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, 2004
                               -------------

                                                         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 atJuly 31, 2004
            -----                                  ---------------------------
Common Stock, $.0001 par value                              2,769,951



<PAGE>






                                      INDEX
                                      -----

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

PART I. FINANCIAL INFORMATION


Item 1. Financial Statements (Unaudited)

         Condensed Consolidated Balance Sheets:
          -       June 30, 2004
          -       December 31, 2003
          -       June 30, 2003

         Condensed Consolidated Statements of Operations:
          -       Three and six months ended June 30, 2004 and 2003

         Condensed Consolidated Statements of Cash Flows:
          -       Three and six months ended June 30, 2004 and 2003

         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. Changes in  Securities,  Use of Proceeds and Issuer  Purchases of Equity
        Securities

Item 4. Submission of Matters to a Vote of Security Holders

Item 6. Exhibits and Reports on Form 8-K


SIGNATURE
---------

CERTIFICATIONS
--------------


                                                         i



<PAGE>



PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
        --------------------

<TABLE>
<CAPTION>

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

                                                                 June 30,   December 31,   June 30,
                                                                  2004        2003          2003
                                                             --------------------------------------
                                                               (Unaudited)   (Audited)  (Unaudited)
ASSETS
Current Assets:
<S>                                                         <C>          <C>          <C>

Cash and cash equivalents ...............................   $  25,932    $  26,556    $  25,526
  Receivables, less allowances of $291,
    $262 and $258, respectively ...........................       8,456        8,183        8,553
  Material and supplies ...................................       3,240        2,597        3,300
  Prepaid expenses and other current assets ...............       3,011        1,272        1,290
                                                              ---------    ---------    ---------
Total Current Assets ......................................      40,639       38,608       38,669

Property, Plant And Equipment:
  Land ....................................................       1,111        1,111        1,104
  Buildings and improvements ..............................      17,555       17,549       17,538
  Machinery and equipment .................................     214,409      209,455      201,560
                                                              ---------    ---------    ---------
                                                                233,075      228,115      220,202
  Less: Accumulated Depreciation ..........................    (111,672)    (102,556)     (97,285)
                                                              ---------    ---------    ---------
                                                                121,403      125,559      122,917
Goodwill ..................................................      60,580       60,580       60,580
Other intangibles .........................................      10,953        8,168        8,316
Investments in and advances to affiliated entities ........      10,523        7,223       10,580
Other assets ..............................................      13,427       12,048       12,366
                                                              ---------    ---------    ---------
Total assets ..............................................   $ 257,525    $ 252,186    $ 253,428
                                                              =========    =========    =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Notes payable to banks ..................................   $   6,450    $   3,456    $  11,623
  Trade accounts payable ..................................       3,606        5,336        3,118
  Accrued interest payable ................................         757          697          372
  Accrued liabilities .....................................       9,952        8,732       15,086
 Current maturities of long-term debt .....................      13,959       13,162       18,619
                                                              ---------    ---------    ---------
Total current liabilities .................................      34,724       31,383       48,818
Long-term debt ............................................     160,721      162,621      160,720
Deferred income taxes .....................................      15,930       15,517        6,659
Other liabilities .........................................       2,962        3,015        2,941
                                                              ---------    ---------    ---------
  Total liabilities .......................................     214,337      212,536      219,138

Minority Interests ........................................      10,784        9,763        9,246

Commitments and Contingencies

Shareholders' equity
  Common stock, $0.0001 par value-10,000,000
    shares authorized; 2,824,766 issued; 2,771,751
     2,779,951 and 2,782,751 outstanding ..................        --           --           --
  Additional paid-in capital ..............................      21,406       21,406       21,406
  Retained earnings .......................................      11,256        9,269        4,448
  Accumulated other comprehensive income ..................       1,453          686          599
  Treasury stock, 53,015, 44,815 and 42,015 shares, at cost      (1,711)      (1,474)      (1,409)
                                                              ---------    ---------    ---------
Total shareholder's equity ................................      32,404       29,887       25,044
                                                              ---------    ---------    ---------
Total liabilities and shareholders' equity ................   $ 257,525    $ 252,186    $ 253,428
                                                              =========    =========    =========
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.

                                      -1-
<PAGE>
<TABLE>
<CAPTION>


                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES
                 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                           (UNAUDITED) (In thousands,
                            except per share amounts)

                                                     Three Months Ended      Six Months Ended
                                                            June 30,              June 30,
                                                    -------------------------------------------
                                                      2004         2003       2004        2003
                                                    -------------------------------------------
<S>                                                 <C>         <C>         <C>         <C>
Revenues ........................................   $ 21,631    $ 21,343    $ 43,519    $ 42,646

Costs and expenses:
Cost of revenue .................................      7,671       7,304      15,151      14,741
General and administrative costs at operations ..      3,533       3,335       6,859       6,742
Corporate office expenses .......................      2,273       1,098       3,246       1,868
Depreciation and amortization ...................      4,927       4,913      10,148       9,828
                                                    --------    --------     -------    --------
    Total Expense ...............................     18,404      16,650      35,404      33,179
                                                    --------    --------    --------    --------
Operating profit ................................      3,227       4,693       8,115       9,467
Combined total

Other income (expense):
   Investment income ............................         82          98         810         656
   Interest expense .............................     (2,851)     (2,999)     (5,670)     (6,025)
   Equity in earnings of affiliated companies ...        886         679       1,598       1,063
                                                    --------     -------    --------    --------
                                                      (1,883)     (2,222)     (3,262)     (4,306)
                                                    --------     -------    --------    --------
Income before income taxes and minority interests      1,344       2,471       4,853       5,161
Provision for income taxes ......................       (473)       (875)     (1,922)     (1,951)
Minority interests ..............................       (487)       (440)       (944)       (641)
                                                    --------     -------    --------    --------
Net income ......................................   $    384    $  1,156    $  1,987    $  2,569
                                                    ========    ========    ========    ========

Basic and diluted weighted average shares outstanding  2,774       2,787       2,775       2,789

Basic and diluted earnings per share                $   0.14    $   0.41    $   0.72    $   0.92
</TABLE>

      See accompanying Notes to Condensed Consolidated Financial Statements.

                                      -2-
<PAGE>
<TABLE>
<CAPTION>



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



                                                                                     Accumulated
                                  Shares of                                             Other
                                   Common                 Additional                Compre-hensive
                                    Stock     Common       Paid-in      Retained       Income        Treasury
                                 Out-standing   Stock      Capital      Earnings                       Stock      Total
                                 ---------------------------------------------------------------------------------------

<S>                     <C>        <C>             <C>        <C>           <C>             <C>       <C>         <C>
Balance as of December  31,        2,779,951       $  0       $21,406       $9,269          $ 686     $(1,474)    $29,887
2003
Net income for the period                 --         --            --        1,987             --           --      1,987
Unrealized losses on available
for sale securities, net                  --         --            --           --            767           --        767
                                                                                                                ----------
Comprehensive income                      --         --            --           --             --           --      2,754
                                                                                                                ----------
Purchase of treasury stock           (8,200)         --            --           --             --        (237)      (237)
                                  ----------       ----       -------      -------         ------     -------   ----------
Balance at June 30, 2004           2,771,751       $  0       $21,406      $11,256         $1,453     $(1,711)    $32,404
                                 ============ ========== ============= ============ ============== ============ ==========
</TABLE>
See accompanying Note to Condensed Consolidated Financial Statements.

                                      -3-


<PAGE>


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


                                                                              Six Months Ended
                                                                                  June 30,
                                                                        ----------------------
                                                                           2004         2003
                                                                        ----------------------
<S>                                                                     <C>         <C>
Operating activities:
Net Income ..........................................................   $  1,987    $  2,569
Adjustments to reconcile net income to net cash provided by operating
activities:
   Depreciation and amortization ....................................     10,148       9,828
   Equity in earnings of affiliated companies .......................     (1,598)     (1,063)
   Minority interests ...............................................        944         641
   Changes in operating assets and liabilities:
        Receivables .................................................       (226)        363
        Accounts payable and accrued liabilities ....................       (368)       (476)
   Other ............................................................     (2,112)        212
                                                                        --------    --------
Net cash provided by operating activities ...........................      8,775      12,074
                                                                        --------    --------

Investing activities:
Capital expenditures ................................................     (6,307)     (9,927)
Acquisition of business .............................................     (4,877)       --
Acquisition of subscriber lists .....................................       (150)       (369)
Investment in and advances to affiliated entities ...................        (63)       (546)
Distributions received from investments .............................        879         409
Other ...............................................................       (217)       (463)
                                                                        --------    --------
Net cash used in investing activities ...............................    (10,735)    (10,896)
                                                                        --------    --------

Financing activities:
Issuance of long term debt ..........................................      5,599       8,748
Repayments of long term debt ........................................     (6,702)     (6,030)
Net proceeds (repayments) on lines of credit ........................      2,994      (1,259)
Purchase of treasury stock ..........................................       (237)       (222)
Other ...............................................................       (318)       (245)
                                                                        --------    --------
Net cash provided by financing activities ...........................      1,336         992
                                                                        --------    --------
Net increase (decrease) in cash and cash equivalents ................       (624)      2,170
Cash and cash equivalents at beginning of period ....................     26,556      23,356
                                                                        --------    --------
Cash and cash equivalents at end of period ..........................   $ 25,932    $ 25,526
                                                                        ========    ========

Cash paid for:
  Interest expense ..................................................   $  5,509    $  5,983
                                                                        ========    ========
  Income taxes ......................................................   $  1,703    $  1,424
                                                                        ========    ========
</TABLE>

See accompanying Notes to Condensed Consolidated Financial Statements.
                                      -4-
<PAGE>




                  LYNCH INTERACTIVE CORPORATION & SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A.   Basis of Presentation

Lynch Interactive Corporation  ("Interactive" or the "Company") consolidates the
operating results of its telephone and cable television  subsidiaries  (81%-100%
owned at June 30,  2004,  December  31, 2003 and June 30,  2003).  In  addition,
certain less than 50% owned  investments in limited  liability  companies  which
were  accounted  for in  accordance  with the equity  method of accounting as of
December  31,  2003 have been  consolidated  at June 30,  2004.  See Note B. All
material   intercompany   transactions   and  balances  have  been   eliminated.
Investments  in affiliates in which the Company does not have a majority  voting
control 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, 2004, December
31, 2003 and June 30, 2003), Capital Communications  Company, Inc. (49% owned at
June 30,  2004,  December  31, 2003 and June 30, 2003;  we note,  however,  that
Interactive  owns a  convertible  preferred  stock which,  if  converted,  would
increase  its  ownership  in  Capital  Communications  to 50%) and the  cellular
partnership  operations in New Mexico (both 33% owned at June 30, 2004, December
31, 2003 and June 30, 2003).

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, 2003. 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 three and six month periods ended June 30,
2004 are not necessarily  indicative of the results that may be expected for the
year ending  December  31,  2004.  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 year amounts in the
accompanying consolidated financial statements have been reclassified to conform
to current year presentation.


B.   Recently Issued Accounting Pronouncements

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

                                      -5-
<PAGE>



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 CLEC that is planning to provide services in the
surrounding area and interests in certain cellular partnerships. The acquisition
price is $21.2 million, subject to certain closing adjustments.  The acquisition
will close  subject to meeting  certain  conditions,  including  approval by the
California  Public  Utilities  Commission  and  other  regulatory   authorities.
Therefore, the Company's consolidated financial statements for the three and six
months ended June 30, 2004 do not include the results of Cal-Ore.

In February 2004, Central Telecom Services,  LLC, a 100% owned subsidiary of the
Company  completed the acquisition of cable television  assets at a cost of $0.4
million.  The  allocation  of the  purchase  price to the  assets  acquired  and
liabilities  assumed was based on  estimates  of fair value,  including  $50,000
allocated to other intangibles for the subscriber list.

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

D.   Investments in Affiliated Companies

Interactive has equity  investments in both broadcasting and  telecommunications
companies.

Summarized  financial  information  for  companies  accounted  for by the equity
method as of and for the three and six months  ended June 30,  2004 and 2003 and
as of December 31, 2003 is as follows (in thousands):

<TABLE>
<CAPTION>

                                                   Broadcasting Combined Information
                                                    June 30,  December 31, June 30,
                                                     2004       2003        2003
                                                   --------------------------------

<S>                                                <C>         <C>         <C>
Current assets .................................   $  5,163    $  5,330    $  5,404
Property, plant & equipment, intangibles & other      8,749       9,615      10,103
                                                   --------    --------    --------
Total assets ...................................   $ 13,912    $ 14,945    $ 15,507
                                                   ========    ========    ========

Current liabilities ............................   $  2,400    $  3,182    $  3,127
Long term liabilities ..........................     15,756      16,483      17,020
Equity .........................................     (4,244)     (4,720)     (4,640)
                                                   --------    --------    --------
Total liabilities & equity .....................   $ 13,912    $ 14,945    $ 15,507
                                                   ========    ========    ========

Three months ended
Revenues .......................................   $  3,204                $  3,115
Gross profit ...................................      1,062                     771
Net (Loss) Profit ..............................        328                      12

</TABLE>
                                      -6-
<PAGE>

<TABLE>
<CAPTION>


<S>                                                <C>         <C>
Six months ended
Revenues .......................................   $ 6,694                   $ 5,738
Gross profit ...................................     2,318                     1,455
Net (Loss) Profit...............................       682                      (212)

</TABLE>

<TABLE>
<CAPTION>

                                                Telecommunications Combined Information
                                                    June 30,   December 31, June 30,
                                                     2004        2003        2003
                                                   ---------------------------------

<S>                                                <C>         <C>         <C>
Current assets .................................   $31,064     $30,340     $11,694
Property, plant & equipment, intangibles & other    26,350      27,114      27,291
                                                   -------     -------     -------
Total assets ...................................   $57,414     $57,454      38,985
                                                   =======     =======     =======

Current liabilities ............................   $22,107     $23,073     $ 5,397
Long term liabilities ..........................     8,223       9,056      10,913
Equity .........................................    27,084      25,325      22,675
                                                   -------     -------     -------
Total liabilities & equity .....................   $57,414     $57,454     $38,985
                                                   =======     =======     =======

Three months ended
Revenues .......................................   $14,443                 $11,476
Gross profit ...................................     6,567                   4,151
Net income .....................................     4,357                   3,161

Six months ended
Revenues .......................................   $26,749                 $21,981
Gross profit ...................................    12,042                   7,580
Net income .....................................     7,652                   5,679
</TABLE>


At June 30, 2004, December 31, 2003, and June 30, 2003 the Company's  investment
in  Coronet  Communications  Company  ("Coronet")  was  carried  at  a  negative
$688,000, a negative $810,000, and a negative $793,000 respectively,  due to the
Company's  guarantee of $3.8 million of  Coronet's  third party debt.  Long-term
debt of Coronet,  at June 30,  2004,  totaled  $9.8 million due to a third party
lender,  which is due in quarterly  payments  through  December  31,  2005.  The
Company's investment in Capital  Communications  Company, Inc. was carried at $0
for all periods.

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

On April 30, 2004,  the Company  acquired a 37% interest in KMG whose  principal
assets consist of a $6.0 million  subordinated note and a 17% equity interest in
Lynch Telephone Corporation, which is an 83% owned subsidiary of the Company.


                                      -7-
<PAGE>



E.   Indebtedness

Interactive  maintains  a  short-term  line of credit  facility  totaling  $10.0
million.  This  facility  was  renewed  during  the  third  quarter  of 2003 and
currently expires on August 31, 2004. The Company expects to refinance this line
of credit at current or somewhat lower borrowing  levels.  Borrowings under this
facility were $2.6 million, zero and $8.3 million at June 30, 2004, December 31,
2003 and June 30, 2003,  respectively.  Long-term debt consists of (all interest
rates are at June 30, 2004) (in thousands):

<TABLE>
<CAPTION>

                                                                                     June 30,        December 31,      June 30,
                                                                                      2004              2003             2003
                                                                                  --------------------------------------------------
<S>                                                                                <C>          <C>          <C>

Rural Electrification Administration ("REA") and Rural Telephone Bank (`RTB")
notes payable due from 2006 to 2027 at fixed interest rates ranging from 2% to
7.5%. (5% weighted average, secured by assets of the telephone
companies with a net book value of $150 million) ...............................   $  58,787        $  59,917        $  58,878

Bank Credit facilities utilized by certain telephone and telephone holding
companies due from 2005 to 2016, $25.9 million at fixed interest rates averaging
7.8 % and $48.6
million at variable interest rates averaging 3.7%  .............................      74,548           78,646           82,681

Unsecured notes issued in connection with acquisitions
through 2006, at fixed interest rates of 8.0% to 10.0% .........................      38,889           34,389           34,634

Other ..........................................................................       2,456            2,831            3,146
                                                                                   ---------        ---------        ---------
                                                                                     174,680          175,783          179,339
Current maturities .............................................................     (13,959)         (13,162)         (18,619)
                                                                                   ---------        ---------        ---------
                                                                                   $ 160,721        $ 162,621        $ 160,720
                                                                                   =========        =========        =========
</TABLE>

On April 30,  2004 a  subsidiary  of the  Company  issued a $4.5  million,  8.5%
five-year  amortizing  subordinated  note in connection  with the acquisition of
KMG, which is classified as unsecured notes in the above table.

F.   Comprehensive Income

Other  comprehensive  income,  net of tax,  which  consists of unrealized  gains
(losses) on available for sale  securities,  for the three and six month periods
ended June 30, 2004 and 2003 are as follows (in thousands):

<TABLE>
<CAPTION>

                                    Three Months Ended    Six Months Ended
                                       June 30,               June 30,
                                   -------------------  --------------------
                                     2004       2003       2004       2003
                                   -------------------  --------------------

<S>                                <C>        <C>        <C>        <C>
Net income .....................   $   384    $ 1,156    $ 1,987    $ 2,569
Unrealized gains ...............       305        218      1,166        104
Tax effect .....................      (104)       (87)      (399)       (39)
                                   -------    -------    -------    -------
  Net other comprehensive income       201        131        767         65
                                   -------    -------    -------    -------
Comprehensive income ...........   $   585    $ 1,287    $ 2,754    $ 2,634
                                   =======    =======    =======    =======

</TABLE>


                                      -8-
<PAGE>


G.   Treasury Stock Purchases

During the six months ended June 30 2004, the Company  purchased 8,200 shares of
its common stock for treasury at an average investment of $28.89 per share.

H.   Litigation

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

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

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

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

On June 7, 2004, the defendants filed a motion to relator to refer the issues in
this litigation to the Federal Communications Commission,  which motion has been
opposed  by  the  relator.   Discovery  continues  while  the  motion  is  under
consideration by the Courts.

On July 28, 2004,  the judge issued a ruling on the motion to dismiss,  which in
large part,  denied the motion and allowed the  discovery  to continue  (See the
Company's website www.lynchinteractivecorp.com). Defendant bidding entities that
did not win licenses were  dismissed.  Interactive and its  subsidiaries  remain

                                      -9-
<page>

parties to the 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.

History of Lynch's "C" Block Activities
---------------------------------------

As part of the  Omnibus  Budget  Resolution  of 1993,  Congress  authorized  its
Federal  Communications  Commission to employ competitive  bidding procedures to
select  among  mutually  exclusive  applicants  for  certain  spectrum  bidding.
Initially the FCC had an initiative to include, among others,  qualified 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.  Lynch Interactive was a participating  investor and/or service provider
to various  entities in the auction.  In 2001,  Interactive was named in a False
Claim Act litigation with regard to its auction  activities.  Below is a history
of our C-Block activities, the first auction Lynch Interactive was involved with
as an investor and as a service provider.

On December 18, 1995,  Lynch  Interactive  Corporation  (through its predecessor
Lynch  Corporation)  had  investments in five entities that  participated in the
Federal  Communications  Commission 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,  qualified  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.
Lynch'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 of
refinancing of "C" block.  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  -  see  our   website
www.lynchinteractivecorp.com for an excerpt of this testimony. 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 include: disaggregation, splitting a 30 MHz license into two
15 MHz licenses and forgoing 50% of the amount deposited, or prepayment,  return
of certain  licenses and utilize 70% of the amount  deposited  to acquire  other
licenses, 30% of the deposits would 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
the government  debt and the 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 following this FCC process,  disaggregation resulted in a reduction of
the bidding credits to $5.3 million.


                                      -10-
<page>

Fortunet  also  lost  $6.0  million  of its  down  payment.  A  lawyer  for many
applications  for FCC licenses,  Mr. Taylor is aware of the details of these FCC
initiated alternatives to the "C" Block, as was and should be his law firm. As a
result of this decision,  during 1997, Interactive recorded a $7.0 million write
down of its investment in Fortunet.

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

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

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

I.   Subsequent Events

Interactive was the high bidder on two licenses in Block 31, Buffalo, NY and
Davenport, IA, for a total cost of $49,000 in the Federal Communications
Communication conducted auction for 24 GHz spectrum which was held on July 27,
2004.

In addition, Interactive acted as the administrative bidding agent for Napoleon
Communications, which was the high bidder in Phoenix, AZ, Las Vegas, NV, Reno,
NV and Albuquerque, NM (Block 39) in that auction. Napoleon qualified as a very
small business and received a bidding credit of 35%.

                                      -11-
<PAGE>

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

Forward Looking Information
---------------------------

Included in this Management  Discussion and Analysis of Financial  Condition and
Results  of  Operations  are  certain  forward   looking   financial  and  other
information,  including  without  limitation,  the Company's  effort to monetize
certain  assets,  Liquidity and Capital  Resources and Market Risk. It should be
recognized  that such  information are estimates or forecasts based upon various
assumptions, including the matters, risks, and cautionary statements referred to
therein,  as  well as  meeting  the  Company's  internal  assumptions  regarding
expected operating  performance and the expected  performance of the economy and
financial  markets as they impact  Registrant's  businesses.  As a result,  such
information is subject to uncertainties,  risks and inaccuracies, which could be
material.

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  period,  Interactive
acquired  fourteen  telephone  companies,  four of which have indirect  minority
ownership of 2% to 19%, whose operations range in size from approximately 800 to
over 10,000 access  lines.  The Company's  telephone  operations  are located in
Iowa, Kansas,  Michigan, New Hampshire, New Mexico, New York, North Dakota, Utah
and Wisconsin.

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

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

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.


                                      -12-
<page>

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  lines to
     residential,  as well as the number of features  subscribed to by customers
     are secondary drivers.

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

o    Interstate  access  revenues depend upon whether the RLEC has elected to be
     "cost-based" or has remained an "average schedule" carrier. The revenues of
     our ten cost-based  carriers  directly  correlate to their approved rate of
     return on regulated net investment  plus the amount of regulated  operating
     expenses  including  taxes.  The  revenues of the  Company's  four  average
     schedule subsidiaries  correlate to usage based measurements such as access
     lines, interstate  minutes-of-use,  and the number and mileage of different
     types of circuits.  The average  schedule  method is intended to be a proxy
     for cost-based recovery.

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

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

o    Long Distance  revenues are only retained by the Company if it is providing
     the long distance  service to the end user  customer as the toll  provider.
     For  unaffiliated  IXCs,  we  provide  a billing  service  and  receive  an
     administrative handling fee.

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

o    Universal Service Reform: There are two separate but associated proceedings
     related to universal service  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

                                      -13-

<page>

     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.

o    In June 2004, the FCC also issued a Notice of Proposed  Rulemaking  seeking
     comment  on  whether  the  Joint  Board's  Recommended  Decision  should be
     adopted,  in whole or in part,  including  the process for  designation  of
     eligible  telecommunications  carriers (ETCs) and the FCC's rules regarding
     high cost universal service support. In its Recommended Decision, the Joint
     Board recommended that the Commission adopt permissive  federal  guidelines
     for states to  consider  in ETC  designation  proceedings  and that the FCC
     limit the scope of high-cost support to a single connection that provides a
     subscriber access to the public telephone network. 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.
     The Company is trying to install more  broadband  service to offset revenue
     losses from traditional voice services.

Three months ended June 30, 2004 compared to June 30, 2003
----------------------------------------------------------

The  following is a breakdown of revenues and  operating  costs and expenses for
the second quarter ended June 30, 2004 and 2003 (in thousands):

<TABLE>
<CAPTION>

                                    Second Quarter ended June 30,
                                    -----------------------------  Increase
                                        2004      2003            (Decrease)
                                      -------------------------------------
                                       (Unaudited)
Revenues:
<S>                                   <C>       <C>              <C>
Local access ......................   $ 3,176   $ 3,103          $    73
Interstate access .................     9,351     9,151              200
Intrastate access .................     3,858     3,693              165
Other telephone ...................       555       835             (280)
Other business ....................     4,691     4,561              130
                                      -------   -------          -------
  Total ...........................    21,631    21,343              288
                                      -------   -------          -------

Operating Cost and Expense:
Cost of revenue ...................     7,671     7,304              367
General and administrative costs at
  operations ......................     3,533     3,335              198
Corporate office expenses .........     2,273     1,098            1,175
Depreciation and amortization .....     4,927     4,913               14
                                      -------   -------          -------
  Total ...........................    18,404    16,650            1,754
                                      -------   -------          -------
  Operating profit ................   $ 3,227   $ 4,693          $(1,466)
                                      =======   =======          =======
</TABLE>


Total  revenues  for the three  months  ended June 30,  2004  increased  by $0.3
million, or 1.3%, to $21.6 million

                                      -14-
<page>

compared  to the second  quarter of 2003.  Local  access  revenue  increased  by
$73,000 in the  second  quarter of 2004  resulting  from the sale of  additional
features  and rate  increases,  partially  offset by a 1.0%  decrease  in access
lines. Interstate access revenue increased $0.2 million in the second quarter of
2004 primarily due to  infrastructure  development  undertaken in 2002 and 2003,
which  entitled the company to increased  USF support  primarily at the Haviland
Telephone Company in Kansas.  Such USF increase was partially offset by the loss
of a  telecommunications  transport contract in Utah. The $0.3 million reduction
in other telephone  revenues resulted  primarily from a one-time NECA adjustment
to our previously  reported rate base,  which effects the amount of revenue that
we were entitled to in prior periods. The Company's acquisition in February 2004
of a small  cable  company in Utah  resulted in $0.1  million  increase in other
business revenue. Other business revenue also benefited from revenue growth at a
competitive local exchange carrier in Kansas.

Total  costs and  expenses  increased  by $1.8  million to $18.4  million in the
second quarter of 2004. Costs of revenue  increased $0.4 million,  or 5%, due to
additional operating costs related to the additional infrastructure  development
in Haviland and to the February  2004  acquisition  of a small cable  television
operation in Central  Utah.  General and  administrative  costs  incurred at the
operations  were  relatively  flat.  Corporate  office  expenses  increased $1.2
million  resulting from $0.8 million of legal costs incurred  defending the "qui
tam"  litigation in the second quarter of 2004,  $0.7 million of increased audit
and consulting costs resulting from Sarbanes-Oxley implementation, offset by the
absence in 2004 of a $0.3 million  management  incentive accrual recorded in the
second quarter of 2003. Depreciation and amortization remained flat.

As a result of the above,  operating  profit for the three months ended June 30,
2004,  decreased by $1.5 million to $3.2 million  compared to the second quarter
of 2003.

EBITDA
------

EBITDA represents the Company's  earnings before interest,  taxes,  depreciation
and amortization.  EBITDA is not intended to represent cash flows from operating
activities  and should not be considered as an alternative to net income or loss
(as determined in conformity with generally accepted accounting principles),  as
an  indicator  of the  Company's  operating  performance  or to cash  flows as a
measure of liquidity.  EBITDA from  operations is presented  herein  because the
Company's  chief  operating  decision maker evaluates and measures each business
unit's performance based on its EBITDA results. The Company believes that EBITDA
from operations is the most accurate indicator of the Company's results, because
it focuses on revenue and  operating  cost items driven by  operating  managers'
performance,  and  excludes  non-recurring  items and items  largely  outside of
operating managers' control. In addition,  Interactive utilizes EBITDA as one of
its metrics for valuing potential  acquisitions.  The following table reconciles
EBITDA to  Operating  profit  and to Income  before  income  taxes and  minority
interests (in thousands).

<TABLE>
<CAPTION>

                                  Second Quarter ended June 30,
                                  -----------------------------    Increase
                                     2004       2003              (Decrease)
                                  -----------------------------------------
                                      (Unaudited)

<S>                                <C>         <C>                <C>
EBITDA from operations .........   $ 10,427    $ 10,704           $   (277)
Corporate office expenses ......     (2,273)     (1,098)            (1,175)
                                   --------    --------           --------
  Total EBITDA .................      8,154       9,606             (1,452)
Depreciation ...................      4,550       4,758               (208)
Amortization ...................        377         155                222
                                   --------    --------           --------
  Operating profit .............      3,227       4,693             (1,466)
Investment income ..............         82          98                (16)
Interest expenses ..............     (2,851)     (2,999)               148
Equity in earnings of affiliates        886         679                207
                                   --------    --------           --------
  Income before income taxes and
    minority  interest             $  1,344    $  2,471           $ (1,127)
                                   ========    ========           ========
</TABLE>

                                      -15-

<Page>

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

For the three months ended June 30, 2004,  investment income decreased  slightly
due to lower yields on investable funds.

Interest  expense  decreased by $0.1 million in the second  quarter of 2004 from
the same period in the prior year due primarily to lower outstanding borrowings.

Equity in  earnings  of  affiliates  for the  three-month  ending  June 30, 2004
increased  from the same period in the previous  year due to higher  earnings at
the Company's New Mexico cellular investments (RSA 3 and 5).

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

The income tax provision includes federal, as well as state and local taxes. The
tax  provision  for the three  months  ended June 30,  2004 and 2003,  represent
effective tax rates of 35.2% and 35.4%,  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 for the three months ended
June 30,  2004,  as compared to $0.4 million for the three months ended June 30,
2003

Net Income
----------

Net income for the three months ended June 30, 2004, was $0.4 million,  or $0.14
per share (basic and diluted), compared to a net income for the same period last
year of $1.2 million, or $0.41 per share (basic and diluted). The Company has no
dilutive instruments outstanding.

Six months ended June 30, 2004 compared to June 30, 2003
--------------------------------------------------------

The  following is a breakdown of revenues and  operating  costs and expenses for
the six months ended June 30, 2004 and 2003 (in thousands):

<TABLE>
<CAPTION>

                                   Six Months ended June 30,
                                      -----------------     Increase
                                        2004      2003     (Decrease)
                                      ------------------------------
                                         (Unaudited)
<S>                                   <C>       <C>       <C>
Revenues:
Local access ......................   $ 6,178   $ 6,134   $    44
Interstate access .................    18,891    18,209       682
Intrastate access .................     7,852     7,616       236
Other telephone ...................     1,278     1,568      (290)
Other business ....................     9,320     9,119       201
                                      -------   -------   -------
  Total ...........................    43,519    42,646       873
                                      -------   -------   -------

Operating Cost and Expense:
Cost of revenue ...................    15,151    14,741       410
General and administrative costs at
  operations ......................     6,859     6,742       117
Corporate office expenses .........     3,246     1,868     1,378
Depreciation and amortization .....    10,148     9,828       320
                                      -------   -------   -------
  Total ...........................    35,404    33,179     2,225
                                      -------   -------   -------
  Operating profit ................   $ 8,115   $ 9,467   $(1,352)
                                      =======   =======   =======
</TABLE>

                                      -16-
<page>

Total revenues for the six months ended June 30, 2004 increased $0.9 million, or
2.0%, to $43.5 million  compared to the first half of 2003. Local access revenue
increased  by  $44,000  in the six  months  of 2004  resulting  from the sale of
additional  features and rate increases,  partially offset by a 1.0% decrease in
access lines.  Interstate  access  revenue  increased $0.7 million in the second
quarter of 2004 primarily due to infrastructure  development  undertaken in 2002
and 2003,  which entitled the company to increased USF support  primarily at the
Haviland Telephone Company in Kansas.  Such USF increase was partially offset by
the loss of a  telecommunications  transport  contract in Utah. The $0.3 million
reduction in other telephone  revenues  resulted  primarily from a one-time NECA
adjustment to our  previously  reported  rate base,  which effects the amount of
revenue that we were entitled to in prior periods. The Company's  acquisition in
February 2004 of a small cable company in Utah resulted in $0.1 million increase
in other business  revenue.  Other business  revenue also benefited from revenue
growth at a competitive local exchange carrier in Kansas.

Total costs and expenses  increased by $2.2 million to $35.4  million in the six
months  of 2004.  Costs of  revenue  increased  $0.4  million,  or 2.8%,  due to
additional operating costs related to the additional infrastructure  development
in Haviland  and the  February  2004  acquisition  of a small  cable  television
operation in Central  Utah.  General and  administrative  costs  incurred at the
operations  were  relatively  flat.  Corporate  office  expenses  increased $1.4
million  resulting from $1.1 million of legal costs incurred  defending the "qui
tam" litigation in the first six months of 2004,  increased audit and consulting
costs resulting from Sarbanes-Oxley implementation,  and partially offset by the
absence in 2004 of a $0.3 million  management  incentive accrual recorded in the
2003 period. Depreciation and amortization increased $0.3 million primarily as a
result  of  a  revision  to  depreciable  lines,  which  resulted  in  increased
depreciation expense at our Michigan telephone company.

As a result of the above,  operating  profit  for the six months  ended June 30,
2004,  decreased by $1.4  million to $8.1 million  compared to the six months of
2003.

EBITDA
------

The following table  reconciles  EBITDA to Operating profit and to Income before
income taxes and minority interests (in thousands).
<TABLE>
<CAPTION>

                                 Six Months ended June 30,
                                   ----------------------  Increase
                                     2004        2003     (Decrease)
                                   --------------------------------
                                       (Unaudited)

<S>                                <C>         <C>         <C>
EBITDA from operations .........   $ 21,509    $ 21,163    $    346
Corporate office expenses ......     (3,246)     (1,868)     (1,378)
                                   --------    --------    --------
  Total EBITDA .................     18,263      19,295      (1,032)
Depreciation ...................      9,619       9,526          93
Amortization ...................        529         302         227
                                   --------    --------    --------
  Operating profit .............      8,115       9,467      (1,352)
Investment income ..............        810         656         154
Interest expenses ..............     (5,670)     (6,025)        355
Equity in earnings of affiliates      1,598       1,063         535
                                   --------    --------    --------
  Income before income taxes and   $  4,853    $  5,161    $   (308)
    minority  interest             ========    ========    ========

</TABLE>

                                      -17-
<PAGE>

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

For the six months  ended June 30,  2004,  investment  income  increased by $0.2
million due to a cash  distribution  from Sunshine PCS  Corporation in the first
quarter of 2004.

Interest  expense  decreased  by $0.4 million in the six months of 2004 from the
same period in the prior year due primarily to lower outstanding borrowings.

Equity  in  earnings  of  affiliates  for the  six-month  ending  June 30,  2004
increased  from the same period in the previous  year due to higher  earnings at
the Company's New Mexico cellular investments (RSA 3 and 5).

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

The income tax provision includes federal, as well as state and local taxes. The
tax  provision  for the six  months  ended  June 30,  2004 and  2003,  represent
effective tax rates of 39.6% and 37.8%,  respectively.  The  difference  between
these effective rates and the federal statutory rate is principally due to state
income taxes,  including the effect of earnings  attributable to different state
jurisdictions.

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

Minority  interests  decreased earnings by $0.9 million for the six months ended
June 30,  2004,  as compared to $0.6  million for the six months  ended June 30,
2003.  The  change  was due to higher  earnings  from the  Company's  New Mexico
cellular investments.

Net Income
----------

Net income for the six months ended June 30, 2004,  was $2.0  million,  or $0.72
per share (basic and diluted), compared to a net income for the same period last
year of $2.6 million, or $0.92 per share (basic and diluted). The Company has no
dilutive instruments outstanding.

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

The debt at each of Interactive's  subsidiary companies contains restrictions on
the  amount  of  funds  that  can be  transferred  to  their  respective  parent
companies.   The  Interactive  parent  company  ("Parent  Company")  needs  cash
primarily to pay corporate  expenses,  federal income taxes and to invest in new
opportunities,  including spectrum licenses. The Parent Company receives cash to
meet  its  obligations   primarily  through   management  fees  charged  to  its
subsidiaries,  a tax sharing agreement with its subsidiaries, a $10 million line
of credit facility, and has obtained additional liquidity by refinancing certain
subsidiary debt. In addition,  the Parent Company considers various  alternative
long-term  financing  sources:  debt,  equity,  or sale of investments and other
assets.

The  Company's  RLECs  and other  businesses  need  cash to fund  their  current
operations, as well as future long-term growth initiatives.  Each RLEC and other
business  finances  its cash  needs  with cash  generated  from  operations,  by
utilizing  existing  borrowing  capacity or by entering into new long-term  debt
agreements.  New business acquisitions are generally financed with a combination
of new long-term debt,  secured by the acquired assets, as well as cash from the
Parent. While management expects that both Parent and its operating subsidiaries
will be able to obtain  adequate  financing  resources  to enable the Company to
meet its obligations, there is no assurance that such can be readily obtained or
at reasonable  costs.  The Company is obligated  under long-term debt provisions
and  lease  agreements  to make  certain  cash  payments  over  the  term of the
agreements.  The following table summarizes, as of June 30, 2004 for the periods
shown,  these  contractual  obligations and certain other financing  commitments
from banks and other financial institutions that provide liquidity:


                                      -18-
 <page>

<TABLE>
<CAPTION>
                                                                      Payments Due by Period
                                                                           (In thousands)
                                                             Less than
                                           Total     1 year    2 - 3 years   4 - 5 years After 5 years
                                         --------------------------------------------------------------

<S>                                      <C>        <C>        <C>          <C>           <C>
Long-term debt (a) ...................   $174,680   $ 13,959   $ 53,616     $ 47,450      $ 59,655
Operating leases .....................      1,703        419        725          242           317
Notes payable to banks ...............      6,450      6,450       --           --            --
Guarantees ...........................      3,750       --        3,750         --            --
                                         --------   --------   --------     --------      --------
Total contractual cash obligations and
  commitments ........................   $186,583   $ 20,828   $ 58,091     $ 47,692      $ 59,972
                                         ========   ========   ========     ========      ========

</TABLE>

(a)  Does not include interest payments on debt.

A subsidiary of the Company has guaranteed $3.8 million of an equity  investees'
total debt of $9.9  million.  The guarantee is in effect for the duration of the
loan  which  expires  on  December  31,  2005 and would be payable if the equity
investee fails to make such payment in accordance with the terms of the loan.

The Parent  Company has a  short-term  line of credit  facility,  which  expires
August 31, 2004, with maximum availability totaling $10.0 million, of which $7.4
million  was  available  at June  30,  2004 and all of which  was  available  at
December  31,  2003.  The Company is  pursuing  various  financing  alternatives
including  renewal  of the  line of  credit,  refinancing  substantially  all or
individual  pieces  of its  currently  outstanding  debt,  and  sale of  certain
investments.  The  Company  expects  that this line of credit  facility  will be
renewed in August 2004 at current or somewhat lower borrowing  levels.  While it
is  management's  belief that the Company will have  adequate  resources to fund
operations  over the next  twelve  months,  there can be no  assurance  that the
Company will obtain financing on terms acceptable to management.  The renewal of
the line of credit is a critical element of the Company's financing strategy.

At June 30,  2004,  total  debt  (including  notes  payable to banks) was $181.1
million,  an increase of $1.9 million from  December 31, 2003. At June 30, 2004,
there was $124.4 million of fixed interest rate debt outstanding  averaging 7.0%
and $56.7 million of variable  interest rate debt  averaging  4.4%.  The debt at
fixed interest rates  includes $38.9 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 either by substantially all
of such  subsidiaries  assets, or by the common stock of such  subsidiaries.  At
June 30, 2004 and December 31, 2003,  substantially all of the subsidiaries' net
assets  are  restricted.  In  addition,  the  debt  facilities  contain  certain
covenants  restricting  distribution to Lynch Interactive.  As of June 30, 2004,
the Company is in compliance with all debt covenants.

Interactive has a high degree of financial leverage.  The ratio of total debt to
equity was 5.6 to 1 as of June 30,  2004 and 6.0 to 1 as of December  31,  2003.
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, 2004, Interactive had current assets of $40.6 million and current
liabilities  of $34.7  million  resulting in a working  capital  surplus of $5.9
million compared to a surplus of $7.2 million at December 31, 2003.

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

Cash at June 30, 2004, was $25.9 million, a decrease of $0.6 million compared to
December  31,  2003.  During the first  quarter of 2004,  net cash  provided  by
operations of $8.4 million were primarily used to invest in plant and equipment,
acquire businesses and repay debt.

                                      -19-

<page>

Capital  expenditures  which  are  predominantly  spent at the RLECs and will be
included in their rate bases for rate setting  purposes were $6.3 million in the
six months of 2004  compared to $9.9 million in 2003.  Capital  expenditures  in
2004 are expected to be approximately  $19 million,  most of which will be added
to  the  RLEC  rate  bases.   External  financing  is  currently  in  place  for
approximately $3 million of these  expenditures.  The remainder will be financed
from internal sources.

The Company completed two acquisitions in the six months ended June 30, 2004. In
February 2004, a 100% owned  subsidiary of the Company acquired cable television
assets at a cost of $0.4 million.  On April 30, 2004, the Company acquired a 37%
interest  in  KMG  by  issuing  a  $4.5  million,   8.5%  five-year   amortizing
subordinated note.

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
Interactive  authorized  the purchase of up to 100,000  shares of common  stock.
Through June 30, 2004,  53,200  shares had been  purchased at an average cost of
$32.32.

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. The Company may consider  paying  dividends in the future
depending  upon the  needs of its  businesses.  Further  financing  may limit or
prohibit the payment of dividends.

Contingencies
-------------

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

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

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

                                      -20-
<page>

its rights under the policy and, as a result, any coverage to be provided to any
director or officer of  Interactive  in connection  with a judgment  rendered in
this action is unclear at this time.

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

On June 7, 2004, the defendants filed a motion to relator to refer the issues in
this litigation to the Federal Communications Commission,  which motion has been
opposed  by  the  relator.   Discovery  continues  while  the  motion  is  under
consideration by the Courts.

On July 28, 2004,  the judge issued a ruling on the motion to dismiss,  which in
large part,  denied the motion and allowed the  discovery  to continue  (See the
Company's website www.lynchinteractivecorp.com). Defendant bidding entities that
did not win licenses were  dismissed.  Interactive and its  subsidiaries  remain
parties to the litigation.

Critical Accounting Policies and Estimates
------------------------------------------

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

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

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

Annually, the Company tests goodwill and other intangible assets with indefinite
lives  for  impairment.   The  Company  screens  for  potential   impairment  by
determining  fair value for each  reporting  unit. We estimate the fair value of
each  reporting  unit based on a number of subjective  factors,  including:  (a)
appropriate weighting

                                      -21-

<page>
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
-----------------------------------------

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

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  $25.9 million at June 30, 2004 and $26.6 million at December 31,
2003).  The  majority  of the  Company's  debt is  fixed  rate  and the  Company
generally  finances the acquisition of long-term  assets by borrowing on a fixed
long-term basis. The Company does not use derivative  financial  instruments for
trading or  speculative  purposes.  Management  does not  currently  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, 2004, the fair value of debt was approximately equal to
its carrying value.

At June 30, 2004 and December 31, 2003,  approximately  $56.7  million and $56.4
million,  respectively, or 31% and 34% of Interactive's long-term debt and notes
payable bears interest at variable rates.  Accordingly,  the Company's  earnings
and cash flows are affected by changes in interest  rates.  Assuming the current
level of borrowings for variable rate debt and assuming a one  percentage  point
change in the 2004 average interest rate

                                      -22-

<page>

under these borrowings,  it is estimated that Interactive's interest expense for
the six months  ended June 30,  2004 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, 2004, if the Company were to convert a
significant  portion of its  variable  interest  rate debt into  fixed  interest
rates,  such conversion could increase interest expense for the six months ended
June 30, 2004 by $0.8 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.

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

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

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

Interactive  strongly believes that this lawsuit is completely without merit and
that  relator's  initial damage  computation  is without  basis,  and intends to
defend the suit vigorously. The U.S. Department of Justice has

                                      -23-

<page>

notified the court that it has declined to intervene in the case.  Nevertheless,
we cannot predict the ultimate outcome of the litigation, nor can we predict the
effect  that the  lawsuit or its  outcome  will have on our  business or plan of
operation.  Interactive  does  not  have  any  insurance  to  cover  its cost of
defending this lawsuit,  which costs will be material.  Interactive  does have a
directors and officers  liability policy but the insurer has reserved its rights
under the policy and, as a result,  any  coverage to be provided to any director
or officer of Interactive in connection with a judgment  rendered in this action
is unclear at this time.

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

On June 7, 2004, the defendants filed a motion to relator to refer the issues in
this litigation to the Federal Communications Commission,  which motion has been
opposed  by  the  relator.   Discovery  continues  while  the  motion  is  under
consideration by the Courts.

On July 28, 2004,  the judge issued a ruling on the motion to dismiss,  which in
large part,  denied the motion and allowed the  discovery  to continue  (See the
Company's website www.lynchinteractivecorp.com). Defendant bidding entities that
did not win licenses were  dismissed.  Interactive and its  subsidiaries  remain
parties to the 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.

History of Lynch's "C" Block Activities
---------------------------------------

As part of the  Omnibus  Budget  Resolution  of 1993,  Congress  authorized  its
Federal  Communications  Commission to employ competitive  bidding procedures to
select  among  mutually  exclusive  applicants  for  certain  spectrum  bidding.
Initially the FCC had an initiative to include, among others,  qualified 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.  Lynch Interactive was a participating  investor and/or service provider
to various  entities in the auction.  In 2001,  Interactive was named in a False
Claim Act litigation with regard to its auction  activities.  Below is a history
of our C-Block activities, the first auction Lynch Interactive was involved with
as an investor and as a service provider.

On December 18, 1995,  Lynch  Interactive  Corporation  (through its predecessor
Lynch  Corporation)  had  investments in five entities that  participated in the
Federal  Communications  Commission 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,  qualified  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.
Lynch's investments in these entities totaled $21 million.

                                      -24-

<page>

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 of
refinancing of "C" block.  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  -  see  our   website
www.lynchinteractivecorp.com for an excerpt of this testimony. 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 include: disaggregation, splitting a 30 MHz license into two
15 MHz licenses and forgoing 50% of the amount deposited, or prepayment,  return
of certain  licenses and utilize 70% of the amount  deposited  to acquire  other
licenses, 30% of the deposits would 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
the government  debt and the 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 following this FCC process,  disaggregation resulted in a reduction of
the bidding credits to $5.3 million. Fortunet also lost $6.0 million of its down
payment. A lawyer for many applications for FCC licenses, Mr. Taylor is aware of
the details of these FCC  initiated  alternatives  to the "C" Block,  as was and
should be his law firm. As a result of this decision,  during 1997,  Interactive
recorded a $7.0 million write down of its investment in Fortunet.

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

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

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

                                      -25-
<page>

Item 2. Changes in  Securities,  Use of Proceeds and Issuer  Purchases of Equity
        -----------------------------------------------------------------------
        Securities
        ----------
<TABLE>
<CAPTION>

                                                                            Total Number of        Maximum Number of
                                                                          Shares Purchased as     Shares that May Yet
                                                                            Part of Publicly       Be Purchased Under
                             Total Number of       Average Price Paid      Announced Plans or    the Plans or Programs
            Period          Shares Purchased           per Share                Programs
       ------------------ ---------------------- ----------------------- ----------------------- -----------------------

           <S>                  <C>                   <C>                     <C>                      <C>
           April 2004             200                $   31.07                   200                   49,500
           May 2004               500                    33.08                   500                   49,000
           June 2004            2,200                    34.44                 2,200                   46,800
                          ----------------------------------------------------------------------------------------------
             Total              2,900                   $33,97                 2,900                      --

</TABLE>

Item 4.    Submission    of   Matters   to   a   Vote   of   Security    Holders
           ---------------------------------------------------

At the Annual Meeting of  Stockholders  of the Company held on May 13, 2004, the
following persons were elected as Directors of with the following votes:

<TABLE>
<CAPTION>

                                 Name             Votes For  Votes Withheld
                               --------------------------------------------

                               <S>                <C>            <C>
                               Morris Berkowitz   2,306,892      51,643
                               Paul J. Evanson    2,352,305       6,230
                               John C. Ferrara    2,352,495       6,040
                               Mario J. Gabelli   2,352,295       6,246
                               Daniel R. Lee      2,352,283       6,252
                               Salvatore Muoio    2,352,495       6,040

</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 May 14,  2004,  under Items 7 and 12
          reporting  the issuance of a press  release  regarding  the  Company's
          first quarter operating results.
     -    Current Report on Form 8-K filed April 15, 2004,  under Items 7 and 12
          reporting  the issuance of a press  release  regarding  the  Company's
          fourth quarter of 2003 operating results.


                                      -26-
<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 16, 2004

                                      -27-