  entity to  finance  its  activities  without
additional  subordinated financial support, or (2) in which the equity investors
lack  an  essential  characteristic  of a  controlling  financial  interest.  In
December 2003, the FASB completed deliberations of proposed modifications to FIN
46 (the "Revised  Interpretations")  resulting in multiple effective dates based
on the nature, as well as the creation date of the variable interest entity. For
variable  interest  entities  created  prior to  January 1,  2004,  the  Revised
Interpretations  must be applied no later  than the first  quarter of 2004.  The
Revised  Interpretations  must be  applied  to all  variable  interest  entities
created  after  January 1, 2004.  Because the Company does not have  affiliation
with any special purpose or variable interest  entities,  this standard will not
have a material effect on the Company's consolidated financial statements.

In April 2002, the FASB issued SFAS No. 145,  "Rescission of FASB Statements No.
4, 44, and 64,  Amendment of FASB Statement No. 13, and Technical  Corrections,"
or SFAS No. 145. SFAS No. 145 provides for the rescission of several  previously
issued  accounting  standards,  new  accounting  guidance for the accounting for
certain  lease  modifications  and various  technical  corrections  that are not
substantive in nature to existing  pronouncements.  The Company adopted SFAS No.
145 on January 1, 2003.  The adoption of this  statement did not have a material
effect  on  our  consolidated  results  of  operations,  consolidated  financial
position or consolidated cash flows.

In July 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or  Disposal  Activities"  ("SFAS No.  146").  SFAS No.  146  replaces
Emerging  Issues Task Force Issue No. 94-3,  "Liability  Recognition for Certain
Employee  Termination  Benefits  and Other Costs to Exit an Activity  (including
Certain Costs Incurred in a Restructuring)."  SFAS No. 146 requires companies to
recognize  costs  associated  with  exit or  disposal  activities  when they are
incurred  rather than at the date of a commitment  to an exit or disposal  plan.
Examples of costs  covered by SFAS No. 146 include lease  termination  costs and
certain  employee  severance  costs that are  associated  with a  restructuring,
discontinued operation,  plant closing, or other exit or disposal activity. SFAS
No. 146 is to be applied prospectively to

                                      -43-
<page>
exit or disposal  activities  initiated  after  December  31,  2002,  with early
application  encouraged.  The  adoption of this  statement  had no effect on the
Company's consolidated results of operations, consolidated financial position or
consolidated cash flows.

In April 2003,  the FASB issued SFAS No. 149,  "Amendments  of Statement  133 on
Derivative  Instruments and Hedging  Activities"  ("SFAS No. 149"). SFAS No. 149
serves as an amendment  and  clarifies  financial  accounting  and reporting for
derivative  instruments,  including  derivative  instruments  embedded  in other
contracts  and for  hedging  activities  under  SFAS No.  133,  "Accounting  for
Derivative  Instruments and Hedging  Activities." The Company does not engage in
hedging activities and therefore, this statement does not apply.

In May 2003,  the FASB issued SFAS No. 150,  "Accounting  for Certain  Financial
Instruments  with  Characteristics  of Both  Liabilities  and Equity" ("SFAS No.
150").  SFAS No. 150  establishes  standards  for how an issuer  classifies  and
measures certain financial  instruments with characteristics of both liabilities
and equity. SFAS No. 150 requires that an issuer classify a financial instrument
that is within its scope as a liability (or an asset in some circumstances). The
Company has not issued such  instruments and this statement has had no effect on
the Company's financial position.

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.

2.   Spin-off of Morgan

On July 12, 2001,  the Company made an  additional  $2.0 million  investment  in
Morgan,  which increased its equity ownership from 55.6% to 70.2% and its voting
control from 68.59% to 80.8%.

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.

As a result,  the Company's  services  segment,  which  consisted  solely of the
operations  of Morgan,  is being  reported as operations  to be  distributed  to
shareholders. Accordingly, operating results of Morgan have been segregated from
continuing  operations and reported as a separate line item in the Statements of
Operations.  Morgan's net sales were $101.2  million for the year ended December
31, 2001.

3.   Acquisitions

The following acquisitions were accounted for as purchases, and accordingly, the
assets  acquired and  liabilities  assumed were recorded at their estimated fair
market values on the date of acquisition.  The operating results of the acquired
companies are included in the  Statements of  Operations  from their  respective
acquisition dates.

On June 22, 2001, a subsidiary of Interactive,  acquired Central Utah Telephone,
Inc. and its subsidiaries,  and Central Telcom Services,  LLC, a related entity,
for approximately $8.0 million in cash (including $1.1 million of cash acquired)
and $7.6 million in notes. The Company recorded  approximately  $11.0 million of
goodwill,  which was being  amortized over 25 years,  through  December 31, 2001
(see Note 1). In addition,  approximately $3.2 million of the purchase price was
allocated to subscriber  lists,  an intangible  asset,  which is being amortized
over 15 years.

In November 2001, a 63.6% owned subsidiary of Interactive acquired the assets of
American Alarm Services, Inc. and American Alarm Commercial Services,  Inc., two
related  Buffalo,  New  York  based  security  alarm  service  providers  for an
estimated acquisition price of $4.15 million,  which was funded, in part, by the
issuance of $2.3  million of  long-term  debt and $0.8  million of  subordinated
notes payable.  The allocation of the  acquisition  price to the assets acquired
included $4 million to subscriber  lists, an intangible asset which is currently
being amortized over 10 years and $50,000 to goodwill.  In 2002, the acquisition
price and the value of the  subscriber  lists were reduced by $0.4  million,  to
$3.75 million and $3.6 million, respectively, to reflect customer attrition.

                                      -44-
<PAGE>

4.   Wireless Communications Services

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

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

On December 31, 2003,  Sunshine sold its three PCS licenses to Cingular Wireless
for $13.75  million in cash.  As part of this sale,  Interactive  received  $7.2
million in exchange for all its preferred stock in Sunshine and $0.4 million for
its warrants,  resulting in a pre-tax gain of $4.0  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.

There are many  risks  relating  to FCC  wireless  licenses  including,  without
limitation,  their cost, 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 an
operating  new  businesses  profitability  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  in which
subsidiaries and affiliates of Interactive  have interests,  can be successfully
sold or financed or developed,  thereby allowing  Interactive's  subsidiaries to
recover their debt and equity investments.

                                      -45-
<PAGE>

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
                                                  -------------------------------
                                                     2001         2002       2003
                                                  -------------------------------
                                                          (in thousands)
<S>                                                <C>         <C>         <C>
Current assets .................................   $  5,457    $  6,048    $  5,330
Property, plant & equipment, intangibles & other     13,852      11,054       9,615
                                                   --------    --------    --------
Total Assets ...................................   $ 19,309    $ 17,102    $ 14,945
                                                   ========    ========    ========

Current liabilities ............................   $  4,251    $  3,621    $  3,182
Long term liabilities ..........................     20,265      17,909      16,483
Equity .........................................     (5,207)     (4,428)     (4,720)
                                                   --------    --------    --------

Total liabilities & equity .....................   $ 19,309    $ 17,102    $ 14,945
                                                   ========    ========    ========

Revenues .......................................   $ 13,111    $ 14,261    $ 13,155
Gross profit ...................................   $  3,784    $  4,748    $  3,167
Net income .....................................   $   (509)   $    779    $   (292)
</TABLE>

A wholly  owned  subsidiary  of the  Company  has a 20%  investment  in  Coronet
Communications Company ("Coronet"), which operates television station WHBF-TV, a
CBS affiliate in Rock Island,  Illinois. A second wholly owned subsidiary of the
Company  has  a  49%  investment  in  Capital   Communications   Company,   Inc.
("Capital"),  which operates  television station WOI-TV, an ABC affiliate in Des
Moines,  Iowa.  At December  31, 2002 and 2003,  the  investment  in Coronet was
carried at a negative $791,000 and a negative $810,000, 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, 2003, totaled $10.1 million payable quarterly through December 31, 2005 to a
third party lender.

At December 31, 2002 and 2003,  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.

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
                                                   -----------------------------
                                                    2001      2002       2003
                                                   -----------------------------
                                                          (in thousands)
<S>                                                <C>       <C>       <C>
Current assets .................................   $12,862   $14,003   $30,347
Property, plant & equipment, intangibles & other    33,788    30,525    29,320
                                                   -------   -------   -------
Total Assets ...................................   $46,650   $44,528   $59,667
                                                   =======   =======   =======

Current liabilities ............................   $ 9,772   $ 9,254   $23,086
Long term liabilities ..........................    24,405    23,628    22,614
Equity .........................................    12,473    11,646    13,967
                                                   -------   -------   -------
Total liabilities & equity .....................   $46,650   $44,528   $59,667
                                                   =======   =======   =======

Revenues .......................................   $34,075   $43,476   $47,392
Gross profit ...................................   $ 9,713   $13,781   $16,746
Net income .....................................   $ 6,184   $ 4,710   $12,710
</TABLE>
                                      -46-
<page>
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 $4.1  million and $4.6  million at December 31, 2002 and 2003,
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 $2.3 million and $3.0 million
at December 31, 2002 and 2003, respectively.

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

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

                                                                                       December 31,
                                                                                    2002          2003
                                                                                -------------------------
                                                                                      (in thousands)

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

Rural Electrification Administration (REA) and Rural Telephone Bank (RTB) notes
payable in equal quarterly installments through 2027 at fixed interest rates
ranging from 2% to 7.5% (5.0% weighted average), secured by
assets of the telephone companies of $150 million .............................   $  58,119    $  59,917

Bank credit facilities utilized by certain telephone and telephone holding
companies through 2016, $27.4 million at fixed interest rates averaging
7.8% and $51.2 million at variable interest rates averaging 4.1% ..............      80,166       78,646

Unsecured notes issued in connection with acquisitions through 2008, all at
fixed interest rates averaging 9.6% (primarily held by management of
telephone company's) ..........................................................      34,749       34,389

Other .........................................................................       3,587        2,831
                                                                                  ---------    ---------
                                                                                    176,621      175,783
Current maturities ............................................................     (18,272)     (13,162)
                                                                                  ---------    ---------
                                                                                  $ 158,349    $ 162,621
                                                                                  =========    =========
</TABLE>


REA debt of $10.8  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 $10.0 million short-term line of credit facility,  which
expires in August 2004. Borrowings under this line at December 31, 2002 and 2003
were $10.0  million and zero,  respectively.  Management  expects that such line
will be renewed by its  expiration  date although  there are no assurances  that
this will be accomplished.  Borrowings outstanding under this facility and other
lines of credit are  classified  as notes  payable in the  consolidated  balance
sheet.  During 2003, the average balance of notes payable  outstanding was $10.5
million,  the  highest  amount  outstanding  was $12.9  million  and the average
interest rate was 4.1%.

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.  Management
believes that the Company is in compliance  with all significant  covenants.  At
December 31, 2002 and 2003,  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.

                                      -47-
<page>

Cash payments for interest were $14.6  million,  $14.0 million and $12.0 million
for the years ended  December 31,  2001,  2002 and 2003,  respectively  and $0.3
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, 2002 for each
of the next five years are as follows: 2004--$13.2 million, 2005--$13.1 million,
2006--$39.3 million, 2007--$23.6 million, 2008--$22.9 million, and the remaining
$63.6 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.  Prior to the
renewal the annual  payment  was  $70,000.  In  addition,  expenses  relating to
administrative  support,   transportation,   and  communications  (approximately
$104,000,  $104,000 and $98,000 for the years ended December 31, 2001,  2002 and
2003,  respectively)  are  paid  to an  affiliate  of its  CEO.  See  Note 4 for
additional references to related party transactions.

During  2001,  the Company  recorded an  administration  fee of $2.8 million for
services  provided to an entity, in which an affiliate of the CEO of the Company
has a minority investment.  The fee relating to a 1999 FCC conducted auction for
spectrum, to be used for the provision of personal communications  services, was
based on the entity's realization of the licenses acquired. This fee is included
in the "Sales and Revenues" in the Consolidated Statement of Operations.

At December 31, 2002 and 2003, assets of $12.4 million and $15.1 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.

On December  12,  1999,  Interactive  completed  the private  placement of a $25
million 6% five-year unsecured,  convertible subordinated note, convertible into
Interactive  common stock at $42.50 per share,  (adjusted for subsequent 2 for 1
stock split).  At that time, to assist the Company with the private placement to
Cascade Investment LLC ("Cascade"),  the CEO of the Company,  agreed to give the
acquirer of the note,  a one-time  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 January 2001,  the above option to sell  agreement  was amended.  As amended,
Cascade  had the right to sell up to $15  million of the note back to the CEO at
any time  prior to  January  31,  2001 and the right to sell the  remaining  $10
million of the notes  between  November 15 and  December 1, 2002.  The option to
sell was at 105% of principal amount sold plus accrued and unpaid interest. As a
condition to modifying  and extending  the option to sell,  the Company  entered
into an agreement with its CEO whereby it will pay for and acquire,  on the same
terms and conditions, any portion of the note sold by Cascade under this option.
During  January  2001,  Cascade  exercised  this  option  with regard to the $15
million of the notes and on February 14, 2001, the Company paid $15.9 million to
Cascade,  including 5% premium plus accrued and unpaid  interest in exchange for
$15.0 million of the note held by Cascade.

The  option  to sell the  remaining  $10  million  of  notes  was  secured  by a
collateralized letter of credit in which, for a period of time, a portion of the
collateral  was provided by an  affiliate of the CEO. The company  agreed to pay
all legal fees,  letter of credit fees and a 10% per annum collateral fee on the
amount of collateral  provided by the  affiliate  which at December 31, 2001 was
valued at $3.0  million.  The Company  expensed $0.8 million in 2001 relating to
this  agreement.  Amounts  payable at 2001 was $0.3  million.  The  Company  can
replace the collateral at any time and the fees would be eliminated  thereafter.
As of December  31, 2001,  the company had  replaced  $7.5 million of the escrow
collateral securing the above noted letter of credit by segregating $7.5 million
of U.S.  Treasury  Bills in a separate  account and pledging this account to the
issuers of the letter of credit.  Subsequent to December 31, 2001, the remaining
collateral  of $3.0  million was replaced by the  Company.  In  November,  2002,
Cascade exercised its option to demand payment on the remaining $10.0 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 $10.0  million  was $0.7  million  and of this  amount $0.1
million 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, 2003,  44,815 shares
have been  purchased  at an  average  cost of $32.87 per  share.  Subsequent  to
year-end,  the Company has  purchased an  additional  5,300 shares at an average
cost of $26.11 per share.



                                      -48-
<PAGE>
9.   Income Taxes

Interactive  files a consolidated  income tax return with its  subsidiaries  for
federal  income tax purposes.  Separate  returns and in some cases  consolidated
returns, of subsidiary entities are filed with other governing authorities.

Deferred  income  taxes  for  2002  and  2003  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, 2002 and 2003 are as follows:

<TABLE>
<CAPTION>
                                                       Dec. 31, 2002          Dec. 31, 2003
                                                       Deferred Tax            Deferred Tax
                                                    Asset     Liability     Asset     Liability
                                                 ----------------------------------------------
                                                                (in thousands)
<S>                                               <C>         <C>         <C>         <C>
Fixed assets revalued under purchase
   accounting and tax over book depreciation ..   $   --      $  8,968    $   --      $  9,852
Discount on long-term debt ....................       --           992        --           550
Unrealized gains on marketable securities .....       --         1,388        --         1,441
Partnership tax losses in excess of book losses       --        (5,434)      1,863       2,274
Other reserves and accruals ...................       --           707        --         1,400
Other .........................................        599        --           800        --
                                                  --------    --------    --------    --------
    Total deferred income taxes ...............        599       6,621       2,663      15,517

Valuation Allowance ...........................       (599)       --        (2,663)       --
                                                  --------    --------    --------    --------
                                                  $   --      $  6,621    $   --      $ 15,517
                                                  ========    ========    ========    ========
</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  $9.0  million  of  state  tax  net  operating  loss
carryforwards,  expiring  between 2005 and 2018. A full valuation  allowance has
been recorded against these net operating loss carryforwards.

The provision (benefit) for income taxes is summarized as follows:
<TABLE>
<CAPTION>
                                                 2001       2002       2003
                                               ------------------------------
                                                       (in thousands)

<S>                                             <C>       <C>       <C>
Current payable taxes:
  Federal ...................................   $ 3,438   $ 3,016   $(4,775)
  State and local............................       740       510        874
                                                -------   -------   --------
                                                  4,178     3,526    (3,901)
Deferred taxes:
 Federal ....................................      (671)       15     8,529
 State and local ............................       (53)      383       340
                                                -------   -------   --------
                                                   (724)      398     8,869
                                                -------   --------  --------
                                                $ 3,454   $ 3,924   $ 4,968
                                                =======   ========  ========
</TABLE>
A  reconciliation  of the  provision  (benefit)  for income taxes and the amount
computed by applying  the  statutory  federal  income tax rate to income  before
income taxes, minority interest, and operations of Morgan follows:
<TABLE>
<CAPTION>

                                                  2001     2002       2003
                                                ---------------------------
                                                      (in thousands)
<S>                                             <C>       <C>       <C>
Tax at statutory rate .......................   $ 2,261   $ 2,963   $ 4,720
Increases (decreases):
State and local taxes, net of federal benefit       453       589       801
Amortization of non-deductible goodwill .....       596      --        --
Other .......................................       144       372      (553)
                                                -------   -------   -------
                                                $ 3,454   $ 3,924   $ 4,968
                                                =======   =======   =======
</TABLE>
Net cash  payments for income taxes were $4.9 million,  $3.2  million,  and $1.0
million  for  the  three  years  ended   December  31,  2001,   2002  and  2003,
respectively.
                                      -49-
<PAGE>

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,
2002 and 2003 are as follows:
<TABLE>
<CAPTION>

                                          Unrealized
                                          Gain (Loss)   Tax Effect     Net
                                          ----------------------------------
                                                  (in thousands)
<S>                                        <C>          <C>          <C>
Balance at December 31, 2001 ...........   $ 2,599      $(1,057)     $ 1,542
Reclassification adjustment ............      (374)         146         (228)
Change in unrealized gains (losses), net    (1,310)         530         (780)
                                           -------      -------      -------

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
                                           =======      =======      =======
</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 $0.9 million,  $1.0 million and $1.1 million for 2001,  2002 and
2003, respectively.

The Company has a Principal  Executive  Bonus Plan that has been approved by the
shareholders,  for which no amounts were recognized in 2001 and $0.3 million and
$1.3 million were recorded in 2002 and 2003, respectively.

In addition,  three of the Company's  telephone  subsidiaries  participate  in a
multi-employer  defined  benefit  plan,  which is  administrated  by a telephone
industry  association.  Under this plan accumulated benefits and plan assets are
not  determined or allocated  separately by individual  employees.  Accordingly,
such data is not currently  available.  Total  expenses of these plans were $0.1
million for each of the three years in the period ended December 31, 2003.

12.  Commitments and Contingencies

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.  Certain leases have renewal  options
and escalation clauses.  Rental expense under operating leases was $0.3 million,
$0.3 million and $0.5 million for years ended  December 31, 2001,  2002 and 2003
respectively.  Minimum lease payments due under non-cancelable  operating leases
at December 31, 2003 are as follows: $0.5 million in 2004; $0.5 million in 2005;
$0.4  million  in 2006;  $0.4  million  in 2007,  $0.2  million in 2008 and $0.3
million thereafter.

Interactive  and  several  other  parties,   including  the  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  Federal   Communications
Commission  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 prior to trebling.

                                      -50-
<page>
Interactive  strongly believes that this lawsuit is completely without merit and
that  relator's  initial damage  computation  is 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 such 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,  Interactive  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,  Interactive  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  the  judge  approved  a
scheduling  order.  Discovery has now commenced as the parties await a ruling on
the defendants' motion to dismiss the case.


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


Interactive  is a  party  to  routine  litigation  incidental  to its  business.
Management  believes that the ultimate resolution of these matters will not have
a material  adverse  effect on the  combined  liquidity,  financial  position or
results of operations of Lynch Interactive.


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

                                                               2002-Three Months Ended
                                             ----------------------------------------------------------
                                             March 31       June 30      September 30      December 31
                                             ----------------------------------------------------------
                                                      (in thousands, except per share amounts)

<S>                                        <C>             <C>          <C>              <C>
Revenues ...............................   $   20,974      $   21,098   $   22,983       $   21,249
Operating profit .......................        5,244           4,457        5,891            3,641
Income (loss) from continuing operations        4,273(a)          905       (1,872)(b)          455(c)
Net Income (Loss) ......................        2,385             905       (1,872)             455
Basic and diluted earnings per share:
Basic: Income (loss) from continuing
 operations ............................   $     1.52      $     0.32   $    (0.67)      $     0.16
Diluted: Income (loss) from continuing
 operations ............................   $     1.45      $     0.32   $    (0.67)      $     0.16
Basic: Net Income (loss) ...............   $     0.85      $     0.32   $    (0.67)      $     0.16
Diluted: Net Income(loss) ..............   $     0.83      $     0.32   $    (0.67)      $     0.16

</TABLE>
<TABLE>
<CAPTION>

                                                   2003-Three Months Ended
                                        -------------------------------------------------------------
                                        March 31             June 30     September 30     December 31
                                        -------------------------------------------------------------
                                                  (in thousands, except per share amounts)

<S>                                       <C>             <C>           <C>              <C>
Revenues ............................     $    21,303     $    21,343   $   22,319       $   22,488
Operating profit ....................           4,774           4,693        5,379            3,582
Net Income (Loss) ...................           1,413           1,156        1,432            3,389(d)
Basic and diluted earnings per share:     $       .51     $       .41   $      .51       $    1.22
</TABLE>

(a)  Includes a $5.0 million gain from the sale of RSA #1 (North) in New Mexico.

(b)  Includes a $5.5 million  provision  for  impairment  of an  investment in a
     spectrum license holder.

(c)  Effective  October 1, 2002, the Company  increased the amortization  period
     from  three  years  to ten  years on  customer  contracts  acquired  in the
     American Alarm acquisition.  Such change reduced quarterly  amortization by
     $0.2 million.

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

                                      -51-
<page>
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 (loss) per share in 2001 and 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 the fourth quarter of 2003, the Company entered into  negotiations to acquire
a 37% interest in an entity  whose  principal  assets  consist of a $6.0 million
subordinated  note and a 17% equity  interest  in Lynch  Telephone  Corporation,
which is an 83% owned  subsidiary of the Company.  The acquisition  cost of this
interest  is  expected  to be $5.0  million,  which will be funded  through  the
issuance of a five-year amortizing subordinated note of the parent.


In  February  2004,  a 100%  owned  subsidiary  of  the  Company  completed  the
acquisition of a cable television operation at a cost of $0.4 million.

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.  The acquisition
is subject to certain conditions including the approval by the California Public
Utilities Commission and other regulatory authorities.


In March 2004, a subsidiary of the Company  invested  $250,000 for a 7% interest
in an entity which provides wireline telecommunication transport services in New
York State.

                                      -52-
<PAGE>



ITEM 15(a)(2)

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

<TABLE>
<CAPTION>

                                                                   Years Ended December 31,
                                                               -----------------------------
                                                                 2001       2002       2003
                                                               -----------------------------
                                                                      (in thousands)

<S>                                                            <C>        <C>        <C>
Interest, dividends & gains on sale of marketable securities   $   891    $   326    $    12
Interest and other income from subsidiaries ................       313       --         --
                                                               -------    -------    -------
     Total income ..........................................     1,204        326         12

Cost and expenses:
  Unallocated corporate administrative expense .............     1,549      1,994      3,095
  Interest expense .........................................     4,612      1,620        827
                                                               -------    -------    -------
      Total cost and expenses ..............................     6,161      3,614      3,922
                                                               -------    -------    -------

Loss before income taxes and equity in
income (loss) of subsidiaries ..............................    (4,957)    (3,288)    (3,910)

Income tax benefit .........................................     1,685      1,117      1,329
Equity in income (loss) of subsidiaries ....................     5,806      5,932      9,971
Loss from operations of Morgan - net .......................    (1,386)    (1,888)      --
                                                               -------    -------    -------
Net income .................................................   $ 1,148    $ 1,873    $ 7,390
                                                               =======    =======    =======
</TABLE>

                                      -53-
<PAGE>
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                          LYNCH INTERACTIVE CORPORATION
                            CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>

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

Assets

<S>                                                                     <C>       <C>
Current assets
   Cash and cash equivalents ........................................   $   133   $ 1,087
   Deferred income taxes ............................................        85        85
   Other current assets .............................................        63       194
                                                                        -------   -------
                                                                            281     1,366

Office equipment (net) ..............................................        13        18

Other assets (principally investment in and advances to subsidiaries)    43,369    42,083
                                                                        -------   -------

Total assets ........................................................   $43,663   $43,467
                                                                        =======   =======
Liabilities and shareholders' equity

Current liabilities .................................................    11,056     2,725

Long term debt ......................................................     7,995     8,475

Deferred credits ....................................................     1,980     2,380

Total shareholders' equity ..........................................    22,632    29,887
                                                                        -------   -------

Total liabilities and shareholders' equity ..........................   $43,663   $43,467
                                                                        =======   =======
</TABLE>

                                      -54-
<PAGE>


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


<TABLE>
<CAPTION>


                                                                Years Ended December 31,
                                                        ---------------------------------
                                                          2001        2002        2003
                                                        ---------------------------------
                                                                 (in thousands)

<S>                                                     <C>         <C>         <C>
Operating activities:
  Net income ........................................   $  1,148    $  1,873    $  7,390
  Depreciation ......................................         15          14           4
  Changes in current assets and liabilities .........     (5,078)     (3,147)      1,683
                                                        --------    --------    --------
Cash provided by (used in) operating activities .....     (3,915)     (1,260)      9,077
                                                        --------    --------    --------
Investing activities:
   Investment and advances to Brighton communications    (12,861)      2,479       1,777
   Proceeds from sale of securities .................      1,679        --          --
   Purchase of securities ...........................       --          (158)        (84)
   Capital expenditures .............................         (9)         (3)         (9)
                                                        --------    --------    --------
Net cash provided by (used in) investing activities .    (11,191)      2,318       1,684
                                                        --------    --------    --------
Financing activities:
  Net borrowings under:
    Lines of credit .................................      7,700       2,400     (10,000)
    Issuance of long term debt ......................     27,784        --           480
    Repayment of long term debt .....................    (15,121)    (10,000)       --
    Purchase of treasury stock ......................        (88)       (956)       (287)
    Other ...........................................         11        --          --
                                                        --------    --------    --------
Net cash provided by (used in) financing activities .     20,286      (8,556)     (9,807)
                                                        --------    --------    --------

Total increase (decrease) cash and cash equivalents .      5,180      (7,498)        954

Cash and cash equivalents at beginning of year ......      2,451       7,631         133
                                                        --------    --------    --------

Cash and cash equivalents at end of year ............   $  7,631    $    133    $  1,087
                                                        ========    ========    ========
</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, 2003, at a fixed interest
     rate  of 6% per  annum,  due in  2004.  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.

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.

                                      -55-
<PAGE>




                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS

                          LYNCH INTERACTIVE CORPORATION
                  YEARS ENDED DECEMBER 31, 2001, 2002 AND 2003

<TABLE>
<CAPTION>

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

<S>                                    <C>          <C>           <C>            <C>             <C>
Year ended December 31, 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

Year ended December 31, 2001
allowance for uncollectible accounts   $  155,000   $  276,000   $   22,000(B)   $   29,000(A)   $  424,000

</TABLE>

(A)  UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES.
(B)  BEGINNING BALANCE OF ACQUIRED SUBSIDIARY

                                      -56-
<PAGE>



                                   SIGNATURES

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

LYNCH INTERACTIVE CORPORATION


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

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

      Signature                    Capacity                             Date

*/s/ Mario J. Gabelli      Vice Chairman of the Board of          April 14, 2004
 --------------------
   MARIO J. GABELLI        Directors and Chief Executive
                           Officer (Principal Executive Officer)

*/s/ Morris Berkowitz      Director                               April 14, 2004
 --------------------
   MORRIS BERKOWITZ

*/s/ Paul J. Evanson       Director                               April 14, 2004
 -------------------
   PAUL J. EVANSON

*/s/ John C. Ferrara       Director                               April 14, 2004
 -------------------
   JOHN C. FERRARA

*/s/ Daniel R. Lee         Director                               April 14, 2004
 -----------------
   DANIEL R. LEE

*/s/ David C. Mitchell     Director                               April 14, 2004
 ---------------------
   DAVID C. MITCHELL

*/s/ Salvatore Muoio       Director                               April 14, 2004
 -------------------
   SALVATORE MUOIO

/s/ Robert E. Dolan       Chief Financial Officer                 April 14, 2004
-------------------
   ROBERT E. DOLAN       (Principal Financial
                          and Accounting Officer)

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

                                      -57-
<PAGE>




                                  EXHIBIT INDEX

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

2    Separation Agreement(1)

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

3.2  Amended By-laws of Registrant(2)

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

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

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

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

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

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

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

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

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

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

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

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

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

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


                                      -58-
<page>
Exhibit No.                         Description
-----------                         -----------

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. +

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.+

14.1 Lynch Interactive Corporation Code of Ethics+

14.2 Lynch Interactive Corporation Conflicts of Interest Policy+

21   Subsidiaries of Registrant+

23.1 Consent of Ernst & Young LLP+

23.2 Consent of Deloitte & Touche LLP+

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

     -    Report of Siepert & Co.,  L.L.P.  on the financial  statements of Cuba
          City Telephone  Exchange  Company for the year ended December 31, 2002
          and 2001
     -    Report of Siepert & Co., L.L.P. on the financial statements of Belmont
          Telephone Company for the year ended December 31, 2002 and 2001
     -    Report of Siepert & Co., L.L.P.  on the financial  statements of Upper
          Peninsula  Telephone  Company for the year ended December 31, 2002 and
          2001
     -    Report of Siepert & Co., L.L.P.  on the financial  statements of Lynch
          Michigan  Telephone  Holding  Company for the year ended  December 31,
          2001 and 2000

24   Powers of Attorney+

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

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

32.1 Section 1350 Certification of the Chief Executive Officer+

32.2 Section 1350 Certification of the Chief Financial Officer+

99.1                    Report of Independent Auditors+

     -    Report of Siepert & Co.,  L.L.P.  on the financial  statements of Cuba
          City Telephone  Exchange  Company for the year ended December 31, 2002
          and 2001
     -    Report of Siepert & Co., L.L.P. on the financial statements of Belmont
          Telephone Company for the year ended December 31, 2002 and 2001
     -    Report of Siepert & Co., L.L.P.  on the financial  statements of Lynch
          Michigan Telephone Holding Corporation for the year ended December 31,
          2002 and 2001
     -    Report of Siepert & Co., L.L.P.  on the financial  statements of Lynch
          Michigan  Telephone  Holding  Company for the year ended  December 31,
          2001 and 2000


+    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 Report for the fiscal year ended December 31, 2002.

                                      -59-
<page>
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.

                                      -60-