================================================================================

                        SECURITIES & EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                   FORM 10-Q
                                   ---------

(Mark One)

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

For the quarterly period ended June 30, 2005
                               -------------

                                       or

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

For the transition period from ____________ to ________________

Commission File No.     1-15097
                   -------------------

                          LYNCH INTERACTIVE CORPORATION
--------------------------------------------------------------------------------

             (Exact name of Registrant as specified in its charter)


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


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

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

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

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

Indicate the number of shares outstanding of each of the Registrant's classes of
Common Stock, as of the latest practical date.

               Class                            Outstanding at July 31, 2005
               -----                            ----------------------------
Common Stock, $.0001 par value                          2,752,251

================================================================================
<PAGE>



                                      INDEX
                                      -----

                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                 ----------------------------------------------

PART I.   FINANCIAL INFORMATION


Item 1.   Financial Statements (Unaudited)

          Condensed Consolidated Balance Sheets:
          -          June 30, 2005
          -          December 31, 2004
          -          June 30, 2004

          Condensed Consolidated Statements of Operations:
          -          Three and six months ended June 30, 2005 and 2004

          Consolidated Statements of Shareholders' Equity

          Condensed Consolidated Statements of Cash Flows:
          -          Six months ended June 30, 2005 and 2004

          Notes to Condensed Consolidated Financial Statements

Item 2.   Management's  Discussion  and  Analysis  of  Financial  Condition  and
          Results of Operations

Item 3.   Quantitative and Qualitative Disclosure About Market Risk

Item 4.   Controls and Procedures

PART II.  OTHER INFORMATION

Item 1.   Legal Proceedings

Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds

Item 6.   Exhibits and Reports on Form 8-K


SIGNATURE

CERTIFICATIONS

                                       1
<PAGE>





PART I.  FINANCIAL INFORMATION
Item 1.  Financial Statements

                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      (In thousands, except share amounts)
<TABLE>
<CAPTION>

                                                              JUNE 30,    DECEMBER 31,        JUNE 30,
                                                               2005         2004               2004
                                                           -----------    -----------    --------------
                                                           (Unaudited)     (Audited)       (Unaudited)
<S>                                                       <C>           <C>              <C>

ASSETS

Current assets:
  Cash and cash equivalents                                $  27,741      $  27,214      $  25,932
  Receivables, less allowances of $245, $260 and $291,
     respectively                                              8,340          8,225          8,456
  Material and supplies                                        2,647          2,314          3,240
  Prepaid expenses and other current assets                      993          1,685          3,011
                                                           ---------------------------------------
Total current assets                                          39,721         39,438         40,639

Property, plant and equipment:
  Land                                                           983            983          1,111
  Buildings and improvements                                  17,757         17,640         17,555
  Machinery and equipment                                    221,692        216,429        214,409
                                                           ---------------------------------------
                                                             240,432        235,052        233,075
  Accumulated depreciation                                  (123,098)      (114,724)      (111,672)
                                                           ---------------------------------------
                                                             117,334        120,328        121,403

Excess of cost over fair value of net assets
 acquired, net (goodwill)                                     60,501         60,042         60,580
Other intangibles                                             10,690         10,026         10,953
Investments in and advances to affiliated entities            11,003         12,340         10,523
Other assets                                                  15,518         14,906         13,427
                                                           ---------------------------------------

Total assets                                               $ 254,767      $ 257,080      $ 257,525
                                                           =======================================


See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>

                                       2
<PAGE>





                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                      (in thousands, except share amounts)
<TABLE>
<CAPTION>

                                                                           June 30,     December 31,      June 30,
                                                                             2005          2004             2004
                                                                         ------------------------------------------
                                                                         (Unaudited)    (Audited)      (Unaudited)

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

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
  Notes payable to banks                                                   $   8,419      $   4,793      $   6,450
  Trade accounts payable                                                       2,874          4,326          3,606
  Accrued interest payable                                                       847            825            757
  Accrued liabilities                                                         12,968         11,238          9,952
  Current maturities of long-term debt                                        25,068         14,364         13,959
                                                                           ---------------------------------------
     Total current liabilities                                                50,176         35,546         34,724

Long-term debt                                                               138,660        154,602        160,721
Deferred income taxes                                                         15,872         17,549         15,930
Other liabilities                                                              3,463          3,268          2,962
                                                                           ---------------------------------------
   Total liabilities                                                         208,171        210,965        214,337

Minority interests                                                            11,250         11,543         10,784

Commitments and contingencies

Shareholders' equity
  Common stock, $0.0001 par value-10,000,000
     shares authorized; 2,824,766 issued;
    2,752,251, 2,757,951 and 2,771,751 outstanding                                --             --             --
  Additional paid-in capital                                                  21,406         21,406         21,406
  Retained earnings                                                           14,643         13,735         11,256
  Accumulated other comprehensive income                                       1,633          1,588          1,453
  Treasury stock, 72,515, 66,815 and 53,015
    shares, at cost                                                           (2,336)        (2,157)        (1,711)
                                                                           ---------------------------------------
                                                                              35,346         34,572         32,404
                                                                           ---------------------------------------

Total liabilities and shareholders' equity                                 $ 254,767      $ 257,080      $ 257,525
                                                                           =======================================

See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>

                                       3
<PAGE>






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

<TABLE>
<CAPTION>

                                                            THREE MONTHS ENDED           SIX MONTHS ENDED
                                                                 JUNE 30,                      JUNE 30,
                                                          --------------------------------------------------
                                                            2005          2004          2005          2004
                                                          --------------------------------------------------
<S>                                                      <C>            <C>          <C>           <C>

Revenues                                                  $ 22,471      $ 21,087      $ 44,089      $ 42,511


Costs and expenses:
Cost of revenue, excluding depreciation                      8,095         7,407        15,746        14,610
General and administrative costs at operations               3,343         3,253         6,766         6,392
Corporate office expenses                                    2,742         2,273         4,834         3,246
Depreciation and amortization                                5,346         4,927        10,541        10,148
                                                         --------------------------------------------------
    Total Expense                                           19,526        17,860        37,887        34,396
                                                         --------------------------------------------------
Operating profit                                             2,945         3,227         6,202         8,115


Other income (expense):
   Investment income                                           191            82           984           810
   Interest expense                                         (2,950)       (2,851)       (5,772)       (5,670)
   Equity in earnings of affiliated companies                  841           886         1,552         1,598
                                                         --------------------------------------------------
                                                            (1,918)       (1,883)       (3,236)       (3,262)
                                                         --------------------------------------------------
Income before income taxes and minority interests            1,027         1,344         2,966         4,853

Provision for income taxes                                    (330)         (473)       (1,097)       (1,922)
Minority interests                                            (484)         (487)         (961)         (944)
                                                         --------------------------------------------------
Net income                                                $    213      $    384      $    908      $  1,987
                                                         ===================================================

Basic and diluted weighted average shares outstanding        2,752         2,774         2,753         2,775

Basic and diluted earnings per share                      $   0.08      $   0.14      $   0.33      $   0.72

See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>

                                       4
<PAGE>





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

<TABLE>
<CAPTION>

                                     SHARES OF                                         ACCUMULATED
                                      COMMON                  ADDITIONAL                  OTHER
                                     STOCK OUT-     COMMON      PAID-IN    RETAINED   COMPREHENSIVE   TREASURY
                                     STANDING       STOCK       CAPITAL    EARNINGS       INCOME        STOCK        TOTAL
                                   ----------------------------------------------------------------------------------------
<S>                               <C>           <C>           <C>          <C>        <C>            <C>          <C>

Balance at December 31, 2004       2,757,951      $      0     $ 21,406     $13,735     $ 1,588      $ (2,157)     $34,572
Net income for the period                 --            --           --         908          --            --          908
Unrealized loss on available
  for sale securities, net                --            --           --          --          45            --           45
                                                                                                                   -------
    Comprehensive income                                                                                               953
                                                                                                                   -------
Purchase of Treasury Stock            (5,700)           --           --          --          --          (179)        (179)
                                 -----------------------------------------------------------------------------------------
Balance at June 30, 2005
                                   2,752,251      $      0     $ 21,406     $14,643     $ 1,633      $ (2,336)     $35,346
                                 =========================================================================================


See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>

                                       5
<PAGE>





                          LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                            (Unaudited) (in thousands)
<TABLE>
<CAPTION>


                                                                             SIX MONTHS ENDED
                                                                                   JUNE 30,
                                                                          -----------------------
                                                                              2005         2004
                                                                          ----------    ---------
<S>                                                                     <C>            <C>

OPERATING ACTIVITIES:
Net Income                                                                $    908      $  1,987
Adjustments   to  reconcile  net  income  to  net  cash  provided
by  operating activities:

   Depreciation and amortization                                            10,541        10,148
   Equity in earnings of affiliated companies                               (1,552)       (1,598)
   Distributions received from affiliated companies                          2,973           879
   Minority interests                                                          961           944
   Changes in operating assets and liabilities:
        Receivables                                                              5          (226)
        Accounts payable and accrued liabilities                            (1,835)         (368)
   Other                                                                      (286)       (2,112)
                                                                          -----------------------
Net cash provided by operating activities                                   11,715         9,654
                                                                          ----------------------

INVESTING ACTIVITIES:
Capital expenditures                                                        (4,205)       (6,307)
Acquisition of business                                                     (3,594)       (4,877)
Acquisition of spectrum                                                       (500)         --
Investment in and advances to affiliated entities                              (62)          (63)
Other                                                                          217          (367)
                                                                          ----------------------
Net cash used in investing activities                                       (8,144)      (11,614)
                                                                          ----------------------

FINANCING ACTIVITIES:
Issuance of long term debt                                                   2,412         5,599
Repayments of long term debt                                                (7,650)       (6,702)
Net proceeds on lines of credit                                              3,626         2,994
Purchase of treasury stock                                                    (179)         (237)
Distributions to partners                                                   (1,253)         (318)
                                                                          ----------------------
Net cash provided by (used in) financing activities                         (3,044)        1,336
                                                                          ----------------------
Net increase (decrease) in cash and cash equivalents                           527          (624)
Cash and cash equivalents at beginning of period                            27,214        26,556
                                                                          ----------------------
Cash and cash equivalents at end of period                                $ 27,741      $ 25,932
                                                                          ======================

Cash paid for:
  Interest expense                                                        $  5,669      $  5,509
                                                                          ======================
  Income taxes                                                            $  1,353      $  1,703
                                                                          ======================

See accompanying Notes to Condensed Consolidated Financial Statements.
</TABLE>

                                                 6
<PAGE>





LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. BASIS OF PRESENTATION

Lynch Interactive Corporation  ("Interactive" or the "Company") consolidates the
operating results of its subsidiaries (81%-100% owned at June 30, 2005, December
31, 2004 and June 30, 2004). 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
management  decisions,  are accounted for in accordance  with the equity method.
The Company accounts for the following  affiliated companies on the equity basis
of  accounting:  Coronet  Communications  Company  (20% owned at June 30,  2005,
December 31, 2004 and June 30, 2004), Capital Communications  Company, Inc. (49%
owned at June 30,  2005,  December  31,  2004 and June 30,  2004;  in  addition,
Interactive  owns a  convertible  preferred  stock which,  if  converted,  would
increase  its  ownership  in  Capital   Communications  to  50%),  two  cellular
partnership  operations in New Mexico (both 33% owned at June 30, 2005, December
31, 2004 and June 30, 2004),  KMG Holdings  Group (37% owned since May 2004) and
telecommunications  operations  in  North  Dakota,  Iowa and New York (5% to 14%
owned).

The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance  with  accounting  principles  generally  accepted in the
United  States  of  America  for  interim  financial  information  and  with the
instructions to Form 10-Q and Articles 10 and 11 of Regulation S-X. Accordingly,
they are not audited and do not include  all of the  information  and  footnotes
required  for  complete  financial   statements.   The  consolidated   financial
statements  and  footnotes  included  in  this  Form  10-Q  should  be  read  in
conjunction  with  the  consolidated  financial  statements  and  notes  thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 2004. In the opinion of management,  all  adjustments  (consisting of normal
recurring  accruals)  considered  necessary  for a fair  presentation  have been
included. Operating results for the six month period ended June 30, 2005 are not
necessarily  indicative  of the results that may be expected for the year ending
December 31, 2005.  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 affect the amounts
reported in the financial  statements  and  accompanying  notes.  Actual results
could  differ  from  those  estimates.  Certain  prior  period  amounts  in  the
accompanying consolidated financial statements have been reclassified to conform
to current period presentation.

B. RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

In June 2004,  the Emerging  Issues Task Force  ("EITF")  issued EITF No. 03-01,
"The Meaning Of  Other-Than-Temporary  Impairment And Its Application To Certain
Investments".  EITF 03-01  includes new guidance for  evaluating  and  recording
impairment  losses on debt and  equity  investments,  as well as new  disclosure
requirements  for investments  that are deemed to be temporarily  impaired.  The
provisions  of  EITF  03-01  were  initially  effective  for  reporting  periods
beginning after June 15, 2004,  while the disclosure  requirements  for debt and
equity  securities  accounted  for  under  SFAS  115,  "Accounting  For  Certain
Investments  In Debt And Equity  Securities",  are effective for annual  periods
ending  after  December  15,  2003.  In  September  2004,  the FASB  delayed the
effective date for the measurement and recognition  guidance of EITF 03-01.  The
Company will  evaluate the effect of adopting the  recognition  and  measurement
guidance when the final consensus is reached.

In  May  2005,  the  FASB  issued  SFAS  154,   "Accounting  Changes  and  Error
Corrections".  SFAS 154  eliminates  the  requirement  in APB  Opinion  No.  20,
"Accounting  Changes", to include the cumulative effect of changes in accounting
principle in the income statement in the period of change.  Instead,  to enhance
the comparability of prior period financial  statements,  SFAS 154 requires that
changes  in  accounting   principle  be  retrospectively   applied.   Under  the
retrospective  application,  the new  accounting  principle is applied as of the
beginning of the first period  presented  as if that  principle  had always been
used. Adoption of SFAS 154 is required for accounting changes and corrections of
errors made in the fiscal year beginning after December 15, 2005.

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

                                       7
<PAGE>





In December 2004, the FASB issued SFAS No.123(R),  "Share-Based Payment",  which
establishes  standards for  transactions in which an entity exchanges its equity
instruments  for goods or services.  This  standard  requires a public entity to
measure the cost of  employee  services  received  in  exchange  for an award of
equity  instruments  based  on the  grant-date  fair  value of the  award.  This
eliminates  the exception to account for such awards using the intrinsic  method
previously  allowable under APB Opinion No.25.  SFAS No.123(R) will be effective
in the first quarter of 2006.  The Company does not believe that the adoption of
SFAS  No.123(R)  will  have a  material  impact  on its  consolidated  financial
statements.

In  March  2005,  the  FASB  issued   Interpretation  No.  47,  "Accounting  for
Conditional  Asset  Retirement  Obligations"  ("FIN 47"),  which  clarifies that
conditional  asset retirement  obligations are within the scope of SFAS No. 143,
"Accounting for Asset  Retirement  Obligations."  FIN 47 requires the Company to
recognize  a  liability  for the fair  value  of  conditional  asset  retirement
obligations if the fair value of the liability can be reasonably estimated.  The
Company does not believe that the adoption of FIN 47 will have a material impact
on its financial statements.

C. ACQUISITIONS AND DISPOSITIONS

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 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.  On May 5, 2005, the California  Public  Utilities
Commission approved the transaction  subject to various conditions.  The Company
expects the acquisition to close in the third quarter of 2005.

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

On March 18, 2005, a subsidiary of the Company,  Central Telcom  Services,  LLC,
closed on an  agreement  with Precis  Communications,  LLC, to acquire its cable
television  assets for a purchase  price of $3.5  million.  The system has 2,411
cable subscribers located in Sanpete and Sevier Counties,  Utah. The preliminary
allocation  of the  purchase  price  included  $0.4 million of goodwill and $0.4
million for subscriber lists and other intangible assets.

On  July  29,  2005,  a  subsidiary  of  the  Company  closed  on  the  sale  of
approximately  62% of the Company's  security business accounts to an investment
group for approximately  $2.75 million,  net of holdbacks and fees. The proceeds
will be used to retire debt.

D. 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 three and six months  ended  June 30,  2005 and
2004 and as of December 31, 2004, is as follows:

<TABLE>
<CAPTION>

                                                            BROADCASTING COMBINED
                                                     ----------------------------------------
                                                       JUNE 30,   DECEMBER 31,      JUNE 30,
                                                        2005         2004            2004
                                                     ----------------------------------------
                                                                 (in thousands)
<S>                                                 <C>          <C>            <C>

Current assets                                       $  4,183      $  6,896      $  5,163
Property, plant & equipment, intangibles & other       10,463         9,558         8,749
                                                     ------------------------------------

Total Assets                                         $ 14,646      $ 16,454      $ 13,912
                                                     ====================================

                                       8
<PAGE>



<CAPTION>

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

Current liabilities                                  $  2,256      $  3,383      $  2,400
Long term liabilities                                  16,231        16,751        15,756
Equity                                                 (3,841)       (3,680)       (4,244)
                                                     ------------------------------------

Total liabilities & equity                           $ 14,646      $ 16,454      $ 13,912
                                                     ====================================
THREE MONTHS ENDED
Revenues                                             $  2,972                    $  3,204
Gross profit                                              807                       1,062
Net income (loss)                                         (72)                        328
SIX MONTHS ENDED
Revenues                                             $  6,028                    $  6,694
Gross profit                                            1,557                       2,318
Net income (loss)                                        (171)                        682
</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 June 30,  2005,  December  31,  2004 and June 30,  2004,  the
investment in Coronet was carried at a negative  $0.6 million,  $0.6 million and
$0.7 million, respectively, due to the subsidiary's guarantee of $3.8 million of
Coronet's  third party debt.  The guarantee is in effect for the duration of the
loan  which  expires  on  December  31,  2005 and would be payable if the equity
investee  fails to make such payment in  accordance  with the terms of the loan.
Long-term  debt of Coronet,  at June 30,  2005,  totaled  $9.2  million  payable
quarterly through December 31, 2005 to a third party lender.

At June 30, 2005, December 31, 2004 and June 30, 2004, the investment in Capital
is carried at zero as its share of net losses  recognized  to date have exceeded
its net  investment  and the Company has no further  commitment to Capital.  The
Company's  shares in Capital have been pledged as security  for  Capital's  long
term debt.

Summarized financial information for telecommunications companies which includes
the  cellular  telephone   providers,   spectrum  license  holders,   and  other
telecommunication  operations  accounted  for by the equity method as of and for
the three and six months  ended June 30,  2005 and 2004 and as of  December  31,
2004 is as follows (in thousands):

<TABLE>
<CAPTION>

                                                        TELECOMMUNICATIONS COMBINED
                                                     --------------------------------
                                                     JUNE 30,  DECEMBER 31,  JUNE 30,
                                                       2005       2004         2004
                                                     -------------------------------
                                                             (in thousands)
<S>                                                 <C>         <C>         <C>

Current assets                                       $33,256     $36,080     $31,064
Property, plant & equipment, intangibles & other      34,900      33,087      26,350
                                                     -------------------------------

Total Assets                                         $68,156     $69,167     $57,414
                                                     ===============================

Current liabilities                                  $22,941     $22,745     $22,107
Long term liabilities                                  6,002       5,900       8,223
Equity                                                39,213      40,522      27,084
                                                     -------------------------------

Total liabilities & equity                           $68,156     $69,167     $57,414
                                                     ===============================
THREE MONTHS ENDED
Revenues                                             $15,229                 $14,443
Gross profit                                           6,920                   6,567
Net income                                             4,005                   4,357


                                       9
<PAGE>



<CAPTION>

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

SIX MONTHS ENDED
Revenues                                             $29,998                 $26,749
Gross profit                                          13,406                  12,042
Net income                                             7,645                   7,652
</TABLE>


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 $4.9 million,  $6.5 million and $5.5 million at June 30, 2005,
December 31, 2004 and June 30, 2004,  respectively and included in Investment in
and advances to affiliated entities.

E.          INDEBTEDNESS

In June 2005, Interactive closed on a new $10 million unsecured revolving credit
facility,  at  1.5%  over  prime,  expiring  in  2008,  replacing  the  previous
short-term  line of credit  facility.  Borrowings  under  this and the  previous
facility,  included in Notes payable to banks,  were $4.3 million,  $1.1 million
and $2.6  million  at June  30,  2005,  December  31,  2004  and June 30,  2004,
respectively.

Long-term  debt  consists  of (all  interest  rates  are at June 30,  2005)  (in
thousands):

<TABLE>
<CAPTION>

                                                              JUNE 30,     DECEMBER 31,        JUNE 30,
                                                                2005           2004               2004
                                                            --------------------------------------------
<S>                                                           <C>          <C>                <C>

Rural  Electrification  Administration  ("REA") and
Rural Telephone Bank ("RTB")notes payable due
quarterly through 2027 at fixed interest rates ranging
from 2% to 7.5%. (5.1% weighted average, secured
by assets  of the  telephone companies with a net book         $55,211       $ 57,129          $ 58,787
value of $150 million)

Bank Credit  facilities  utilized by certain  telephone
and  telephone  holding companies due from 2005 to
2016, $8.3 million at fixed interest rates averaging
8.3% and $60.0 million at variable  interest rates              68,347         70,402            74,548
averaging 5.3%.

Unsecured notes issued in connection with
acquisitions through 2008, at fixed interest rates              38,419         38,983            38,889
averaging 9.5%

Other                                                            1,751          2,452             2,456
                                                             ------------------------------------------
                                                               163,728        168,966           174,680
Current maturities                                             (25,068)       (14,364)          (13,959)
                                                             ------------------------------------------
                                                             $ 138,660       $154,602          $160,721
                                                             ==========================================
</TABLE>


In March 2005, in  conjunction  with the  acquisition of cable assets in Utah, a
subsidiary of the Company borrowed $2.2 million from a bank at variable interest
rates included in Bank Credit facilities above.

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.  At June 30,  2005,  the Company is in  compliance  with all
covenants. At June 30, 2005, December 31, 2004 and June 30, 2004,  substantially
all the  subsidiaries'  net assets are  restricted  from  distribution  to Lynch
Interactive.

                                       10
<PAGE>





F. COMPREHENSIVE INCOME

Other  comprehensive  income,  net of tax,  which  consists of unrealized  gains
(losses) on available for sale  securities,  as of June 30, 2005 and 2004 are as
follows (in thousands):

<TABLE>
<CAPTION>

                                                   THREE MONTHS ENDED          SIX MONTHS ENDED
                                                         JUNE 30,                   JUNE 30,
                                                 ----------------------------------------------
                                                    2005        2004         2005        2004
                                                 ----------------------------------------------
<S>                                             <C>          <C>          <C>          <C>

              Net income                         $   213      $   384      $   908      $ 1,987
              Unrealized gains                       209          305           69        1,166
              Tax effect                             (71)        (104)         (24)        (399)
                                                 ----------------------------------------------
              Net other comprehensive income         138          201           45          767
                                                 ----------------------------------------------
              Comprehensive income               $   351      $   585      $   953      $ 2,754
                                                 ==============================================

</TABLE>

G. TREASURY STOCK PURCHASES

In January  2005,  the Company  purchased  5,700  shares of its common stock for
treasury at an average  investment of $31.53 per share.  The Company has made no
additional share repurchases since January.

H. LITIGATION

TAYLOR LITIGATION.
Interactive and several other parties, including Interactive's CEO, and Fortunet
Communications,     L.P.,     which    was    Sunshine     PCS     Corporation's
predecessor-in-interest,  have been named as defendants in a lawsuit  originally
brought by Rufus C. Taylor, III ("Taylor" or the " relator") 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 in February 2001. At the initiative of one of the defendants, the seal was
lifted in January 2002. Under the False Claims Act, a private plaintiff called a
relator may file a civil action on the U.S.  government's behalf against another
party for violation of the statute.  In return, the relator receives a statutory
bounty from the government's litigation proceeds if he is successful.

The  main  allegation  in the case is that the  defendants  participated  in the
creation  of "sham"  bidding  entities  that  allegedly  defrauded  the  federal
Treasury  by  improperly   participating   in  certain  Federal   Communications
Commission ("FCC") spectrum auctions restricted to small businesses,  as well as
obtaining  bidding credits in other spectrum  auctions  allocated to "small" and
"very small"  businesses.  While the complaint  seeks to recover an  unspecified
amount of  damages,  which  would be subject  to  mandatory  trebling  under the
statute,  a report  prepared for the relator in February 2005 alleges damages of
approximately  $91  million in respect of  bidding  credits,  approximately  $70
million in respect of government loans and approximately $206 million in respect
of subsequent sales of licenses, in each case prior to trebling.

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

Interactive  was formally  served with the  complaint in July 2002. In September
2002, the defendants filed two motions with the United States District Court for
the District of Columbia: a motion to dismiss the lawsuit and a motion to

                                       11
<PAGE>





transfer the action to the Southern District of New York. In September 2003, the
Court  granted our motion to transfer the action.  A scheduling  conference  was
held in February 2004, at which time the judge  approved a scheduling  order and
discovery commenced.  In July 2004, the judge denied in part and granted in part
our motion to dismiss.  Interactive and its  subsidiaries  remain parties to the
litigation.

In December 2004, the  defendants  filed a motion in the United States  District
Court  for the  District  of  Columbia  to  compel  the FCC to  provide  certain
information  subpoenaed  by  defendants in order to enable them to conduct their
defense.  This motion was denied in May 2005 and defendants  have filed a notice
of appeal with the U. S. Court of Appeals  for the D.C.  Circuit.  Discovery  is
substantially complete and the preparation and filing of dispositive motions has
begun. See "History of Lynch's "C" Block Activities" below.

HISTORY OF LYNCH'S "C" BLOCK ACTIVITIES.

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

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

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

On June 8, 1998,  Fortunet elected to apply its eligible credits relating to its
original  down  payment  to the  purchase  of three  licenses  for 15 MHz of PCS
spectrum in Tallahassee,  Panama City and Ocala, Florida. Consistent with an FCC
promulgated disaggregation  alternative,  Fortunet surrendered all the remaining
licenses and forfeited 30% of its original down payment in full  satisfaction of
its  government  obligations,  including  forgiveness  of all accrued  interest.
Accordingly,  Fortunet  retained 15 MHz of spectrum in the three Florida markets
covering a population  of  approximately  962,000 at a net auction cost of $15.8
million. As a result of this FCC process, disaggregation resulted in a reduction
of the bidding  credits to $5.3 million.  Fortunet also lost $6.0 million of its
down payment. As a result of this decision, during 1997, Interactive recorded a

                                       12
<PAGE>





$7.0 million write down of its investment in Fortunet. As a lawyer who worked on
many  applications  for FCC  licenses,  Taylor  (the  relator  in this  case) is
doubtless aware of the details of these FCC initiated  alternatives  for the "C"
Block, as presumably are his law firms.

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

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

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

OTHER LITIGATION.

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

I. MCI/WORLDCOM RECOVERY

During 2002, the Company wrote off substantially all receivables associated with
MCI/WorldCom  ("MCI"),  which had filed for protection under bankruptcy laws. In
the second quarter of 2005, certain of the Company's  subsidiaries received cash
and stock in MCI, Inc.  valued at less than $0.1 million which has been recorded
in income as a reduction to General and Administrative  Costs at Operations.  In
addition,  the Company  expects to receive  $0.2  million in cash and stock that
will be recorded in income when such cash and stock is received.

J. RELATED PARTY TRANSACTIONS

Expenditures  for fees that the  Company is  incurring  with regard to the False
Claims Act litigation are based on allocations among defendants, and are subject
to negotiation. It is expected that the final allocation may be adjusted subject
to final conclusion of the litigation.

At June 30, 2005, December 31, 2004, and June 30, 2004, assets of $20.8 million,
$15.2  million  and  $14.1  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.

ITEM 2.  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
Quarterly Report.

                                       13
<PAGE>




RESULTS OF OPERATIONS

OVERVIEW

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

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

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

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

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

         o   TELECOMMUNICATION  BANKRUPTCIES-  Interactive's telephone companies
             have  significant,  normal  course  of  business  receivables  from
             interexchange  carriers,  such as MCI or Global Crossings who filed
             for bankruptcy and, as a result, have been written-off.  Additional
             bankruptcies  could  have a  significant  effect  on our  financial
             condition.  The Company has recovered  settlements from MCI of less
             than $0.1  million  through June 30, 2005 and expects to recover an
             additional $0.2 million in the third quarter of 2005.

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

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

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

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

         o   All of our  RLECs  participate  in the  National  Exchange  Carrier
             Association  ("NECA")  access  pools.  Interstate  access  revenues
             depend upon whether the RLEC has elected to be  "cost-based" or has
             remained an "average schedule" carrier. The revenues of our nine

                                       14
<PAGE>





             cost-based  carriers  directly  correlate to the  rate-of-return on
             regulated net  investment  earned by the NECA access pools plus the
             amount  of  regulated   operating  expenses  including  taxes.  The
             revenues  of  the  Company's  five  average  schedule  subsidiaries
             correlate  to  usage  based  measurements  such  as  access  lines,
             interstate minutes-of-use,  and the number and mileage of different
             types of circuits. The average schedule formulas are intended to be
             a proxy for cost-based recovery.

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

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

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

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

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

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

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

                                       15
<PAGE>





                revenue losses from traditional  voice services,  Interactive is
                installing more broadband  services and is exploring how to best
                incorporate VoIP into its business model.

            o   Intrastate   revenue  and  operating   income  at  our  Michigan
                telephone  company will be  substantially  reduced in the future
                due to a state requirement to expand the local calling area. The
                Company has filed with the state commission to recover a portion
                of the revenue  deficiency  by  increasing  local access  rates,
                however, there is no assurance that it will be successful.

SECOND QUARTER ENDED JUNE 30, 2005 COMPARED TO 2004
The  following is a breakdown of revenues and  operating  costs and expenses (in
thousands):

<TABLE>
<CAPTION>

                                            Three months ended June 30,  Increase
                                             2005         2004          (Decrease)
                                            ---------------------------------------
                                                (Unaudited)
<S>                                        <C>          <C>            <C>

Revenues:
Local access                                $ 2,986     $ 3,058         $   (72)
Interstate access                            10,237       9,272             965
Intrastate access                             3,478       3,693            (215)
Other business                                5,770       5,064             706
                                            ---------------------------------------
  Total                                      22,471      21,087           1,384
                                            ---------------------------------------

Operating Cost and Expense:
Cost of revenue, excluding depreciation       8,095       7,407             688
General and administrative costs at
  operations                                  3,343       3,253              90
Corporate office expenses                     2,742       2,273             469
Depreciation and amortization                 5,346       4,927             419
                                            ---------------------------------------
  Total                                      19,526      17,860           1,666
                                            ---------------------------------------
  Operating profit                          $ 2,945     $ 3,227         $  (282)
                                            =======================================
</TABLE>


Total revenues in the 2005 second quarter increased $1.4 million, 6.6%, to $22.5
million  compared to $21.1 million in 2004.  Local access  revenue  decreased by
$72  resulting from a 3.6% decrease in access lines partially  offset by the
sale of additional features. The decrease in access lines is due to the increase
in cell phone  usage and  reduction  in second  lines as  customers  switch from
dial-up  internet  service to DSL.  Interstate  access  revenue  increased  $1.0
million in 2005 primarily due to infrastructure  development  undertaken in 2002
and 2003, which entitled the Company to increased network access and USF support
primarily at the Haviland  Telephone Company in Kansas,  and to a lesser extent,
the effects of 2005 investments  resulted in increased network access revenue at
our Michigan telephone company. Intrastate network access revenue decreased $0.2
million due to a loss of toll revenue for dial-up  access to the internet at our
Michigan telephone  company,  the gradual phase-out of a New York pool for small
carriers,  and a reduction of minutes of use at several of our companies.  Other
business revenues  increased $0.7 million due to increased DSL penetration,  and
revenues  from a small  cable  company  in Utah  that the  Company  acquired  in
February 2004 as well as a larger  acquisition of cable  television  assets that
was completed in March 2005.

Total  costs and  expenses  increased  by $1.7  million to $19.5  million in the
second quarter of 2005. Costs of revenue increased $0.7 million, or 9.3%, due to
additional operating costs related to the infrastructure development in Haviland
and costs generated by the cable television operations acquired in February 2004
and March 2005.  General and  administrative  costs  incurred at the  operations
increased  $0.1 million  primarily  due to increased  property  taxes due to the
Haviland  infrastructure  development.  Corporate office expenses increased $0.5
million resulting from $1.6 million of legal costs incurred  defending the False
Claims Act litigation in 2005 compared to $0.8 million in 2004. In addition, in

                                       16
<PAGE>






2005 the Company  incurred  legal and  consulting  costs in  conjunction  with a
shareholder  proposal  to  deregister  as a  public  company.  Depreciation  and
amortization  increased  $0.4  million  primarily  due  to  a  2004  regulatory
adjustment.

As a result  of the  above,  operating  profit  in the  second  quarter  of 2005
decreased by $0.3 million to $2.9 million compared to 2004.

ADJUSTED OPERATING PROFIT

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

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

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

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

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

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

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

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

                                       17
<PAGE>





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

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

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

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

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

<TABLE>
<CAPTION>

                                      Three months ended June 30,  Increase
                                        2005           2004        (Decrease)
                                      ---------------------------------------
                                           (Unaudited)
<S>                                  <C>           <C>             <C>

Adjusted operating profit from:
   Operating units                    $ 11,033      $ 10,427        $    606
   Corporate expense:
      Taylor litigation                  1,607           778             829
      Other                              1,135         1,495            (360)
                                      --------------------------------------
      Total corporate expenses           2,742         2,273             469
                                      --------------------------------------
Adjusted operating profit             $  8,291      $  8,154        $    137
                                      ======================================

Reconciliation to net income:
Adjusted operating profit             $  8,291      $  8,154        $    137
Depreciation and amortization           (5,346)       (4,927)           (419)
Investment income                          191            82             109
Interest expense                        (2,950)       (2,851)            (99)
Equity in income of affiliates             841           886             (45)
Income tax                                (330)         (473)            143
Minority Interests                        (484)         (487)              3
                                      --------------------------------------
Net income                            $    213      $    384        $   (171)
                                      ======================================
</TABLE>

                                       18
<PAGE>





OTHER INCOME (EXPENSE)

In  2005,  investment  income  increased  by $0.1  million  primarily  due to an
increase in interest rates.

Interest  expense   decreased  $0.1  million  due  primarily  to  lower  average
outstanding borrowings partially offset by higher interest rates.

Equity in earnings of  affiliates  was $0.8  million in 2005 and $0.9 million in
2004  reflecting  consistent  earnings  of the  Company's  New  Mexico  cellular
investments (RSA 3 and 5) in both periods.

INCOME TAX PROVISION

The income tax provision includes federal, as well as state and local taxes. The
tax provision for the second quarter of 2005 and 2004,  represent  effective tax
rates of 45.1% and 44.4%  respectively.  The difference  between these effective
rates and the federal  statutory rate is principally  due to state income taxes,
including the effect of earnings attributable to different state jurisdictions.

MINORITY INTERESTS

Minority  interests  decreased  earnings  by $0.5  million in both 2005 and 2004
reflecting  the  consistent  earnings  of  the  Company's  New  Mexico  cellular
investments.

NET INCOME

Net income in 2005 was $0.2  million,  or $0.08 per share  (basic and  diluted),
compared to a net income last year of $0.4  million,  or $0.14 per share  (basic
and diluted). The Company has no dilutive instruments outstanding.

SIX MONTHS ENDED JUNE 30, 2005 COMPARED TO 2004
The  following is a breakdown of revenues and  operating  costs and expenses (in
thousands):

                                           Six months ended June 30,   Increase
                                             2005         2004        (Decrease)
                                          --------------------------------------
                                               (Unaudited)
Revenues:
Local access                               $ 5,844     $ 5,947          $  (103)
Interstate access                           19,932      18,610            1,322
Intrastate access                            7,175       7,814             (639)
Other business                              11,138      10,140              998
                                           -------------------------------------
  Total                                     44,089      42,511            1,578
                                           -------------------------------------

Operating Cost and Expense:
Cost of revenue, excluding depreciation     15,746      14,610            1,136
General and administrative costs at
  operations                                 6,766       6,392              374
Corporate office expenses                    4,834       3,246            1,588
Depreciation and amortization               10,541      10,148              393
                                           -------------------------------------
  Total                                     37,887      34,396            3,491
                                           -------------------------------------
  Operating profit                         $ 6,202     $ 8,115          $(1,913)
                                           =====================================

Total revenues in the first six months of 2005 increased $1.6 million,  or 3.7%,
to $44.1  million  compared  to $42.5  million  in 2004.  Local  access  revenue
decreased by $0.1 million resulting from a 3.6% decrease in access lines

                                       19
<PAGE>





partially  offset by the sale of  additional  features.  The  decrease in access
lines is due to the  increase in cell phone usage and  reduction in second lines
as customers  switch from dial-up  internet  service to DSL.  Interstate  access
revenue   increased  $1.3  million  in  2005  primarily  due  to  infrastructure
development undertaken in 2002 and 2003, which entitled the Company to increased
network access and USF support  primarily at the Haviland  Telephone  Company in
Kansas,  and to a lesser  extent,  the effects of 2005  investments  resulted in
increased network access revenue at our Michigan telephone  company.  Intrastate
network access revenue  decreased $0.6 million due to a loss of toll revenue for
dial-up access to the internet at our Michigan  telephone  company,  the gradual
phase-out of a New York pool for small  carriers,  and a reduction of minutes of
use at several of our companies.  Other business revenues increased $1.0 million
due to increased  DSL  penetration,  and revenues  from a small cable company in
Utah that the Company acquired in February 2004 as well as a larger  acquisition
of cable television assets that was completed in March 2005.

Total costs and expenses increased by $3.5 million to $37.9 million in the first
six months of 2005.  Costs of revenue  increased  $1.1 million,  or 7.8%, due to
additional operating costs related to the infrastructure development in Haviland
and costs generated by the cable television operations acquired in February 2004
and March 2005.  General and  administrative  costs  incurred at the  operations
increased $0.4 million  primarily due to professional  fees with regard to local
area calling in Michigan and increased audit and Sarbanes - Oxley implementation
fees.  Corporate  office  expenses  increased  $1.6 million  resulting from $2.8
million of legal costs  incurred  defending  the False Claims Act  litigation in
2005 compared to $1.2 million in 2004. In addition,  the Company  incurred legal
and consulting costs in conjunction with a shareholder proposal to deregister as
a public company. Depreciation and amortization increased $0.4 million primarily
due to a 2004 regulatory adjustment.

As a result of the above,  operating profit in 2005 decreased by $1.9 million to
$6.2 million compared to 2004.

ADJUSTED OPERATING PROFIT

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

<TABLE>
<CAPTION>

                                         Six months ended June 30,  Increase
                                          2005           2004       (Decrease)
                                        --------------------------------------
                                            (Unaudited)
<S>                                     <C>          <C>             <C>

Adjusted operating profit from:
   Operating units                      $ 21,577      $ 21,509        $     68
   Corporate expense:
      Taylor litigation                    2,808         1,150           1,658
      Other                                2,026         2,096             (70)
                                        --------------------------------------
      Total corporate expenses             4,834         3,246           1,588
                                        --------------------------------------
Adjusted operating profit               $ 16,743      $ 18,263        $ (1,520)
                                        ======================================

Reconciliation to net income:
Adjusted operating profit               $ 16,743      $ 18,263        $ (1,520)
Depreciation and amortization            (10,541)      (10,148)           (393)
Investment income                            984           810             174
Interest expense                          (5,772)       (5,670)           (102)
Equity in income of affiliates             1,552         1,598             (46)
Income tax                                (1,097)       (1,922)            825
Minority Interests                          (961)         (944)            (17)
                                        --------------------------------------
Net income                              $    908      $  1,987        $ (1,079)
                                        ======================================
</TABLE>


                                       20
<PAGE>





OTHER INCOME (EXPENSE)

In  2005,  investment  income  increased  by $0.2  million  primarily  due to an
increase in CoBank  patronage  refunds and a $0.1 million  retroactive  dividend
from Iowa Network Services. Such increases were offset by a $0.2 million gain on
the sale of an investment in the 2004 period.

Interest  expense   decreased  $0.1  million  due  primarily  to  lower  average
outstanding borrowings partially offset by higher interest rates.

Equity  in  earnings  of  affiliates   decreased  slightly  in  2005  reflecting
consistent earnings of the Company's New Mexico cellular  investments (RSA 3 and
5) in both periods.

INCOME TAX PROVISION

The income tax provision includes federal, as well as state and local taxes. The
tax provision for the first six months of 2005 and 2004, represent effective tax
rates of 45.5% and 44.5%,  respectively.  The difference between these effective
rates and the federal  statutory rate is principally  due to state income taxes,
including the effect of earnings attributable to different state jurisdictions.

MINORITY INTERESTS

Minority  interests  decreased earnings by similar amounts in both 2005 and 2004
reflecting  the  consistent  earnings  of  the  Company's  New  Mexico  cellular
investments.

NET INCOME

Net income in 2005 was $0.9  million,  or $0.33 per share  (basic and  diluted),
compared to a net income last year of $2.0  million,  or $0.72 per share  (basic
and diluted). The Company has no dilutive instruments outstanding.

LIQUIDITY AND CAPITAL RESOURCES

LIQUIDITY

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

In June  2005,  Interactive  closed on a new $10  million  unsecured  revolving
credit  facility of which $5.7 million was  available at June 30, 2005,  at 1.5%
over prime,  expiring in 2008,  replacing the previous short-term line of credit
facility. The Company continues to have a need for additional credit facilities,
but management believes that it has various alternative means to obtain adequate
resources to fund operations over the next twelve months.

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

                                       21
<PAGE>





and  lease  agreements  to make  certain  cash  payments  over  the  term of the
agreements.  The following table summarizes, as of June 30, 2005 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                               After 5
                                       Total        1 year    1 - 3 years  4 - 5 years     years
                                     -------------------------------------------------------------
<S>                                  <C>          <C>         <C>         <C>            <C>

Long-term debt (a)                    $163,728     $ 25,068     $ 54,087     $ 35,582     $ 48,991
Operating leases                         1,271          286          455          230          300
Notes payable to banks                   8,419        8,419           --           --           --
Guarantees                               3,750        3,750           --           --           --
                                      --------     --------     --------     --------     --------
Total contractual cash obligations
and commitments                       $177,168     $ 37,523     $ 54,542     $ 35,812     $ 49,291
                                      ========     ========     ========     ========     ========

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


A subsidiary of the Company has guaranteed $3.8 million of an equity  investees'
total debt of $9.2  million.  The guarantee is in effect for the duration of the
loan  which  expires  on  December  31,  2005 and would be payable if the equity
investee fails to make such payment in accordance with the terms of the loan.

At June 30,  2005,  total  debt  (including  notes  payable to banks) was $172.1
million,  a decrease of $1.7 million from  December 31, 2004.  At June 30, 2005,
there was $102.6 million of fixed interest rate debt outstanding  averaging 7.0%
and $69.6 million of variable  interest rate debt  averaging  6.3%.  The debt at
fixed interest rates  includes $38.1 million of  subordinated  notes at interest
rates  averaging 9.5% issued to sellers as part of  acquisitions.  The long-term
debt facilities at certain subsidiaries are secured by substantially all of such
subsidiaries  assets,  while at other  subsidiaries  it is secured by the common
stock of such  subsidiaries.  In addition,  the debt facilities  contain certain
covenants  restricting  distribution  to Lynch  Interactive.  At June 30,  2005,
December 31, 2004 and June 30, 2004,  substantially all of the subsidiaries' net
assets are restricted.

Interactive  has a high degree of financial  leverage.  As of June 30, 2005, the
ratio of total debt to equity was 4.9 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 June 30, 2005, Interactive had current assets of $39.7 million and current
liabilities of $50.2 million resulting in a working capital  deficiency of $10.5
million,  compared  to a surplus  of $3.9  million at  December  31,  2004.  The
reduction in working capital was primarily due to the  reclassification of $11.9
million of long-term debt to current maturities,  which will become due prior to
June 30,  2006.  The  Company  expects  to  re-finance  such debt prior to their
maturity dates.

SOURCES AND USES OF CASH

Cash at June 30, 2005, was $27.7 million,  an increase of $0.5 million  compared
to December 31, 2004. The majority of the cash is restricted by debt covenant to
the subsidiary  that generated it and is generally not available for transfer to
the Parent  Company.  In 2005,  net cash provided by operations of $11.7 million
was used to invest in plant and equipment and to repay debt. The  acquisition of
cable assets in March 2005 was funded in part by $2.2 million of new borrowings.

Capital expenditures were $4.2 million in the 2005 six month period, compared to
$6.3 million in 2004 which is predominantly spent at the RLECs and will be

                                       22
<PAGE>





included in their rate bases for rate setting purposes.  Capital expenditures in
2005 are expected to be approximately  $11 million,  most of which will be added
to the RLEC rate bases.

On March 18, 2005, a subsidiary of the Company,  Central Telcom  Services,  LLC,
closed on an  agreement  with  Precis  Communications,  LLC,  to acquire a cable
television assets for a purchase price of $3.5 million of which $2.2 million was
financed with secured bank debt.

On  July  29,  2005,  a  subsidiary  of  the  Company  closed  on  the  sale  of
approximately 62% of the company's  security accounts to an investment group for
approximately  $2.75  million,  net of holdbacks and fees.  The proceeds will be
used to retire  debt.  The Company will  continue to monitor  such  accounts and
provide billing and collection services for the new owner.

The Company has initiated an effort to monetize certain of its assets, including
selling a portion or all of its investment in certain of its operating  entities
and  equity  investments.  These  initiatives  may  include  the sale of certain
telephone operations where growth opportunities are not readily apparent.  There
is no  assurance  that all or any part of this  program  can be  effectuated  on
acceptable terms.

Subsequent to the spin-off by Lynch Corporation, the Board of Directors of Lynch
Interactive  Corporation  authorized  the  purchase  of up to 100,000  shares of
common  stock.  Through June 30, 2005,  72,700  shares had been  purchased at an
average cost of $32.26 per share.

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

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

CONTINGENCIES

TAYLOR LITIGATION.
Interactive and several other parties, including Interactive's CEO, and Fortunet
Communications,     L.P.,     which    was    Sunshine     PCS     Corporation's
predecessor-in-interest,  have been named as defendants in a lawsuit  brought by
Taylor 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 in February  2001.  At the  initiative of one of
the defendants, the seal was lifted in January 2002. Under the False Claims Act,
a  private  plaintiff  called  a  relator  may file a civil  action  on the U.S.
government's  behalf  against  another  party for  violation of the statute.  In
return, the relator receives a statutory bounty from the government's litigation
proceeds if he is successful.

The  main  allegation  in the case is that the  defendants  participated  in the
creation  of "sham"  bidding  entities  that  allegedly  defrauded  the  federal
Treasury by improperly participating in certain FCC spectrum auctions restricted
to small  businesses,  as well as obtaining  bidding  credits in other  spectrum
auctions allocated to "small" and "very small"  businesses.  While the complaint
seeks to recover an  unspecified  amount of  damages,  which would be subject to
mandatory  trebling  under the  statute,  a report  prepared  for the relator in
February 2005 alleges damages of approximately $91 million in respect of bidding
credits,   approximately   $70  million  in  respect  of  government  loans  and
approximately  $206 million in respect of subsequent sales of licenses,  in each
case prior to trebling.

                                       23
<PAGE>





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

Interactive  was formally  served with the  complaint in July 2002. In September
2002, the defendants filed two motions with the United States District Court for
the  District  of  Columbia:  a motion to dismiss  the  lawsuit  and a motion to
transfer the action to the Southern District of New York. In September 2003, the
Court  granted our motion to transfer the action.  A scheduling  conference  was
held in February 2004, at which time the judge  approved a scheduling  order and
discovery commenced.  In July 2004, the judge denied in part and granted in part
our motion to dismiss.  Interactive and its  subsidiaries  remain parties to the
litigation.

In December 2004, the  defendants  filed a motion in the United States  District
Court  for the  District  of  Columbia  to  compel  the FCC to  provide  certain
information  subpoenaed  by  defendants in order to enable them to conduct their
defense.  This motion was denied in May 2005 and defendants  have filed a notice
of appeal with the U.S.  Court of Appeals  for the D.C.  Circuit.  Discovery  is
substantially complete and the preparation and filing of dispositive motions has
begun.

See also "H.  Litigation - History of Lynch's  C-Block  Activities"  above for a
history of our involvement in Auction 5.

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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

We believe that revenue from interstate access for our "cost-based" companies 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  for  cost-based  companies 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

                                       24
<PAGE>





studies in the  subsequent  period.  In  addition,  an  accounting  estimate  is
required  of  the  potential  liability  that  may be  required  for  NECA  pool
over-earnings.

Interactive's business development strategy is to expand its existing operations
through internal growth and acquisition. From 1989 through 2001, the Company has
acquired fourteen 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."

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 June 2004,  the Emerging  Issues Task Force  ("EITF")  issued EITF No. 03-01,
"The Meaning Of  Other-Than-Temporary  Impairment And Its Application To Certain
Investments".  EITF 03-01  includes new guidance for  evaluating  and  recording
impairment  losses on debt and  equity  investments,  as well as new  disclosure
requirements  for investments  that are deemed to be temporarily  impaired.  The
provisions  of  EITF  03-01  were  initially  effective  for  reporting  periods
beginning after June 15, 2004,  while the disclosure  requirements  for debt and
equity  securities  accounted  for  under  SFAS  115,  "Accounting  For  Certain
Investments  In Debt And Equity  Securities",  are effective for annual  periods
ending  after  December  15,  2003.  In  September  2004,  the FASB  delayed the
effective date for the measurement and recognition  guidance of EITF 03-01.  The
Company will  evaluate the effect of adopting the  recognition  and  measurement
guidance when the final consensus is reached.

In  May  2005,  the  FASB  issued  SFAS  154,   "Accounting  Changes  and  Error
Corrections".  SFAS 154  eliminates  the  requirement  in APB  Opinion  No.  20,
"Accounting  Changes", to include the cumulative effect of changes in accounting
principle in the income statement in the period of change.  Instead,  to enhance
the comparability of prior period financial  statements,  SFAS 154 requires that
changes  in  accounting   principle  be  retrospectively   applied.   Under  the
retrospective  application,  the new  accounting  principle is applied as of the
beginning of the first period  presented  as if that  principle  had always been
used. Adoption of SFAS 154 is required for accounting changes and corrections of
errors made in the fiscal year beginning after December 15, 2005.

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

                                       25
<PAGE>





In December 2004, the FASB issued SFAS No.123(R),  "Share-Based Payment",  which
establishes  standards for  transactions in which an entity exchanges its equity
instruments  for goods or services.  This  standard  requires a public entity to
measure the cost of  employee  services  received  in  exchange  for an award of
equity  instruments  based  on the  grant-date  fair  value of the  award.  This
eliminates  the exception to account for such awards using the intrinsic  method
previously  allowable under APB Opinion No.25.  SFAS No.123(R) will be effective
in the first quarter of 2006.  The Company does not believe that the adoption of
SFAS  No.123(R)  will  have a  material  impact  on its  consolidated  financial
statements.

In  March  2005,  the  FASB  issued   Interpretation  No.  47,  "Accounting  for
Conditional  Asset  Retirement  Obligations"  ("FIN 47"),  which  clarifies that
conditional  asset retirement  obligations are within the scope of SFAS No. 143,
"Accounting for Asset  Retirement  Obligations."  FIN 47 requires the Company to
recognize  a  liability  for the fair  value  of  conditional  asset  retirement
obligations if the fair value of the liability can be reasonably estimated.  The
Company does not believe that the adoption of FIN 47 will have a material impact
on its financial statements.

ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The Company is exposed to market risks  relating to changes in the general level
of U.S. interest rates.  Changes in interest rates affect the amount of interest
earned  on  the  Company's   cash   equivalents   and   short-term   investments
(approximately  $27.7 million at June 30, 2005 and $27.2 million at December 31,
2004).  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
June 30, 2005,  the fair value of debt was  approximately  equal to its carrying
value.

At June 30, 2005 and December 31, 2004,  approximately  $69.6  million and $67.2
million,  respectively, or 40% and 39% 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 2005 average interest rate under these borrowings, it is estimated
that Interactive's interest expense in the six months of 2005 would have changed
by  approximately  $0.3 million.  In the event of an adverse  change in interest
rates,  management  would likely take actions to further  mitigate its exposure.
However,  due to the  uncertainty  of the actions  that would be taken and their
possible  effects,  no such  actions are assumed.  As of June 30,  2005,  if the
Company were to convert a significant portion of its variable interest rate debt
into fixed interest rates, such conversion could have increased interest expense
for the six month period by $0.9 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 4.      CONTROLS AND PROCEDURES

Our Chief  Executive  Officer and Chief  Financial  Officer have  evaluated  the
effectiveness of the Company's disclosure controls and procedures (as defined in
Rules  13a-15(e)  and  15d-15(e)  of the  Securities  Exchange  Act of 1934 (the
"Act"))  as of the end of the  period  covered  by this  report.  Based  on that
evaluation,  the Chief  Executive  Officer  and  Chief  Financial  Officer  have
concluded that the Company's disclosure controls and procedures as of the end of
the period covered by this report were designed and were functioning effectively
to provide reasonable assurance that the information required to be disclosed by
the Company in reports  filed under the Act is recorded,  processed,  summarized
and reported within the time periods specified in the SEC's rules and forms. The
Company  believes  that a  controls  system,  no matter  how well  designed  and
operated,  cannot provide absolute assurance that the objectives of the controls
system are met, and no  evaluation  of controls can provide  absolute  assurance
that all control  issues and instances of fraud,  if any,  within a company have
been detected.

                                       26
<PAGE>





During the  period  covered  by this  report,  there have been no changes in our
internal control over financial reporting that have materially  affected,  or is
reasonably likely to materially affect, our financial statements.

PART II. OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

TAYLOR LITIGATION.
Interactive and several other parties, including Interactive's CEO, and Fortunet
Communications,     L.P.,     which    was    Sunshine     PCS     Corporation's
predecessor-in-interest,  have been named as defendants in a lawsuit  originally
brought by Taylor 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  in  February  2001.  At the
initiative of one of the defendants,  the seal was lifted in January 2002. Under
the False  Claims  Act, a private  plaintiff  called a relator  may file a civil
action on the U.S.  government's  behalf against  another party for violation of
the  statute.  In return,  the  relator  receives a  statutory  bounty  from the
government's litigation proceeds if he is successful.

The  main  allegation  in the case is that the  defendants  participated  in the
creation  of "sham"  bidding  entities  that  allegedly  defrauded  the  federal
Treasury by improperly participating in certain FCC spectrum auctions restricted
to small  businesses,  as well as obtaining  bidding  credits in other  spectrum
auctions allocated to "small" and "very small"  businesses.  While the complaint
seeks to recover an  unspecified  amount of  damages,  which would be subject to
mandatory  trebling  under the  statute,  a report  prepared  for the relator in
February 2005 alleges damages of approximately $91 million in respect of bidding
credits,   approximately   $70  million  in  respect  of  government  loans  and
approximately  $206 million in respect of subsequent sales of licenses,  in each
case prior to trebling.

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

Interactive  was formally  served with the  complaint in July 2002. In September
2002, the defendants filed two motions with the United States District Court for
the  District  of  Columbia:  a motion to dismiss  the  lawsuit  and a motion to
transfer the action to the Southern District of New York. In September 2003, the
Court  granted our motion to transfer the action.  A scheduling  conference  was
held in February 2004, at which time the judge  approved a scheduling  order and
discovery commenced.  In July 2004, the judge denied in part and granted in part
our motion to dismiss.  Interactive and its  subsidiaries  remain parties to the
litigation.

In December 2004, the  defendants  filed a motion in the United States  District
Court  for the  District  of  Columbia  to  compel  the FCC to  provide  certain
information  subpoenaed  by  defendants in order to enable them to conduct their
defense.  This  motion was  denied in May 2005 and  defendants  are  considering
appropriate  responses.  Discovery is substantially complete and the preparation
and filing of dispositive  motions has begun.  See "History of Lynch's "C" Block
Activities" below.

HISTORY OF LYNCH'S "C" BLOCK ACTIVITIES.

As part of the Omnibus Budget Resolution of 1993, Congress authorized the FCC to
employ  competitive  bidding  procedures  to  select  among  mutually  exclusive
applicants for certain spectrum licenses. Initially the FCC had an initiative to
include, among others, African Americans, Native Americans, Asian Americans and

                                       27
<PAGE>





women.  As a result of this,  the FCC  conducted  auctions  beginning in 1995 to
allocate  spectrum in a  competitive  manner.  Interactive  was a  participating
investor and/or service provider to various entities in this "C-Block" auction.

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

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

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

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

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

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

                                       28
<PAGE>





OTHER LITIGATION.

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

ITEM 2. ISSUER PURCHASES OF EQUITY SECURITIES

<TABLE>
<CAPTION>

                                                                                   MAXIMUM NUMBER
                                                                                  OF (OR APPROXIMATE
                                                               TOTAL NUMBER OF     DOLLAR VALUE) OF
                       TOTAL NUMBER                           SHARES PURCHASED    SHARES THAT MAY YET
                      OF SHARES (OR        AVERAGE PRICE     AS PART OF PUBLICLY   BE PURCHASED UNDER
                          UNITS)           PAID PER  SHARE   ANNOUNCED  PLANS         THE PLANS OR
       PERIOD           PURCHASED            (OR UNIT)          OR PROGRAMS(1)         PROGRAMS(1)
       ------           ---------           ---------           --------------       -----------

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

4/1/05 to 4/30/05          --                  --                     --               27,300

5/1/05 to 5/31/05          --                  --                     --               27,300

6/1/05 to 6/30/05          --                  --                     --               27,300
                        ------------------------------------------------------

Total                      --                  --                     --
                        ======================================================

     (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.

</TABLE>

ITEM 6.     EXHIBITS AND REPORTS ON FORM 8-K

            (a)  Exhibits

                 Exhibit   31.1  -   Chief   Executive   Officer   Section   302
                 Certification.
                 Exhibit   31.2  -   Chief   Financial   Officer   Section   302
                 Certification.
                 Exhibit   32.1  -   Chief   Executive   Officer   Section   906
                 Certification.
                 Exhibit   32.2  -   Chief   Financial   Officer   Section   906
                 Certification.

            (b)  Reports on Form 8-K during the quarter  reported  on: - Current
                 Report on Form 8-K filed April 4, 2005, under Items
                    7 and 12 reporting the issuance of a press release regarding
                    the  Company's  operating  results  for the quarter and year
                    ended December 31, 2004.
                 -  Current Report on Form 8-K filed May 16, 2005, under Items 7
                    and 12 reporting the issuance of a press  release  regarding
                    the company's first quarter 2005 operating results.
                 -  Current  Report on Form 8-K filed June 15, 2005 under Item 1
                    and Item 9 reporting on the closing of the  Company's  three
                    year $10 million  revolving  credit line with Webster  Bank,
                    N.A.

                                       29
<PAGE>





                                    SIGNATURE


            Pursuant to the requirements of the Securities Exchange Act of 1934,
the  Registrant  has duly  caused  this report to be signed on its behalf by the
undersigned thereunto duly authorized.


                                             LYNCH INTERACTIVE CORPORATION
                                             (Registrant)

                                              /s/ Robert E. Dolan
                                              -------------------
                                              Robert E. Dolan
                                              Chief Financial Officer
August 15, 2005


                                       30