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

                        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 September 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 at  October 29, 2004
            -----                               --------------------------------
Common Stock, $.0001 par value                            2,760,251

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

<PAGE>

                                      INDEX

                 LYNCH INTERACTIVE CORPORATION AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION


Item 1. Financial Statements (Unaudited)

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

         Condensed Consolidated Statements of Operations:
          -       Three and nine months ended September 30, 2004 and 2003

         Consolidated Statements of Shareholders' Equity

         Condensed Consolidated Statements of Cash Flows:
         -        Three and nine months ended September 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. Unregistered Sales of Equity Securities and Use of Proceeds

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)

                                                              September 30, December 31, September 30,
                                                                 2004          2003          2003
                                                             ----------------------------------------
                                                             (Unaudited)   (Audited)    (Unaudited)
<S>                                                           <C>          <C>          <C>
ASSETS
Current Assets:
  Cash and cash equivalents ...............................   $  27,592    $  26,556    $  27,409
  Receivables, less allowances of $270
    $262 and $262, respectively ...........................       8,535        8,183        8,774
  Material and supplies ...................................       3,010        2,597        3,160
  Prepaid expenses and other current assets ...............       1,265        1,272        1,334
                                                              ---------    ---------    ---------
Total Current Assets ......................................      40,402       38,608       40,677

Property, Plant and Equipment:
  Land ....................................................       1,113        1,111        1,101
  Buildings and improvements ..............................      17,606       17,549       13,308
  Machinery and equipment .................................     215,541      209,455      209,487
                                                              ---------    ---------    ---------
                                                                234,260      228,115      223,896
  Less: Accumulated Depreciation ..........................    (113,872)    (102,556)    (101,093)
                                                              ---------    ---------    ---------
                                                                120,388      125,559      122,803
Goodwill ..................................................      60,580       60,580       60,580
Other intangibles .........................................      10,850        8,168        8,316
Investments in and advances to affiliated entities ........      11,529        7,223       10,665
Other assets ..............................................      13,476       12,048       12,510
                                                              ---------    ---------    ---------
Total assets ..............................................   $ 257,225    $ 252,186    $ 255,551
                                                              =========    =========    =========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
  Notes payable to banks ..................................   $   6,269    $   3,456    $  11,537
  Trade accounts payable ..................................       3,601        5,336        3,331
  Accrued interest payable ................................         783          697          325
  Accrued liabilities .....................................       9,606        8,732       16,927
 Current maturities of long-term debt .....................      14,006       13,162       31,805
                                                              ---------    ---------    ---------
Total current liabilities .................................      34,265       31,383       63,925
Long-term debt ............................................     157,421      162,621      145,814
Deferred income taxes .....................................      17,425       15,517        6,720
Other liabilities .........................................       2,961        3,015        2,896
                                                              ---------    ---------    ---------
  Total liabilities .......................................     212,072      212,536      219,355

Minority Interests ........................................      11,418        9,763        9,653

Commitments and Contingencies

Shareholders' equity
  Common stock, $0.0001 par value-10,000,000
    shares authorized; 2,824,766 issued; 2,763,851
     2,779,951 and 2,782,151 outstanding ..................        --           --           --
  Additional paid-in capital ..............................      21,406       21,406       21,406
  Retained earnings .......................................      12,798        9,269        5,880
  Accumulated other comprehensive income ..................       1,499          686          682
  Treasury stock, 60,915, 44,815 and 42,615 shares, at cost      (1,968)      (1,474)      (1,425)
                                                              ---------    ---------    ---------
Total shareholder's equity ................................      33,735       29,887       26,543
                                                              ---------    ---------    ---------
Total liabilities and shareholders' equity ................   $ 257,225    $ 252,186    $ 255,551

                                                              =========    =========    =========
</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     Nine Months Ended
                                                            September 30,          September 30,
                                                        -------------------------------------------
                                                           2004       2003        2004        2003
                                                        -------------------------------------------

<S>                                                     <C>         <C>         <C>         <C>
Revenues ............................................   $ 23,110    $ 22,082    $ 66,142    $ 64,293

Costs and expenses:
Cost of revenue .....................................      7,409       7,501      22,073      21,807
General and administrative costs at operations ......      3,648       3,413      10,507      10,155
Corporate office expenses ...........................      1,743         795       4,989       2,663
Depreciation and amortization .......................      5,223       4,994      15,371      14,822
                                                                                --------    --------
    Total Expense ...................................     18,023      16,703      52,940      49,447
                                                                                --------    --------
Operating profit ....................................      5,087       5,379      13,202      14,846
Combined total

Other income (expense):
   Investment income ................................         88          83         898         739
   Interest expense .................................     (2,847)     (2,995)     (8,517)     (9,020)
   Equity in earnings of affiliated companies .......      1,051         530       2,649       1,593
                                                                                --------    --------
                                                          (1,708)     (2,382)     (4,970)     (6,688)
                                                                                --------    --------
Income before income taxes and minority interests ...      3,379       2,997       8,232       8,158
Provision for income taxes ..........................     (1,203)     (1,158)     (3,125)     (3,109)
Minority interests ..................................       (634)       (407)     (1,578)     (1,048)
                                                                                --------    --------
Net income ..........................................   $  1,542    $  1,432    $  3,529    $  4,001
                                                                                ========    ========

Basic and diluted weighted average shares outstanding      2,768       2,782       2,773       2,787

Basic and diluted earnings per share ................   $   0.56    $   0.51    $   1.27    $   1.44
</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-
                                    Stock       Common        Paid-in       Retained     hensive     Treasury
                                 Out-standing    Stock        Capital       Earnings     Income       Stock       Total
                                 ------------ ---------- ------------- ------------ -------------- ------------ ----------

<S>                                <C>          <C>          <C>          <C>          <C>          <C>          <C>
Balance as of December 31, 2003    2,779,951    $        0   $   21,406   $    9,269   $      686   $   (1,474)   $   29,887
Net income for the period .....         --            --           --          3,529         --           --           3,529
Unrealized gains on available
for
  sale securities, net ........         --            --           --           --            813         --             813
                                                                                                                  ----------
Comprehensive income ..........         --            --           --           --           --           --           4,342
                                                                                                                  ----------
Purchase of treasury stock ....      (16,100)         --           --           --           --           (494)         (494)
                                  ----------    ----------   ----------   ----------   ----------   ----------    ----------
Balance at September 30, 2004 .    2,763,851    $        0   $   21,406   $   12,798   $    1,499   $   (1,968)   $   33,735
                                  ==========    ==========   ==========   ==========   ==========   ==========    ==========
</TABLE>

See accompanying Note to Condensed Consolidated Financial Statements.


                                      -3-
<PAGE>
<TABLE>
<CAPTION>



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

                                                                                       Nine Months Ended
                                                                                         September 30,
                                                                                    --------------------
                                                                                       2004        2003
                                                                                    --------------------
<S>                                                                                 <C>         <C>
Operating activities:
Net Income ......................................................................   $  3,529    $  4,001
Adjustments to reconcile net income to net cash provided by operating activities:
   Depreciation and amortization ................................................     15,371      14,822
   Equity in earnings of affiliated companies ...................................     (2,649)     (1,593)
   Minority interests ...........................................................      1,048
                                                                                                   1,578
   Changes in operating assets and liabilities:
        Receivables .............................................................       (305)        142
        Accounts payable and accrued liabilities ................................        814       1,481
   Other ........................................................................        103         308
                                                                                    --------    --------
Net cash provided by operating activities .......................................     18,441      20,209
                                                                                    --------    --------

Investing activities:
Capital expenditures ............................................................    (10,366)    (14,701)
Acquisition of business .........................................................     (4,877)          0
Acquisition of subscriber lists .................................................       (217)       (369)
Investment in and advances to affiliated entities ...............................       (125)       (170)
Distributions received from investments .........................................        930         409
Other ...........................................................................       (395)       (495)
                                                                                    --------    --------
Net cash used in investing activities ...........................................    (15,050)    (15,326)
                                                                                    --------    --------

Financing activities:
Issuance of long term debt ......................................................      5,599      10,233
Repayments of long term debt ....................................................     (9,955)     (9,235)
Net proceeds (repayments) on lines of credit ....................................      2,813      (1,345)
Purchase of treasury stock ......................................................       (494)       (238)
Other ...........................................................................       (318)       (245)
                                                                                    --------    --------
Net cash used in financing activities ...........................................     (2,355)       (830)
                                                                                    --------    --------
Net increase in cash and cash equivalents .......................................      1,036       4,053
Cash and cash equivalents at beginning of period ................................     26,556      23,356
                                                                                    --------    --------
Cash and cash equivalents at end of period ......................................   $ 27,592    $ 27,409
                                                                                    ========    ========

Cash paid for:
  Interest expense ..............................................................   $  8,291    $  8,993
                                                                                    ========    ========
  Income taxes ..................................................................   $  1,891    $  1,632
                                                                                    ========    ========
</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 September  30, 2004,  December 31, 2003 and  September  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 September 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 September  30, 2004,
December 31, 2003 and September 30, 2003), Capital Communications  Company, Inc.
(49% owned at September  30, 2004,  December 31, 2003 and September 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 September
30, 2004, December 31, 2003 and September 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 nine month periods ended September
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 were applicable for the first interim or annual period
ending  after  March  15,  2004  for  both new and  existing  variable  interest
entities.   Certain  less  than  50%  owned  investments  in  limited  liability
companies,  which were considered to be variable interest entities, needed to be
consolidated  as a  result  of the  implementation  of FIN  46.  The  effect  of
consolidating  such  operations  resulted in  increasing  intangible  assets and
decreasing  investments in and advances to affiliated companies by approximately
$2 million and had no other  significant  effect on the  Company's  consolidated
financial statements.

                                      -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
nine months ended September 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 also owns a lumber yard in Andrews,
Texas, and other investments.

On July 27, 2004,  Interactive was the high bidder in the Federal Communications
Commission  ("FCC")  conducted  auction for 24 GHz  spectrum on two  licenses in
Buffalo,  NY and  Davenport,  IA (Block  31),  for a total cost of  $49,000.  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%.

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 nine months ended September 30, 2004 and 2003
and as of December 31, 2003 is as follows (in thousands):

<TABLE>
<CAPTION>

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

<S>                                                <C>         <C>         <C>
Current assets .................................   $  6,917    $  5,330    $  5,382
Property, plant & equipment, intangibles & other      9,728       9,615       9,866
                                                   --------    --------    --------
Total assets ...................................   $ 16,645    $ 14,945    $ 15,248
                                                   ========    ========    ========

Current liabilities ............................   $  3,619    $  3,182    $  3,227
Long term liabilities ..........................     16,967      16,483      16,844
Equity .........................................     (3,941)     (4,720)     (4,823)
                                                   --------    --------    --------
Total liabilities & equity .....................   $ 16,645    $ 14,945    $ 15,248
                                                   ========    ========    ========

</TABLE>
                                      -6-
<PAGE>
<TABLE>
<CAPTION>


                                                     Broadcasting Combined Information
Continued                                         September 30, December 31, September 30,
                                                      2004        2003         2003
                                                  ---------------------------------------
<S>                                                   <C>                       <C>
Three months ended
Revenues.......................................    $  3,218        --       $ 2,584
Gross profit ..................................       1,021        --           510
Net Profit (Loss)..............................         303        --          (183)

Nine months ended
Revenues ......................................    $  9,912        --       $ 8,222
Gross profit ..................................       3,339        --         1,965
Net Profit (Loss)..............................         985        --          (395)
</TABLE>
<TABLE>
<CAPTION>

                                                   Telecommunications Combined Information
                                                   September 30, December 31, September 30,
                                                     2004         2003        2003
                                                   ----------------------------------------
<S>                                                <C>          <C>        <C>
Current assets .................................   $ 34,525     $ 30,340   $ 13,337
Property, plant & equipment, intangibles & other     26,402       27,114     27,643
                                                   --------     --------    --------
Total assets ...................................   $ 60,927     $ 57,454     40,980
                                                   =======-     ========    ========

Current liabilities ............................   $ 22,305     $ 23,073   $  5,928
Long term liabilities ..........................      7,267        9,056     10,459
Equity .........................................     31,355       25,325     24,593
                                                   --------     --------    --------
Total liabilities & equity .....................   $ 60,927     $ 57,454   $  40,980
                                                   ========     ========    ========

Three months ended
Revenues .......................................   $ 14,655                $ 12,110
Gross profit ...................................      7,207                   4,215
Net income .....................................      4,501                   3,102

Nine months ended
Revenues .......................................   $ 41,404                $ 34,091
Gross profit ...................................     19,249                  11,795
Net income .....................................     12,154                   8,781
</TABLE>


At September 30, 2004,  December 31, 2003,  and September 30, 2003 the Company's
investment  in  Coronet  Communications  Company  ("Coronet")  was  carried at a
negative $624,000,  a negative $810,000,  and a negative $798,000  respectively,
due to the  Company's  guarantee of $3.8 million of Coronet's  third party debt.
Long-term debt of Coronet,  at September 30, 2004, totaled $9.6 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,  a
subsidiary  of the  Company,  invested  $250,000  for a 7% interest in an entity
which provides wireline telecommunication transport services in New York State.

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,  which was renewed during the third quarter of 2004. In accordance with
the terms of the  renewal,  the  facility was reduced to $7.0 million on October
31, 2004,  will be further  reduced to $5.0 million on January 31, 2005 and will
remain at that level until it expires on August 31, 2005.  Borrowings under this
facility  were $2.3  million,  zero and $7.9  million  at  September  30,  2004,
December 31, 2003 and September 30, 2003, respectively.  Long-term debt consists
of (all interest rates are at September 30, 2004) (in thousands):

<TABLE>
<CAPTION>

                                                                                September 30, December 31,  September 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) ..............................   $  57,816    $  59,917    $  59,472

Bank Credit facilities utilized by certain telephone and telephone holding
companies due from 2005 to 2016, $9.9 million at fixed interest rates averaging
8.3 % and $62.6
million at variable interest rates averaging 4.6%  ............................      72,478       78,646       80,684

Unsecured notes issued in connection with acquisitions
through 2006, at fixed interest rates of 8.0% to 10.0% ........................      38,483       34,389       34,515

Other .........................................................................       2,650        2,831        2,948
                                                                                  ---------    ---------    ---------
                                                                                    171,427      175,783      177,619
Current maturities ............................................................     (14,006)     (13,162)     (31,805)
                                                                                  ---------    ---------    ---------
                                                                                  $ 157,421    $ 162,621    $ 145,814
                                                                                  =========    =========    =========
</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 nine month periods
ended September 30, 2004 and 2003 are as follows (in thousands):

<TABLE>
<CAPTION>

                                   Three Months Ended    Nine Months Ended
                                     September 30,          September 30,
                                   ----------------------------------------
                                    2004       2003       2004        2003
                                   ----------------------------------------

<S>                                <C>        <C>        <C>        <C>
Net income .....................   $ 1,542    $ 1,432    $ 3,529    $ 4,001
Unrealized gains ...............        70        143      1,236        247
Tax effect .....................       (24)       (60)      (423)       (99)
                                   -------    -------    -------    -------
  Net other comprehensive income        46         83        813        148
                                   -------    -------    -------    -------
Comprehensive income ...........   $ 1,588    $ 1,515    $ 4,342    $ 4,149
                                   =======    =======    =======    =======
</TABLE>


                                      -8-
<PAGE>

G.   Treasury Stock Purchases
-----------------------------

During the nine months ended  September 30 2004,  the Company  purchased  16,100
shares of its common stock for treasury at an average  investment  of $30.68 per
share.

H.   Amortization of Other Intangible Assets
--------------------------------------------

Amortization  expense on other intangible assets is estimated to be between $0.6
million and $0.7 million annually for the next five years.

I.   Litigation
---------------

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

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

                                      -9-

On July 28,  2004,  the judge  denied in part and  granted in part the motion to
dismiss. Defendant bidding entities that did not win licenses were dismissed and
the "reverse" False Claims Act count was dismissed as redundant. Interactive and
its  subsidiaries  remain parties to the litigation.  On September 14, 2004, the
judge issued a ruling denying the motion to refer the issues in this  litigation
to the FCC, and discovery continues.

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.

As part of the Omnibus Budget Resolution of 1993, Congress authorized its FCC 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.  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  Interactive was involved with as an investor and as a service
provider.

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

On December 18, 1995,  Interactive  (through its predecessor Lynch  Corporation)
had  investments  in five  entities  that  participated  in the FCC  Auction for
Broadband PCS "C" Block Spectrum (Auction 5). When the auction closed, on May 6,
1996,  these five  entities,  on a combined  basis,  were the higher bidders for
thirty-one  30 MHz licenses at a gross cost of $288.2  million.  These  entities
were initially put together under the FCC's initiative to include, among others,
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. Interactive's investments in these entities totaled $21 million.

Events during and subsequent to Auction 5, made financing these licenses through
the capital  markets much more difficult than originally  anticipated.  On April
18, 1997, among other reasons,  in order to obtain some economies of scale, such
as financing,  the five entities merged into Fortunet  Communications,  Inc. The
FCC, in partial  response to actions by Nextwave and others,  promoted a plan 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. 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

                                      -10-
<page>
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, the relator in this case, 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.

J.   Potential MCI/WorldCom Recovery
------------------------------------

During 2002, the Company wrote off all receivables associated with MCI/WorldCom,
which had declared bankruptcy at that time. While it has not received settlement
from the bank of  claims,  it is  currently  estimated  that  Interactive  could
receive  $0.3  million.  Such  amounts  have not been  included in the  attached
financial  statements  and  income  will only be  recorded  to the  extent it is
received.

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, within the meaning of Section 27A of the Securities Act of 1933, as
amended,  and Section 21E of the Securities  Act of 1934, as amended,  including
without limitation, the Company's effort to monetize certain assets, adequacy of
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  reporting  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.

                                      -11-
<page>
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.

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

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

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

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

                                      -12-
<page>

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

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

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

     o    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 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

                                      -13-
<page>

          wireless  services.  The Company is trying to install  more  broadband
          service to offset revenue losses from traditional voice services.

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

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

<TABLE>
<CAPTION>

                                     Third Quarter ended Sept. 30,
                                    ----------------------------- Increase
                                        2004        2003         (Decrease)
                                    --------------------------------------
                                          (Unaudited)
<S>                                   <C>          <C>          <C>
Revenues:
Local access ......................   $ 2,963      $ 2,933      $    30
Interstate access .................    10,521        9,697          824
Intrastate access .................     3,872        3,909          (37)
Other telephone ...................       651          640           11
Other business ....................     5,103        4,903          200
                                      -------      -------      -------
  Total ...........................    23,110       22,082        1,028
                                      -------      -------      -------
Operating Cost and Expense:
Cost of revenue ...................     7,409        7,501          (92)
General and administrative costs at
  operations ......................     3,648        3,413          235
Corporate office expenses .........     1,743          795          948
Depreciation and amortization .....     5,223        4,994          229
                                      -------      -------      -------
  Total ...........................    18,023       16,703        1,320
                                      -------      -------      -------
  Operating profit ................   $ 5,087      $ 5,379      $  (292)
                                      =======      =======      =======
</TABLE>


Total  revenues for the three months ended  September 30, 2004 increased by $1.0
million,  or 4.7%, to $23.1 million compared to the third quarter of 2003. Local
access revenue  increased by $30,000 in the third quarter of 2004 resulting from
the sale of  additional  features  and rate  increases,  partially  offset  by a
decrease in access lines.  Interstate  access revenue  increased $0.8 million in
the third quarter of 2004 primarily due to infrastructure development undertaken
in 2002 and 2003, which entitled the company to increased network access and USF
support primarily at the Haviland Telephone Company in Kansas. Such increase was
partially offset by the loss of a telecommunications transport contract in Utah.
Other   business   revenues   increased   $0.2   million  due  to  the  sale  of
telecommunications  equipment to an Iowa school district,  revenues from a small
cable company in Utah that the Company  acquired in February 2004, and partially
offset by lower revenues in the Company's security operation.

Total costs and expenses increased by $1.3 million to $18.0 million in the third
quarter of 2004.  Costs of revenue  decreased $0.1 million,  or 1.2% due to cost
savings at the Company's  unregulated  subsidiaries,  particularly  the security
business,  offset by costs  related to the sale of  equipment to the Iowa school
district and costs  related to the small cable  television  operation in Central
Utah acquired in February 2004. General and administrative costs incurred at the
operations increased $0.2 million primarily due to increased staffing, increased
corporate  advertising,  and higher  professional  fees offset by a $0.1 million
decrease in consulting fees relating to the Kansas  Commission audit incurred in
2003.  Corporate  office  expenses  increased  $0.9 million  resulting from $1.0
million of legal costs incurred  defending the "qui tam" litigation in the third
quarter of 2004,  $0.2  million of increased  consulting  costs  resulting  from
Sarbanes-Oxley  implementation,  offset by the absence in 2004 of a $0.2 million
management incentive accrual recorded in the third quarter of 2003. Depreciation
and amortization  increased $0.2 million primarily due to a regulatory  approved
change in depreciable lives, which resulted in increased depreciation expense at
our Michigan telephone company.

                                      -14-
<page>
As a result of the above,  operating profit for the three months ended September
30,  2004,  decreased  by $0.3  million to $5.1  million  compared  to the third
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>

                                  Third Quarter ended Sept. 30,
                                  ----------------------------- Increase
                                     2004           2003        (Decrease)
                                  ----------------------------------------
                                        (Unaudited)
<S>                                <C>            <C>            <C>
EBITDA from operations .........   $ 12,053       $ 11,168       $    885
Corporate office expenses ......     (1,743)          (795)          (948)
                                   --------       --------       --------
  Total EBITDA .................     10,310         10,373            (63)
Depreciation ...................      5,004          4,832            172
Amortization ...................        219            162             57
                                   --------       --------       --------
  Operating profit .............      5,087          5,379           (292)
Investment income ..............         88             83              5
Interest expenses ..............     (2,847)        (2,995)           148
Equity in earnings of affiliates      1,051            530            521
                                   --------       --------       --------
  Income before income taxes and   $  3,379       $  2,997       $    382
    minority  interest
                                   ========       ========       ========

</TABLE>

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

For the three months ended September 30, 2004,  investment income was relatively
unchanged compared to the 2003 period.

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

Equity in earnings of affiliates for the three-month ending September 30, 2004
increased $0.5 million compared to 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 September 30, 2004 and 2003,  represent
effective tax rates of 35.6% and 38.6%,  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.


                                      -15-
<PAGE>



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

Minority interests decreased earnings by $0.6 million for the three months ended
September  30,  2004,  as compared to $0.4  million for the three  months  ended
September 30, 2003. The change was due to higher earnings from the Company's New
Mexico cellular investments.


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

Net income for the three months ended  September 30, 2004, was $1.5 million,  or
$0.56 per share  (basic  and  diluted),  compared  to a net  income for the same
period last year of $1.4 million,  or $0.51 per share (basic and  diluted).  The
Company has no dilutive instruments outstanding.

Nine months ended September 30, 2004 compared to September 30, 2003

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

<TABLE>
<CAPTION>


                                   Nine Months ended September 30,
                                   ------------------------------- Increase
                                      2004          2003          (Decrease)
                                   -----------------------------------------
                                           (Unaudited)

<S>                                   <C>          <C>          <C>
Revenues:
Local access ......................   $ 8,919      $ 8,851      $    68
Interstate access .................    29,134       27,672        1,462
Intrastate access .................    11,684       11,486          198
Other telephone ...................     1,982        2,170         (188)
Other business ....................    14,423       14,114          309
                                      -------      -------      -------
  Total ...........................    66,142       64,293        1,849
                                      -------      -------      -------

Operating Cost and Expense:
Cost of revenue ...................    22,073       21,807          266
General and administrative costs at
  operations ......................    10,507       10,155          352
Corporate office expenses .........     4,989        2,663        2,326
Depreciation and amortization .....    15,371       14,822          549
                                      -------      -------      -------
  Total ...........................    52,940       49,447        3,493
                                      -------      -------      -------
  Operating profit ................   $13,202      $14,846      $(1,644)
                                      =======      =======      =======
</TABLE>


Total  revenues  for the nine months ended  September  30, 2004  increased  $1.8
million,  or 2.9%, to $66.1 million  compared to the same period in 2003.  Local
access  revenue  increased by $68,000 in the nine months of 2004  resulting from
the sale of additional  features and rate increases,  partially offset by a 3.2%
decrease in access lines.  Interstate  access revenue  increased $1.5 million in
the nine  months  ended  September  30,  2004  primarily  due to  infrastructure
development undertaken in 2002 and 2003, which entitled the Company to increased
network access and USF support  primarily at the Haviland  Telephone  Company in
Kansas.  Such increase was partially offset by the loss of a  telecommunications
transport  contract in Utah and by a one-time NECA  adjustment to our previously
reported rate base, which effects the amount of revenue that we were entitled to
in prior periods. The $0.2 million increase in intrastate network access revenue
was also due to the  infrastructure  development  in Haviland.  The $0.2 million
reduction in other telephone  revenues  reflects  reduced billing and collection
revenue and lower directory  revenues.  Other business  revenues  increased $0.3
million  due to the  sale of  telecommunications  equipment  to an  Iowa  school
district,  revenues from a small cable company in Utah that the Company acquired
in February  2004,  and  partially  offset by lower  revenues  in the  Company's
security operation.

                                      -16-
<page>
Total costs and expenses  increased by $3.5 million to $52.9 million in the nine
months  of 2004.  Costs of  revenue  increased  $0.3  million,  or 1.2%,  due to
additional  operating  costs  related  to  the  infrastructure   development  in
Haviland,  costs  related to the sale of equipment to the Iowa school  district,
costs generated by the cable television  operation acquired in February 2004 and
partially offset by cost savings in the Company's  security  operation.  General
and  administrative  costs  incurred at the  operations  increased  $0.4 million
primarily due to increased staffing, increased corporate advertising, and higher
professional  fees offset by a $0.1 million decrease in consulting fees relating
to the Kansas  Commission  audit  incurred in 2003.  Corporate  office  expenses
increased  $2.3  million  resulting  from $2.1  million of legal costs  incurred
defending the "qui tam"  litigation in the first nine months of 2004,  increased
audit and consulting  costs resulting from  Sarbanes-Oxley  implementation,  and
partially offset by the absence in 2004 of a $0.5 million  management  incentive
accrual recorded in the 2003 period.  Depreciation  and  amortization  increased
$0.5  million  primarily  as  a  result  of  a  regulatory  approved  change  in
depreciable  lives,  which  resulted in  increased  depreciation  expense at our
Michigan telephone company.

As a result of the above,  operating  profit for the nine months ended September
30, 2004,  decreased by $1.6 million to $13.2 million  compared to the same nine
month period in 2003.

EBITDA
------

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


                                  Nine Months ended Sept. 30,
                                  ----------------------------   Increase
                                     2004          2003          (Decrease)
                                  -----------------------------------------
                                        (Unaudited)

<S>                                <C>            <C>            <C>
EBITDA from operations .........   $ 33,562       $ 32,331       $  1,231
Corporate office expenses ......     (4,989)        (2,663)        (2,326)
                                   --------       --------       --------
  Total EBITDA .................     28,573         29,668         (1,095)
Depreciation ...................     14,623         14,358            265
Amortization ...................        748            464            284
                                   --------       --------       --------
  Operating profit .............     13,202         14,846         (1,644)
Investment income ..............        898            739            159
Interest expenses ..............     (8,517)        (9,020)           503
Equity in earnings of affiliates      2,649          1,593          1,056
                                   --------       --------       --------
  Income before income taxes and   $  8,232       $  8,158       $     74
    minority  interest
                                   ========       ========       ========

</TABLE>

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

For the nine months ended  September 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 $0.5 million in the nine months of 2004 from the
same  period in the prior year due  primarily  to lower  outstanding  borrowings
partially offset by higher interest rates.

Equity in earnings of affiliates for the  nine-months  ended  September 30, 2004
increased  $1.1 million  compared to the same period in the previous year due to
higher earnings at the Company's New Mexico cellular investments (RSA 3 and 5).


                                      -17-
<PAGE>

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

The income tax provision includes federal, as well as state and local taxes. The
tax provision for the nine months ended  September 30, 2004 and 2003,  represent
effective tax rates of 38.0% and 38.1%,  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 $1.6 million for the nine months ended
September  30,  2004,  as  compared to $1.0  million  for the nine months  ended
September 30, 2003. The change was due to higher earnings from the Company's New
Mexico cellular investments.

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

Net income for the nine months ended  September 30, 2004,  was $3.5 million,  or
$1.27 per share  (basic  and  diluted),  compared  to a net  income for the same
period last year of $4.0 million,  or $1.44 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 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  is  sensitive  to  liquidity  issues  as it is  incurring
significant  cost for  litigation  and  Sarbanes  Oxley  compliance.  The Parent
Company's line of credit facility, which was $10 million in 2004, was reduced to
$7.0 million on October 31, 2004 and will be further  reduced to $5.0 million on
January  31,  2005.  The  Company is  pursuing  various  financing  alternatives
including obtaining an additional line of credit,  refinancing substantially all
or individual  pieces of its  currently  outstanding  debt,  and sale of certain
investments. 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  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 September 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) ...................   $171,427    $ 14,006    $ 53,095    $ 47,166    $ 57,160
Operating leases .....................      1,595         411         725         146         313
Notes payable to banks ...............      6,269       6,269        --          --          --
Guarantees ...........................      3,750        --         3,750        --          --
                                         --------    --------    --------    --------    --------
Total contractual cash obligations and
  commitments ........................   $183,041    $ 20,686    $ 57,570    $ 47,312    $ 57,473
                                         ========    ========    ========    ========    ========
</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.

At September 30, 2004,  total debt (including notes payable to banks) was $177.7
million,  a decrease of $1.5 million from  December 31, 2003.  At September  30,
2004, there was $107.3 million of fixed interest rate debt outstanding averaging
6.9% and $70.4 million of variable  interest rate debt averaging  4.7%. The debt
at fixed interest rates includes $38.5 million of subordinated notes at interest
rates  averaging  9.5% issued to sellers as part of  acquisitions.  On August 1,
2004,  the  Company  converted  $15.4  million  of 7.5%  fixed  rate debt into a
variable rate instrument.  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 September 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 September 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 5.3 to 1 as of  September  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 September 30, 2004,  Interactive  had current  assets of $40.4 million and
current  liabilities of $34.3 million  resulting in a working capital surplus of
$6.1 million compared to a surplus of $7.2 million at December 31, 2003.

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

Cash at  September  30,  2004,  was $27.6  million,  an increase of $1.0 million
compared to December 31, 2003.  During the nine months ended September 30, 2004,
net cash provided by operations of $18.5 million was primarily used to invest in
plant and equipment, acquire businesses and repay debt.

Capital  expenditures  which  are  predominantly  spent at the RLECs and will be
included in their rate bases for rate setting purposes were $10.4 million in the
nine months  ended  September  30, 2004  compared to $14.7  million for the same
period in 2003.  Capital  expenditures in 2004 are expected to be  approximately
$18.9  million,  most of  which  will be added to the  RLEC  rate  bases  and is
primarily financed from internal sources.

The Company  completed two  acquisitions  in the nine months ended September 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

                                      -19-
<page>
subordinated note.

The Company  has  initiated  an effort to  monetize  or spin-off  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.  In addition,  the Company is considering the  distribution of certain
non-core assets to its shareholders.  There is no assurance that all or any part
of these programs 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  September 30, 2004, 61,100 shares had been purchased at an average cost
of $32.34.

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.  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

                                      -20-
<page>

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 refer  the  issues in this
litigation to the FCC, which motion has been opposed by the relator.

On July 28,  2004,  the judge  denied in part and  granted in part the motion to
dismiss. Defendant bidding entities that did not win licenses were dismissed and
the "reverse" false claims act count was dismissed as redundant. Interactive and
its  subsidiaries  remain parties to the litigation.  On September 14, 2004, the
judge issued a ruling denying the motion to refer the issues in this  litigation
to the FCC, and discovery continues.

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  and  identifiable   intangible  assets  acquired  and
liabilities  assumed.  Any excess  purchase  price over the above fair values is
allocated  to  goodwill.  Additional  judgments  and  estimates  are required to
determine if identified intangible assets have finite or indefinite lives.

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

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

                                      -21-
<page>

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
were  applicable  for the first  interim or annual period ending after March 15,
2004 for both new and existing variable interest entities. Certain less than 50%
owned  investments in limited liability  companies,  which were considered to be
variable  interest  entities,  needed  to be  consolidated  as a  result  of the
implementation of FIN 46. The effect of consolidating  such operations  resulted
in increasing  intangible  assets and decreasing  investments in and advances to
affiliated  companies by approximately  $2 million and had no other  significant
effect on the Company's consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosure about Market Risk
        ---------------------------------------------------------

The Company is exposed to market risks  relating to changes in the general level
of U.S. interest rates.  Changes in interest rates affect the amount of interest
earned  on  the  Company's   cash   equivalents   and   short-term   investments
(approximately $27.6 million at September 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  September  30, 2004,  the fair value of debt was  approximately
equal to its carrying value.

At September  30, 2004 and December 31, 2003,  approximately  $70.4  million and
$56.4 million,  respectively, or 40% 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 under these  borrowings,  it is
estimated  that  Interactive's  interest  expense  for  the  nine  months  ended
September  30, 2004 would have changed by  approximately  $0.5  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 September 30, 2004, if the Company were to convert a significant
portion of its  variable  interest  rate debt into fixed  interest  rates,  such
conversion  would have  increased  interest  expense for the nine  months  ended
September 30, 2004 by $1.2 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.

                                      -22-
<page>

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 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.  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

                                      -23-
<page>
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 FCC, which motion was opposed by the relator.

On July 28,  2004,  the judge  denied in part and  granted in part the motion to
dismiss. Defendant bidding entities that did not win licenses were dismissed and
the "reverse" False Claims Act count was dismissed as redundant. Interactive and
its  subsidiaries  remain parties to the litigation.  On September 14, 2004, the
judge issued a ruling denying the motion to refer the issues in this  litigation
to the FCC, and discovery continues.

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.

As part of the Omnibus Budget Resolution of 1993, Congress authorized its FCC 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.  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  Interactive was involved with as an investor and as a service
provider.

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

On December 18, 1995,  Interactive  (through its predecessor Lynch  Corporation)
had  investments  in five  entities  that  participated  in the FCC  Auction for
Broadband PCS "C" Block Spectrum (Auction 5). When the auction closed, on May 6,
1996,  these five  entities,  on a combined  basis,  were the higher bidders for
thirty-one  30 MHz licenses at a gross cost of $288.2  million.  These  entities
were initially put together under the FCC's initiative to include, among others,
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. Interactive's investments in these entities totaled $21 million.

Events during and subsequent to Auction 5, made financing these licenses through
the capital  markets much more difficult than originally  anticipated.  On April
18, 1997, among other reasons,  in order to obtain some economies of scale, such
as financing,  the five entities merged into Fortunet  Communications,  Inc. The
FCC, in partial  response to actions by Nextwave and others,  promoted a plan 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. 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

                                      -24-
<page>
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 the relator
in this case, 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.

Item 2. Unregistered Sale of Equity in Securities and Use of Proceeds
        -------------------------------------------------------------

The  following  table  sets  forth the  repurchases  made by the  Company of its
securities during the three months ended September 30, 2004:
<TABLE>
<CAPTION>

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

<S>               <C>          <C>                <C>              <C>
July 2004 ....    1,800        $   33.96          1,800            45,000
August 2004 ..    4,600            31.61          4,600            40,400
September 2004    1,500            33.63          1,500            38,900
                 ------           ------          -----            ------
   Total .....    7,900        $   32.53          7,900              --
</TABLE>


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


                                      -25-
<PAGE>



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 August 17, 2004, under Items 7 and 12
          reporting  the issuance of a press  release  regarding  the  Company's
          second quarter 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

     November 15, 2004