FORM 10-K

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


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

For the fiscal year ended December 31, 1998     Commission file number  1-106
                                   OR
[   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934 [NO FEE REQUIRED]

For the transition period from                       to                       
                              
                                LYNCH CORPORATION
                                -----------------
             (Exact name of Registrant as specified in its charter)

            Indiana                                    38-1799862             
-------------------------------           -----------------------------------
State of other jurisdiction of           (I.R.S. Employer Identification No.)
incorporation or organization

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

Registrant's telephone number, including area code    (914) 921-7601  
                                                     -----------------

Securities registered pursuant to Section 12(b) of the Act:
                                                       Name of each exchange
         Title of each class                              on which registered  
    Common Stock, No Par Value                        American Stock Exchange

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

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

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

     The aggregate  market value of voting stock held by  non-affiliates  of the
Registrant (based upon the closing price of the Registrant's Common Stock on the
American Stock Exchange on March 19, 1999 of $78 per share) was $84,434,844. (In
determining this figure, the Registrant has assumed that all of the Registrant's
directors  and  officers are  affiliates.  This  assumption  shall not be deemed
conclusive for any other purpose.)

     The  number of  outstanding  shares of the  Registrant's  Common  Stock was
1,418,248 as of March 19, 1999.



<PAGE>



                      DOCUMENTS INCORPORATED BY REFERENCE:

Part III:  Certain portions of Registrant's  Proxy Statement for the 1999
              Annual Meeting of Shareholders.

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

     This Form 10-K contains  certain  forward  looking  information,  including
without  limitation  the  possibility  of a spin-off,  a "harvesting  of assets"
initiative  (pg.3),  Item 1-I.A  "Regulatory  Environment"  and possible changes
thereto  and  "Competition"  (pgs.  5-8),  Item 1-I.C  "Personal  Communications
Services  ("PCS")",  including  without  limitation  the risks  described  (pgs.
10-12),  Item 1-II. Morgan "Growth Strategy"  (p.13-14),  Item 7.  "Management's
Discussion  and  Analysis of  Financial  Condition  and Results of  Operations,"
including without limitation Financial Condition, the cost cutting initiative, a
possible  reevaluation  of  Registrant's   investment  in  Fortunet,  Year  2000
information,  and Market  Risk,  and Notes to Financial  Statements  (Item 14(a)
below). It should be recognized that such information are estimates or forecasts
based upon various  assumptions,  including the matters referred to therein,  as
well as meeting the  Registrant's  internal  performance  assumptions  regarding
expected operating  performance and the expected  performance of the economy and
financial  markets  as it impacts  Registrant's  businesses.  As a result,  such
information is subject to uncertainties,  risks and inaccuracies, which could be
material. 

                                     PART I
                                     ------


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

     The Registrant, Lynch Corporation ("Lynch"), incorporated in 1928 under the
laws of the State of Indiana, is a diversified holding company with subsidiaries
engaged in multimedia, services and manufacturing. Lynch's executive offices are
located at 401 Theodore  Fremd  Avenue,  Rye, New York  10580-1430.  Its current
telephone number is 914/921-7601.  

     Registrant's  business  development  strategy  is to  expand  its  existing
operations  through internal growth and acquisitions.  It may also, from time to
time,  consider  the  acquisition  of other  assets or  businesses  that are not
related  to its  present  businesses.  For the year  ended  December  31,  1998,
multimedia  operations provided 11% of the Registrant's  consolidated  revenues;
services operations provided 29% of the Registrant's  consolidated revenues; and
total  manufacturing  operations  provided 60% of the Registrant's  consolidated
revenues. As used herein, the Registrant includes subsidiary corporations.

     Registrant  has been pursuing  segmentation  of its  businesses,  through a
spin-off  of its  multimedia  and  services  operations.  There  are a number of
matters to be examined in connection with a possible spin-off, including without
limitation tax consequences, and there is no assurance that such a spin-off will
be effected.




                                       -2-

<PAGE>



Harvesting Initiative.
----------------------

     In November 1998, Registrant announced a "harvesting" initiative,  i.e., an
effort to monetize certain assets, including considering selling all or portions
of certain operating entities. These may include Registrant's minority interests
in  network  affiliated  television  stations,  its 61%  interest  in  Spinnaker
Industries,  Inc.  and certain  telephone  operations  where  competitive  local
exchange carrier opportunities are not readily apparent. In addition, Registrant
has been  searching for a way to accelerate  growth at its M-tron  subsidiary as
well as providing Registrant with a more financially visible investment therein.
As part of this  initiative,  in December  1998,  Registrant  sold its  DirectTV
franchise serving certain counties in New Mexico for approximately $3.1 million.
Spinnaker  has retained  Schroder & Co.,  Inc. to seek  strategic  alternatives,
including a possible sale of all or a portion of its  business,  merger or other
combination  of Spinnaker.  There is no assurance  that any  transaction  can be
consummated on terms favorable to Registrant.

I.  MULTIMEDIA
--------------

A.  Telecommunications
----------------------

     Operations.  The  Registrant  conducts  its  telecommunications  operations
through  subsidiary  corporations.   The  telecommunications  segment  has  been
expanded through the selective acquisition of local exchange telephone companies
serving rural areas and by offering additional services such as Internet service
and long distance service.  From 1989 through 1998,  Registrant has acquired ten
telephone  companies,  five of which have indirect  minority  ownership of 2% to
20%, whose operations range in size from approximately 500 to over 10,000 access
lines.  Registrant's  telephone operations are located in Kansas,  Michigan, New
Hampshire,  New Mexico, New York, North Dakota and Wisconsin. As of December 31,
1998, total access lines were approximately  37,600, 100% of which are served by
digital switches.

     These  subsidiaries'  principal  business is  providing  telecommunications
services. These services fall into four major categories: local network, network
access, long distance and other non-regulated  telecommunications services. Toll
service to areas outside  franchised  telephone  service  territory is furnished
through  switched and special access  connections with intrastate and interstate
long distance networks.

     The Company holds franchises, licenses and permits adequate for the conduct
of its business in the territories which it serves.

     Future  growth in telephone  operations  is expected to be derived from the
acquisition of additional  telephone  companies,  from providing  service to new
customers or additional services to existing customers,  from upgrading existing
customers to higher grades of service,  and from additional  service  offerings.
The following table summarizes  certain  information  regarding the Registrant's
telephone operations.


                                       -3-

<PAGE>


<TABLE>
<CAPTION>


                                                      YEAR ENDED DECEMBER 31
Telephone Operations                              1998       1997         1996
--------------------                              ----       ----         ----

<S>                                              <C>         <C>         <C>   
Access lines* ..............................     37,604      36,525      28,984
 % Residential .............................         75%         75%         74%
 % Business (nonresidential) ...............         25%         25%         26%

Total revenues ($000s) .....................     46,265      43,824      28,608
 % Local service ...........................         16%         17%         14%
 % Network access and long distance ........         78%         73%         73%
 % Other ...................................          6%         10%         13%
</TABLE>

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

     Telephone  Acquisitions.  The  Registrant  pursues  an  active  program  of
acquiring operating telephone  companies.  From January 1, 1989 through December
31,  1998,  Lynch  has  acquired  ten  telephone  companies  serving  a total of
approximately  30,950  access  lines at the time of  these  acquisitions  for an
aggregate consideration totaling approximately $135 million. In November 1996, a
subsidiary  of  Registrant  acquired  the stock of Dunkirk & Fredonia  Telephone
Company and its subsidiaries, Cassadaga Telephone Corporation and Comantel, Inc.
(collectively  "DFT") for  approximately $22 million.  DFT serves  approximately
12,000  access lines in western New York,  including  the community of Fredonia,
the Village of Cassadaga and the Hamlet of Stockton.  DFT also owns and operates
other telecommunications  businesses,  including Internet, long distance resale,
security systems, and sales and servicing of  telecommunications  equipment.  In
the spring of 1997,  Registrant  acquired the stock of Upper Peninsula Telephone
Company  ("UPTC") for  approximately  $26.5 million.  UPTC serves  approximately
6,800 access lines located primarily in the Upper Peninsula of Michigan.

     The Registrant  continually evaluates acquisition  opportunities  targeting
domestic rural telephone  companies with a strong market  position,  good growth
potential  and  predictable  cash flow.  In addition,  Registrant  has generally
sought  companies  with  excellent  local  management  already in place who will
remain active with their company.  Recently,  certain large telephone  companies
have offered  certain of their rural  telephone  exchanges for sale,  often on a
state-wide  or larger area basis.  Registrant  has and in the future may, bid on
such  groups of  exchanges.  Telephone  holding  companies  and others  actively
compete for the  acquisition of telephone  companies and such  acquisitions  are
subject to the consent or approval of regulatory agencies in most states.  While
management   believes  that  it  will  be   successful   in  making   additional
acquisitions,  there can be no  assurance  that the  Registrant  will be able to
negotiate  additional  acquisitions on terms acceptable to it or that regulatory
approvals, where required, will be received.

     Related   Services  and   Investments.   The   Registrant   also   provides
non-regulated telephone related services,  including internet access service and
long distance resale service, in certain of its telephone service (and adjacent)

                                      -4-

<PAGE>



areas.  The  Registrant  also  intends  to  provide  local  telephone  and other
telecommunications   service   outside   certain  of  its  franchise   areas  by
establishing  competitive local exchange carrier ("CLEC")  operations in certain
adjacent  areas.  Affiliates of seven of  Registrant's  telephone  companies now
offer internet access service.  At December 31, 1998,  internet access customers
totaled  approximately  8,000  compared to  approximately  3,500 at December 31,
1997.

     In late 1998,  an affiliate of Dunkirk & Fredonia  Telephone  Company began
providing  long  distance   resale   service,   and  affiliates  of  certain  of
Registrant's other telephone companies are considering  becoming a long distance
reseller.

     An  affiliate  of Dunkirk &  Fredonia  Telephone  Company  expects to begin
providing  CLEC  service on a resale  basis in  neighboring  Dunkirk,  NY in the
second quarter of 1999. Affiliates of Inter-Community Telephone Company in North
Dakota and  Western New Mexico  Telephone  Company in New Mexico have filed with
the state regulatory commissions to provide CLEC services in those states. Final
plans  to offer  CLEC  service  in  areas  adjacent  to  Registrant's  telephone
operations in those states have not been completed. In December 1998, Registrant
also  acquired a 10 MHZ license to provide PCS  services in the Las Cruces,  New
Mexico BTA and is considering how to utilize that license.

     At December 31, 1998,  the Registrant  owned minority  interests in certain
entities  that provide  wireless  cellular  telephone  service in several  Rural
Service Areas  ("RSA's") in New Mexico and North Dakota,  covering  areas with a
total   population  of   approximately   305,000,   of  which  the  Registrant's
proportionate interest is approximately 10,000.

     The  operating  results of these  services  and  investments  have not been
material  to  date,  although  Registrant  expects  its CLEC  services  to incur
operating losses initially.

     Regulatory  Environment.  Operating  telephone  companies  are regulated by
state regulatory agencies with respect to its intrastate  telephone services and
the Federal  Communications  Commission  ("FCC") with respect to its  interstate
telephone service and, with the enactment of the  Telecommunications Act of 1996
(the "1996 Act"),  certain other matters relating principally to fostering local
and intrastate competition.

     The  Registrant's  telephone  subsidiaries   participate  in  the  National
Exchange Carrier Association  ("NECA") common line and traffic sensitive tariffs
and participate in the access revenue pools  administered by NECA for interstate
services.  Where  applicable,  the Company's  subsidiaries  also  participate in
similar  pooling  arrangements  approved  by state  regulatory  authorities  for
intrastate services. Such interstate and intrastate arrangements are intended to
compensate local exchange carriers ("LEC's"), such as the Registrant's operating
telephone  companies,  for  the  costs,  including  a fair  rate of  return,  of
facilities  furnished in originating and  terminating  interstate and intrastate
long distance services.

     In  addition  to access  pool  participation,  certain of the  Registrant's
subsidiaries  are  compensated  for their  intrastate  costs through billing and
keeping access charge revenues  (without  participating  in an access pool). The
intrastate access charge revenues are developed based on intrastate access rates

                                      -5-

<PAGE>



filed with the state regulatory agency.

     In addition,  a 1989 FCC decision  provided  for price cap  regulation  for
certain  interstate  services.  The price cap approach  differs from traditional
rate-of-return  regulation by focusing primarily on the prices of communications
services.  The intention of price cap regulation is to focus on productivity and
the approved plan for telephone operating companies. This allows for the sharing
with its customers of profits achieved by increasing productivity.  Alternatives
to  rate-of-return  regulation have also been adopted or proposed in some states
as well.  Inter-Community Telephone Company is an example of one such subsidiary
which has elected a price cap limitation on intrastate access charges.  However,
management  does not believe that this agreement will have a material  effect on
the  Registrant's  results.  In certain  states,  regulators  have  ordered  the
restructuring of local service areas to eliminate nearby long distance calls and
substitute extended calling areas.

     Various  aspects of federal and state  telephone  regulation have in recent
years been  subject to  re-examination  and on-going  modification.  In February
1996,  the  Telecommunications  Act of 1996 (the "1996 Act"),  which is the most
substantial revision of communication law since the 1930's, became law. The 1996
Act is  intended  generally  to allow  telephone,  cable,  broadcast  and  other
telecommunications  providers  to  compete  in each  other's  businesses,  while
loosening regulation of those businesses.  Among other things, the Act (i) would
allow major long distance telephone companies and cable television  companies to
provide local exchange telephone  service;  (ii) would allow new local telephone
service providers to connect into existing local telephone exchange networks and
purchase  services  at  wholesale  rates for resale;  (iii) would  provide for a
commitment to universal service for high-cost,  rural areas and authorizes state
regulatory  commissions to consider their status on certain  competition issues;
(iv) would allow the Regional  Bell  Operating  Companies to offer long distance
telephone  service  and enter  the  alarm  services  and  electronic  publishing
businesses;  (v) would remove rate  regulation  over non-basic  cable service in
three years; and (vi) would increase the number of television  stations that can
be owned by one party.

     Although the FCC has completed numerous regulatory  proceedings required to
implement  the 1996 Act,  the FCC is still in the  process of  promulgating  new
regulations  covering these and related  matters.  For certain  issues,  the FCC
bifurcated the proceedings between price cap and rate-of-return  companies or in
the case of the  Universal  Service  Fund  (USF)  between  rural  and  non-rural
companies.  In several cases,  the  regulations for the price-cap (or non-rural)
local exchange carriers (LECs) have been or are being determined first, followed
by separate  proceedings for rate-of-return  (or rural) companies.  Since all of
the Registrant's telephone subsidiaries are rural,  rate-of-return companies for
the  interstate  jurisdiction,  many of the issues are yet to be resolved by the
FCC for the Registrant's subsidiaries. Current or anticipated proceedings, which
could have  significant  revenue  impacts for rural,  rate-of-return  companies,
include changes in access charge regulations,  jurisdictional  separations rules
(which allocate costs between interstate and intrastate services),  reevaluation
of the interstate rate-of-return, and permanent USF procedures.

     The USF is intended,  among other things,  to provide special support funds
to high cost rural LECs so that they can provide affordable services to their

                                       -6-

<PAGE>



customers  notwithstanding their high cost due to low population density. In May
1997,  the FCC adopted  interim USF procedures  effective  January 1, 1998 which
continue  to  use  actual  embedded  costs  for  rural  companies.  The  interim
procedures  transferred  the Weighted DEM (which is a subsidy related to central
office switching  equipment) and Long-Term Support (LTS) to the USF and required
all   telecommunications   companies   (including  the  Registrant's   telephone
subsidiaries)  to contribute to the fund. In addition,  a cap was implemented on
the amount of  corporate  expense  allowable  for the  computation  of USF.  The
interim rules are expected to be in effect until at least January 1, 2001.  This
is the  earliest  date that a  transition  to a new  universal  service  support
mechanism may begin. On July 1, 1998, the Federal-State Joint Board on Universal
Service (Joint Board) appointed a Rural Task Force ("RTF") to address changes to
the  universal  service  support  mechanisms  for  rural  carriers.  All  of the
Registrant's  telephone companies are designated as rural carriers for universal
service support. By March 31, 2000, the RTF is scheduled to make recommendations
to the Joint  Board  regarding  any changes  required  to the current  universal
service support mechanism for rural carriers.  This includes, but is not limited
to, reviewing a proxy model built on Forward-Looking Economic Costs (FLEC).

     The FCC is currently in the process of determining permanent USF procedures
for non-rural carriers.  In October 1998, the FCC adopted a proxy model platform
based on FLEC. The FCC is still in the process of developing inputs for the FLEC
proxy model for non-rural carriers.  The new universal service support mechanism
for  non-rural  carriers  based on the FLEC proxy  model is  scheduled  to be in
effect July 1, 1999.

     In  addition  to the changes to  universal  service,  the FCC also has open
dockets related to access charges, jurisdictional separations and rate-of-return
reevaluation.  The FCC made  several  changes  to access  charges  for price cap
companies in May 1997.  The FCC issued a proposal for similar  changes to access
charges for  rate-of-return  carriers  in June 1998.  In October  1997,  the FCC
initiated a proceeding  where companies  provided  comments to the FCC regarding
how costs should be allocated between the state and interstate jurisdictions. In
October  1998,  the FCC  requested  comments  regarding  whether the  interstate
rate-of-return was at the appropriate rate. No final decision regarding proposed
changes for  rate-of-return  carriers related to access charges,  jurisdictional
separations or rate-of-return  represcription  has been issued by the FCC. Since
interstate  revenues  constituted  approximately  50%  of  the  revenues  of the
Registrant's  telephone  companies  in 1998,  modifications  to access  changes,
separations,  rate-of-returns,  and/or USF could have a material  effect.  It is
impossible to determine the impact of these proposed changes on the Registrant's
telephone companies at this time.

     Registrant cannot predict the effect of the 1996 Act, state initiatives and
new proposed Federal and state regulations,  but because its  telecommunications
and multimedia  properties  (other than its television  stations  interests) are
primarily in high-cost,  rural areas,  Registrant expects competitive charges to
be slower in coming.

     Competition.  All of  the  Registrant's  current  telephone  companies  are
currently  monopoly  wireline  providers  in  their  respective  area  of  local
telephone  exchange  service;  although there can be no assurance that this will
continue.  However,  as a  result  of the 1996  Act,  FCC and  state  regulatory
authority
                                       -7-

<PAGE>



initiatives and judicial decisions, competition has been introduced into certain
areas of the toll network  wherein  certain  providers are  attempting to bypass
local exchange  facilities to connect  directly with high-volume toll customers.
For example, in the last few years the States of New York,  Michigan,  Wisconsin
and Kansas passed or amended telecommunications bills intended to introduce more
competition among providers of local services and reduce regulation.  Regulatory
authorities in certain  states,  including New York, have taken steps to promote
competition in local telephone exchange service,  by requiring certain companies
to offer wholesale rates to resellers. A substantial impact is yet to be seen on
Registrant's  telephone companies.  The Registrant's  subsidiaries do not expect
bypass  to pose a  significant  near-term  competitive  threat  due to a limited
number of  high-volume  customers  they serve.  In addition,  cellular  radio or
similar radio-based wireless services, including personal communication services
("PCS"),  and cable  television  and internet  based  services  could provide an
alternative  local telephone  exchange  service as well as possible  competition
from electric companies.


B.   Broadcasting
-----------------

See  the  "Harvesting"  initiative  at page 3 above  concerning  the  television
operations.

STATION WHBF-TV - Lynch Entertainment  Corporation ("Lynch  Entertainment I"), a
wholly-owned  subsidiary  of  Registrant,  and  Lombardo  Communications,  Inc.,
wholly-owned  by  Philip  J.  Lombardo,  are the  general  partners  of  Coronet
Communications Company ("Coronet").  Lynch Entertainment I has a 20% interest in
Coronet and Lombardo  Communications,  Inc. has an 80% interest.  Coronet owns a
CBS-affiliated  television  station  WHBF-TV  serving  Rock  Island and  Moline,
Illinois and Davenport and Bettendorf, Iowa.

STATION WOI-TV - Lynch Entertainment  Corporation II ("LEC-II"),  a wholly-owned
subsidiary of Registrant,  owns 49% of the outstanding  common shares of Capital
Communications  Corporation  ("Capital") and convertible  preferred stock, which
when converted,  would bring LEC-II's common share ownership to 50%. On March 1,
1994, Capital acquired the assets of WOI-TV for $12.7 million.  WOI-TV is an ABC
affiliate and serves the Ames/Des Moines, Iowa market. Lombardo  Communications,
Inc. II,  controlled by Philip J. Lombardo,  has the remaining share interest in
Capital.

     Operations.  Revenues of a local  television  station depend to some extent
upon its relationship with an affiliated  network.  In general,  the affiliation
contracts of WHBF-TV and WOI-TV with CBS and ABC, respectively, provide that the
network will offer to the affiliated station the programs it generates,  and the
affiliated  station will transmit a number of hours of network  programming each
month.  The programs  transmitted by the affiliated  station  generally  include
advertising  originated by the network,  for which the network is compensated by
its advertisers.

     The  affiliation  contract  provides  that  the  network  will  pay  to the
affiliated station an amount which is determined by negotiation,  based upon the
market size and rating of the  affiliated  station.  Typically,  the  affiliated
station  also makes  available a certain  number of hours each month for network

                                      -8-

<PAGE>



transmission  without  compensation to the local station,  and the network makes
available to the  affiliated  station  certain  programs which will be broadcast
without advertising,  usually public information programs. Some network programs
also  include  "slots" of time in which the local  station is  permitted to sell
spot  advertising  for its own  account.  The  affiliate  is  permitted  to sell
advertising spots preceding, following, and sometimes during network programs.

     A network  affiliation  is important  to a local  station  because  network
programs,  in general,  have higher viewer ratings than non-network programs and
help to establish a solid audience base and acceptance within the market for the
local station.  Because network  programming often enhances a station's audience
ratings, a network-affiliated  station is often able to charge higher prices for
its own  advertising  time.  In addition to revenues  derived from  broadcasting
network  programs,  local  television  stations derive revenues from the sale of
advertising  time for spot  advertisements,  which  vary from 10  seconds to 120
seconds in length,  and from the sale of program  sponsorship  to  national  and
local advertisers. Advertising contracts are generally short in duration and may
be canceled  upon  two-weeks  notice.  WHBF-TV and WOI-TV are  represented  by a
national firm for the sale of spot advertising to national  customers,  but have
local  sales  personnel  covering  the  service  area in which each is  located.
National   representatives   are  compensated  by  a  commission  based  on  net
advertising revenues from national customers.

     Competition.  WHBF-TV and WOI-TV compete for revenues with local television
and radio stations,  cable  television,  and other  advertising  media,  such as
newspapers,   magazines,  billboards  and  direct  mail.  Generally,  television
stations  such as  WHBF-TV  and WOI-TV do not  compete  with  stations  in other
markets.

     Other sources of competition  include community antenna television ("CATV")
systems,   which  carry  television  broadcast  signals  by  wire  or  cable  to
subscribers who pay a fee for this service. CATV systems retransmit  programming
originated by broadcasters,  as well as providing additional programming that is
not originated on, or transmitted from,  conventional  broadcasting stations. In
addition,  some  alternative  media operators,  such as multipoint  distribution
service owners, provide for a fee and on a subscription basis,  programming that
is not a part of regular  television  service.  Additional  program services are
provided  by  low-power  television  stations  and direct  broadcast  satellites
provide video services as well.

     Federal Regulation.  Television broadcasting is subject to the jurisdiction
of the FCC under the Communications Act of 1934, as amended (the "Communications
Act"). The  Communications  Act, and/or the FCC's rules, among other things, (i)
prohibit the  assignment of a broadcast  license or the transfer of control of a
corporation  holding  a license  without  the prior  approval  of the FCC;  (ii)
prohibit  the common  ownership  of a  television  station and an AM or FM radio
station  or  daily  newspaper  in  the  same  market,   although  AM-FM  station
combinations by itself are permitted;  (iii) prohibit ownership of a CATV system
and  television  station in the same market;  (iv)  restrict the total number of
broadcast  licenses which can be held by a single entity or individual or entity
with  attributable  interests in the stations and prohibits such individuals and
entities  from  operating  or having  attributable  interests  in most  types of
stations in the same service area (loosened in the 1996 Act); and (v) limit

                                       -9-

<PAGE>



foreign  ownership of FCC licenses under certain  circumstances.  See Regulatory
Environment  under A. above for a description of certain  provisions of the 1996
Act  including  in  particular  those which would  remove the  regulations  over
non-basic cable service in three years and permit telephone service providers to
provide cable service.  In calculating media ownership  interests,  Registrant's
interests  may be  aggregated  under  certain  circumstances  with certain other
interests of Mr. Mario J. Gabelli,  Chairman and Chief Executive  Officer of the
Registrant, and certain of his affiliates.

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

Other

     On December 1, 1995,  CLR Video LLC, a 60% owned  subsidiary  of Registrant
acquired 23 cable television  systems in northeast Kansas serving  approximately
4,500  subscribers  for $5.2 million.  Certain of the systems cluster with local
telephone  exchanges  owned by J.B.N.  Telephone.  Registrant  also owns a small
cable  system  in  Haviland,   Kansas.  Results  of  operations  have  not  been
significant to date.

     See the  "harvesting"  initiative  at  page 3 as to  sale  of  Registrant's
DirectTV franchise in certain parts of New Mexico. In December 1998,  Registrant
sold for approximately  $3.1 million its right to market direct  broadcasting TV
services via  satellite in New Mexico.  Financial  results for the operation had
not been material.

C.   Personal Communications Services ("PCS").
----------------------------------------------

     A  subsidiary  of  Registrant  is  a  49.9%  limited  partner  in  Fortunet
Communications,   L.P.   ("Fortunet").   Fortunet  is  the   successor  to  five
partnerships that won 30 megahertz personal  communications services licenses in
the FCC's C-Block  auction  (restricted  to small  businesses  and certain other
qualifying  bidders),  which  concluded in 1996.  Fortunet won 31 licenses in 17
states covering a population of approximately 7 million people. The licenses had
an aggregate purchase price of $216 million after a 25% bidding credit.

     Under FCC rules, Fortunet made a down payment equal to 10% of the cost (net
of bidding credits) of the licenses ($21.6 million).  The Government provided 10
year installment financing, interest only for the first six years at an interest
rate of 7% per annum.  Registrant's  subsidiary has loaned Fortunet an aggregate
of approximately  $24.0 million to fund the down payments and the first interest
payment on the licenses.  The 50.1% general partner has no obligation to provide
loans or additional funds to Fortunet.

     Certain C-Block  licensees,  including  Fortunet,  experienced  substantial
financial  problems in connection with servicing the FCC installment debt and/or
building  out the  licenses.  The  three  largest  C-Block  licensees  filed for
protection under the Federal Bankruptcy Act. As a result, the FCC in March 1997,
suspended  interest  payments on the FCC installment  debt while it examined the
situation. In September 1997 the FCC gave C-Block licensees four choices (one

                                      -10-

<PAGE>



of which was the resumption of principal and interest  payments) with respect to
their  licenses.  The three other options,  as modified in March 1998,  were (i)
giving up all C-Block  licenses in any Metropolitan  Trading Areas ("MTA");  for
licenses returned, the licensee may either opt (a) to rebid on those licenses in
the  reauction  and  forfeit  100% of the  down  payment  or (b) to  forego  the
opportunity  to rebid on those  licenses and receive a credit of 70% of the down
payment to be used to prepay any licenses  retained,  (ii) using 70% of the down
payments (100% in the case of licenses to be paid up) to prepay  licenses in any
MTA while giving up the licenses not prepaid,  and (iii) giving up 15 MHZ of the
30 MHZ licenses in any MTAs for  forgiveness  of 50% of the debt; a licensee who
elects to resume installment payments on the remaining portion would be entitled
to a credit  towards  debt  service  equal to 40% of the  down  payments  on the
spectrum  given up while a licensee who elects to prepay the  retained  licenses
would receive a credit towards  prepayment  equal to 70% of the down payments on
the  spectrum  given up. In the third  quarter  of 1997,  Registrant  provided a
reserve  of  30%  of its  subsidiary's  investment  in  Fortunet  ($4.6  million
after-tax).

     In June 1998, Fortunet,  pursuant to the FCC restructuring program, elected
to give up all of its PCS licenses,  except for 15 MHZ licenses in  Tallahassee,
Panama  City and  Ocala,  Florida.  It used the FCC  credits  from the  returned
licenses to pay the remaining purchase prices for the retained Florida licenses.
Fortunet  also  received  back $3.9 million from the FCC,  which was used to pay
down a portion of Fortunet's loan from Registrant's subsidiary. This reduced the
net investment and advances to Fortunet to approximately $19
million.

     Another subsidiary of Registrant,  Lynch PCS Corporation F ("LPCSF"), was a
49.9% limited partner in Aer Force  Communications  B, L.P. ("Aer Force").In the
FCC's  F-Block  Auction  (restricted  to  small  businesses  and  certain  other
qualifying bidders) of 10 megahertz PCS licenses, Aer Force won five licenses in
four states  covering a  population  of  approximately  20 million  people.  The
licenses  have an aggregate  purchase  price of $19 million  after a 25% bidding
credit. In December 1997, East/West Communications, Inc. ("East/West") succeeded
to the assets and  liabilities  of Aer Force with LPCSF  receiving  49.9% of the
common stock.  Immediately  thereafter,  Registrant spun off 39.9% of the common
stock of East/West to Registrant's shareholders and transferred 10% of East/West
stock to Gabelli Funds,  Inc. ("GFI") in satisfaction of an obligation to pay it
10% of the net  profits  of Aer  Force  (after  an  assumed  cost  of  capital).
Registrant currently owns 7,800 shares ($7,800,000 par and liquidation value) of
5% payment-in-kind  preferred stock of East/West,  redeemable in 2009 subject to
earlier payment in certain circumstances.  East/West needs to raise financing in
the near term and determine how to best utilize its licenses.

     Another subsidiary of the Registrant, Lynch PCS Corporation H ("LPCSH"), is
a  49.9%  non-control  member  of  BCDJMS   Communications,   L.L.C.,  which  is
participating  in the FCC's  reauction  of certain PCS  licenses  which began on
March 23, 1999. LPCSH has provided BCDJMS approximately $50,000 in equity and $3
million in loans for bidding  purposes.  The other equity  owners of BCDJMS have
provided  in the  aggregate  $50,000 in equity and no loan  funds.  It cannot be
determined  at this time if BCDJMS will win any PCS  licenses  in the  reauction
and, if so, whether such licenses would prove profitable.

     Another subsidiary of the Registrant, Lynch PCS Corporation G ("LPCSG") had

                                      -11-

<PAGE>



an agreement with Rivgam Communicators L.L.C.  ("Rivgam"),  a subsidiary of GFI,
which won licenses in the FCC's D and E Block PCS Auctions for 10 megahertz  PCS
licenses,  to receive a fee equal to 10% of the  realized  net profits of Rivgam
(after an assumed cost of capital) in return for  providing  bidding and certain
other services.  Rivgam won 12 licenses in seven states covering a population of
33 million,  with an aggregate cost of $85.1 million.  In December 1998,  Rivgam
settled its obligation  under said agreement by transferring to LPCSG its 10 MHZ
PCS license for the Las Cruces, New Mexico market.

     LPCSG also has an agreement  with  Bal/Rivgam LLC (in which GFI has a 49.9%
equity interest),  which won licenses in FCC's Wireless  Communications Services
("WCS")  Auction  in 1997,  to  receive  a fee equal to 5% of the  realized  net
profits  of  Bal/Rivgam  (after an  assumed  cost of  capital),  in  return  for
providing bidding and certain other services to Bal/Rivgam. Bal/Rivgam won 5 WCS
licenses  covering a population  of  approximately  42 million with an aggregate
cost of $0.7 million.  LPCSG also has an agreement to provide BCK\Rivgam L.L.C.,
in which GFI has a 49.9% equity  interest,  with similar  services in connection
with the FCC's Local Multipoint  Distribution Services ("LMDS") Auction ended on
March 25, 1998. Subject to final grant, BCK/Rivgam won three licenses covering a
population of 1.3 million with an aggregate  cost of $6.1 million.  LPCSG has an
agreement to receive 5% of the net profits of BCK\Rivgam  (after an assumed cost
of capital).

     FCC rules  impose  build-out  requirements  that  require PCS  licensees to
provide adequate service to at least one-third of the population in the licensed
area within five years from the date of grant and to at least two-thirds  within
ten years, as well as build out requirements for WCS and LMDS licenses.  Neither
Fortunet nor East/West has begun any build out of their licenses. There are also
substantial  restrictions  on the  transfer  of  control  of C and F  Block  PCS
licenses, WCS licenses and LMDS licenses.

     There are many  risks  relating  to PCS  communications  including  without
limitation,  the high cost of PCS licenses,  the fact that it involves  start-up
businesses,  raising the substantial  funds required to pay for the licenses and
the build  out,  determining  the best way to  develop  the  licenses  and which
technology  to utilize,  the small size and limited  resources  of Fortunet  and
East/West  compared  to  other  potential  competitors,  existing  and  changing
regulatory  requirements,  additional  auctions of  wireless  telecommunications
spectrum and actually building out and operating new businesses  profitably in a
highly competitive environment (including already established cellular telephone
operators and other new PCS  licensees).  There are also similar risks as to WCS
and LMDS  licenses.  There can be no  assurance  that any  licenses  granted  to
Fortunet or East/West can be  successfully  sold or financed or developed,  with
Registrant's subsidiaries recovering their debt and equity investments.

II.  SERVICES
-------------

A.  The Morgan Group, Inc.
--------------------------

     The  Morgan  Group  Inc.   ("Morgan")  is  the  Registrant's  only  service
subsidiary.  On July 22,  1993,  Morgan  completed  an initial  public  offering
("IPO") of 1,100,000  shares of its Class A common  stock,  $.015 par value,  at
$9.00 per share.  As a result of this  offering,  Lynch's  equity  ownership  in
Morgan was 

                                      -12-

<PAGE>



reduced from 90% to 47%,  represented  by its  ownership of 1,200,000  shares of
Class B common stock.  In December  1995,  Lynch  acquired  from Morgan  150,000
shares  of  Class A  common  stock  (plus  $1.3  million  in cash  plus  accrued
dividends) in exchange for its 1,493,942  shares of Series A Preferred  Stock of
Morgan. As of March 19, 1999, Morgan purchased  approximately  103,000 shares of
its Class A common  stock at $9.00 per share  pursuant to a "Dutch  Auction." At
March 25,  1999,  Lynch's  equity  ownership  in Morgan was  approximately  55%.
Because the Class B common stock is entitled to two votes per share,  its voting
interest in Morgan at March 25, 1999 was approximately 70% and, therefore, Lynch
continues to consolidate  Morgan's results in its financial  statements.  Morgan
Class A common stock is listed on the American  Stock  Exchange under the symbol
"MG."

     Morgan is the nation's  largest  publicly owned service company in managing
the delivery of  manufactured  housing,  specialized  equipment  and  commercial
vehicles in the United States,  and through its wholly owned subsidiary,  Morgan
Drive Away,  Inc. has been operating  since 1936.  Morgan  provides  outsourcing
transportation  services  through a  national  network  of  approximately  1,530
independent  owner-operators  and 1,420 other  drivers.  Morgan  dispatches  its
drivers from 105  locations in 33 states.  Morgan's  largest  customers  include
Fleetwood  Enterprises,  Inc., Oakwood Homes Corporation,  Winnebago Industries,
Inc.,  Champion  Enterprises,  Inc.,  Cavalier Homes,  Inc., Clayton Homes, Palm
Harbor Homes, Inc., Four Seasons Housing,  Inc.,  Fairmont Homes, Inc. and Ryder
Systems, Inc.

     In 1996, Morgan acquired the assets of Transit Homes of America, a national
outsourcing company located in Boise, Idaho. In 1995, Morgan acquired the assets
of Transfer Drivers, Inc. ("TDI"), a northern Indiana-based outsourcing company.
TDI is a market leader in the  fragmented  truck delivery  business  focusing on
relocation of consumer and commercial  vehicles for customers,  including Budget
One-Way Rental, Ryder System, Inc. and Ford Motor Company.

     Morgan  also  provides  certain  insurance  and  financing  services to its
owner-operators   through  its   subsidiaries,   Interstate   Indemnity  Company
("Interstate") and Morgan Finance, Inc. ("Finance").

     In the first half of 1997, Morgan discontinued the "Truckaway" operation of
the  Specialized  Transport  Division  taking a special  charge to income in the
fourth  quarter of 1996.  Truckaway was a line of business  which focused on the
transportation  of  van  conversions,  tent  campers,  and  automotive  products
utilizing  Company-owned  equipment.  The  truckaway  operation  had revenues of
$12,900,000  and an estimated  operating  loss of $1,800,000  for the year ended
December 31, 1996.

     Industry Information. Morgan's business is substantially dependent upon the
manufactured housing industry.  Morgan's operations are affected by, among other
things,  fluctuations in interest rates and availability of credit to purchasers
of manufactured  homes and motor homes and the  availability  and price of motor
fuels. This industry is subject to production cycles.  The manufactured  housing
industry growth was approximately 2.3% in 1998.

     Growth  Strategy.  Morgan's  strategy is to grow  through  expansion in the
niche businesses already being served with heavy emphasis on outsourcing,  along
with pursuing  acquisitions of niche  transportation  carriers who are servicing

                                      -13-

<PAGE>



their  customer base with unique  service  and/or  equipment.  In addition,  the
Company  looks to expand  insurance  product  offerings  to drivers  through its
subsidiary Interstate.

     Morgan's  initiatives  for  improved  margins are to exit lines of business
which are unrewarding,  reducing corporate overhead, and improving the Company's
safety record.  There is no assurance that such strategy and initiatives will be
successful in light of changing economic markets and competitive conditions.

     Morgan is continuously  reviewing and negotiating  potential  acquisitions.
There can be no assurance that any future  acquisitions  will be effected or, if
effected, that they can be successfully integrated with Morgan's business.

     Competition. All of Morgan's activities are highly competitive. In addition
to fleets operated by manufacturers, Morgan competes with several large national
interstate  carriers  and  numerous  small  regional  or  local  interstate  and
intrastate carriers.  Morgan's principal competitors in the manufactured housing
marketplace are privately  owned.  In the commercial  transport  market,  Morgan
competes  with  large   national   interstate   carriers,   many  of  whom  have
substantially  greater  resources  than Morgan.  No assurance  can be given that
Morgan will be able to maintain its competitive position in the future.

     Competition  among  carriers  is based on the rate  charged  for  services,
quality of service,  financial  strength,  insurance coverage and the geographic
scope of the carrier's authority and operational structure.  The availability of
tractor  equipment and the  possession  of  appropriate  registration  approvals
permitting  shipments  between  points  required  by the  customer  may  also be
influential.

     Lines  of  Business.  Morgan  has  three  lines of  business:  manufactured
housing,  specialized  outsourcing  services  and  insurance  and  finance.  The
Company's  manufactured  housing line  provides  outsourced  transportation  and
logistical  services to manufacturers of manufactured  housing through a network
of  terminals  located  in 31  states.  The  Company's  specialized  outsourcing
services provides outsourced  transportation services primarily to manufacturers
of recreational  vehicles,  commercial  trucks and trailers through a network of
service centers in eight states. The third line, insurance and finance, provides
insurance   and   financing   to   the   Company's   drivers   and   independent
owner-operators.   Morgan's  lines  are  strategic  business  units  that  offer
different  services and are managed separately based on the differences in these
services.

     Selected Operating and Industry  Participation  Information.  The following
table sets forth certain  operating and industry  participation  information for
each of the five years ended December 31, 1998.
<TABLE>
<CAPTION>

Manufactured Housing          1994        1995      1996        1997      1998
                              ----        ----      ----        ----      ----
<S>                           <C>       <C>        <C>        <C>        <C> 
  Operating Information:
New Home Shipments ......     98,181    114,890    121,136    154,389    161,543
Other Shipments .........     23,423     29,860     23,465     24,144     17,330
                            --------   --------   --------   --------   --------
Total Shipments .........    121,604    135,750    144,601    178,533    178,873

Linehaul Revenues
  (In Thousands) (1) ....   $ 53,520   $ 63,353   $ 72,616   $ 93,092   $ 94,158
</TABLE>



                                      -14-

<PAGE>

<TABLE>
<CAPTION>

Manufactured Housing          1994       1995      1996       1997       1998
                              ----       ----      ----       ----       ----
<S>                         <C>        <C>        <C>        <C>        <C>    
Industry Participation:
Industry Production (2) .   451,646    505,819    553,133    558,435    601,678
New Home Shipments ......    98,181    114,890    121,136    154,389    161,543
Share of Unites Shipped .      21.7%      22.7%      21.9%      27.6%      26.8%
</TABLE>


<TABLE>
<CAPTION>

Specialized Outsourcing           1994      1995      1996      1997      1998
                                  ----      ----      ----      ----      ----
<S>                               <C>       <C>       <C>       <C>       <C>   
 Services Operating
Information:
Shipments ....................    73,994    94,291    99,623    80,314    82,344
Linehaul Revenues
 (In Thousands) (1) ..........   $43,443   $49,336   $49,259   $39,336   $42,994
</TABLE>
                                                                        
 -------
(1) Linehaul  revenue is derived by multiplying the miles of a given shipment by
the stated mileage rate.

(2) Based on reports of Manufactured  Housing  Institute.  To calculate share of
homes shipped, Morgan assumes two units shipped for each multi-section home.

     Customers  and  Marketing.  A  substantial  portion of  Morgan's  operating
revenues are generated under one, two, or three year contracts with producers of
manufactured  homes,  recreational  vehicles,  and the other products.  In these
contracts,  the manufacturers  agree that a specific  percentage (up to 100%) of
their  transportation  service  requirements from a particular  location will be
performed  by Morgan on the basis of a  prescribed  rate  schedule,  subject  to
certain  adjustments  to accommodate  increases in the Company's  transportation
costs.  Operating results generated under customer  contracts in 1996, 1997, and
1998 were 62%, 68% and 64% of total operating revenues,  respectively.  Morgan's
ten largest  customers  have been served for at least three years and  accounted
for approximately 59%, 66%, and 69% of its operating revenues in 1996, 1997, and
1998, respectively.

     Independent  Owner-Operators.  The  shipment  of  product  by  Manufactured
Housing and certain Specialized  Outsourcing Services such as towaway and pickup
is  conducted  by  contracting  for  the  use of the  equipment  of  independent
owner-operators.

     Owner-operators  are independent  contractors  who own toters,  tractors or
pickup  trucks which they  contract  to, and operate for,  Morgan on a long-term
basis.  Independent  owner-operators  are not  generally  approved to  transport
commodities on their own in interstate or intrastate commerce.  Morgan, however,
possesses such approvals  and/or  authorities (see  "Regulation"),  and provides
marketing, insurance, communications, administrative, and other support required
for such transportation.

     Risk  Management,  Safety and  Insurance.  The risk of  substantial  losses
arising  from  traffic  accidents  is inherent in any  transportation  business.
Morgan  carries  insurance to cover such losses up to $25 million per occurrence
with a deductible  of up to $150,000  per  occurrence  for  personal  injury and
property  damage.  The  frequency  and  severity of claims  under the  Company's
liability  insurance affect the cost, and potentially the availability,  of such
insurance.  If  Morgan  is  required  to  pay  substantially  greater  insurance
premiums,  or incurs  substantial losses above $25 million or substantial losses
below its $150,000 deductible, its results of operations can be materially

                                      -15-

<PAGE>



adversely  affected.  There can be no  assurance  that  Morgan can  continue  to
maintain its present insurance coverage on acceptable terms.

     Interstate  makes  available  physical  damage  insurance  coverage for the
Company's  owner-operators.  Interstate also writes performance surety bonds for
Morgan Drive Away, Inc.

     Regulation. Morgan's interstate operations are subject to regulation by the
Federal  Highway  Administration,  which  is an  agency  of  the  United  States
Department of Transportation ("D.O.T.").  Effective August 26, 1994, essentially
all  motor  common  carriers  were  no  longer  required  to  file  individually
determined  rates,  classifications,  rules or  practices  with  the  Interstate
Commerce  Commission   ("I.C.C.")   Effective  January  1,  1995,  the  economic
regulation  of certain  intrastate  operations  by various  state  agencies  was
preempted  by  federal  law.  The  states  will  continue  to have  jurisdiction
primarily to insure that carriers providing intrastate  transportation  services
maintain  required  insurance  coverage,   comply  with  all  applicable  safety
regulations,  and conform to regulations  governing size and weight of shipments
on state  highways.  Most states have  adopted  D.O.T.  safety  regulations  and
conform to regulations  governing size and weight of shipments on state highway,
and actively enforce them in conjunction with D.O.T. personnel.

     Carriers  normally are required to obtain  authority from the I.C.C. or its
successor  as well as various  state  agencies.  Morgan is  approved  to provide
transportation  from,  to,  and  between  all points in the  continental  United
States.

     Federal  regulations govern not only operating  authority and registration,
but also  such  matters  as the  content  of  agreements  with  owner-operators,
required  procedures  for  processing  of cargo  loss  and  damage  claims,  and
financial reporting.  Morgan believes that it is in substantial  compliance with
all material regulations applicable to its operations.

     The  D.O.T.  regulates  safety  matters  with  respect  to  the  interstate
operations of Morgan. Among other things, the D.O.T. regulates commercial driver
qualifications   and  licensing;   sets  minimum  levels  of  carrier  liability
insurance;  requires  carriers  to  enforce  limitations  on  drivers'  hours of
service;  prescribes  parts,  accessories  and  maintenance  procedures for safe
operation of freight  vehicles;  establishes  noise emission and employee health
and safety  standards  for  commercial  motor  vehicle  operators;  and utilizes
audits,  roadside  inspections  and  other  enforcement  procedures  to  monitor
compliance  with all such  regulations.  In 1997,  the  D.O.T.  has  established
regulations which mandate random,  periodic,  pre-employment,  post-accident and
reasonable  cause drug  testing  for  commercial  drivers.  The D.O.T.  has also
established similar regulations for alcohol testing.  Morgan believes that it is
in substantial  compliance with all material D.O.T.  requirements  applicable to
its operations.

     From  time to time,  tax  authorities  have  sought to  assert  that  owner
operators  in the  trucking  industry  are  employees,  rather than  independent
contractors.  No such tax  claim has been  successfully  made  with  respect  to
Morgan.  Under existing  industry  practice and  interpretations  of federal and
state tax laws, as well as Morgan's current method of operation,  Morgan,  based
on the advice of counsel,  maintains that its owner operators are not employees.
Whether an owner operator is an independent  contractor or employee is, however,
generally a fact-sensitive  determination and the laws and their interpretations
can vary from state to state.  There can be no  assurance  that tax  authorities
will not successfully challenge this position, or that such tax laws or 

                                      -16-

<PAGE>



interpretations  thereof will not change. If the owner operators were determined
to  be  employees,   such  determination   could  materially  increase  Morgan's
employment tax and workers' compensation exposure.

     Interstate,  Morgan's insurance subsidiary,  is a captive insurance company
incorporated under Vermont law. It is required to report annually to the Vermont
Department of Banking,  Insurance & Securities and must submit to an examination
by this Department on a triennial basis.  Vermont regulations require Interstate
to be audited  annually and to have its loss  reserves  certified by an approved
actuary.  Morgan believes  Interstate is in substantial  compliance with Vermont
insurance regulations.

III.   MANUFACTURING
--------------------

A.  Spinnaker Industries, Inc. ("Spinnaker")
--------------------------------------------

     See the "harvesting" initiative at page 3 hereof concerning Spinnaker.

     Spinnaker's  Common  Stock  and  Class A Common  Stock  are  listed  on the
American  Stock  Exchange  under the symbols  "SKK" and "SKK.A." In August 1996,
Spinnaker  changed the name of its existing Common Stock to Class A Common Stock
and declared a stock  dividend of one share of a new Common Stock for each share
of  Class A  Common  Stock  outstanding.  At March  1,  1999,  Registrant  owned
2,237,203   shares  of  Spinnaker  Common  Stock,   approximately   61%  of  the
outstanding,  and 2,259,063 shares of Class A Common Stock, approximately 62% of
the outstanding.

     In June 1994, Spinnaker entered into an agreement with Boyle, Fleming, Inc.
("BF"),  for BF to provide  operating and strategic  management to Spinnaker and
for Messrs. Boyle and Fleming to become Chairman and President. In addition to a
management  fee, BF received a warrant to purchase  678,945  shares of Spinnaker
Class A Common  Stock and Common Stock (20% at the time) at a price of $2.67 for
one share of both Common Stock and Class A Common Stock  (adjusted for the 3 for
2 stock  splits in December  1994 and  December  1995 and the August 1996 Common
Stock Dividend). In August 1996, the Management Agreement with BF was terminated
and Messrs.  Richard J. Boyle and Ned Fleming III became employees of Spinnaker.
All BF warrants have now been exercised.

     Spinnaker  is  a  leading  manufacturer  and  marketer  of  adhesive-backed
material,  primarily for the industrial tape and pressure  sensitive label stock
markets.  Its strategy is to focus on the growing pressure sensitive markets for
industrial tape and label stock applications, while pursuing acquisitions within
the adhesive-backed  materials industry that complement its existing businesses.
However, as announced in November 1998, Spinnaker continues to examine strategic
alternatives,  including  a possible  sale of all or a portion of its  business,
merger, or other business combination.  Spinnaker's  businesses are grouped into
two principal  categories  that  accounted for the following  percentages of pro
forma net sales for the year ended December 31, 1998:  industrial  tape: 43% and
adhesive-backed  label stock 54%.  

     Spinnaker  has five  100%  owned  subsidiaries:  Spinnaker  Coating,  Inc.,
(formerly called Brown-Bridge Industries,  Inc.) ("Spinnaker Coating"), 80.1% of
which was  acquired  in  September  1994,  Central  Products  Company  ("Central
Products"),  acquired in October 1995, Spinnaker Coating-Maine,  Inc. ("Coating-
Maine") acquired in 1998, Spinnaker Electrical Tape Company ("Spinnaker

                                      -17-

<PAGE>



Electrical") acquired in 1998 and Entoleter,  Inc.  ("Entoleter"),  which it has
owned since Registrant  acquired  Spinnaker in 1987. In October 1996,  Spinnaker
acquired the remaining  19.9% of  outstanding  stock of Spinnaker  Coating (plus
management  stock  options),  which were owned by the  management  of  Spinnaker
Coating,  BF and  Registrant.  Spinnaker  Coating and  Coating-Maine  (which are
collectively   referred   to  as   "Spinnaker   Coating"   herein)  are  in  the
adhesive-backed label stock industry.  Central Products manufactures  industrial
sealing tape.  Spinnaker  Electrical  manufactures  electrical  tape.  Entoleter
manufactures a line of industrial  process equipment and a line of air pollution
equipment.

     Spinnaker's  industrial  tape  business  is  conducted  through its Central
Products  subsidiary,  which was founded in 1917.  Central Products is a leading
manufacturer  of  carton  sealing  tape and  offers  the  broadest  line of such
products in the United  States.  Its branded and private label products are used
primarily for  commercial  packaging and  applications  and are sold through its
national  sales  force to over  1,500  paper and  office  products  distributors
nationwide,  including the largest national distributors of paper products,  for
resale  to  over  20,000  end  users.  Spinnaker  maintains  relationships  with
Unisource Worldwide,  Inc.  ("Unisource") and xpedx (a division of International
Paper Co.),  formerly  known as ResourceNet  International,  which are among the
largest distributors of paper and office products in the United States.  Central
supplies each of Unisource and xpedx with a full line of their own private label
carton sealing tape products.  Spinnaker believes that its arrangements with key
customers  are  evidence of its  leading  position  in the carton  sealing  tape
market,  which is due in part to Spinnaker being the only one-stop  manufacturer
of private label products in the carton sealing market.

     In July 1998,  Spinnaker  acquired the pressure  sensitive  electrical tape
product  line  of  tesa  tape,  inc.  and its  associated  Carbondale,  Illinois
manufacturing  plant.  The purchase  price totaled $10.7 million  comprising the
issuance of 200,000  share of Spinnaker  Common Stock  (subject to  adjustment),
cash and seller notes. The product line produces  electrical tape for insulating
motors,  coils and  transformers  for major customers in Europe,  Canada and the
United States.  The  electrical  tape business  offers  multiple types of tapes,
including laminate,  glass cloth,  filament,  film,  polypropylene and polyester
high  temperature  industrial  electrical  tapes.  Pro  forma  net sales in 1998
totaled approximately $13 million.

     Spinnaker's  adhesive-backed  label  stock  business is  conducted  through
Spinnaker Coating, Inc. (formerly known as Brown-Bridge Industries,  Inc.) which
was founded in 1928.  With the  acquisition of the Pressure  Sensitive  Business
from  S.D.  Warren  Company  in  March  1998,   Spinnaker  Coating  is  a  major
manufacturer of adhesive-backed label stock in the United States. It is the only
manufacturer of all adhesive-backed paper technologies (pressure, water and heat
sensitive), which enables Spinnaker Coating to provide a broad range of standard
and  custom  coating  solutions  that  meet  the  design  specifications  of its
customers.   Spinnaker  Coating  manufacturers  custom,   low-volume,   pressure
sensitive  products  used for  speciality  applications,  whereas  the  Pressure
Sensitive  Business  manufactures  standard,  high  volume,  pressure  sensitive
products,  which  complements it product line.  Spinnaker  Coating offers a full
line of more than 2,000 variations of adhesive-backed  label stock and sells its
products  in roll  and  sheet  form to over  1,000  printers,  paper  merchants,
industrial  users and major  forms  manufacturers  and  distributors.  Customers
convert  its  label  stock  into  labels  used  for a  broad  range  of end  use
applications,   including  bar-coding,   mailing  and  shipping,  packaging  for
pharmaceutical, food and other consumer products, office identification and

                                      -18-

<PAGE>



business forms,  postage stamps stock,  decorative  labels and other  speciality
industrial uses. Spinnaker Coating is the largest supplier of pressure sensitive
postage  stamp stock for use by the United States  Postal  Service.  In 1995 and
again  in  March  1998,  Spinnaker  was  elected  to  exclusively  supply  Paper
Corporation  of the U.S. and the U.S.  Bureau of Engraving and Printing  ("BEP")
the label stock for pressure-sensitive  postage stamps. The March 1998 contract,
a five-year supply contract, is valued at approximately $75 million.

     In March 1998,  Coating-Maine  acquired the Pressure  Sensitive Business of
S.D. Warren Company  ("Warren") for an aggregate purchase price of approximately
$51.8   million  plus  the   assumption   of  certain   liabilities   (excluding
substantially all trade payables).  The Pressure Sensitive Business manufactures
standard pressure  sensitive products that are primarily used for EDP labels and
consumer  products  labels  that  are  sold to  major  forms  manufacturers  and
distributors.   The  Pressure  Sensitive  Business  operates  at  S.D.  Warren's
Westbrook,  Maine facility and had sales of approximately  $62.1 million for its
fiscal year ended October 1, 1997.  The purchase  price was paid by the issuance
of a 10% subordinated  convertible note (the "Note") to Warren,  in the original
principal  amount of $7.0 million,  and the remainder with funds available under
Spinnaker's  asset-backed  working  capital  revolving  credit  facility with BT
Commercial Corporation (the "Revolving Credit Facility"), which was concurrently
amended to increase the aggregate  facility  amount to $60 million.  The Note is
convertible  for  shares of  Spinnaker's  common  stock,  no par value  ("Common
Stock"),  on the basis of 40 shares  per  $1,000  of the  outstanding  principal
amount of the Note (or $25 per share), subject to adjustment as set forth in the
Note.

     Spinnaker also  manufactures and markets  industrial  process equipment and
air  pollution  control  scrubbers  through its  Entoleter,  Inc.  ("Entoleter")
subsidiary.  Spinnaker  is  exploring  strategic  alternatives  with  respect to
Entoleter to improve shareholder value,  including the possible sale or spin-off
of Entoleter.

Industrial Tape
---------------

     Central  Products  provides a full range of packaging  system solutions for
the packaging of goods for shipment by a wide variety of  manufacturing,  retail
and  distribution  companies,  such as UPS and Land's End.  Central Products has
developed a "razor/razor  blade" concept by selling carton sealing tape machines
in combination with its tape products.  Central Products  manufactures  pressure
sensitive  carton  sealing tape with all three  primary  adhesive  technologies:
acrylic,  hot melt and  natural  rubber.  It also  offers  three  types of water
sensitive  carton sealing tape: paper tape,  fiberglass  reinforced tape and box
tape.  Central  Products  believes  it is the only  United  States  supplier  to
manufacture both pressure sensitive and water activated carton sealing tape, and
that it is the only  company to produce all three  pressure  sensitive  adhesive
technologies.

     Pressure  Sensitive  Carton  Sealing  Tape.   Pressure  sensitive  tape  is
manufactured  primarily through the coating of plastic film with a thin layer of
acrylic, hot melt or natural rubber adhesive. The adhesive is applied to various
grades  of  high-quality,   low-stretch  polypropylene  film  for  use  in  most
applications  as well as PVC and  polyester  films  which  are used for  certain
specialized applications.  Acrylic adhesives, which are noted for their clarity,
non-yellowing properties,  good temperature resistance and low application cost,
are best  suited for manual  applications  on light and  medium  carton  sealing
situations.  Hot melt  adhesives,  noted for their quiet release and easy unwind

                                      -19-

<PAGE>



during  application,  are the most  widely  used  pressure  sensitive  adhesives
because  they satisfy 90% of all carton  sealing  requirements.  Natural  rubber
adhesives  are  unique  because of their  aggressive  adhesion  properties  and,
although they are ideal for recycled content cartons and cartons  requiring hot,
humid or cold packing,  transportation and storage,  they can be used for a wide
variety  of surface  conditions  and  extreme  temperature  tolerances.  Central
Products'  pressure  sensitive  tapes are sold under the trade names  Alltac and
Central.

     Water  Sensitive  Carton  Sealing Tape.  Water  sensitive tape is generally
manufactured through the application of a thin layer of water sensitive adhesive
to gumming kraft paper. It is offered as either  non-reinforced  (paper) tape or
fiberglass reinforced tape.  Non-reinforced tape is made by applying an adhesive
to a single  layer of high  tensile  strength  kraft paper  coated with  Central
Products'  patented  starch-based  adhesive.  Non-reinforced  tapes are  totally
biodegradable  and are used in  light to  medium  carton  sealing  applications.
Fiberglass  reinforced  tape contains a layer of fiberglass  yarn placed between
two layers of kraft paper,  and is typically  used to seal heavy  packages or on
cartons  that will be subject to a high level of abuse  during  shipping  and is
also favored in shipping high value goods due to its strong  sealing  qualities.
Both non-reinforced tape and fiberglass  reinforced tape are available in light,
medium and heavy grades.  Central Products' water sensitive carton sealing tapes
are sold under the trade names Glasseal, Central, Green Core and Tru-Seal.

     Pressure Sensitive  Electrical Tape. Pressure sensitive  electrical tape is
manufactured through the coating of laminate,  glass cloth,  filament,  and film
backing  materials  with  acrylic,  rubber and silicone  adhesives.  Spinnaker's
electrical tapes are classified by specific  insulating  characteristics  of the
backing material and are categorized by temperature class from up to 105 degrees
to up to 180 degrees Celsius.  In addition,  Spinnaker's  electrical  insulating
tapes are approved by Underwriters Laboratories for use in electrical insulating
applications.

     Tape Dispensing Machines. Spinnaker also supplies tape dispensing equipment
manufactured  by other  companies.  Spinnaker  currently  offers a broad line of
carton sealing  equipment for pressure  sensitive  tape,  which ranges from hand
held dispensers to automatic random sizing equipment.  Spinnaker also offers two
types of table top dispensers for water sensitive tape, a manual dispenser and a
more expensive electric dispenser.

Adhesive-backed Label Stock
---------------------------

     Spinnaker Coating develops,  manufactures and markets adhesive-backed label
stock that is converted by printers and industrial  users into products that are
utilized for marking,  identifying,  labeling and  decorating  applications  and
products. Spinnaker Coating is a major supplier of adhesive-back label stock for
use in United States postage stamps. Spinnaker Coating's products are offered in
three primary adhesive categories:  pressure sensitive, water sensitive and heat
sensitive.  During 1998, pressure sensitive products  constituted  approximately
93.4% of the  Spinnaker's  pro forma net sales of  adhesive-backed  label  stock
products,  while water  sensitive  products  constitute  5.1% and heat sensitive
products constituted 1.5% of such sales.

     Pressure Sensitive. Pressure sensitive products, which are activated by the
application  of pressure,  are  manufactured  with a three element  construction
consisting of face stock,  adhesive  coating and silicone  coated release liner.
The adhesive  product is sold in roll or sheet form for further  conversion into

                                      -20-

<PAGE>



products used primarily for marking,  identification  and promotional  labeling.
Spinnaker  Coating's  pressure sensitive products are sold under the trade names
Strip Tac and Strip Tac Plus.  Roll  pressure  sensitive  products are generally
sold to label printers that produce  products used  primarily for  informational
labels  (shipping  labels,   price  labels,   warning  labels,   etc.),  product
identification and postage stamps. Sheet pressure sensitive products are sold to
commercial  sheet printers,  who provide  information  labels and other products
(such as laser printer stock).

     Water  Sensitive.  Water  sensitive  products,  which are  activated by the
application of water, include a broad range of paper and cloth materials, coated
with a variety of adhesives.  The adhesive  coated  products are sold in roll or
sheet form for further conversion to postage and promotional  stamps,  container
labels,  inventory  control labels,  shipping  labels and splicing,  binding and
stripping  tapes.  The water sensitive line is sold under the trade name Pancake
and  consists of three  product  groups:  dry process,  conventional  gummed and
industrial.  Dry process is sold  primarily  for label and  business  form uses.
Conventional  gum  products  serve  many of the same  end uses for hand  applied
labels as dry  process  stock.  A major  portion of these  products  is sold for
government postage and promotional stamp uses.  Industrial  products are sold in
several niche markets, such as electrical and other specialty markets.

     Heat  Sensitive.  Heat  sensitive  products,  which  are  activated  by the
application of heat, are  manufactured by coating a face stock with either a hot
melt coating or an emulsion process adhesive. The heat sensitive product line is
sold primarily for labeling end uses, such as pharmaceutical  bottles,  meat and
cheese packages, supermarket scales, cassettes and bakery packages. The adhesive
coated product is sold in roll or sheet form for further  conversion.  Spinnaker
Coating's heat sensitive products are sold under the trade name Heat Seal.

Marketing and Customers
-----------------------

     Spinnaker  markets its broad  range of products to a variety of  customers.
During 1998, no single  customer  accounted for more than 10% of Spinnaker's net
sales.

     Central Products' marketing and sales strategy emphasizes  supplying a full
line of both water sensitive and pressure  sensitive tape products to the carton
sealing tape  industry.  Central  Products  sells its products  directly to over
1,500 paper distributors (customers),  who in turn resell these tape products to
the end user markets. In addition,  Central Products sells private-brand  carton
closure  tapes direct to large  customers  who in turn  distribute  the products
under  their  name to end  users.  Central  Products  provides  its  distributor
customers  with a high level of product  education to enable them to better sell
the Company's products.  Spinnaker markets its high temperature  electrical tape
products  domestically  through  its own sales  representatives  and to  Eastern
Europe through a relationship with the world's largest distributor of electrical
products.  Market  growth  for  Spinnaker's  high  temperature  electrical  tape
products is driven by the growing use of electronics in consumer  products,  the
expanded  use  of  motors,   and  the  growth  and   replacement  of  industrial
transformers.

     Spinnaker  Coating  generally  markets its  products  through its own sales
representatives to regional and national printers, converters and merchants. The
majority of sales  represent  product sold and shipped from Spinnaker  Coating's
facilities in Troy, Ohio and Westbrook,  Maine.  However,  to broaden its market
penetration,   Spinnaker   Coating  also  contracts  with  regional   processors
throughout
                                      -21-

<PAGE>



the United  States,  with whom  Spinnaker  Coating  stores  product  until sold.
Generally,  these processors perform both slitting and distribution services for
Spinnaker Coating.

     The slow down in Asian  "growth  consumption,"  the impact of Asian imports
and increased global capacity for certain tape products have adversely  affected
Spinnaker's operations.

Manufacturing and Raw Materials
-------------------------------

     Spinnaker  produces all adhesive  technologies  for carton sealing tape and
adhesive-backed  label stock.  It produces  carton sealing tapes and label stock
for a variety of standard and custom applications  requiring water, pressure and
heat  sensitive  technologies.   Spinnaker  believes  its  strong  manufacturing
capabilities  enable it to maintain high product quality and low operating costs
and respond to customers' needs quickly and efficiently.

     Raw  materials  are the most  significant  cost  component  in  Spinnaker's
production process. The material component accounts for approximately 65% of the
total cost of its products,  with the most  important raw materials  being paper
(gumming   kraft  and  face  stock),   adhesive   materials,   fiberglass,   and
polypropylene  resin.  These materials are currently  readily  available and are
procured from numerous suppliers.

     Central Products manufactures its pressure sensitive tape at its facilities
in  Brighton,  Colorado,  and its  water  sensitive  tape at its  facilities  in
Menasha,  Wisconsin.  Among Spinnaker's  manufacturing  strengths at its Central
Products  water  sensitive  tape  operation are fully  integrated,  computerized
coating  and  laminating  machines,  fully  automated  slitting,  rewinding  and
packaging  machines and a state of the art print shop. At its pressure sensitive
tape   operation,   they  include  an  in-house  film  line  for  production  of
polypropylene film and an advanced  computerized coating machine for each of the
three adhesive  technologies.  Spinnaker Coating  manufactures its adhesive-back
label  stock at two plants in Troy,  Ohio and a recently  acquired  facility  in
Westbrook,  Maine. Spinnaker Coating has installed at its Troy, Ohio, facilities
a new production line for silicone  coating.  The electrical tape  manufacturing
facility  is in  Carbondale,  Illinois,  and was  brought on line in 1995 from a
greenfield site.

     See  Item 2 below  for a  description  of  manufacturing  and  distribution
facilities.

Competition
-----------

     The  adhesive-backed  materials industry is highly  competitive.  Spinnaker
competes  with  national and regional  suppliers,  as well as Asian and European
imports.  As a result of the  competitive  environment  in the  markets in which
Spinnaker  operates,  Spinnaker  faces (and will  continue to face)  pressure on
sales prices of its products.  As a result of such pricing pressures,  Spinnaker
may in the future  experience  reductions in the profit margins on its sales, or
may be unable to pass  future raw  material  price  increases  to its  customers
(which  would  also  reduce  profit  margins).  Spinnaker  operates  in  markets
characterized  by a few  large  diversified  companies  selling  products  under
recognized  trade  names  and a number  of  smaller  public  and  privately-held
companies selling to the market. In addition to branded products, some companies
in the industry produce  private-label  products to enhance supply relationships
with large buyers.

                                      -22-

<PAGE>



     Central Products  competes with other  manufacturers of carton sealing tape
products  as well as  manufacturers  of  alternative  carton  closure  products.
Central Products  believes the basis of competition in the carton sealing market
is quality of adhesion  across a broad  spectrum of  applications,  delivery and
account service,  and price,  although other factors,  such as technical support
and product literature,  may enhance a company's competitive position. There are
a wide range of participants in the carton sealing  industry.  3M Corporation is
the largest manufacturer of pressure sensitive tape in the carton sealing market
in  the  United   States.   Spinnaker   Electrical   Tape  competes  with  other
manufacturers,  both  domestic  and  foreign,  some of  which  are  larger  than
Spinnaker  Electrical Tape. 3M is the largest manufacturer in both North America
and Europe.

     The  adhesive-backed  label stock market is fragmented.  Spinnaker  Coating
competes with several national manufacturers,  including Avery-Dennison,  Bemis,
3M Corporation and a number of smaller regional manufacturers.

Environmental Regulations
-------------------------

     Spinnaker's  operations are subject to  environmental  laws and regulations
governing  emissions  to the  air,  discharges  to  waterways,  and  generation,
handling,  storage,  transportation,  treatment and disposal of waste materials.
Spinnaker  is also  subject  to other  federal  and state  laws and  regulations
regarding  health and safety  matters.  Environmental  laws and  regulations are
constantly  evolving and it is  impossible to predict the effect that these laws
and regulations will have on Spinnaker in the future.  While Spinnaker  believes
it is currently in substantial  compliance with all such  environmental laws and
regulations,  there can be no assurance that it will at all times be in complete
compliance with all such requirements.  In addition, although Spinnaker believes
that  any  noncompliance  is  unlikely  to have a  material  adverse  affect  on
Spinnaker,  it is possible that such noncompliance could have a material adverse
affect  on  Spinnaker.  Spinnaker  has made and will  continue  to make  capital
expenditures  to comply  with  environmental  requirements.  As is the case with
manufacturers in general, if a release of hazardous substances occurs on or from
Spinnaker's  properties  or any  associated  offsite  disposal  location,  or if
contamination  from  prior  activities  is  discovered  at  any  of  Spinnaker's
properties,  Spinnaker may be held liable and the amount of such liability could
be material.

Patents and Trademarks
----------------------

     Patents are held by Spinnaker with respect to the manufacture of certain of
its products,  but its management does not consider such patents to be important
to Spinnaker's operations.  The patents expire over various lengths of time with
the last patent expiring in about 10 years.  Spinnaker has registered several of
its trade names and trademarks for adhesive-backed materials.

International Sales
-------------------

     Spinnaker's international sales were $21.9 million, $14.2 million and $11.5
million in 1998,  1997,  and 1996,  respectively.  Of the $21.9  million in 1998
international sales,  approximately 84% were represented by exports of Spinnaker
Coating,  Central Products and Spinnaker Electrical  adhesive-backed  materials.
The  substantial  majority  of these sales were to  Canadian  customers  and its
European  distributors  and,  consequently,  Spinnaker  believes  that the risks
commonly associated with doing business in international  countries are minimal.
The profitability of international sales is substantially equivalent to that of

                                      -23-

<PAGE>



domestic  sales.  Because  international  sales are  transacted in United States
dollars, payments in many cases are secured by irrevocable letters of credit.

Backlog
-------

     The Company's  backlog believed to be firm was $5.8 million at December 31,
1998, as compared to $7.1 million at December 31, 1997.

Industrial Process Equipment Business
-------------------------------------

     Through its Entoleter subsidiary,  the Company engineers,  manufactures and
markets  a line of  industrial  process  equipment  and a line of air  pollution
control equipment. Entoleter's net sales consist entirely of sales to commercial
and industrial  customers.  Spinnaker is exploring  strategic  alternative  with
respect to Entoleter,  including a possible  spin-off of the Entoleter  stock to
its  shareholders.  There can be no  assurance,  however,  that any  transaction
involving Entoleter will occur.

Employees
---------

     As of December 31, 1998, Spinnaker employed approximately 1,100 persons, of
which 508 were Central Products employees, 474 were Spinnaker Coating employees,
71 were  Spinnaker  Electrical  employees  and 37 were  Entoleter  employees.  A
majority of its hourly employees are not represented by unions. Central Products
has a labor  agreement  expiring  in 2003  with  the  Paper,  Allied-Industrial,
Chemical and Energy Workers  International Union,  (formerly known as the United
Paperworkers International Union) covering approximately 178 hourly employees at
the  Menasha,  Wisconsin  plant.  Spinnaker  Electrical  has a  labor  agreement
expiring  in 2001  with the  AFL-CIO  union  covering  approximately  47  hourly
employees  at its  Carbondale,  Illinois  plant.  Spinnaker  Coating has a labor
agreement  expiring in 2002 with the AFL-CIO union,  covering  approximately  75
employees at its Westbrook, Maine plant. Entoleter's 16 production employees are
members of the United  Electrical,  Radio and Machine  Workers of America Union.
The current collective bargaining agreement expires on April 30, 1999. Spinnaker
believes that its relations with its employees are good;  however,  there can be
no assurance that the Company will not experience work stoppages or slowdowns in
the future.

B.   Lynch Systems, Inc. (Formerly called Lynch Machinery, Inc.)
----------------------------------------------------------------

         Lynch Systems,  Inc.  ("LS"),  a 91% owned subsidiary of Registrant and
the initial part of the Lynch Display  Technologies  group,  designs,  develops,
manufactures  and  markets  a broad  range of  manufacturing  equipment  for the
electronic display and consumer glass industries.  LS also produces  replacement
parts for various types of packaging and glass  container-making  machines which
LS does not manufacture.

     CRT Display and Consumer Glass Manufacturing Technologies.  LS manufactures
glass-forming  presses and electronic  controls to provide high-speed  automated
systems to form different sizes of face panels and tubes for television  screens
and  computer  monitors.  LS produces an HDTV model press to build  large-screen
televisions  for  the  HDTV  (high  definition   television)   market.  LS  also
manufactures  and installs  forming  equipment to form  tableware  such as glass
tumblers,   plates,   cups,  saucers  and  commercial  optical  glass.  LS  also
manufactures and installs fire polishing, electronic controls and retrofit

                                      -24-

<PAGE>



systems for CRT display and consumer glass presses.

     The  production of glassware  entails the use of machines  which heat glass
and,  using great  pressure,  form an item by pressing it into a desired  shape.
Because  of  the  high  cost  of  bringing  the  machine  and  materials  up  to
temperature,  a machine for  producing  glassware  must be capable of running 24
hours a day, 365 days a year.

     During 1998,  LS delivered 3 glass press  machines and 1 fire polisher (but
no large TV glass press  orders),  compared to 9 machines (of which 3 were large
TV glass press orders) in 1997. At December 31, 1998, LS had orders for, and had
in various stages of production, 2 glass press machines (none of which are large
TV glass press orders),  at a total sales price of approximately  $0.35 million,
which are scheduled for delivery in 1999.  There can be no assurance that LS can
obtain orders for additional large TV glass press orders to replace its previous
orders.  In 1998,  LS shipped 2  controls  and  retrofit  systems  amounting  to
approximately  $0.15 million compared to 6 systems  amounting to $2.8 million in
1997. 

     LS believes that it is the largest  supplier to glass companies that do not
manufacture  their own  pressware  machines in the worldwide  pressware  market.
Competitors  include  various  companies  in Italy,  Japan,  Korea,  Germany and
elsewhere.

     While several of the largest domestic and international  producers of glass
pressware  frequently build their own  glass-forming  machines and produce spare
parts in-house,  nearly all pressware  producers have made purchases of machines
and/or spare parts from LS.

     International Sales. During 1998, approximately 60% of LS's sales were made
to  international   customers.  The  profitability  of  international  sales  is
equivalent to that of domestic sales.  Because many international orders require
partial advance deposits,  with the balance often secured by irrevocable letters
of credit from banks in the international  country, the Registrant believes that
some  of  the  credit  risks   commonly   associated   with  doing  business  in
international  countries are minimized.  The Registrant avoids currency exchange
risk by transacting most international sales in United States dollars.  The East
Asian  financial  crisis  has  had a  very  substantial  adverse  impact  on LS,
particularly  on its large TV press  business,  and LS is unable to predict  how
long that adverse impact will continue.

     Backlog.  LS had an order backlog of approximately $0.6 million at December
31,  1998,  compared  with  approximately  $2.4  million at  December  31,  1997
(excluding  the canceled $16 million  order  referred to below).  LS includes as
backlog  those orders which are subject to written  contract,  written  purchase
orders  and  telephone   orders  from  long  standing   customers  who  maintain
satisfactory  credit  ratings.  In 1998,  LS received $2.4 million in connection
with the  cancellation  of a $16  million  order for large TV glass  presses and
parts, which can be used by the customer as a credit for future orders.

     Raw  Materials.  Raw materials  are  generally  available to LS in adequate
supply from a number of suppliers.

     Lynch-AMAV.  At year end 1998,  LS,  through a  subsidiary,  entered into a
joint  venture  Lynch-AMAV  L.L.C.  with AMAV GmbH of  Germany  to  develop  and
manufacture glass manufacturing equipment to the tableware industry. LS will

                                      -25-

<PAGE>



have a 75%  interest in the joint  venture.  The joint  venture  will design and
develop  feeders,  shears  and  presses,  most  of  which  are  expected  to  be
manufactured  for the joint  venture by LS. LS believes  that this joint venture
will expand LS's glass tableware equipment business, particularly in Europe.

C.    M-tron Industries, Inc. ("M-tron")
----------------------------------------

     M-tron,  a 91% owned  subsidiary of the Registrant,  is a manufacturer  and
importer  of quartz  crystal  products  and clock  oscillator  modules  used for
clocking digital circuits, precision time base references and telecommunications
equipment.  A quartz  crystal is an  oscillating  component  which  performs the
clocking function in a circuit.  Crystals and clock oscillator  modules are used
primarily in microprocessor-related  equipment and telecommunications equipment.
Frequency  and  time  related   products   essentially  use  crystals  or  clock
oscillators,  with the addition of electronic circuitry  vertically  integrating
the  product.  Crystal  and clock  oscillators  are sold to  original  equipment
manufacturers,  both  directly  and  through  commissioned  representatives  and
distributors.

     For 1998, 1997, and 1996, M-tron's sales consisted of (in thousands):
<TABLE>
<CAPTION>
                                          1998            1997            1996
                                          ----            ----            ----
<S>                                      <C>             <C>             <C>    
Crystals .......................         $11,871         $12,611         $10,594
Oscillator Modules .............          10,927          10,217           7,839
                                         -------         -------         -------
Total ..........................         $22,798         $22,828         $18,433
                                         =======         =======         =======
</TABLE>

     Competition.  Quartz  crystals and clock  oscillators  are sold in a highly
competitive   industry.   There  are   numerous   domestic   and   international
manufacturers who are capable of providing quartz crystals and clock oscillators
comparable  in quality  and  performance  to  M-tron's  products.  International
competitors,  particularly  from the Far East,  continue to dominate  the United
States market.  M-tron seeks to manufacture smaller specialty orders of crystals
and oscillators,  which it believes it can competitively  fill based upon price,
quality and order response time.  M-tron also performs  quality control tests on
all  products  it  imports  from  the Far  East  and  resells  domestically  and
internationally.

     International   Sales.   M-tron's   international   sales   in  1998   were
approximately  35.7% of total sales and were  concentrated in Canada and Western
Europe.  The  profitability  of  international   sales  has  been  substantially
equivalent  to that of domestic  sales.  M-tron is unable to predict what effect
the East Asian financial crisis will continue to have on its business.  However,
because  sales are  ordinarily  spread over a number of customers in a number of
developed countries with no individually  significant shipments,  the Registrant
believes that risks commonly  associated  with doing  business in  international
countries are minimized.

     Backlog.  M-tron  had  backlog  orders of  approximately  $3.6  million  at
December 31,  1998,  compared  with $5.2  million at December  31, 1997.  M-tron
includes  as backlog  those  orders  which are  subject to  specific  production
release  orders  under  written  contracts,   verbal  and  written  orders  from
distributors with which M-tron has had long-standing  relationships,  as well as
written purchase orders from sales representatives.  M-tron believes that all of
the backlog at

                                      -26-

<PAGE>



December 31, 1998, will be shipped during 1999.

     Raw Material. To the extent possible,  M-tron's raw materials are purchased
from multiple sources.  Of primary  significance are quartz crystal bars and the
bases used for mounting certain finished crystals. M-tron currently has at least
two qualified vendors for each of these items. No shortages have occurred in the
recent past nor are any anticipated in the near future.

     See the "harvesting" initiative at page 3 as to M-tron.


IV.   OTHER INFORMATION
-----------------------

     While  the  Registrant   holds  licenses  and  patents  of  various  types,
Registrant does not believe they are critical to its overall operations,  except
for  (1)  the  television-broadcasting   license  of  WHBF-TV  and  WOI-TV;  (2)
Registrant's   telephone   subsidiaries   franchise   certificates   to  provide
local-exchange  telephone  service within its service  areas;  (3) Western's FCC
licenses to operate  point-to-point  microwave  systems;  (4)  licenses  held by
partnerships and corporations in which Western and  Inter-Community own minority
interests to operate  cellular  radio systems  covering  areas in New Mexico and
North Dakota,  (5) CLR Video's  franchises to provide cable  television  service
within its service areas and (6) personal  communications services licenses held
by companies in which Lynch  subsidiaries have  investments,  as well as the Las
Cruces, New Mexico PCS License held by Registrant.

     The Registrant conducts product development activities with respect to each
of its major lines of  manufacturing  business.  Currently,  such activities are
directed   principally  toward  the  improvement  of  existing   products,   the
development of new products and/or diversification. The cost of such activities,
which have been funded  entirely by the  Registrant,  amounted to  approximately
$1,106,000 in 1998, $1,022,000 in 1997 and $1,627,000 in 1996.

     The capital  expenditures,  earnings and competitive position of Registrant
have not been materially affected by compliance with current federal, state, and
local  laws and  regulations  relating  to the  protection  of the  environment;
however,  Registrant  cannot predict the effect of future laws and  regulations.
The  Registrant  has not  experienced  difficulties  relative  to fuel or energy
shortages  but  substantial  increases  in fuel  costs or fuel  shortages  could
adversely affect the operations of Morgan. See also "Environmental  Regulations"
under III  Manufacturing - A. Spinnaker  Industries,  Inc. for more  information
with respect to Spinnaker.

     See Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations for a discussion of Year 2000 matters.

     No portion of the  business of the  Registrant  is  regarded  as  seasonal,
except that, in the case of Morgan,  fewer  shipments  are scheduled  during the
winter  months in those  parts of the country  where  weather  conditions  limit
highway use.

         There were no customers in 1998 or 1997 that  represents 10% or more of
consolidated  revenues.  The Registrant does not believe that it is dependent on
any single customer.

     Excluding the following for The Morgan  Group,  Inc.:  approximately  1,530

                                      -27-

<PAGE>



independent  owner-operators and 1,420 other drivers, the Registrant had a total
of 1,966 employees at December 31, 1998, compared to 1,881 employees at December
31, 1997.

     Additional  information with respect to each of the  Registrant's  lines of
business  is  included  in  Note  16 to the  Consolidated  Financial  Statements
included as Item 14(a) below.

     For  additional  information  on  The  Morgan  Group,  Inc.  and  Spinnaker
Industries,  Inc.  reference  is made the their Form 10-K's and other  documents
filed with the Securities and Exchange Commission.

V.   EXECUTIVE OFFICERS OF THE REGISTRANT
-----------------------------------------

     Pursuant to General  Instruction G (3) of Form 10-K,  the following list of
executive officers of the Registrant is included in Part 1 of this Annual Report
on Form  10-K in lieu of being  included  in the  Proxy  Statement  for the 1999
Annual Meeting of  Shareholders.  Such list sets forth the names and ages of all
executive  officers of Registrant  indicating all positions and offices with the
Registrant held by each such person and each such person's principal occupations
or employment during the past five years.

                          Offices and
      Name               Positions Held                            Age
      ----               --------------                            ---
                                                        
Mario J. Gabelli                                                   56 

          Chairman and Chief  Executive  Officer (since May 1986);  Chairman and
          Chief  Executive  Officer  (since March 1980) of Gabelli Funds Inc., a
          private  company  which makes  investments  for its own  account;  and
          Chairman and Chief Executive  Officer of Gabelli Asset Management Inc.
          (since 1999), a NYSE listed holding company for  subsidiaries  engaged
          in various aspects of the securities business. 

Robert E. Dolan                                                    47
 
          Chief Financial  Officer (since  February 1992) and Controller  (since
          May 1990). 

Robert  A.  Hurwich                                                57

          Vice  President-Administration,  Secretary  & General  Counsel  (since
          February 1994). 


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

ITEM 2. PROPERTIES
------------------

         Lynch leases space containing approximately 5,000 square feet for its

                                      -28-

<PAGE>



executive offices in Rye, New York.

     LS's operations are housed in two adjacent buildings situated on 3.19 acres
of land in  Bainbridge,  Georgia.  In January 1997, LS completed an expansion of
its manufacturing capacity at this site, which added approximately 15,000 square
feet, bringing total  manufacturing  space to approximately  73,000 square feet.
Finished  office area in the two buildings  totals  approximately  17,000 square
feet. All such properties are subject to security deeds relating to loans.

     M-tron's operations are housed in two separate facilities in Yankton, South
Dakota.  These  facilities  contain  approximately  34,000  square  feet  in the
aggregate.  One facility owned by M-tron  contains  approximately  18,000 square
feet and is situated on 5.34 acres of land.  This land and  building are subject
to a mortgage  executed in support of a bank loan.  The other  Yankton  facility
containing  approximately  16,000 square feet is leased,  which lease expires on
September 30, 2000, with options to extend the lease to 2006.

     Spinnaker's  corporate  headquarters is located in Dallas,  Texas, where it
shares office space with an affiliate of its principal executive officers.

     Spinnaker  Coating owns two manufacturing  facilities,  Plant One and Plant
Two,  in Troy,  Ohio.  Plant One is a 200,000  square  foot  complex  located on
approximately  five acres of land adjacent to the Miami River and Plant Two is a
98,000 square foot facility located on  approximately  five aces of land nearby.
There are  approximately  five  undeveloped  acres of land adjacent to Plant Two
that  are  available  for  expansion.   Both  facilities  house   manufacturing,
administrative and shipping operations.

     Central  Products  owns  two  manufacturing  facilities,  one  in  Menasha,
Wisconsin and the other in Brighton,  Colorado.  The Menasha  facility  contains
approximately   160,000   square  feet  and  the  Brighton   facility   contains
approximately   210,000  square  feet.  The  corporate  office  and  center  for
administrative services are located in a 20,000 square foot facility adjacent to
the Menasha  plant.  Central  Products  also  maintain  two leased  distribution
centers in Neenah,  WI (90,000  square  feet),  and Denver,  CO (100,000  square
feet).

     In  connection  with  Spinnaker's  acquisition  of the  Pressure  Sensitive
Business of S.D.  Warren in March 1998, the parties entered into the Site Lease,
which provides for Warren's lease of a portion of its Westbrook,  Maine facility
to Spinnaker. Such lease is for a term of 99 years, provides for nominal rent of
$1.00 per year,  with an option to purchase  for $1.00.  The  facility  contains
approximately  151,000 square feet. Spinnaker Coating also leases a 5,000 square
foot  facility  (expiring  October 31, 1999) and a 15,000  square foot  facility
(expiring April, 2004) at Westbrook.

     Spinnaker  Electrical  leases a 182,000 square foot facility in Carbondale,
Illinois.  The plant is  located  on 15 acres of a 55 acre site and  leases  for
$1.00 per year, per acre, until 2092 with a 99 year extension option.

     Entoleter owns a manufacturing  plant containing 72,000 square feet located
on approximately 5 acres of land in Hamden,  Connecticut.  The land and building
are subject to a mortgage and security  agreement  executed in support of a bank
loan.  Entoleter also owns  approximately 6 unimproved  acres located in Hamden,
Connecticut adjacent to its property.

     During 1998 and 1997, Registrant's manufacturing facilities (except for LS)

                                      -29-

<PAGE>



operated in the aggregate at a relatively high level of capacity utilization.

     Morgan owns  approximately  24 acres of land with  improvements in Elkhart,
Indiana.  The improvements  include a 23,000 square foot office building used as
Morgan's  principal  office,  a 7,000  square  foot leased  building  containing
additional  offices,  a 9,000 square foot building used for Morgan's  safety and
driver  service  departments  and also for  storage  and an  8,000  square  foot
building used for driver training and commercial driver  licensing,  testing and
certification.  Most of Morgan's  105 offices are  situated on leased  property.
Morgan also owns and leases  property  for parking and storage of  equipment  at
various  locations  throughout  the  United  States,  usually  in  proximity  to
manufacturers  of products moved by Morgan.  The property leases have lease term
commitments of a minimum of thirty days and a maximum of three years, at monthly
rental ranging from $25 to $6,500.  The Elkhart facility is currently  mortgaged
to one of Morgan's  lenders.  In total,  Morgan owns 69 acres of land throughout
the United States, including the Elkhart facilities.

     Western New Mexico Telephone Company owns a total of 16.9 acres at fourteen
sites located in southwestern New Mexico. Its principal operating facilities are
located in Silver  City,  where  Western  owns a building  comprising a total of
6,480  square feet  housing  its  administrative  offices  and  certain  storage
facilities.  In Cliff, Western owns five buildings with a total of 14,055 square
feet in which are located additional offices and storage facilities as well as a
vehicle  shop, a wood shop,  and central  office  switching  equipment.  Smaller
facilities,  used mainly for storage and for housing  central  office  switching
equipment, with a total of 8,384 square feet, are located in Lordsburg, Reserve,
Magdalena and five other localities.  In addition,  Western leases 1.28 acres on
which it has constructed four microwave  towers and a 120 square-foot  equipment
building.  Western has the use of 38 other sites under  permits or  easements at
which it has installed various equipment either in small company-owned buildings
(totaling 2,403 square feet) or under protective cover.  Western also owns 3,317
miles of  copper  cable  and 421  miles of fiber  optic  cable  running  through
rights-of-way   within  its  15,000  square-mile  service  area.  All  Western's
properties  described  herein are encumbered  under  mortgages held by the Rural
Utilities Service ("RUS").

     Inter-Community  Telephone  Company owns 12 acres of land at 10 sites.  Its
main office at Nome, ND, contains 4,326 square feet of office and storage space.
In  addition,  it has 4,400  square feet of garage  space and 5,035  square feet
utilized for its switching facilities. Inter-Community has 1,756 miles of copper
cable and 202 miles of fiber optic cable.  All of  Inter-Community's  properties
described  herein are encumbered  under  mortgages held by the National Bank for
Co-Operatives ("Co-Bank").

     Cuba City  Telephone  Company  is  located  in a 3,800  square  foot  brick
building on 0.4 of an acre of land. The building  serves as the central  office,
commercial office, and garage for vehicle and material storage. The company also
owns a cement block  storage  building of 800 square feet on 0.1 of an acre.  In
Madison,  Wisconsin,  Cuba  City  leases  900  square  feet  for  administrative
headquarters and financial functions.  Belmont Telephone Company is located in a
cement  block  building  of 800  square  feet on .5  acre  of  land in  Belmont,
Wisconsin.  The building  houses the central office  equipment for Belmont.  The
companies  own a  combined  total of 221 miles of  copper  cable and 28 miles of
fiber optic cable.  All of Cuba City's and Belmont's  property  described herein
are  encumbered  under  mortgages  held  by the RUS and  Rural  Telephone  Bank,
respectively.

                                      -30-

<PAGE>

     J.B.N.  Telephone  Company  owns a total  of  approximately  2.25  acres at
fifteen sites located in northeast  Kansas.  Its  administrative  and commercial
office consisting of 2,820 square feet along with a 1,600 square feet garage and
warehouse  facility are located in Wetmore,  Kansas.  In addition,  J.B.N.  owns
thirteen smaller facilities housing central office switching  equipment and over
1,186 miles of copper cable and 186 miles of fiber optic cable.  All  properties
described herein are encumbered under mortgages held by the RUS.

     Haviland  Telephone  Company owns a total of approximately  3.9 acres at 20
sites located in south central Kansas.  Its administrative and commercial office
consisting  of 4,450  square feet is located in Haviland,  Kansas.  In addition,
Haviland  owns 19 smaller  facilities  housing  garage,  warehouse,  and central
office switching  equipment and over 1,316 miles of copper cable and 61 miles of
fiber optic  cable.  All  properties  described  herein are  encumbered  under a
mortgage held by the RUS.

     Dunkirk & Fredonia  Telephone  Company  (including its  subsidiaries) own a
total of  approximately  16.4 acres at 5 sites located in western New York.  Its
host central office switching  equipment,  administrative and commercial offices
consisting of 18,297 square feet is located in Fredonia,  New York. In addition,
Dunkirk & Fredonia owns 4 other smaller facilities housing garage, warehouse and
central  office  switching  equipment  and over 341 miles of copper cable and 30
miles of fiber optic cable. All properties described herein are encumbered under
a mortgage held by RUS.

     Upper Peninsula Telephone Company owns a total of approximately 25 acres at
19 sites  located  principally  in the Upper  Peninsula  of  Michigan.  Its host
central  office  switching  equipment,  administrative  and  commercial  offices
consisting  of 11,200 square feet is located in Carney,  Michigan.  In addition,
Upper Peninsula owns 25 other smaller facilities  housing garage,  warehouse and
central office  switching  equipment and over 2,098 miles of copper cable and 93
miles of fiber optic cable. All properties described herein are encumbered under
mortgages held by the RUS and Co-Bank.

     CLR Video has its headquarters in leased space in Wetmore,  Kansas. It also
owns one small parcel of land and leases 22 small  sites,  which it uses for its
cable receiving and transmission equipment.  All properties described herein are
encumbered under a mortgage to Co-Bank.

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

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

       Registrant  is a party to  certain  lawsuits  in the  ordinary  course of
business.


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

       Not applicable.



                                      -31-

<PAGE>



                                     PART II
                                     -------


ITEM 5.   MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
---------------------------------------------------------------
          STOCKHOLDER MATTERS
          -------------------

     The  Common  Stock of Lynch  Corporation  is traded on the  American  Stock
Exchange under the symbol "LGL." The market price high and lows in  consolidated
trading of the Common Stock during the past two years is as follows:

<TABLE>
<CAPTION>
                                              Three Months Ended 
                                              -------------------
                   1998         March 31         June 30     Sept 30         Dec 31
-----------------------         --------         ---         -------         ---

<S>                             <C>               <C>         <C> <C>        <C>
High ..................         109               113         100 1/2        82
Low ...................          77 1/4            88          76            69 1/2

                   1997         March 31         June 30     Sept 30         Dec 31
-----------------------         --------         ---         -------         ---

High ..................         109 3/4           98          100               95
Low ...................          69 1/2           83 1/2       87 1/2           77
</TABLE>


         At March 15, 1999, the Company had 923 shareholders of record.


ITEM 6. SELECTED FINANCIAL DATA
-------------------------------

<TABLE>
<CAPTION>
                                                       Year Ended December 31 (a)
                                      1998         1997         1996         1995         1994
                                    ---------    ---------    ---------    ---------    ---------

<S>                                 <C>          <C>          <C>          <C>          <C>      
Revenues (a) ....................   $ 514,526    $ 467,536    $ 451,880    $ 333,627    $ 183,241
                                    ---------    ---------    ---------    ---------    ---------
Operating Profit (b) ............      24,020       24,787       16,940       19,847       10,942
Net Financing Activities ........     (25,341)     (21,259)     (14,689)      (7,376)      (4,333)
Reserve for Impairment, of
 Investment in PCS License ......        --         (7,024)        --           --           --

Gain on Sale of Subsidiary Stock
and Other Operating Assets ......       4,778          169        5,146           59          190
                                    ---------    ---------    ---------    ---------    ---------
Income (Loss) from Continuing
 Operations Before Income Taxes,
 Minority Interests, Discontinued
 Operations and Extraordinary
 Item ...........................       3,457       (3,327)       7,397       12,530        6,799
(Provision) Benefit for Income
  Taxes .........................      (1,412)         713       (3,021)      (4,906)      (2,726)
Minority Interests ..............       1,312         (264)         418       (2,155)      (1,372)
                                    ---------    ---------    ---------    ---------    ---------
Income from Continuing Operations
 Before Discontinued Operations,
 and Extraordinary Items ........       3,357       (2,878)       4,794        5,469        2,701



Discontinued Operations (c) .....        --           --           (750)        (324)        (109)
Extraordinary Items (d) .........        --           --         (1,348)        --           (264)
                                    ---------    ---------    ---------    ---------    ---------
Net Income (Loss) ...............   $   3,357    ($  2,878)   $   2,696    $   5,145    $   2,328
                                    =========    =========    =========    =========    =========

Per Common Share (e)

                                                       -32-

<PAGE>

 Income (Loss) from Continuing
 Operations Before Discontinued
 Operations and Extraordinary
 Items:
   Basic ......................   $      2.37         (2.03)          3.45          3.96       2.03
   Diluted ....................   $      2.37         (2.03)          3.41          3.89       1.95
 Net Income (Loss):
   Basic ......................   $      2.37         (2.03)          1.94          3.73       1.75
   Diluted ....................   $      2.37         (2.03)          1.92          3.66       1.72
Cash, Securities and Short-Term
 Investments ..................   $    29,120   $    34,542    $    36,102   $    27,353   $ 31,521


Total Assets ..................       480,000       423,638        392,620       302,439    185,910
Long-Term Debt ................       246,000       242,776        219,579       138,029     62,745
Shareholders' Equity(f) .......   $    39,793   $    36,451    $    38,923   $    35,512   $ 30,531
</TABLE>

Notes:
(a)      Includes results of Station WOI-TV from March 1, 1994, the Brown Bridge
         Division (name changed to Spinnaker Coating in 1998) from September 19,
         1994,  Haviland  Telephone  Company from  September  26, 1994,  Central
         Products Company from October 4, 1995,  Dunkirk and Fredonia  Telephone
         Company from November  26,1996,  Transit Homes of America from December
         30, 1996, Upper Peninsula  Telephone  Company from March 18, 1997, S.D.
         Warren (name changed to Spinnaker  Coating-Maine,  Inc.) from March 17,
         1998, and tesa tape, inc. from July 31, 1998.
(b)      Operating Profit is sales and revenues less operating  expenses,  which
         excludes  investment income,  interest expense,  share of operations of
         affiliated companies, minority interests and taxes.
(c)      Discontinued operations of Lynch Tri-Can International.
(d)      Loss  on  repurchase   or   redemption  of  Company's  8%   convertible
         subordinated  debentures  in 1994 and early  extinguishment  of debt at
         Spinnaker in 1996.
(e)      Based on  weighted  average  number  of  common  shares  outstanding  -
         restated to conform to SFAS #128 in 1996 and prior years.
(f)      No cash dividends have been declared over the period. In 1997, for each
         share of Lynch Common  Stock,  our  shareholders  received one share of
         East/West  Communications,  Inc., an F-Block PCS licensee with licenses
         covering a population of 20 million. These shares have a net book value
         to Lynch of $0.12 per share.


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

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

YEAR 1998 COMPARED TO 1997
--------------------------

     Revenues increased to $514.5 million in 1998 from $467.5 million in 1997, a
10% increase.  Acquisitions made during 1998 by Spinnaker Industries,  Inc. were
the most significant  contributors to this increase.  In the multimedia segment,
revenues increased by $6.7 million, or 14% from the previous year, partially due
to the  acquisition of Upper  Peninsula  Telephone  Company in which control was
acquired  on March 18,  1997,  the  remainder  primarily  coming  from growth in
regulated and deregulated revenues. In addition, 1998 results include management
service  income  of  $1.0  million  related  to  compensation  for  bidding  and
administrative  services provided in certain PCS auctions.  At The Morgan Group,
Inc.,  revenues  increased by $4.3  million,  or 3% due to gains in  Specialized
Transport. In the manufacturing segment, revenues increased by $36.0 million, or
13%. On March 17,  1998,  Spinnaker  acquired  the  adhesive-backed  label stock
division of S.D. Warren. This operation contributed $47.0 million to Spinnaker's
revenue increase.  On July 31, 1998, Spinnaker acquired tesa tape, inc. pressure
-sensitive   electrical  tape  line  and  manufacturing   plant.  This  purchase
contributed  $4.2  million  to  Spinnaker's  revenue  increase.   The  remaining
Spinnaker  operations,  Central  Products and  Spinnaker  Coating,  Inc.  (Ohio)
reported small revenue decreases during 1998 as a result of higher unit volume,

                                      -33-

<PAGE>



but at overall lower prices.  Lynch Systems'  revenues  decreased by $13 million
from 1997 to 1998 due to lack of order  activity  for CRT glass press  machines.
During 1998 and early 1999, Lynch Systems added several new consumer glass press
machines to its product offerings and expects to be less dependent on orders for
CRT glass press machines in the future.

     Earnings before interest,  taxes,  depreciation  and amortization  (EBITDA)
increased to $49.5  million in 1998 from $45.8  million in 1997, a $3.7 million,
or an 8% increase.  EBITDA for the  telecommunications  segment,  which for 1998
represented 58% of EBITDA, increased by $4.8 million, or 20%, from 1997 to 1998.
$1.4 million of this  increase  was due to the  acquisition  of Upper  Peninsula
Telephone  Company.  The  remaining  increase was due to growth in regulated and
deregulated operations.  EBITDA at The Morgan Group, Inc. which represents 7% of
EBITDA increased by $1.1 million, or 55% from 1997's EBITDA primarily due to the
absence of special  charges in 1998,  special charges were $0.6 million in 1997.
EBITDA for the  manufacturing  group,  which  represents  38% of EBITDA in 1998,
decreased by $2.3 million due to decreases in EBITDA at Spinnaker Coating,  Inc.
(Ohio),  Central  Products  Company  and Lynch  Systems,  Inc.,  which  were not
entirely  offset by the additional  EBITDA as a result of the acquisition of the
adhesive-backed  division of S.D.  Warren,  which  contributed  $5.6  million in
EBITDA in 1998. Of note, the acquisition of the electrical tape division of tesa
tape, inc. was essentially flat from an EBITDA perspective in 1998. Lower prices
plus higher  manufacturing  cost  associated  with  increased  volume caused the
reduced  EBITDA at  Spinnaker  Coating  and  Central  Products.  Lynch  Systems'
negative  EBITDA  variance of $3.4 million was due to  significant  decreases in
orders.

     Operating  profits for 1998 were $24.0 million,  down from $24.8 million in
1997. The  telecommunications  segment's operating profits grew $3.9 million due
to the  inclusion  of Upper  Peninsula  Telephone  Company for the full year and
revenue  growth.  Operating  profits in the services  segment  increased by $1.0
million, or 98%, due to the absence of special charges. Operating profits in the
manufacturing  sector  fell by  $5.8  million  due to the  $2.3  million  EBITDA
decline,  depreciation and amortization associated with the S.D. Warren and tesa
tape acquisitions of $1.7 million and $0.3 million,  respectively, and increased
depreciation  from capital  expenditures  at Central  Products  made in previous
years.

     Effective   September  30,  1998,  the  Company   amended  its  SAR  (stock
appreciation  rights)  Program so that the SARs become  exercisable  only in the
event the price for the Company's  shares double from the SAR grant price within
five years  from the  original  issuance.  The grant  prices of the 42,700  SARs
currently  outstanding  range from $63.03 to $84.63.  On December 31, 1998,  the
closing  price of the Company's  common shares in trading on the American  Stock
Exchange was $70.50.  This amendment  eliminated the recording of the profit and
loss effect from changes in the market price in the Company's common stock until
it is probable that the SARs will become  exercisable.  During 1997, the Company
recorded  $0.4  million SAR expense and in 1998,  prior to the  amendment of the
program, $0.2 million in SAR income.

     Investment income was approximately $2.0 million both in 1998 and 1997.
         
     Interest  expense  increased by $4.2 million in 1998 when compared to 1997.
The  increase is due  primarily  to the effect of  financing  the two  Spinnaker
acquisitions.

     On July 31, 1998, Spinnaker Industries, Inc. completed the acquisition of

                                      -34-

<PAGE>



the electrical  tape division of tesa tape, inc. A portion of the purchase price
was satisfied by the issuance of 200,000 shares, subject to certain adjustments,
of Spinnaker's  Class A common stock. As a result of this issuance,  the Company
recorded a gain on sale of  subsidiary  stock of $2.1  million,  or $1.2 million
($0.87 per share) after tax.

     As of  December  9,  1998,  WNM  Communications,  Inc.  a  Lynch  Telephone
Corporation  subsidiary,  sold the  assets  of its  direct  broadcast  satellite
business serving  portions of New Mexico for  approximately  $3.1 million.  As a
result  of the  transaction,  a  pre-tax  gain  on the  sale  of the  assets  of
approximately  $2.7 million was  recognized  and  classified  as gain on sale of
subsidiary  stock and other operating  assets in the  consolidated  statement of
operations.

     In 1997,  Lynch recorded a write-off of 30% of the investment in, loans to,
and deferred costs  associated with its  subsidiary's  49.9% equity ownership in
Fortunet  Communications,  L.P.  ("Fortunet"),  a partnership formed to acquire,
construct  and operate  licenses for the  provision  of personal  communications
services in the so-called C-Block.  Such write-off amounted to $7.0 million,  or
$4.6  million  after tax  benefit  (see  discussion  below).  No such  write-off
occurred  in 1998.  Lynch will  continue to evaluate  the  realizability  of its
investment  in  Fortunet  and  anticipates  that the  final  results  of the FCC
reauction  of  PCS  licenses  which  began  on  March  23,  1999,  could  have a
significant impact on this evaluation.

     The 1998 tax provision of $1.4 million,  includes federal,  state and local
taxes and  represents  an effective  rate of 40.8% versus  21.4%  effective  tax
benefit rate in 1997. The difference in the effective  rates is primarily due to
the effects of the amortization of goodwill and losses of subsidiaries.

     During  1998,  minority  interest  was income of $1.3  million  versus $0.3
million  expense in 1997. The variance was primarily  associated with additional
losses  recorded by Spinnaker  (61% owned  subsidiary by the Company at December
31, 1998) during 1998.

YEAR 1997 COMPARED TO 1996
--------------------------

     Revenues increased to $467.5 million in 1997 from $451.9 million in 1996, a
4% increase. Acquisitions made during late 1996 and early 1997 in the multimedia
and service segments were the most significant contributors to this increase. In
the  multimedia  segment,  revenues  increased by $19.3 million to $47.9 million
from $28.6 million in the previous year. Dunkirk and Fredonia Telephone Company,
which was acquired on November 26, 1996,  contributed  $10.3 million compared to
$0.9 million in 1996. Upper Peninsula  Telephone  Company,  control of which was
acquired on March 18, 1997,  contributed $7.2 million to this segment's  revenue
increase. In the services segment,  revenues of $21.2 million resulting from the
acquisition  of Transit Homes of America,  Inc. on December 31, 1996,  offset by
lower "Truckaway" revenues,  was the primary contributor to the revenue increase
at The Morgan Group, Inc. In the manufacturing  segment,  revenues  decreased by
$17.6 million reflecting order short-fall at Lynch Systems, Inc. (formerly Lynch
Machinery,  Inc) of $7.4  million;  revenue  short-fall  at all  three  units of
Spinnaker of $14.5 million;  and partially offset by improved revenues at M-tron
of $4.4 million.

     Earnings before interest,  taxes,  depreciation  and amortization  (EBITDA)

                                      -35-

<PAGE>



increased to $45.8 million in 1997 from $33.9 million in 1996, an $11.9 million,
or a 35% increase.  Operating segment EBITDA (prior to corporate management fees
and expenses)  grew to $47.4  million from $36.3  million,  a 31% increase.  The
manufacturing segment represented 46% of EBITDA, or $21.2 million, a decrease of
$1.6 million versus 1996. While all of the other components of the manufacturing
segment  had  increases,  they were more  than  offset by lower  EBITDA at Lynch
Systems of $3.2 million when  compared to 1996 results due to lower sales volume
of the  extra-large  glass  presses.  The  services  segment  had EBITDA of $2.1
million versus  negative EBITDA of ($1.8) million in 1996  predominately  due to
special  charges  recorded at Morgan of $3.5 million in 1996 and $0.6 million in
1997. The multimedia segment contributed $24.1 million, or 52.7% of total EBITDA
versus  $15.3  million in 1996 due the effects of the  acquisition  of Dunkirk &
Fredonia Telephone Company and Upper Peninsula Telephone Company.

     Operating profits for 1997 were $24.8 million, an increase of $7.8 million,
or 46.3%,  versus 1996.  Operating  profits in the services segment increased by
$4.3 million due to the same factors impacting EBITDA. There were also increases
in the multimedia and corporate  segments  operating profits of $5.2 million and
$0.9 million offset by a decline in the manufacturing segment of $2.5 million.

     Investment  income decreased by $0.2 million to $2.0 million in 1997 versus
1996. The decrease was related to lower dollar  investments  generating  current
income.

     Interest  expense  increased by $6.5 million in 1997 when compared to 1996.
The  increase  is due  primarily  to the  full  year  effect  of  financing  the
acquisitions of Dunkirk and Fredonia Telephone Company, the acquisition of Upper
Peninsula  Telephone  Company and the Subordinated  Notes issued by Spinnaker in
October 1996.

     In 1997,  Lynch  provided a reserve of 30% of the  investment in, loans to,
and deferred costs  associated with its  subsidiary's  49.9% equity ownership in
Fortunet  Communications,  L.P.  ("Fortunet"),  a partnership formed to acquire,
construct  and operate  licenses for the  provision  of personal  communications
services ("PCS") in the so-called  C-Block Auction.  Such write-off  amounted to
$7.0 million, or $4.6 million after tax benefit.

     In May 1996,  the FCC  concluded the C Block  Auction for  30-megahertz  of
broadband  spectrum  across  the  United  States to be used for PCS.  PCS is the
second generation of low-cost digital wireless service utilized for voice, video
and data devices.  In the C-Block  Auction,  certain  qualified small businesses
were  afforded  bidding  credits  as  well as  access  to  long-term  government
financing for a substantial portion of the cost of the licenses acquired.

     As a result of this  auction,  Fortunet  acquired  31 licenses in 17 states
covering a population  ("POP") of 7.0 million.  The total cost of these licenses
was $216  million,  or $30.76 per POP,  after the 25% bidding  credit.  The U.S.
Government lent licensees 90% of the net cost of the licenses. Events during and
subsequent to the auction,  as well as other externally driven  technologies and
market forces,  have made financing of the Government  installment  debt and the
development  of these licenses  through the capital  markets much more difficult
than previously anticipated.

     Fortunet,  as well as many of the license  holders from this  auction,  has
petitioned the FCC for relief in terms of (1) resetting the interest rate to the
appropriate rate at the time; (2) further reducing or delaying the required debt

                                      -36-

<PAGE>



payments in order to afford better access to capital  markets;  and (3) relaxing
the restrictions with regard to ownership structure and alternative arrangements
in order to afford these small businesses the opportunity to more  realistically
restructure  and build-out  their  systems.  The response from the FCC which was
announced on September 26, 1997, and modified on March 26,1998, afforded license
holders a choice of four  options,  one of which was the  resumption  of current
debt payments which had been suspended  earlier this year. The  ramifications of
choosing the other three  courses of action could result in Fortunet  ultimately
forfeiting either 30%, 50%, or 100% of its current investment in these licenses.

     On July 8, 1998, Fortunet returned 28 of the 31 licenses it was awarded and
returned  half  of  the  spectrum  of the  remaining  three  licenses.  Fortunet
currently  is the  licensee  for 15 MHZ of  spectrum in three  Florida  markets:
Tallahassee,  Panama City,  and Ocala covering  approximately  785,000 POPs at a
cost of $20.09 per 15 MHZ POP (equal to $40.18 per 30 MHZ POP). It used the down
payment from the licenses returned,  after deducting the 30% forfeited, to repay
all remaining  Government  debt. No further  write-offs  have been recorded as a
result of this restructure.

     The 1997 tax benefit of $0.7  million,  includes  federal,  state and local
taxes and represents an effective  rate of 21.4% versus the 40.8%  effective tax
rate in 1996.  The  difference  in the  effective  rates is primarily due to the
effects of state income taxes and the amortization of goodwill.

FINANCIAL CONDITION
-------------------

     As of December 31, 1998,  the Company had current  assets of $162.6 million
and current  liabilities of $143.8 million.  Working capital was therefore $18.8
million as compared to $60.5  million at December  31,  1997.  The  decrease was
primarily due to the two  acquisitions  at Spinnaker  which were financed,  to a
large  extent,  through the use of  Spinnaker's  working  capital line of credit
which expires 2001 but is classified as a short term facility.

     Capital  expenditures were $19.8 million in 1998 and $21.8 million in 1997.
Overall 1999 capital  expenditures are expected to be approximately $5.0 million
above the 1998 level due to additional  expenditures  for the  Company's  Kansas
Telephone operation.

     At  December  31,  1998,  total  debt was $318.4  million,  which was $37.3
million more than the $281.1  million at the end of 1997,  primarily  due to the
two acquisitions at Spinnaker during 1998. Debt at year end 1998 included $234.8
million of fixed  interest  rate debt,  at an average  interest rate of 9.0% and
$83.6  million of variable  interest  rate debt at an average  interest  rate of
8.0%.  Additionally,  the Company had $26.1 million in unused lines of credit at
December 31, 1998, of which $8.2 million was  attributed to Spinnaker,  and $8.7
million of which was attributable to Morgan. As of December 31, 1998, the Parent
Company  borrowed $15.2 million under two short-term  line of credit  facilities
with maximum  availability  totaling $20.0 million.  These  short-term  lines of
credit  expire on June 30, 1999 ($10.0  million)  and  December  29, 1999 ($10.0
million).  Management  anticipates  that these  lines will be renewed  when they
expire but there is no assurance that they will be.

     Backlog in the  manufactured  products segment at December 31, 1998 was $12
million  versus  $30.9  million at the end of 1997.  Included  in the backlog at
December 31, 1997 was a $16 million  glass press order at Lynch  Systems from an
international customer. The customer subsequently canceled this order. The

                                      -37-

<PAGE>



purchase order  associated  with this order  contained a cancellation  provision
pursuant to which the customer paid Lynch Systems $2.4 million which can be used
by the customer as a discount for future orders.  Aside from the cancellation at
Lynch Systems referred to above, backlog decreased by $2.7 million primarily due
to a decrease in orders at M-tron.

     Since 1987,  the Board of Directors of Lynch has  authorized the repurchase
of 300,000 common shares. At December 31, 1998, Lynch's remaining  authorization
is to repurchase an additional 69,000 shares of common stock. No shares of stock
have been purchased since April 1993.

     On February 22, 1999, The Morgan Group,  Inc.  filed a Schedule 13E4,  that
invites its shareholders to tender up to 100,000 shares of Class A common stock,
to Morgan at prices not less than $8.50 nor greater  than $10.00 per share.  The
tender offer expired March 19, 1999,  whereby Morgan purchased 103,000 shares at
$9 per share.  Lynch has  decided  not to tender any shares in  response to this
offer.

     The Board of Directors  has adopted a policy not to pay cash  dividends and
such policy is reviewed  annually.  This policy takes into account the long term
growth   objectives  of  the  Company,   especially  its  acquisition   program,
shareholders'  desire for capital appreciation of their holdings and the current
tax law disincentives for corporate dividend distributions. Accordingly, no cash
dividends have been paid since January 30, 1989 and none are expected to be paid
in 1999.

     Lynch  Corporation  maintains an active  acquisition  program and generally
finances each acquisition with a significant component of debt. This acquisition
debt contains  restrictions on the amount of readily available funds that can be
transferred  to the  Parent  Company  from its  subsidiaries.  As the  result of
acquisitions, Lynch consolidated, Spinnaker and certain acquisition subsidiaries
have relatively high debt to equity ratios. For Lynch  consolidated,  total debt
to shareholder equity was 8 to 1, and for Spinnaker,  consolidated total debt to
shareholder equity was 22 to 1.

     The Company has been pursuing  segmentation  of its  businesses,  through a
"spin-off" of its multimedia and services  operations.  A spin-off could improve
management focus, facilitate and enhance financings and set the stage for future
growth,  including acquisitions.  A split could also help surface the underlying
values of the company as the  different  business  segments  appeal to differing
"value" and "growth" cultures in the investment community. There are a number of
matters  to  be  examined  in   connection   with  a  spin-off,   including  tax
consequences, and there is no assurance that such a spin-off will be effected.

     The Company has a significant  need for resources to fund the operations of
the holding  company  and fund future  growth.  Lynch is  currently  considering
various  alternative  long  and  short-term  financing  arrangements.  One  such
alternative  could  be to  sell  a  portion  or all of  certain  investments  in
operating  entities either directly or through an exchangeable  debt instrument.
Additional   debt  and/or  equity   financing   vehicles  at  corporate   and/or
subsidiaries  are also  being  considered.  While  management  expects to obtain
adequate  financing  resources  to enable the  company to meet its  obligations,
there is no assurance that such can be readily obtained or at reasonable costs.

     The Company has recently  initiated  two programs  which may effect  future
operations and cash flow.

                                      -38-

<PAGE>



     a.   Cost Cutting - The Company is taking a three step  approach to cutting
          costs.  First is a review to eliminate  certain  centralized  overhead
          costs.  Second, a review of the Company's  overall  financial costs is
          being   undertaken  with  an  objective  of  achieving   savings  from
          refinancing and  restructuring  certain debt  instruments.  Third, the
          Company's  operating  entities  will take  advantage  of cost  savings
          opportunities without sacrificing quality of service.

     b.   Harvesting - The second program is a  concentrated  effort to monetize
          the Company's  assets,  including  selling a portion or all of certain
          investments  in  Company's  operating  entities.   These  may  include
          Company's minority interest in network affiliated  television stations
          and certain  telephone  operations  where  competitive  local exchange
          carrier   opportunities   are   not   readily   apparent.    Company's
          approximately 61% owned subsidiary, Spinnaker, has retained Schroder &
          Co., Inc. to seek strategic alternatives, including a possible sale of
          all or a  portion  of its  business,  merger or other  combination  of
          Spinnaker and/or its  subsidiaries.  There is no assurance that all or
          any part of this program can be effected on acceptable terms.

YEAR 2000
---------

     The Company has initiated a comprehensive review of its computer systems to
identify  the  systems  that could be  affected  by the "Year 2000" issue and is
developing and conducting an implementation  plan to resolve the issue. The Year
2000 problem is the result of computer  programs  being written using two digits
(rather than four) to define the applicable year. Any of the Company's  programs
or programs utilized by vendors to the Company that have time-sensitive software
may recognize a date using "00" as the year 1900 rather than the year 2000. This
could result in a major system  failure or  miscalculation.  The Company's  Year
2000  review is being  performed  primarily  by internal  staff,  and in certain
operations is supplemented  by outside  consultants.  The principal  Information
Technology  ("IT")  systems  that  may be  impacted  by the  Year  2000  for the
Company's  telecommunications  operations are central office switching,  billing
and  accounting.  The  principal IT systems for the Morgan Group are order entry
dispatch  and   accounting.   The   principal  IT  systems  for  the   Company's
manufacturing  companies are sales order entry,  shop floor  control,  inventory
control and  accounting.  The Year 2000 may also impact various non-IT  systems,
including among other things  security  systems,  HVAC,  elevator  systems,  and
communications  systems.  In addition,  each of the Company's  businesses may be
impacted by the Year 2000 readiness of third party vendors/suppliers.

     Due to the integral nature of switching  equipment and billing  software to
their  operations,  the  telecommunications  businesses are most effected by the
Year 2000 issue. The majority of the telephone  companies' switching and billing
software is Year 2000 compliant,  with the remaining expected to be compliant by
the third quarter of 1999. The  telecommunications  businesses rely on switching
equipment  and software  provided by third party  vendors.  It is the  Company's
understanding  that the vendors have completed  testing of the software and that
no additional  action by the Company will be required  after  installation.  The
telecommunications  businesses  periodically upgrade switching software in order
to remain current with respect to service features.  The upgrades provided other
enhanced  service features as well as included Year 2000 readiness and have been
capitalized. Other remediation costs, including internal costs have been charged
to expense as incurred. The total cost of Year 2000 remediation for the

                                      -39-

<PAGE>



telecommunications  businesses is estimated to be approximately $0.9 million, of
which approximately $0.4 million has been spent to date. The  telecommunications
businesses  have not  developed  a  contingency  plan and are in the  process of
determining the needs for such a plan.

     The Morgan  Group,  Inc.  is in the  process of  remediating  the Year 2000
issue,  primarily  through  the  replacement  of a  significant  portion  of its
operating  software.  Implementation  is expected to be  completed by July 1999,
with final  testing  completed  by September  1999.  The total cost of Year 2000
remediation   is  estimated  to  be   approximately   $0.4  million,   of  which
approximately $0.1 million has been spent to date. Costs specifically associated
with modifying internal use software are charged to expense as incurred. At this
time, The Morgan Group has not developed a comprehensive contingency plan.

     The  assessment  phase  for  the  Company's  manufacturing   businesses  is
approximately 80% complete. Based upon its identification and assessment efforts
to date,  the Company has  determined  that certain of its computer and software
used  in   manufacturing   and  accounting   systems   require   replacement  or
modification.  Such  replacements and modifications are ongoing and estimated to
be 60% complete.  The Company  expects the  assessment  phase to be completed by
June 1999,  with testing and  remediation  complete by September 1999. The total
cost of Year 2000 remediation for the  manufacturing  businesses is estimated to
be  approximately  $0.6 million,  of which  approximately  $0.1 million has been
spent to date. A comprehensive  contingency  plan has not been completed at this
time.

     The  estimated  costs and projected  dates of completion  for the Company's
Year 2000 program are based on  management's  estimates and were developed using
numerous  assumptions of future  events,  some of which are beyond the Company's
control.  The Company  presently  believes that with  modifications  to existing
software  and  converting  to new  software,  the Year 2000  issue will not pose
significant  operational  problems for the Company as a whole.  However, if such
modifications  and conversions are not completed timely or are ineffective,  the
Year 2000 issue may  materially  and adversely  impact the  Company's  financial
condition, results of operations and cash flows.

MARKET RISK
-----------

     The  Company is exposed to market  risk  relating to changes in the general
level of U.S.  interest  rates.  Changes in interest rates affect the amounts of
interest  earned on the Company's cash  equivalents  and short-term  investments
(approximately  $29.1  million at December  31,  1998).  The  Company  generally
finances the debt  portion of the  acquisition  of  long-term  assets with fixed
rate,  long-term debt. The Company generally  maintains the majority of its debt
as fixed rate in nature either by borrowing on a fixed  long-term basis or, on a
limited basis, entering into interest rate swap agreements. The Company does not
use  derivative  financial  instruments  for  trading or  speculative  purposes.
Management  does not foresee any  significant  changes in the strategies used to
manage  interest rate risk in the near future,  although the  strategies  may be
reevaluated as market conditions dictate.

     At December 31, 1998,  approximately $83.6 million, or 26% of the Company'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 1998  average  interest  rate under  these
borrowings, it is estimated that the Company's 1998 interest expense would have

                                      -40-

<PAGE>



changed by $0.8 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,  the analysis assumes no such actions.  Further,  the analysis does not
consider  the  effects of the change in the level of overall  economic  activity
that could exist in such an environment.


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

     The  information  required  by this Item 7A is  included  under the caption
"Market Risk" in  "Management's  Discussion and Analysis of Financial  Condition
and Results of Operations" in Item 7.

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

         See Item 14(a).


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

     On  August  25,  1997,  Registrant's  majority-owned  subsidiary  Spinnaker
Industries,  Inc.  ("Spinnaker")  dismissed  Deloitte & Touche LLP,  independent
accountants ("DT"), as the principal  accountant for Central Products Company, a
wholly owned  subsidiary  of Spinnaker  ("Central  Products"),  and expanded the
auditing  responsibility of Registrant's and Spinnaker's principal  accountants,
Ernst & Young LLP ("EY"), to include Central Products operations.  EY has served
as the Registrant's and Spinnaker's  principal  independent  accountant since at
least 1988. EY referred to DT's audits of Central Products' financial statements
as of December 31, 1996 and for the year ended December 31, 1996, in its reports
regarding its audits of the financial statements of Registrant and Spinnaker.

     Spinnaker's  Audit  Committee,  with the  knowledge of  Registrant's  Audit
Committee,  recommended the foregoing change in accountants to Spinnaker's Board
of Directors,  who approved such action on August 12, 1997. The Spinnaker  Audit
Committee's  recommendation  was based upon its desire to consolidate its annual
audit process under one independent accounting firm.

     The reports of DT on Central  Products'  financial  statements for the year
ended December 31, 1996,  have not contained an adverse  opinion or a disclaimer
of an opinion,  nor were they  qualified  or modified as to  uncertainty,  audit
scope,  or accounting  principles.  There were no  disagreements  with DT or any
matter of accounting principles or practices, financial statement disclosure, or
auditing  scope or  procedure  during the period and in the  subsequent  interim
periods,  which, if they had not been resolved to the  satisfaction of DT, would
have caused it to make reference to such  disagreement  in its report on Central
Products'  financial  statements.  Spinnaker  filed a Form 8-K dated  August 25,
1997, with respect to such change.


                                      -41-

<PAGE>



                                    PART III
                                    --------


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

     The  information  required  by this Item 10 is  included  under the caption
"Executive  Officers of the  Registrant" in Item 1 hereof and included under the
captions  "Election of Directors" and "Section 16(a)  Reporting" in Registrant's
Proxy  Statement  for  its  Annual  Meeting  of  Shareholders  for  1999,  which
information is incorporated herein by reference.

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

     The  information  required by this Item 11 is included  under the  captions
"Compensation of Directors," "Executive  Compensation,"  "Executive Compensation
and Benefits Committee Report on Executive Compensation" and "Performance Graph"
in Registrant's Proxy Statement for its Annual Meeting of Shareholders for 1999,
which information is incorporated herein by reference.  The Performance Graph in
the Proxy  Statement shows that  Registrant's  Common Stock  underperformed  the
American  Stock  Exchange  Market  Value  Index and a combined  peer group index
(telephone  communications,  except radio telephone operations;  converted paper
and  paperboard;  and  trucking  except  local) in 1998 and out  performed  said
indices through 1994, 1995, 1996, and 1997.

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

     The  information  required  by this Item 12 is  included  under the caption
"Security  Ownership  of  Certain  Beneficial  Owners  and  Management,"  in the
Registrant's  Proxy Statement for its Annual Meeting of  Shareholders  for 1999,
which information is included herein by reference.

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

     The  information  required  by this Item 13 is  included  under the caption
"Executive Compensation",  and "Transactions with Certain Affiliated Persons" in
the  Registrant's  Proxy  Statement for its Annual Meeting of  Shareholders  for
1998, which information is included herein by reference.


                                     PART IV
                                     -------

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
-------------------------------------------------------------------------

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

   (1)  Financial Statements:

     The Report of Independent Auditors and the following Consolidated Financial
Statements of the Company are included herein:

         Consolidated Balance Sheets - December 31, 1998 and 1997


                                      -42-

<PAGE>



         Consolidated Statements of Operations - Years ended December 31, 1998,
         1997, and 1996

         Consolidated  Statements of Shareholders' Equity - Years ended December
         31, 1998, 1997, and 1996

         Consolidated  Statements of Cash Flows - Years ended December 31, 1998,
         1997, and 1996

         Notes to Consolidated Financial Statements

   (2)   Financial Statement Schedules:

         Schedule I - Condensed Financial Information of Registrant

         Schedule II - Valuation and Qualifying Accounts


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

         See Page 2 above re Forward Looking Information.


(3)      Exhibits: See the Exhibit Index on pages 75-81 of this Form 10-K Annual
         Report.  The following  Exhibits  listed in the Exhibit Index are filed
         with this Form 10-K Annual Report:

10(u)(iv) -    Letter  Agreement  dated as of December 16, 1998 between Rivgam
               Communicators,  L.L.C.  and Lynch PCS Corporation G. 

10(c)(c) -     Letter Agreement dated November 11, 1998 between Registrant and 
               Gabelli & Company, Inc.

21      -      Subsidiaries of the Registrant

23      -      Consents of Independent Auditors
                    -      Ernst & Young LLP
                    -      McGladrey & Pullen, LLP(2)
                    -      Deloitte & Touche LLP
                    -      Johnson Mackowiak Moore & Myott, LLP
                    -      Frederick & Warriner, L.L.C.

24      -      Powers of Attorney

27      -      Financial Data Schedule

99      -      Report of Independent Auditors.
               -        Report of McGladrey & Pullen, LLP on the  Financial
                        statements of Capital Communications Corporation for the
                        year ended December 31, 1996.
               -        Report of McGladrey & Pullen, LLP on the Financial
                        Statements of Coronet Communications Corporation for the
                        year ended December 31, 1996.

                                      -43-

<PAGE>


               -         Report of  Deloitte & Touche  LLP on the  Financial
                         Statements of Central Products Company for the year
                         ended December 31, 1996.
               -         Report of Johnson  Mackowiak Moore & Myott,  LLP on
                         the Consolidated  financial statements of Dunkirk &
                         Fredonia  Telephone Company for the period November
                         21, 1996 through December 31, 1996.
               -         Report of Frederick & Warinner, L.L.C. on the Financial
                         Statements of CLR Video, Inc. for the year ended 
                         December 31, 1996.

(b) Reports on Form 8-K: None were filed since September 30, 1998

(d)      Exhibits:

         Exhibits are listed in response to Item 14(a)(3)

(e)      Financial Statement Schedules:

         Financial Statement Schedules are listed in response to Item 14(a)(2)


                                      -44-

<PAGE>



                         REPORT OF INDEPENDENT AUDITORS


Shareholders and Board of Directors
Lynch Corporation

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Lynch
Corporation  and  subsidiaries  ("Lynch  Corporation"  or the  "Company")  as of
December  31,  1998  and  1997,  and  the  related  consolidated  statements  of
operations,  shareholders' equity, and cash flows for each of the three years in
the period  ended  December  31, 1998.  Our audits also  included the  financial
statement  schedules  listed  in  the  index  at  Item  14(a).  These  financial
statements and schedules are the responsibility of the Company's management. Our
responsibility  is to  express  an opinion  on these  financial  statements  and
schedules based on our audits. We did not audit the 1996 financial statements of
Central Products  Company,  a wholly-owned  subsidiary of Spinnaker  Industries,
Inc. (a 73% owned  subsidiary of Lynch  Manufacturing as of December 31, 1996, a
wholly-owned  subsidiary of Lynch  Corporation),  which statements reflect total
revenues  of  $126,383,000  for the  year  ended  December  31,  1996,  the 1996
financial  statements of Dunkirk and Fredonia  Telephone Company, a wholly-owned
subsidiary  of DFT  Communications,  Inc.  (formerly  Lynch  Telephone  VIII,  a
wholly-owned  subsidiary of Lynch  Corporation)  which statements  reflect total
revenues of $575,000 for the two month period ended  December 31, 1996, the 1996
financial  statements of CLR Video,  L.L.C., a wholly-owned  subsidiary of Lynch
Multimedia ( a wholly-owned  subsidiary of Lynch  Corporation)  which statements
reflect total  revenues of $1,399,000  for the year ended December 31, 1996, and
the 1996 financial statements of Coronet  Communications  Company and of Capital
Communications  Company,  Inc.  (corporations in which the Company has a 20% and
49% interest,  respectively).  Those  statements  were audited by other auditors
whose reports have been furnished to us, and our opinion,  insofar as it relates
to data included for Central Products  Company in 1996,  Dunkirk and Fredonia in
1996, CLR Video,  L.L.C.  in 1996,  Coronet  Communications  Company and Capital
Communications  Company,  Inc. in 1996,  is based solely on the reports of other
auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We  believe  that our  audits  and the  reports  of  other  auditors  provide  a
reasonable basis for our opinion.

In our  opinion,  based on our audits and the  reports  of other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material respects,  the consolidated financial position of Lynch Corporation and
subsidiaries at December 31, 1998 and 1997 and the consolidated results of their
operations  and their cash flows for each of the three years in the period ended
December 31, 1998, in conformity with generally accepted accounting  principles.
Also, in our opinion,  based on our audits,  and the reports of other  auditors,
the related financial statements  schedules,  when considered in relation to the
basic financial  statements  taken as a whole,  present fairly,  in all material
respects the information set forth therein.



                                                       /s/ ERNST & YOUNG LLP
Stamford, Connecticut
March 26, 1999


                                      -45-

<PAGE>



                       Lynch Corporation and Subsidiaries
                           Consolidated Balance Sheets
                           ---------------------------
<TABLE>
<CAPTION>
                                                              December 31
                                                           1998          1997
                                                           -----         ----
                                                              (In Thousands)
ASSETS
CURRENT ASSETS:
<S>                                                      <C>          <C>      
  Cash and cash equivalents ..........................   $  28,153    $  33,557
  Marketable securities and short-term investments ...         967          985
  Trade accounts receivable, less allowances of $1,305
  and $1,448 in 1998 and 1997, respectively ..........      58,988       54,480
  Inventories ........................................      46,563       35,685
  Deferred income taxes ..............................      15,979       17,993
  Other current assets ...............................      11,972       10,059
                                                            ------       ------
TOTAL CURRENT ASSETS .................................     162,622      152,759

PROPERTY, PLANT AND EQUIPMENT:
  Land ...............................................       2,054        1,742
  Buildings and improvements .........................      30,248       25,272
  Machinery and equipment ............................     232,152      190,579
                                                           -------      -------
                                                           264,454      217,593
  Accumulated depreciation ...........................     (77,930)     (60,064)
                                                           -------      ------- 
                                                           186,524      157,529

EXCESS OF COST OVER FAIR VALUE
  OF NET ASSETS ACQUIRED, NET ........................      91,520       73,257

INVESTMENTS IN AND ADVANCES TO PCS ENTITIES ..........      23,360       25,448

OTHER ASSETS .........................................      15,974       14,645
                                                            ------       ------

TOTAL ASSETS .........................................   $ 480,000    $ 423,638
                                                         =========    =========
</TABLE>

See accompanying notes.


                                      -46-

<PAGE>


<TABLE>
<CAPTION>
                                                                December 31
                                                             1998         1997
                                                            ------       ------
                                                              (In Thousands)

   Liabilities and shareholders' equity

   CURRENT LIABILITIES:
<S>                                                      <C>          <C>      
   Notes payable to banks ............................   $  61,723    $  29,021
   Trade accounts payable ............................      36,561       21,381
   Accrued interest payable ..........................       3,464          886
   Accrued liabilities ...............................      27,038       29,417
   Customer advances .................................       4,402        2,249
   Current maturities of long-term debt ..............      10,666        9,302
                                                            ------        -----
 TOTAL CURRENT LIABILITIES ...........................     143,854       92,256



 LONG-TERM DEBT ......................................     246,000      242,776
 DEFERRED INCOME TAXES ...............................      26,560       33,764
 MINORITY INTERESTS ..................................      14,526       13,839
 OTHER LONG-TERM LIABILITIES .........................       9,267        4,552


 SHAREHOLDERS' EQUITY:
   Common Stock, no par or stated value:
      Authorized 10 million shares, issued 1,471,191
     shares and outstanding  of 1,418,248 and
     1,417,048 shares ................................       5,139        5,139
   Additional paid-in capital ........................       8,554        8,644
   Retained earnings .................................      26,771       23,414
   Accumulated other comprehensive income ............          59         --
   Treasury stock of 52,943 and 54,143 shares, at cost        (730)        (746)
                                                            ------       ------ 
 TOTAL SHAREHOLDERS' EQUITY ..........................      39,793       36,451
                                                            ------       ------

 TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY ..........   $ 480,000    $ 423,638
                                                         =========    =========
</TABLE>



See accompanying notes.



                                      -47-

<PAGE>



                       Lynch Corporation and Subsidiaries

                      Consolidated Statements of Operations
                      -------------------------------------
                (Dollars In Thousands, Except per Share Amounts)


<TABLE>
<CAPTION>
                                                                 Year ended December 31
                                                           1998          1997           1996
                                                       -----------    -----------    -----------
   SALES AND REVENUES:
<S>                                                    <C>            <C>            <C>        
     Multimedia ....................................   $    54,622    $    47,908    $    28,608
     Services ......................................       150,454        146,154        132,208
     Manufacturing .................................       309,450        273,474        291,064
                                                       -----------    -----------    -----------
                                                           514,526        467,536        451,880
                                                       -----------    -----------    -----------
   COSTS AND EXPENSES:
     Multimedia ....................................        38,176         35,363         21,435
     Services ......................................       138,193        135,431        127,236
     Manufacturing .................................       268,376        227,621        241,683
     Selling and administrative ....................        45,761         44,334         44,586
                                                       -----------    -----------    -----------
   OPERATING PROFIT ................................        24,020         24,787         16,940
                                                       -----------    -----------    ------------
   Other income (expense):
     Investment income .............................         2,064          2,048          2,203
     Interest expense ..............................       (27,722)       (23,461)       (17,011)
     Equity in earnings of affiliated companies ....           317            154            119
     Reserve for impairment of investment in
       PCS license holders .........................          --           (7,024)          --
     Gain on sales of subsidiary stock and
       other operating assets ......................         4,778            169          5,146
                                                        ----------     ----------     ----------
                                                           (20,563)       (28,114)        (9,543)
                                                        ----------     ----------     ---------- 
   INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
   INCOME TAXES, MINORITY INTERESTS, DISCONTINUED
   OPERATIONS AND EXTRAORDINARY ITEM ...............         3,457         (3,327)         7,397
   Benefit (provision) for income taxes ............        (1,412)           713         (3,021)
   Minority interests ..............................         1,312           (264)           418
                                                        ----------      ---------      ---------
   INCOME (LOSS) FROM CONTINUING OPERATIONS BEFORE
   DISCONTINUED OPERATIONS AND EXTRAORDINARY ITEM ..         3,357         (2,878)         4,794

   Discontinued operations:
     Loss from operations of Lynch Tri-Can
     International (less applicable income taxes of
     $149 and minority interest effects of $29) ....          --             --             (263)
     Loss on disposal of Lynch Tri-Can International
     (less applicable income taxes of $167 and
     minority interest effect of $54) ..............          --             --             (487)
                                                       -----------    -----------    -----------
INCOME (LOSS) BEFORE EXTRAORDINARY ITEM ............         3,357         (2,878)         4,044

   Loss on early extinguishment of debt, net of
   income tax benefit of $953 and minority
   interest effect of $495 .........................          --             --           (1,348)
                                                       -----------    -----------    ----------- 
   NET INCOME (LOSS) ...............................   $     3,357    $    (2,878)   $     2,696
                                                       ===========    ===========    ===========
                                                       

   Weighted average shares outstanding .............     1,418,000      1,415,000      1,388,000

   Basic earnings per share:
     Income (loss) from continuing operations before
     discontinued operations and extraordinary item    $      2.37    $     (2.03)   $      3.45
     Loss from discontinued operations .............          --             --             (.54)
     Extraordinary loss ............................          --             --             (.97)
                                                       -----------    -----------    ----------- 
   NET INCOME (LOSS) ...............................   $      2.37    $     (2.03)   $      1.94
                                                       ===========    ===========    ===========
   Diluted earnings per share:
     Income (loss) from continuing operations before
     discontinued operations and extraordinary item    $      2.37    $     (2.03)   $      3.41
     Loss from discontinued operations .............          --             --             (.53)
     Extraordinary loss ............................          --             --             (.96)
                                                       -----------    -----------    ----------- 
   NET INCOME (LOSS) ...............................   $      2.37    $     (2.03)   $      1.92
                                                       ===========    ===========    ===========
</TABLE>

See accompanying notes.

                                                       -48-

<PAGE>

                       Lynch Corporation and Subsidiaries

                 Consolidated Statements of Shareholders' Equity
                 -----------------------------------------------

<TABLE>
<CAPTION>


                                                                                 Accumulated
                                                                                    Other
                                  Common                 Additional               Comprehen-
                                   Stock       Common     Paid-in     Retained       sive      Treasury
                                Outstanding    Stock      Capital     Earnings      Income       Stock       Total
                               ------------- ---------- ------------ ------------------------------------ ------------
                                                                (Dollars In Thousands)

<S>                            <C>         <C>          <C>         <C>           <C>        <C>          <C>           
Balance at December 31, 1995    1,378,663   $   5,139   $   7,873    $  23,776         --     $  (1,276)   $  35,512
   Issuance of treasury stock      12,371        --           584         --           --           171          755
   Capital transactions of
     The Morgan Group Inc. ..        --          --           (40)        --           --          --            (40)
   Net income for the year ..        --          --          --          2,696         --          --          2,696
                                --------    --------    ---------    ---------   ----------   ----------   --------- 
Balance at December 31, 1996    1,391,034       5,139       8,417       26,472         --        (1,105)      38,923
   Capital transactions of
     The Morgan Group, Inc. .        --          --           (86)        --           --          --            (86)
   Issuance of treasury stock      26,014        --           313         --           --           359          672
   Dividend of East/West
     Communications, Inc. ...        --          --          --           (180)        --          --           (180)
   Net loss for the year ....        --          --          --         (2,878)        --          --         (2,878)
                                --------    ---------   ---------    ---------   ---------    ---------    ---------- 
Balance at December 31, 1997    1,417,048       5,139       8,644       23,414         --          (746)      36,451
 Issuance of treasury stock .       1,200        --            74         --           --            16           90
 Capital transactions of The
  Morgan Group, Inc. ........        --          --          (164)        --           --          --           (164)
 Net income for the year ....        --          --          --          3,357         --          --          3,357
 Other comprehensive income,
  net of tax
 Unrealized gains on
  securities, net of
  reclassification adjustment        --          --          --           --             59        --             59
                                                                                         --                ---------
 Other comprehensive income .        --          --          --           --             --        --             59
                                                                                                           ---------
 Comprehensive income .......        --          --          --           --             --        --          3,416
                                ---------   ---------   ---------   ----------    ---------   ---------    ---------
Balance at December 31, 1998    1,418,248   $   5,139   $   8,554    $  26,771    $      59   $    (730)   $  39,793
                                =========   =========   =========    =========    =========   =========    =========
</TABLE>


See accompanying notes.



                                      -49-

<PAGE>



                       Lynch Corporation and Subsidiaries

                      Consolidated Statements of Cash Flows
                      -------------------------------------

<TABLE>
<CAPTION>
                                                               Year ended December 31
                                                           1998        1997         1996
                                                        ---------   ---------    -----------
                                                                  (In Thousands)

   OPERATING ACTIVITIES
<S>                                                    <C>          <C>          <C>      
   Net income (loss) ...............................   $   3,357    $  (2,878)   $   2,696
   Adjustments to reconcile net income (loss) to net
   cash provided by operating activities:
       Depreciation and amortization ...............      25,453       21,045       16,981
       Amortization of deferred financing charges ..         771          632         --  
       Extraordinary loss on early extinguishment of
       debt ........................................        --           --          1,348
       Net effect of purchases and sales of
         trading securities ........................          18        1,171        9,276
       Deferred income taxes .......................      (4,862)      (3,751)       2,082
       Equity in earnings of affiliated companies ..        (317)        (154)        (119)
       Minority interests ..........................      (1,312)         264         (500)
       Morgan special charge .......................        --           --          3,500
       Gain on sale of subsidiary stock and other
       operating assets ............................      (4,778)        (169)      (5,146)
       Reserve for impairment in investment in PCS
       license holders .............................        --          7,024         --
       Changes  in  operating  assets  and                              
        liabilities, net  of  effects  of
         acquisitions:
         Receivables ...............................          91       (1,357)         407
         Inventories ...............................         492        1,174       (3,374)
         Accounts payable and accrued liabilities ..      17,387       (1,342)       3,743
         Other .....................................      (1,295)       2,426       (1,810)
                                                          ------        -----       ------ 
   NET CASH PROVIDED BY OPERATING ACTIVITIES .......      35,005       24,085       29,084
                                                          ------       ------       ------

   INVESTING ACTIVITIES
   Acquisitions (total cost less debt assumed and
      cash equivalents acquired):
     Spinnaker Coating-Maine .......................     (47,933)        --           --
     Spinnaker Electrical Tape Company .............      (7,267)        --           --
     Dunkirk and Fredonia ..........................        --           --        (17,788)
     Upper Peninsula Telephone Company .............        --        (24,968)        --
     Other .........................................        --           --         (7,813)
   Investment in Personal Communications Services
     Partnerships, net .............................       2,088        1,644      (27,106)
   Capital expenditures ............................     (19,795)     (21,828)     (25,518)
   Investment in Coronet Communications Company ....        --          2,995         --
   Sale of investments in DBS operation and
     cellular partnerships .........................       2,696        8,576         --
   Other ...........................................         144          (31)      (1,597)
                                                       ---------    ---------    ---------
   NET CASH USED IN INVESTING ACTIVITIES ...........     (70,067)     (33,612)     (79,822)
                                                       ---------    ---------    ---------

   FINANCING ACTIVITIES
   Issuance of long-term debt ......................       6,989       25,027      166,358
   Payments to reduce long-term debt ...............      (9,455)     (26,634)    (101,708)
   Net borrowings, lines of credit .................      32,256        9,863        7,797
   Deferred financing costs ........................        (726)        --         (7,139)
   Sale of treasury stock ..........................          90          672          755
   Sale of minority interests ......................        --           --          3,642
   Other ...........................................         504          210         (942)
                                                       ---------    ---------    ---------
   NET CASH PROVIDED BY FINANCING ACTIVITIES .......      29,658        9,138       68,763
                                                       ---------    ---------    ---------
   Net increase (decrease) in cash and cash ........      (5,404)        (389)      18,025
   equivalents
   Cash and cash equivalents at beginning of year ..      33,557       33,946       15,921
                                                       ---------    ---------    ---------
   Cash and cash equivalents at end of year ........   $  28,153    $  33,557    $  33,946
                                                       =========    =========    =========
</TABLE>

See accompanying notes.


                                      -50-

<PAGE>



1. Accounting and Reporting Policies
------------------------------------

Principles of Consolidation
---------------------------

The consolidated  financial statements include the accounts of Lynch Corporation
(the "Company" or "Lynch") and entities in which it has majority voting control.
Investments  in affiliates  in which the Company does not have  majority  voting
control are  accounted for in accordance  with the equity  method.  All material
intercompany transactions and accounts have been eliminated in consolidation.

Use of Estimates
----------------

The preparation of financial  statements in conformity  with generally  accepted
accounting principles 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.

The Company has a significant  need for resources to fund the  operations of the
holding  company and fund future  growth.  The Company is currently  considering
various  alternative  long  and  short-term  financing  arrangements.  One  such
alternative  would  be to  sell  a  portion  or all of  certain  investments  in
operating  entities either directly or through an exchangeable  debt instrument.
Additional  debt and/or  equity  financing  vehicles are also being  considered.
While management  expects to obtain adequate  financing  resources to enable the
Company to meet its obligations,  there is no assurance that such can be readily
obtained or at reasonable costs.

Cash Equivalents
----------------

Cash  equivalents  consist of highly liquid  investments with a maturity of less
than three months when purchased.

At December  31,  1998 and 1997,  assets of $21.8 and $19.9  million,  which are
classified as cash and cash equivalents,  are invested in United States Treasury
money  market  funds for which  affiliates  of the Company  serve as  investment
managers to the respective funds.

Marketable Securities and Short-term Investments
------------------------------------------------

Marketable  securities and short-term  investments  consist  principally of U.S.
Treasury  obligations  and common  stocks.  At December  31, 1998 and 1997,  all
marketable  securities and United States Treasury money market funds  classified
as cash  equivalents  were classified as trading,  with the exception of certain
equity  securities  in 1998 and 1997 with a carrying  value of $1.2  million and
$1.0 million, respectively, which were classified as available-for-sale. Trading
and available-for-sale securities are stated at fair value with unrealized gains
or losses on trading  securities  included in earnings and  unrealized  gains or
losses on  available-for-sale  securities  included in a separate  component  of
shareholders'  equity and as a component  of  comprehensive  income.  Unrealized
gains of $82,000,  $169,000 and $628,000 on trading securities has been included
in earnings for the year ended December 31, 1998,  1997 and 1996,  respectively.
During 1998, shareholders' equity was adjusted by $59,000 for unrealized gains

                                      -51-

<PAGE>



on  available-for-sale  securities.  There was no  adjustment  to  shareholders'
equity for the available-for-sale  securities at December 31, 1997 and 1996. 

The  cost  of  marketable   securities   sold  is  determined  on  the  specific
identification  method.  Realized gains of $382,000,  $229,000 and $102,000, and
realized  losses of $0, $9,000 and $112,000,  are included in investment  income
for the years ended December 31, 1998, 1997 and 1996, respectively.

Property, Plant and Equipment
-----------------------------

Property,  plant and equipment are recorded at cost and include expenditures for
additions  and major  improvements.  Maintenance  and  repairs  are  charged  to
operations  as  incurred.  Depreciation  is  computed  for  financial  reporting
purposes using the  straight-line  method over the estimated useful lives of the
assets  which  range  from  3  years  to 35  years.  For  income  tax  purposes,
accelerated depreciation methods are used.

Excess of Cost Over Fair Value of Net Assets of Companies Acquired
------------------------------------------------------------------

Excess of cost over fair value of net assets of companies acquired (goodwill) is
being  amortized on a  straight-line  basis over periods  ranging from twenty to
forty years. The Company periodically reviews goodwill to assess recoverability,
and  impairments  would  be  recognized  in  operating  results  if a  permanent
diminution in value were to occur. The Company measures the potential impairment
of recorded goodwill by the undiscounted  value of expected future cash flows in
relation to its net capital  investment in the subsidiary.  Based on its review,
the Company does not believe that an  impairment  of its goodwill has  occurred.
Excess  of cost over  fair  value of net  assets  acquired  include  acquisition
intangibles of $91.5 million and $73.3 million, net of accumulated  amortization
of $15.3 million and $11.2 million, at December 31, 1998 and 1997, respectively.

Multimedia
----------

Multimedia  revenues  include local and  intrastate  telephone  company  service
revenues  which are  subject  to review and  approval  by state  public  utility
commissions, and long distance network revenues, which are based upon charges to
long distance  carriers through a tariff filed by the National Exchange Carriers
Association with the Federal  Communications  Commission.  Revenues are based on
cost  studies  for the  Company's  exchanges,  and have been  estimated  pending
completion of final cost studies.

Services
--------

Service revenues and related  estimated costs of  transportation  are recognized
when transportation of the manufactured  housing,  recreational vehicle or other
product is completed.

Liability  insurance is maintained with a deductible amount for claims resulting
from personal  injury and property damage (up to $25 million per occurrence) and
cargo  damage (up to $1 million  per  occurrence).  Provisions  are made for the
estimated liabilities for the self-insured portion of such claims as incurred.



                                      -52-

<PAGE>



Manufacturing
-------------

Manufacturing  revenues,  with the  exception  of  certain  long-term  contracts
discussed   below,   are   recognized   on  shipment.   The  Company   considers
concentrations of credit risk to be minimal due to its diverse customer base.

Research and Development Costs
------------------------------

Research and development costs are charged to operations as incurred. Such costs
were   $1,106,000,   $1,022,000,   and  $1,627,000  in  1998,  1997,  and  1996,
respectively.

Earnings Per Share
------------------

In 1997, the Company  adopted  Financial  Accounting  Standards  Board Statement
("SFAS") No. 128,  Earnings Per Share.  SFAS No. 128 replaced the calculation of
primary and fully diluted earnings per share with basic and diluted earnings per
share.  Unlike primary earnings per share, basic earnings per share excludes any
dilutive  effects of options,  warrants,  and  convertible  securities.  Diluted
earnings  per share is very similar to the  previously  reported  fully  diluted
earnings per share.  All  earnings  per share  amounts for all periods have been
presented in conformity with the SFAS No. 128 requirements.

Comprehensive Income
--------------------

Effective  January  1,  1998,  the  Company  adopted  SFAS  No.  130,  Reporting
Comprehensive  Income.  SFAS No. 130 establishes new standards for the reporting
and display of comprehensive income and its components. However, the adoption of
SFAS No. 130 had no impact on the Company's net income or shareholders'  equity.
SFAS  No.   130   requires   unrealized   gains  or  losses  on  the   Company's
available-for-sale  securities, which prior to adoption were reported separately
in shareholders'  equity, to be included in other  comprehensive  income.  There
were no items of comprehensive income in 1997 and 1996.

Segment Information
-------------------

Effective  December 1998, the Company  adopted SFAS No. 131,  Disclosures  About
Segments of an Enterprise and Related Information.  SFAS No. 131 superseded SFAS
No. 14, Financial Reporting for Segments of a Business Enterprise.  SFAS No. 131
establishes new standards for reporting  information  about operating  segments.
SFAS  No.  131  requires   disclosure  of  selected  financial  and  descriptive
information  for  each  operating   segment  based  on   management's   internal
organizational decision-making structure.  Additional information is required on
a  company-wide  basis  for  revenues  by  product  or  service,   revenues  and
identifiable  assets by geographic  location and information  about  significant
customers.  The adoption of SFAS No. 131 did not affect results of operations or
financial position, but did affect the disclosure of segment information.  Prior
year amounts have been  reclassified to conform to the  requirements of SFAS No.
131. See Note 16.

Pensions and Other Post-Retirement Benefits
-------------------------------------------

In February 1998, the FASB issued SFAS No. 132, Employers Disclosures About

                                      -53-

<PAGE>



Pensions and Other Post-Retirement Benefits, which is an amendment to SFAS No.'s
87, 88, and 106.  This SFAS revises  employers'  disclosures  about  pension and
other  post-retirement  benefit  plans.  It does not change the  measurement  or
recognition of those plans.  The adoption of SFAS No. 132 in 1998 did not have a
significant  impact on the Company's  consolidated  financial  statements as the
Company's benefit plans are not material.

Accounting for Long-Term Contracts
----------------------------------

Lynch  Systems,  Inc., a 91% owned  subsidiary  of the Company is engaged in the
manufacture   and   marketing  of  glass   forming   machines  and   specialized
manufacturing  machines.  Certain  sales  contracts  require an advance  payment
(usually  15% of the  contract  price)  which  is  accounted  for as a  customer
advance.  The contractual  sales prices are paid either (i) as the manufacturing
process  reaches  specified  levels of  completion or (ii) based on the shipment
date. Guarantees by letter of credit from a qualifying financial institution are
required for most sales  contracts.  Because of the specialized  nature of these
machines  and the period of time needed to  complete  production  and  shipping,
Lynch Systems  accounts for these contracts  using the  percentage-of-completion
accounting method as costs are incurred. At December 31, 1998 and 1997, costs in
excess of billings were $0 and $1.2 million, respectively.

Impairments
-----------

Effective January 1, 1996, the Company adopted SFAS No. 121,  Accounting for the
Impairment  of  Long-Lived  Assets to be Disposed  Of. The Company  periodically
assesses the net realizable  value of its  long-lived  assets and evaluates such
assets for impairment  whenever events or changes in circumstances  indicate the
carrying  amount  of an asset  may not be  recoverable.  For  assets to be held,
impairment is determined  to exist if estimated  undiscounted  future cash flows
are less than the carrying amount.  For assets to be disposed of,  impairment is
determined  to exist if the  estimated  net  realizable  value is less  than the
carrying amount.

Stock Based Compensation
------------------------

During  1996,  the  Company  adopted  SFAS No. 123,  Accounting  for Stock Based
Compensation.  SFAS No. 123  establishes a fair value method of  accounting  and
reporting standards for stock based compensation plans.  However as permitted by
SFAS No. 123,  the Company  has elected to continue to apply the  provisions  of
Accounting  Principles Board Opinion ("APB") No. 25, Accounting for Stock Issued
to  Employees  and related  interpretations.  Under APB No. 25, if the  exercise
price of the Company's employee stock options was not less than the market price
of the  underlying  stock on the  date of  grant,  no  compensation  expense  is
recognized.  The Company is required to disclose the pro forma net income (loss)
and net income (loss) per share as if the fair value method  defined in SFAS No.
123 had been applied to all grants made on or after January 1, 1995. See Note 10
for pro forma disclosures.

Fair Value of Financial Instruments
-----------------------------------

Cash and cash equivalents,  trade accounts  receivable,  short-term  borrowings,
trade accounts payable and accrued liabilities are carried at cost which

                                      -54-

<PAGE>



approximates fair value due to the short-term maturity of these instruments. The
carrying amount of the Company's  borrowings under its revolving lines of credit
approximates  fair value, as the  obligations  bear interest at a floating rate.
The  fair  value of  other  long-term  obligations  approximates  cost  based on
borrowing  rates for similar  instruments,  excluding the Spinnaker  Industries,
Inc. ("Spinnaker")  senior-secured debt with a carrying value of $115 million at
December 31, 1998 and 1997 and a fair value of approximately  $100.1 million and
$119.0  million,  respectively  at December  31, 1998 and 1997,  based on quoted
market  prices.  A subsidiary of the Company is a party to an interest rate swap
agreement  (which is accounted for as an adjustment to interest  expense) with a
principal  amount of $9.3 million at December 31, 1998 which expires in December
2000.  At December 31, 1998 and 1997,  the Company  estimated it would have paid
$390,000 and $406,000, respectively, to terminate the swap agreement.

Issuance of Stock by Subsidiaries and Investees
-----------------------------------------------

Changes  in the  Company's  equity  in a  subsidiary  or an  investee  caused by
issuances of the  subsidiary's or investees' stock are accounted for as gains or
losses where such issuance is not part of a broader reorganization (see Note 9).

Reclassifications
-----------------

Certain amounts in the 1997 and 1996 financial statements have been reclassified
to conform to the 1998 presentation. The reclassifications are immaterial to the
consolidated financial statements taken as a whole.

Recent Accounting Pronouncements
--------------------------------

In June 1998,  the  Financial  Accounting  Standards  Board issued SFAS No. 133,
Accounting for Derivative Instruments and Hedging Activities,  which is required
to be adopted in years  beginning after June 15, 1999. SFAS No. 133 requires the
Company  to  recognize  all  derivatives  on the  balance  sheet at fair  value.
Derivatives  that are not hedges must be adjusted to fair value through  income.
If the derivative is a hedge,  depending on the nature of the hedge,  changes in
fair value are either  offset  against  the  changes in fair value of assets and
liabilities through earnings or recognized in other  comprehensive  income until
the hedged item is recognized in earnings.  Because of the Company's minimal use
of derivatives, management does not anticipate that the adoption of SFAS No. 133
will have a significant effect on its earnings or financial position.

2. Acquisitions and Dispositions
--------------------------------

Acquisitions
------------

On July 31, 1998, the Company's subsidiary,  Spinnaker Industries, Inc. acquired
tesa tape,  inc.'s  pressure  sensitive  electrical  tape  product  line and its
Carbondale,  IL manufacturing plant (the "tesa tape Acquisition").  The purchase
price totaled $10.7 million plus transactions costs, comprised of 200,000 shares
of Spinnaker common stock (subject to adjustment)  valued at $3.7 million,  $4.5
million in term debt,  $2.0  million in cash,  and a $0.5  million  subordinated
note. The acquired  business  produces  electrical  tape for insulating  motors,
coils and transformers for customers in Europe, Canada and the U.S.


                                      -55-

<PAGE>



On March 17,  1998,  Spinnaker  Coating-Maine,  Inc.  acquired the assets of the
pressure  sensitive  adhesive-backed  label stock  business of S.D.  Warren (the
"S.D. Warren Acquisition").  The purchase price was approximately $51.8 million,
plus the assumption of certain  liabilities and transaction costs and was funded
by issuing the seller a convertible  subordinated  note of $7.0 million with the
remainder funded by Spinnaker's  revolving credit facility.  As a result of this
transaction,  the Company recorded approximately $21.3 million in goodwill which
is being amortized over 30 years.

On March 18, 1997,  Lynch Michigan  Telephone  Holding  Company,  a wholly-owned
subsidiary of Lynch  acquired  approximately  60% of the  outstanding  shares of
Upper  Peninsula   Telephone   Company  for  $15.2  million  and  completed  the
acquisition  of  the  remaining  40% on  May  23,  1997  (the  "Upper  Peninsula
Acquisition").  The total cost of the acquisition was $26.5 million. As a result
of this  transaction,  the Company  recorded  $7.4 million in goodwill  which is
being amortized over 25 years.

On December 30, 1996, The Morgan Group,  Inc., 53% owned by Lynch,  acquired the
operating assets of Transit Homes of America, Inc., a provider of transportation
services to a number of  producers in the  manufactured  housing  industry  (the
"Transit Homes Acquisition"). The purchase price was approximately $4.4 million,
including  assumed  obligations.  As a result of this  transaction,  the Company
recorded $4.1 million of goodwill which is being amortized over twenty years.

On November 26, 1996, DFT  Communications,  Inc., a  wholly-owned  subsidiary of
Lynch,  acquired all of the outstanding  shares of Dunkirk & Fredonia  Telephone
Company,  a local  exchange  company  serving  portions of western New York (the
"Dunkirk & Fredonia Acquisition").  The total cost of this transaction was $27.7
million. As a result of this transaction,  the Company recorded $13.8 million in
goodwill which is being amortized over 25 years.

On  June  3,  1996,   Inter-Community   Telephone  Company,  a  Lynch  Telephone
Corporation  II  subsidiary  acquired four  telephone  exchanges in North Dakota
containing approximately 1,400 access lines from U.S. West Communications,  Inc.
for approximately $4.7 million.

Disposition
-----------

As of December 9, 1998, WNM Communications,  Inc. a Lynch Telephone  Corporation
subsidiary,  sold the assets of its direct broadcast  satellite business serving
portions of New Mexico for approximately  $3.1 million (the "DBS  Disposition").
As a result  of the  transaction,  a pre-tax  gain on the sale of the  assets of
approximately  $2.7 million was  recognized  and  classified  as gain on sale of
subsidiary stock and other operating  assets in the  consolidated  statements of
operations.

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

The following  unaudited combined pro forma information shows the results of the
Company's operations presented as if the tesa tape Acquisition was made at the

                                      -56-

<PAGE>



beginning of 1997, and the S.D. Warren Acquisition, Upper Peninsula Acquisition,
Transit Homes Acquisition,  Dunkirk & Fredonia Acquisition,  and DBS Disposition
were made at the beginning of 1996.  The unaudited  proforma  information is not
necessarily indicative of the results of operations that would have occurred had
the  transactions  been made at that date nor is it  necessarily  indicative  of
future results of operations.

<TABLE>
<CAPTION>

                                                    For the year ended December 31
                                                  1998            1997          1996
                                              -----------    ------------   -----------
                                                  (In thousands except per share data)


<S>                                           <C>            <C>            <C>        
Sales .....................................   $   534,639    $   549,902    $   569,145
Income (loss) from continuing operations            1,222         (2,579)         4,444
Loss from discontinued operations .........          --             --             (750)
Extraordinary item ........................          --             --           (1,348)
                                              -----------    -----------    ----------- 
Net income (loss) .........................   $     1,222    $    (2,579)   $     2,346
                                              ===========    ===========    ===========

Basic earnings per share:
   Income (loss) from continuing operations   $     0.86     $    (1.82)    $      3.20
   Loss from discontinued operations ......          --             --            (0.54)
   Extraordinary item .....................          --             --            (0.97)
                                              ----------     ----------     ----------- 
Net income (loss) per share ...............   $     0.86     $    (1.82)    $      1.69
                                              ===========    ===========    ===========

Diluted earnings per share:
  Income (loss) from continuing operations    $     0.86     $    (1.82)    $      3.16
  Loss from discontinued operations .......          --             --            (0.53)
  Extraordinary item ......................          --             --            (0.96)
                                              -----------    -----------    -----------
Net income (loss) per share ...............   $     0.86     $    (1.82)    $      1.67
                                              ===========    ===========    ===========
</TABLE>


3. Special Charges/Discontinued Operations
------------------------------------------

Morgan Drive Away, a 53% owned subsidiary of the Company, recorded in the fourth
quarter of 1996,  special charges of $3,500,000  before income taxes relating to
exiting the  truckaway  operation  and a write down of  properties in accordance
with SFAS 121.  Morgan  recorded a special  charge for 1997 of  $624,000  before
taxes comprised of gains in excess of the net realizable  value  associated with
exiting the truckaway operation of $361,000, offset by charges related to driver
pay of $985,000.  These charges have been  included in the Company's  results of
continuing operations.

The Board of Directors of Lynch Systems,  decided to discontinue  the operations
of Tri-Can International, Ltd. ("Tri-Can") and sell the assets of the operation.
The sale of  Tri-Can  was  completed  in August  1996.  Accordingly,  Tri-Can is
reported  as a  discontinued  operation  for the year  ended  December  31 1996.
Tri-Can which was previously  reported in the  manufacturing  segment due to the
insignificance  to  the  Company's  financial   statements,   is  treated  as  a
discontinued operation as its products and customers are different than those of
Lynch Systems.

As a result of this  disposal,  Lynch  recorded a provision for loss of $487,000
after-taxes,  to reflect the write-down of certain assets and costs estimated to
be  incurred  prior to  disposal  and a  provision  of  $263,000  after-tax  for
operating

                                      -57-

<PAGE>



losses prior to the sale.  The  operating  results of Tri-Can for the year ended
December 31, 1996 are summarized as follows:

<TABLE>
<CAPTION>
                                              1996
                                          --------------
                                          (In thousands)


<S>                                          <C>    
Sales ....................................   $ 2,797
                                             =======
Loss before income tax benefit ...........   $  (441)
Income tax benefit .......................       149
Minority interest ........................        29
                                             -------
Loss from operations .....................      (263)
                                             =======
Loss on disposal before income tax benefit      (708)
Income tax benefit .......................       167
Minority interest ........................        54
                                             -------
Loss on disposal .........................      (487)
                                             ------- 
Total loss on discontinued operations ....   $  (750)
                                             =======
</TABLE>

4. Inventories
--------------

Inventories are stated at the lower of cost or market value.  Inventories valued
using the last-in,  first-out (LIFO) method comprised  approximately 48% and 51%
of  consolidated  inventories  at  December  31, 1998 and 1997.  Inventories  at
Spinnaker Coating, 50% and 43% of inventories at December 31, 1998 and 1997, are
valued using the specific  identification method. The balance of inventories are
valued using the first-in first-out (FIFO) method.

<TABLE>
<CAPTION>
                                December 31
                              1998        1997
                            ---------- ---------
                                (In Thousands)

<S>                          <C>       <C>    
Raw materials and supplies   $13,050   $10,493
Work in process ..........     4,433     3,544
Finished goods ...........    29,080    21,648
                              ------    ------
Total ....................   $46,563   $35,685
                             =======   =======
</TABLE>

Current cost exceeded the LIFO value of  inventories  by $1,176,000 and $925,000
at December 31, 1998 and 1997, respectively.

5. Wireless Communications Services
-----------------------------------

Lynch subsidiaries,  through limited partnerships,  participated in the auctions
conducted by the Federal Communications  Commission ("FCC") for 30 megahertz and
10  megahertz  of  broadband  spectrum  to be used for  personal  communications
services,  the  "C-Block"  and  "F-Block"  Auctions,   respectively.  These  two
auctions,  which were part of six  auctions  conducted by the FCC for a total 90
megahertz of spectrum,  were specially  designated by the FCC to encourage small
businesses to participate in the wireless telecommunications industry, so-called
"entrepreneurial   blocks."  To  effectuate   this,  the  FCC  provided  certain
qualifying bidders a 25% bidding credit to be used during the auction as well as
long-term  financing  for a  substantial  portion  of the  cost of the  licenses
acquired.  The licenses  represent the right to provide wireless  communications
services  to  territorial  areas of the United  States.  Under FCC  regulations,
service must be provided to one-third of the  population  within the area of the
license  within  five  years of the date of the award and to  two-thirds  of the
population  within ten years of the date of award.  Failure to comply may result
in the forfeiture of the license. The subsidiaries held a 49.9% limited

                                      -58-

<PAGE>



partnership interest in each of these partnerships and have committed to funding
the government  interest and certain other expenses up to a specified  amount as
discussed below.

In the  C-Block  auction,  which  ended in May 1996,  Lynch's  subsidiary  was a
limited partner in Fortunet Communications, L.P. ("Fortunet"), which acquired 31
licenses  at a net cost,  after  the  bidding  credit,  of $216  million.  These
licenses were awarded in September  1996.  The FCC provided 90% of the financing
of the cost of these  licenses.  Lynch's  subsidiary has agreements to provide a
total of $41.8  million of funding to such  partnership,  of which $21.6 million
was funded through December 31, 1998. These loans carry an annual commitment fee
of 20% and an interest  rate of 15% which are payable  when the loans  mature in
2003.  For  accounting  purposes,  all cost  and  expenses,  including  interest
expense,  associated  with the licenses are currently  being  capitalized  until
service is provided.

Events during and subsequent to the auction,  as well as other externally driven
technological  and market  forces,  made  financing the  development  of C-Block
licenses  through  the  capital  markets  much more  difficult  than  previously
anticipated. Fortunet, as well as many of the license holders from this auction,
petitioned  the FCC for  certain  forms of  financial  and  ownership  structure
relief.  The response  from the FCC,  which was  announced  in  September  1997,
afforded  license  holders  a  choice  of four  options,  one of  which  was the
resumption  of  current  debt  payment  which had been  suspended  in 1997.  The
ramifications  of choosing the other three courses of action could have resulted
in Lynch's  subsidiary  ultimately  forfeiting  either 30%,  50%, or 100% of its
investment in these licenses.

On June 8, 1998,  Fortunet elected to apply its eligible credits relating to its
original deposit to the purchase of three licenses for 15 MHZ of PCS spectrum in
Tallahassee, Panama City and Ocala, Florida. Fortunet returned all the remaining
licenses and forfeited 30% of its original  deposit in full  satisfaction of the
government debt.  Accordingly,  Fortunet is currently the licensee for 15 MHZ of
spectrum in the three Florida  markets  covering a population  of  approximately
785,000 at a net cost at auction of $20.09 per POP.

During  1997,  Lynch  provided a reserve on its  investment  in Fortunet of $7.0
million,  representing  30%  of its  investment,  management's  estimate  of its
impairment.  No  further  reserves  have  been  provided  as  a  result  of  the
restructuring.

The balance  sheets of Fortunet at December 31, 1998 and 1997 are as follows (in
thousands):
<TABLE>
<CAPTION>
                                         December 31
                                       1998       1997
                                     --------   --------
Assets
<S>                                 <C>          <C>      
Cost of license acquired ........   $  26,982    $ 243,693
                                    ---------    ---------
Total assets ....................      26,982    $ 243,693
                                    =========    =========

Liabilities and Deficit
Due to the Department of Treasury   $    --      $ 208,188
Due to Lynch Subsidiaries .......      61,857       49,513
Partnership Deficit .............     (34,875)     (14,008)
                                    ---------    --------- 
Total liabilities and deficit ...   $  26,982    $ 243,693
                                    =========    =========
</TABLE>

Included in "Due to Lynch  Subsidiary"  are  interest and other  financing  fees
aggregating  $40.9  million  and $24.8  million at  December  31, 1998 and 1997,
respectively.  The net investment in Lynch's consolidated balance sheet is $18.8
million at December 31, 1998,  which  includes cash  advances  plus  capitalized
interest of $3.5 million ($1.6  million,  $1.5 million and $0.4 million in 1998,
1997, and 1996, respectively).

In the F-Block Auction, East/West Communications,  Inc. ("East/West"),  acquired
five licenses to provide personal communications services in geographic areas of
the United  States with a total  population  of 20 million at a net bid of $19.0
million. In order to fund East/West's  participation in the auction, the Company
borrowed  $11.8 million under a short-term  facility  from Gabelli  Funds,  Inc.
("GFI"),  an affiliate  of the  Chairman  and CEO of the Company.  The money was
repaid after  completion  of the auction.  $10.0 million of this was repaid with
monies  returned from the FCC upon  completion  of the auction.  In May and July
1997,  the licenses were  awarded.  $15.2 million of the cost of the licenses is
financed with a loan from the United States Government. As of November 30, 1997,
Lynch's  subsidiary had invested $225,000 in partnership equity and provided the
partnership  with a loan of $3.5 million.  In December  1997,  the  partnerships
converted to a corporation with Lynch receiving 49.9% of the common stock. Lynch
spun off 39.9% of the common  stock of  East/West  to Lynch's  shareholders  and
transferred  10% of East/West  stock to GFI in  satisfaction of an obligation to
pay it 10% of the net profits (after a capital  charge) as partial  compensation
for a loan. Prior to the conversion, Lynch's subsidiary contributed a portion of
the debt owed to it as a  contribution  to  capital  and  immediately  after the
conversion the remaining debt owed to it ($4.5 million book value) was converted
into 7,800 shares ($7,800,000  liquidation  preference) of Redeemable  Preferred
Stock.  At that time Lynch's  subsidiary's  obligation to make further loans was
terminated. The Redeemable Preferred Stock has a 5% payment-in-kind dividend and
is  mandatorily  redeemable  in 2009  subject  to  earlier  payment  in  certain
circumstances.

During  1998,  Rivgam  Communicators,  LLC  ("Rivgam"),  a  subsidiary  of  GFI,
transferred  to Lynch PCS  Corporation  G ("Lynch PCS G") a subsidiary of Lynch,
its 10 MHZ PCS license  covering  the  Rand-McNally  basic  trading  area of Las
Cruces, New Mexico. This transfer was in full settlement of an agreement between
Lynch  PCS G and  Rivgam.  This  agreement  provided  that  Lynch PCS G would be
compensated  for  certain  bidding  and  administrative  services it provided to
Rivgam in the PCS D and E Block Auctions by receiving a 10% net profit  interest
(after capital charges) in any PCS licenses acquired by Rivgam. The transfer was
accounted for as a non-monetary  transaction  and resulted in Lynch  recognizing
management  service income of $1.0 million in 1998 based upon the estimated fair
value of the  license.  Lynch PCS G has similar  arrangements  with two separate
entities in which GFI has minority interests in which Lynch PCS G is entitled to
receive a 5% net profit interest (after capital charges) in licenses acquired in
the WCS and LMDS Auctions.

6. Investments in Affiliated Companies
--------------------------------------

Lynch  Entertainment  Corporation  ("LENCO"),  a wholly-owned  subsidiary of the
Company,  has a 20% investment in Coronet  Communications  Company  ("Coronet"),
which  operates  television  station  WHBF-TV,  a CBS  affiliate in Rock Island,
Illinois. Lynch Entertainment Corporation II ("LENCO II"), a wholly-owned

                                      -59-

<PAGE>



subsidiary  of the  Company,  has a 49%  investment  in  Capital  Communications
Company ("Capital"),  which operates television station WOI-TV, an ABC affiliate
in Des Moines, Iowa.

At December 31, 1998 and 1997,  LENCO's  investment  in Coronet was carried at a
negative of $1,262,000 and a negative $1,612,000,  respectively,  due to LENCO's
guarantee of $3.8 million of $13.6  million of  Coronet's  third party debt.  In
1997,  Coronet  repaid a $2.9  million  loan to  LENCO  plus  accrued  interest.
Long-term  debt of Coronet,  at December 31, 1998, is comprised of $13.6 million
due to a third party lender which is due  quarterly  through  December 31, 2003.
The Company  recorded  interest income on the LENCO debt of $30,000 and $287,000
for the years ended December 31, 1997 and 1996, respectively.

At December 31, 1998 and 1997,  LENCO II's  investment  in Capital is carried at
zero as its  share  of net  losses  recognized  to date  have  exceeded  its net
investment. LENCO II also owns $10,000 of Preferred Stock B of Capital, which is
convertible at any time into the Common Stock of Capital in a sufficient  amount
to bring LENCO II's ownership to 50%.

7. Spinnaker Industries' Strategic Alternatives
-----------------------------------------------

In November 1998, the Company's 61%-owned subsidiary, Spinnaker Industries, Inc.
engaged  an  investment  banker  to seek  strategic  alternatives,  including  a
possible sale of all or a portion of its  business,  merger,  or other  business
combination of Spinnaker.  There can be no assurance  that any such  transaction
will be completed.

8. Notes Payable and Long-term Debt
-----------------------------------

Long-term debt consists of (all interest rates are at December 31, 1998):
<TABLE>
<CAPTION>
                                                                                     December 31
                                                                                  1998         1997
                                                                                ---------   ---------
                                                                                   (In thousands)
Spinnaker Industries, Inc. 10.75% Senior Secured
<S>                                                                             <C>          <C>      
  Notes due 2006 ............................................................   $ 115,000    $ 115,000

Rural  Electrification  Administration  (REA) and Rural  Telephone Bank (RTB)
notes payable in equal quarterly  installments through 2027 at fixed interest
rates ranging from 2% to 7.5% (4.7% weighted  average),  secured by assets of
the telephone companies of $107.2
million .....................................................................      45,264       47,109

Bank credit  facilities  utilized by certain  telephone and telephone holding
companies through 2009, $33.7 million at a fixed interest rate averaging 8.9%
and $16.9
million at variable interest rates averaging 7.3% ...........................      50,623       54,633

Unsecured  notes issued in  connection  with  acquisitions;  $35.0 million at
fixed interest rates averaging 9.2%
and $0.5 million at a variable rate of 5.0% .................................      35,503       28,049

Other .......................................................................      10,276        7,287
                                                                                ---------    ---------
                                                                                  256,666      252,078
Current maturities ..........................................................     (10,666)      (9,302)
                                                                                ---------    --------- 
                                                                                $ 246,000    $ 242,776
                                                                                =========    =========
</TABLE>

On October 23, 1996,  Spinnaker completed the issuance of $115,000,000 of 10.75%
senior-secured  debt  due  2006.  The  debt  proceeds  were  used to  extinguish
substantially  all  existing  bank  debt,  bridge  loans  and lines of credit at
Spinnaker  and  its two  major  operating  subsidiaries,  Central  Products  and
Spinnaker Coating. The early extinguishment of debt resulted in an extraordinary
charge to fourth quarter 1996 earnings of $1,348,000 net of applicable taxes and
minority  interest.  Financing  costs were incurred by Spinnaker in  conjunction
with the  issuance  of the  10.75%  senior  secured  notes and  other  financing
activities.  These  financing  costs are deferred and amortized over the term of
the related debt.  Unamortized  financing costs of $5.8 million and $5.7 million
at December 31, 1998 and 1997, respectively, are included in other assets.

The notes are redeemable,  in whole or in part, at the option of Spinnaker on or
after October 15, 2001, at the  redemption  prices  beginning at 105.375% of the
principal  amount declining to 100% of the principal amount on October 15, 2005,
plus accrued and unpaid interest.  In addition, at any time or from time to time
on or prior to October 15,  1999,  Spinnaker,  at its  option,  may redeem up to
331/3% of the  aggregate  principal  amount of the notes with net cash  proceeds
from  public  equity  offerings  at a  redemption  price equal to 110.75% of the
principal amount plus accrued and unpaid interest. The notes are unconditionally
guaranteed,  jointly  and  severally,  by  Spinnaker's  subsidiaries,  Spinnaker
Coating, Inc., Central Products Company, and Entoleter, Inc.

REA debt of $12.2 million bearing  interest at 2% has been reduced by a purchase
price  allocation  of $2.6 million  reflecting  an imputed  interest rate of 5%.
Unsecured notes issued in connection with the telephone company acquisitions are
predominantly  held  by  members  of  management  of  the  telephone   operating
companies.

On a consolidated  basis, at December 31, 1998,  Lynch maintains  short-term and
long-term  line  of  credit  facilities  totaling  $117.9  million  (subject  to
limitations  that  reduce the  availability  to $87.6  million),  of which $26.1
million was available for future  borrowings.  Lynch (Parent Company)  maintains
two $10.0 million  short-term line of credit  facilities,  of which $4.9 million
was available at December 31, 1998.  These  short-term lines of credit expire on
December 29, 1999 ($10.0 million) and June 30, 1999 ($10.0 million).  Management
anticipates  that these  lines will be renewed  when they expire but there is no
assurance  that they will be.  Spinnaker  Industries,  Inc.  maintains  lines of
credit at its subsidiaries which in the aggregate total $65.0.  million (subject
to limitations  that reduce the  availability to $51.0  million),  of which $8.2
million was available at December 31, 1998. The Morgan Group  maintains lines of
credit totaling $15.0 million,  all of which was available at December 31, 1998.
On January 28, 1999,  Morgan  executed a new two year  renewable  $20.0  million
revolving credit facility which replaces the $15.0 million line. If not renewed,
this credit  facility will convert to a three year term loan. The interest rates
will be variable and adjusted quarterly. These facilities, as well as facilities
at other  subsidiaries of Lynch,  generally limit the credit available under the
lines of credit to certain variables,  such as inventories and receivables,  and
are secured by the  operating  assets of the  subsidiary,  and  include  various
financial  covenants.  At  December  31,  1998,  $24.9  million  of these  total
facilities  expire  within one year.  The  weighted  average  interest  rate for
short-term  borrowings  at  December  31, 1998 was 8.0%.  The Company  pays fees
ranging from 0% to 0.375% on its unused lines of credit.

                                      -60-

<PAGE>



In general,  the long-term debt facilities are secured by  substantially  all of
the Company's property, plant and equipment,  inventory,  receivables and common
stock  of  certain  subsidiaries  and  contain  certain  covenants   restricting
distributions  to Lynch.  At December 31, 1998 and 1997,  substantially  all the
subsidiaries' net assets are restricted.

Cash payments for interest were $24.1  million,  $23.1 million and $16.7 million
for the years ended December 31, 1998, 1997 and 1996, respectively.

Aggregate principal maturities of long-term debt for each of the next five years
are as follows:  1999--$10.7 million;  2000--$23.5 million; 2001--$12.3 million,
2002--$11.5 million and 2003--$6.2 million.

9. Minority Interests and Related Party Transactions
----------------------------------------------------

On July 31, 1998,  Spinnaker  completed the  acquisition of the electrical  tape
division of tesa tape,  inc.  (see Note 2). A portion of the purchase  price was
200,000  newly issued  shares of  Spinnaker's  Class A common stock  (subject to
certain  adjustments).  In accordance with the Company's  policy, as a result of
this  issuance  the Company  recorded a pre-tax  gain on the sale of  subsidiary
stock of $2.1 million in 1998.

On June 13, 1994, Spinnaker entered into a management agreement (the "Management
Agreement") with Boyle, Fleming & Co., Inc. ("BF"), of whom a former Director of
the Company is a principal,  to assume the  management of  Spinnaker.  Effective
August 31, 1996, the  Management  Agreement was terminated at which time Messrs.
Boyle,  and Fleming  became  employees of Spinnaker and continued to be Chairman
and Chief Executive Officer and President, respectively, of Spinnaker. Spinnaker
and BF also entered into a Warrant Purchase Agreement in 1994, pursuant to which
BF received  warrants to purchase  common stock of Spinnaker  (equating to a 20%
ownership  of  Spinnaker  at that time) at any time on or before June 30,  1999,
subject to certain  restrictions.  The  remaining  warrants  were  exercised  in
January 1998.

On May 5, 1996,  Alco converted a $6.0 million note,  issued in connection  with
the  purchase of CPC,  into  Spinnaker  common  stock.  In  accordance  with the
Company's  policy,  as a result  of this and  other  transactions,  the  Company
recognized a gain on sales of subsidiary stock of $5.1 million in 1996.

On October 23, 1996,  concurrent  with the  issuance of the $115 million  senior
notes (see Note 8),  Spinnaker  acquired the remaining 25% minority  interest in
its Spinnaker Coating subsidiary.  The terms of the acquisition  involved a cash
payment of  approximately  $2.3  million  and the  issuance  of 9,613  shares of
Spinnaker Common Stock. In addition, as part of the consideration for the shares
of capital stock of Spinnaker Coating,  the minority  shareholders  received the
right to a  contingent  payment,  which is  exercisable  at any time  during the
period  beginning  October 1, 1998 and ending September 30, 2000. The contingent
payment is based upon the  percentage  of the capital  stock owned by the former
Spinnaker Coating entity at the time of the merger multiplied by the fair market
value of the capital  stock of Spinnaker  Coating,  as  determined in accordance
with certain  economic  assumptions  and including an adjustment  for a minority
ownership  discount,  as  of  the  date  such  right  is  exercised,   less  the
consideration  received at closing.  The contingent price is payable through the
issuance of Common Stock

                                      -61-

<PAGE>



of Spinnaker,  unless  Spinnaker  elects to pay the contingent price in cash. If
such  payments  are made in cash,  they could  give rise to a default  under the
Senior Notes, unless there is sufficient availability under provisions regarding
restricted payments contained in the Senior Notes.

In connection with the purchase of the Spinnaker Coating minority interest,  all
the  Spinnaker  Coating  options  were  accelerated  and  in  turn  certain  key
executives of Spinnaker Coating  management  exercised those options to purchase
71,065 shares of Spinnaker  Coating common stock at various prices between $7.16
and $14.69 per share,  for a total of approximately  $670,000.  The options were
originally  granted  in 1994 and were  issued  at not less than 100% of the fair
market value of the common stock at the date of grant.

During  1998,  the  Company  entered  into a five-year  lease for its  corporate
headquarters  for an annual  payment of  $90,000  with an  affiliate  of the its
Chairman and Chief Executive Officer.

On March 12,  1996,  Lynch  sold  10,373,  shares of  common  stock  held in its
treasury to its Chairman and Chief  Executive  Officer at $60.25 per share,  the
closing price in trading of Lynch common stock on that date.

10. Stock Option Plans
----------------------

On June 4, 1993,  the Board of  Directors  of Morgan  approved the adoption of a
stock option plan which provides for the granting of incentive or  non-qualified
stock  options  to  purchase  up to  200,000  shares of Class A Common  Stock to
officers,  including  members  of  Morgan's  Board of  Directors,  and other key
employees.  No  options  may be  granted  under  this plan at less than the fair
market  value of the Common  stock at the date of the grant,  except for certain
non-employee directors.  Although the exercise period is determined when options
are actually  granted,  an option shall not be exercised later than 10 years and
one day  after it is  granted.  Stock  options  granted  will  terminate  if the
grantee's  employment  terminates  prior to  exercise  for  reasons  other  than
retirement,  death,  or  disability.  Stock options vest over a four year period
pursuant  to the  terms of the  plan,  except  for stock  options  granted  to a
non-employee director, which are immediately vested.

Morgan  employees  have been  granted  non-qualified  stock  options to purchase
113,000 shares of Class A Common stock, net of cancellations  and exercises,  at
prices ranging from $7.00 to $9.39 per share.  Non-employee  directors have been
granted  non-qualified stock options to purchase 57,000 shares of Class A Common
stock,  net of  cancellations  and  exercises,  at prices  ranging from $6.20 to
$10.19 per share.  As of  December  31,  1998,  there  were  123,625  options to
purchase shares granted to Morgan's  employees and non-employee  directors which
were exercisable based upon the vesting terms, of which 30,375 shares had option
prices less than the December 31, 1998 closing price of $7 3/8.

In accordance with Spinnaker's  directors stock option plan, Spinnaker may grant
stock options to directors who are not employees of Spinnaker. In February 1996,
Spinnaker  granted  30,000  stock  options for the purchase of one share each of
Spinnaker  Class A Common Stock and  Spinnaker  Common Stock at a total price of
$40 per option  exercised  (adjusted  for the stock  dividend in August 1996) to
qualifying  directors.  The  options  vest over a two year  period  with  15,000
options

                                      -62-

<PAGE>



becoming  exercisable  one year  after the grant date and the  remaining  15,000
options becoming  exercisable two years after the grant date. The options expire
on the fifth  anniversary  after the grant  date or 30 days  after the  director
ceases to be a director.  In January of 1997,  under the same  terms,  Spinnaker
issued  10,000 stock options for the purchase of one share of Common Stock at an
exercise price of $27 per share. As permitted by SFAS No. 123, Spinnaker elected
to  account  for these  options  under  APB No.  25 and as such no  compensation
expenses was recorded  because the option  exercise  price was not less than the
market price at the date of grant.

Pro forma information regarding net income and earnings per share is required by
SFAS No. 123, and has been  determined  as if Spinnaker  had  accounted  for its
director  stock options under the fair value method of that  Statement.  The pro
forma effect on Lynch's 1998, 1997, and 1996 operations is immaterial.


11. Shareholders' Equity
------------------------

In  December  1996,  the  Company's  Board  of  Directors  announced  that it is
examining  the  possibility  of  splitting,  through a  "spin-off",  either  its
communications  operations or its  manufacturing  operations.  A spin-off  could
improve  management focus,  facilitate and enhance  financings and set the stage
for future growth,  including acquisitions.  A split could also help surface the
underlying  values of the Company as the different  business  segments appeal to
differing "value" and "growth" cultures in the investment community. There are a
number of  matters  to be  examined  in  connection  with a  possible  spin-off,
including tax consequences,  and there is no assurance that such a spin-off will
be effected.

In 1987, 1988 and 1992, the Board of Directors  authorized the purchase of up to
300,000 shares of Common Stock.  Through  December 31, 1998,  230,861 shares had
been purchased at an average cost of $13.15 per share.


                                      -63-

<PAGE>



In January  1994,  an officer was granted stock options to purchase up to 24,516
shares of Lynch common stock at an exercise price of $23.125,  the closing price
on the date of grant.  These  options were  exercised in January 1997 and shares
were issued from Treasury.

On  February  1, 1996,  the  Company  adopted a plan to provide a portion of the
compensation  for its directors in common  shares of the Company.  The amount of
common  stock is based upon the market  price at the end of the  previous  year.
Through December 31, 1998, 4,126 shares have been awarded under this program.

On February 29, 1996, the Company  adopted a Stock  Appreciation  Rights program
for certain employees. To date, 43,000 of Stock Appreciation Rights ("SAR") have
been granted at prices ranging from $63 to $85 per share. Upon the exercise of a
SAR,  the holder is entitled  to receive an amount  equal to the amount by which
the market value of the Company's  common stock on the exercise date exceeds the
grant price of the SAR.  Effective  September 30, 1998, the Company  amended the
SAR Program so that the SAR's  became  exercisable  only if the market price for
the Company's  shares  exceeds 200% of the SAR exercise  price within five years
from original grant date. This amendment  eliminated the recording of the profit
and loss  effect of the SAR's for changes in the market  price in the  Company's
common stock until it becomes  probable that the SAR's will become  exercisable.
The net income  (expense)  relating  to this  program,  prior to the time of the
amendment, was $185,000 in income in 1998 and ($439,000) of expense in 1997.

12. Income Taxes
----------------

Deferred  income  taxes  for  1998  and  1997  are  provided  for the  temporary
differences  between  the  financial  reporting  basis  and the tax basis of the
Company's  assets  and  liabilities.   Cumulative   temporary   differences  and
carryforwards at December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                       December 31, 1998  December 31, 1997
                                       ----------------- ------------------
                                          Deferred Tax       Deferred Tax
                                       Asset   Liability   Asset  Liability
                                      -------   -------   -------  --------
                                                   (In Thousands)
<S>                                     <C>       <C>       <C>       <C>  
   Inventory reserve ..............   $   451      --     $   474      --
   Fixed assets written up under
     purchase accounting and
     tax over book depreciation ...      --      18,679      --     $18,514
   Discount on long-term debt .....      --       1,085      --       1,184
   Basis difference in subsidiary
   and affiliate stock ............      --       2,918      --       3,378
   Partnership tax losses in excess
     of book losses ...............      --       1,309      --       8,040
   Net operating losses of
   subsidiaries ...................     7,166      --       4,056      --
   Other reserves and accruals ....     5,767      --       7,847      --
   Other ..........................     2,595     2,569     5,616     2,648
                                      -------   -------   -------   -------
   Total deferred income taxes ....   $15,979   $26,560   $17,993   $33,764
                                      =======   =======   =======   =======
</TABLE>


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



                                      -64-

<PAGE>



<TABLE>
<CAPTION>
                           1998       1997       1996
                         -------    ---------  --------
                                 (In Thousands)
Current payable taxes:
<S>                      <C>        <C>        <C>    
   Federal ...........   $ 4,935    $ 2,359    $   695
   State and local ...     1,339        679        193
                         -------    -------    -------
                           6,274      3,038        888
                         -------    -------    -------

Deferred taxes:
   Federal ...........    (3,923)    (3,722)     1,495
   State and local ...      (939)       (29)       638
                         -------    -------    -------
                          (4,862)    (3,751)     2,133
                         -------    -------    -------
                         $ 1,412    $  (713)   $ 3,021
                         =======    =======    =======
</TABLE>

A  reconciliation  of the provision for income taxes from continuing  operations
and the amount  computed by applying the  statutory  federal  income tax rate to
income  before  income  taxes,   minority  interest,   extraordinary  item,  and
cumulative effect of accounting change follows:

<TABLE>
<CAPTION>
                                                    1998       1997        1996
                                                 --------   ---------   ---------
                                                           (In Thousands)

<S>                                               <C>        <C>        <C>    
Tax at statutory rate .........................   $ 1,175    $(1,131)   $ 2,515

Increases (decreases):
  State and local taxes, net of federal benefit       270        429        543
  Amortization of goodwill ....................       468        443        132
  Operating losses of subsidiaries ............      (561)      (108)       (65)
  Reduction attributable to special election by
  captive insurance company ...................      --         (155)      (216)
  Other .......................................        60       (191)       112
                                                  -------    -------    -------
                                                  $ 1,412    $  (713)   $ 3,021
                                                  =======    =======    =======
</TABLE>

Net cash  payments  for income  taxes were $6.1  million,  $.7  million and $3.5
million for the years ended December 31, 1998, 1997 and 1996, respectively.

13. Comprehensive Income
------------------------

The components of accumulated other comprehensive income, net of related tax, at
December 31, 1998 and 1997 are as follows:

<TABLE>
<CAPTION>
                                          1998      1997
                                          --------------
                                          (In Thousands)
<S>                                      <C>     <C>   
Balance beginning of year ............   $  --   $   --
  
Current year unrealized gains on
available-for-sale securities ........      59       --
                                         ------  -------      
Accumulated other comprehensive income   $  59   $   --
                                         ======  =======
</TABLE>


The income tax effects allocated to each component of other comprehensive income
for the year ended December 31, 1998 are as follows:



                                      -65-

<PAGE>


<TABLE>
<CAPTION>

                                                     Tax
                                                  (Benefit)/
                                        Before Tax  Expense  After Tax
                                        ----------  -------  ---------
<S>                                       <C>      <C>      <C>  
Unrealized gains on securities
 Unrealized gains on available-for-sale
   securities .........................   $ 314    $ 132    $ 182
 Less reclassification adjustment for
   gains realized in net income .......    (213)     (90)    (123)
                                          -----    -----    ----- 
Net unrealized gains ..................     101       42       59
                                          -----    -----    -----
Other comprehensive income ............   $ 101    $  42    $  59
                                          =====    =====    =====
</TABLE>


14.  Employee Benefit Plans
---------------------------

The  company,  through  its  operating  subsidiaries,  has  several  and various
employee retirement type plans including defined benefit,  defined contribution,
multi-employer, profit sharing, and 401(k) plans. The following table sets forth
the consolidated expenses for these plans (dollars in thousands):

<TABLE>
<CAPTION>

                       1998     1997      1996
                      -------  -------  --------
<S>                    <C>      <C>      <C>   
Defined Contribution   $1,671   $1,530   $  913
Defined Benefit ....      733      531      519
Multi-Employer .....      305      234      194
                       ------   ------   ------
  Total ............   $2,709   $2,295   $1,626
                       ======   ======   ======
</TABLE>

The  unfunded   pension   liabilities,   primarily   for  defined   benefit  and
multi-employer plans are $2,480 and $1,041 for 1998 and 1997, respectively.

15.  Contingencies
------------------

Lynch has pending claims  incurred in the normal course of business.  Management
believes  that the ultimate  resolution of these claims will not have a material
adverse effect on the consolidated  liquidity,  financial position or operations
of Lynch.

16. Segment Information
-----------------------

The  Company is  principally  engaged in three  business  segments:  multimedia,
services and manufacturing.  All businesses are located domestically, and export
sales were approximately  $26.2 million in 1998, $30.4 million in 1997 and $25.0
million in 1996.  The  Company  does not believe it is  dependent  on any single
customer.  The  multimedia  segment  includes  local  telephone  companies,  the
investment in PCS entities and investments in two network-affiliated  television
stations.  The services segment includes  transportation  and related  services.
$13.4 million of the Company's  accounts  receivable are related to the services
segment  and  are  principally  due  from  companies  in  the  mobile  home  and
recreational   vehicle  industry  located  throughout  the  United  States.  The
manufacturing segment includes the manufacture and sale of adhesive coated paper
stock for labels and related  applications,  industrial  tapes,  glass  forming,
impact milling,  and other machinery and related  replacement  parts, as well as
quartz crystals and oscillators. There were no intersegment sales or transfers.

EBITDA  (before  corporate  allocation)  for  operating  segments  is  equal  to
operating  profit before  depreciation,  amortization  and  allocated  corporate
expenses.

                                      -66-

<PAGE>



EBITDA is presented because it is a widely accepted financial indicator of value
and ability to incur and service debt.  EBITDA is not a substitute for operating
income or cash flows from  operating  activities  in accordance  with  generally
accepted accounting principles.

Operating profit (loss) is equal to revenues less operating expenses,  excluding
unallocated general corporate  expenses,  interest and income taxes. The Company
allocates a portion of its general corporate expenses to its operating segments.
Such  allocation  was  $939,000,  $932,000 and  $932,000  during the years ended
December  31 1998,  1997 and  1996,  respectively.  Identifiable  assets of each
industry segment are the assets used by the segment in its operations  excluding
general corporate assets. General corporate assets are principally cash and cash
equivalents,   short-term   investments   and  certain  other   investments  and
receivables.
<TABLE>
<CAPTION>
                                               Year ended December 31
                                            1998       1997       1996
                                          --------   --------   --------
                                                   (In Thousands)
Revenues
<S>                                    <C>          <C>          <C>      
Multimedia .........................   $  54,622    $  47,908    $  28,608
Services ...........................     150,454      146,154      132,208
Manufacturing
  Adhesive-backed label stock ......     151,561      106,787      114,564
  Industrial tape ..................     121,806      119,739      124,088
  Other manufacturing ..............      36,083       46,948       52,412
                                       ---------    ---------    ---------
     Total Manufacturing ...........     309,450      273,474      291,064
                                       ---------    ---------    ---------
Consolidated total .................   $ 514,526    $ 467,536    $ 451,880
                                       =========    =========    =========
EBITDA (before corporate allocation)
Multimedia ........................   $  29,389    $  24,666    $  15,863
Services ..........................       3,337        2,190       (1,665)
Manufacturing
    Adhesive-backed label stock ....      12,010        9,027        8,385
    Industrial tape ................       9,341       11,334        9,626
    Other manufacturing ............         714        3,291        6,961
    Corporate manufacturing expenses      (2,910)      (2,181)      (1,921)
                                       ---------    ---------    ---------
    Total Manufacturing ............      19,155       21,471       23,051
  Corporate expenses, gross ........      (2,408)      (2,495)      (3,328)
                                       ---------    ---------    --------- 
   Consolidated total ..............   $  49,473    $  45,832    $  33,921
                                       =========    =========    =========
Operating profit
Multimedia .........................   $  15,757    $  11,845    $   6,611
Services ...........................       2,007        1,015       (3,263)
Manufacturing
    Adhesive-backed label stock ....       8,104        6,923        6,923
    Industrial tape ................       3,289        6,769        5,315
    Other manufacturing ............        (742)       1,971        5,770
    Corporate manufacturing expenses      (3,006)      (2,279)      (2,080)
                                       ---------    ---------    ---------
    Total Manufacturing ............       7,645       13,384       15,928
    Unallocated corporate expense ..      (1,389)      (1,457)      (2,336)
                                       ---------    ---------    --------- 
      Consolidated total ...........   $  24,020    $  24,787    $  16,940
                                       =========    =========    =========
Depreciation and amortization
Multimedia .........................   $  12,995    $  12,175    $   8,653
Services ...........................       1,230        1,075        1,498
Manufacturing
    Adhesive-backed label stock ....       3,906        2,104        1,462
    Industrial tape ................       6,052        4,565        4,311
    Other manufacturing ............       1,252        1,118        1,050
                                       ---------    ---------    ---------
 Total Manufacturing ...............      11,210        7,787        6,823
  All other ........................          18            8            7
                                       ---------    ---------    ---------
   Consolidated total ..............   $  25,453    $  21,045    $  16,981
                                       =========    =========    =========

                                      -67-
<PAGE>

Capital expenditures
Multimedia .............................   $  11,028    $  10,914    $  11,056
Services ...............................         566          919        1,007
Manufacturing
    Adhesive-backed label stock ........       2,219        1,854        6,875
    Industrial tape ....................       4,856        6,760        1,703
    Other manufacturing ................       1,078        1,377        4,860
                                           ---------    ---------    ---------
    Manufacturing ......................       8,153        9,991       13,438
    General corporate ..................          48            4           17
                                           ---------    ---------    ---------
                                           $  19,795    $  21,828    $  25,518
                                           =========    =========    =========

Total assets
Multimedia .............................   $ 196,846    $ 197,881    $ 168,354
Services ...............................      33,387       32,746       33,066
Manufacturing
    Adhesive-backed label stock ........     108,133       47,188       46,248
    Industrial tape ....................     107,586       95,582       95,925
    Other manufacturing ................      29,089       37,522       44,126
                                           ---------    ---------    ---------
    Manufacturing ......................     244,808      180,292      186,299
    General corporate ..................       4,959       12,719        4,901
                                           ---------    ---------    ---------
                                           $ 480,000    $ 423,638    $ 392,620
                                           =========    =========    =========

Total operating profit for reportable
   segments ............................   $  24,020    $  24,787    $  16,940
  Other profit or loss:
  Investment income ....................       2,064        2,048        2,203
  Interest expense .....................     (27,722)     (23,461)     (17,011)
  Equity in earnings of affiliated
    companies ..........................         317          154          119
  Reserve for impairment of investment
     in PCS license holders ............        --         (7,024)        --
  Gain on sales of subsidiary stock and
   other operating assets ..............       4,778          169        5,146
                                           ---------    ---------    ---------
Income (loss) from continuing operations
 before income taxes, minority interests
 and extraordinary item ................   $   3,457    $  (3,327)   $   7,397
                                           =========    =========    =========
</TABLE>

17. Quarterly Results of Operations (unaudited)
-----------------------------------------------

The following is a summary of the quarterly  results of operations for the years
ended December 31, 1998 and 1997 (in thousands, except per share amounts):

<TABLE>
<CAPTION>
    
                                                 1998-Three Months Ended
                                     March 31    June 30   September 30   December 31
                                     --------    -------   ------------   -----------

<S>                                <C>          <C>         <C>            <C>      
Sales and revenues .............   $ 115,217    $ 133,016   $ 134,631      $ 131,662

Operating profit ...............       4,387        8,200       7,545          3,888
   Income (loss) from continuing
   operations ..................        (436)       1,324       2,149(a)         320(b)
Net income (loss) ..............        (436)       1,324       2,149(a)         320(b)

Basic earnings per share:
   Net income (loss) ...........       (0.31)        0.93        1.52            .23

Diluted earnings per share:
   Net income (loss) ...........       (0.31)        0.93        1.52            .23

</TABLE>



                                      -68-

<PAGE>


<TABLE>
<CAPTION>
                                                     1997--Three Months Ended
                                   ------------------------------------------------------
                                    March 31     June 30   September 30     December 31
                                    --------     -------   ------------     -----------

<S>                                <C>          <C>         <C>             <C>      
Sales and revenues .............   $ 108,779    $ 121,426   $ 118,717       $ 118,614
Operating profit ...............       4,236        8,116       6,287           6,148
   Income (loss) from continuing
     operations ................        (512)       1,250      (4,274)(c)         658
Net income (loss) ..............        (512)       1,250      (4,274)(c)         658

Basic earnings per share:
   Net income (loss) ...........        (.36)         .88       (3.02)            .46

Diluted earnings per share:
   Net income (loss) ...........        (.36)         .88       (3.02)            .46
</TABLE>


     Note:
 
     (a)  Includes gain on sale of subsidiary stock of $2,127 before income tax.

     (b)  Includes  gain on sale of other  operating  assets  of  $2,696  before
          income tax.

     (c)  Includes ($7.0  million)  before income tax for reserve for impairment
          in PCS license holders.


18. Earnings per Share
----------------------

The following table sets forth the computation of basic and diluted earnings per
share from continuing operations:
<TABLE>
<CAPTION>
                                                      Year ended December 31
                                                  1998          1997          1996
                                              ------------  ------------   ------------
Numerator:
<S>                                            <C>           <C>            <C>      
Income (loss) from continuing operations
  before extraordinary item ................   $ 3,357,000   $(2,878,000)   $ 4,794,000

  Numerator for diluted earnings per share .     3,357,000    (2,878,000)     4,794,000

Denominator:
  Denominator for basic earnings per share -
  weighted-average shares ..................     1,418,000     1,415,000      1,388,000
  Effect of dilutive securities:
    Stock options ..........................          --            --           17,000
                                               -----------   -----------    -----------
  Dilutive potential common shares .........          --            --           17,000

  Denominator for diluted earnings per share
  - adjusted weighted-average shares .......     1,418,000     1,415,000      1,405,000
                                               ===========   ===========    ===========

Basic earnings (loss) per share ............   $      2.37   $     (2.03)   $      3.45
                                               ===========   ===========    ===========

Diluted earnings (loss) per share ..........   $      2.37   $     (2.03)   $      3.41
                                               ===========   ===========    ===========
</TABLE>


19. Subsequent Events
---------------------

On February 22, 1999, the Company's 53%-owned subsidiary, The Morgan Group, Inc.
announced that it is commencing a tender offer to purchase shares of its Class A
common stock.  Under terms of the offer,  Morgan would determine the price to be
paid for shares between $8.50 and $10.00 per share.  The tender offer  concluded
on March 19, 1999,  whereby  Morgan  purchased  approximately  103,000 shares at
$9.00 per share. Lynch Corporation did not tender any of its Morgan shares.


                                      -69-

<PAGE>



  SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT LYNCH CORPORATION
                        CONDENSED STATEMENT OF 0PERATIONS
                        ---------------------------------

<TABLE>
<CAPTION>
                                                     Year Ended December 31
                                                 -------------------------------
                                                  1998       1997        1996
                                                 -------   --------    ---------
                                                   (In Thousands of Dollars)
                                                 -------   --------    ---------
<S>                                              <C>        <C>        <C>    
Interest, Dividends & Gains on Sale of
  Marketable Securities ......................   $   128    $   377    $   649
Interest & Other Income from Subsidiaries ....        35         35        621
Gain on Sale of Subsidiary and Affiliated
Stock: Brown-Bridge Industries, Inc. .........      --         --          203
                                                 -------    -------    -------
      TOTAL INCOME ...........................       163        412      1,473

Costs and Expenses:
 Unallocated Corporate Administrative Expense      1,371    $ 1,436    $ 2,312
 Interest Expense ............................     1,394      1,257        669
 Interest Expense to Subsidiaries ............       830        741        249
                                                 -------    -------    -------
      TOTAL COST AND EXPENSES ................     3,595      3,434      3,230

LOSS BEFORE INCOME TAXES, EQUITY IN NET INCOME
  INCOME (LOSS) OF SUBSIDIARIES LOSS .........    (3,432)    (3,022)    (1,757)

Income Tax Benefit ...........................     1,648      1,142        515
Equity in Net Income (Loss) of Subsidiaries ..     5,141       (998)     3,939
                                                 -------    -------    -------
      NET INCOME .............................   $ 3,357    $(2,878))  $ 2,697
                                                 =======    =======    =======

</TABLE>

NOTES TO CONDENSED FINANCIAL STATEMENTS

NOTE A - BASIS OF PRESENTATION

         In the parent company's financial statements,  the Company's investment
         in subsidiaries is stated at cost plus equity in undistributed earnings
         of the subsidiaries.

NOTE B - DIVIDENDS FROM SUBSIDIARIES

         Cash  dividends  paid  to  Lynch   Corporation  from  the  Registrant's
         consolidated  subsidiaries were $3,060,000 in 1998, $1,195,000 in 1997,
         and  $1,811,000  in  1996.  No  other   dividends  were  received  from
         subsidiaries or investees.

NOTE C - LONG-TERM DEBT

         Lynch  Corporation  has a note payable to a subsidiary with a principal
         amount of $6.0 million at a fixed interest rate of 6% per annum, due in
         2001.  The note is  convertible  at the  subsidiary's  option  into the
         Company's common stock at an exercise price of $120 per share.

NOTE D -  SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL
         INFORMATION.


                                      -70-

<PAGE>



           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
                    LYNCH CORPORATION CONDENSED BALANCE SHEET
                    -----------------------------------------

<TABLE>
<CAPTION>
                                                     Year Ended December 31
                                                         1998      1997
                                                       --------  --------
                                                        (In Thousands of
                                                           Dollars)
                                                       ------------------
ASSETS

CURRENT ASSETS
<S>                                                    <C>       <C>    
  Cash and Cash Equivalents ........................   $   291   $   290
  Marketable Securities and Short Term Investments .       874       755
  Deferred Income Tax Benefits .....................       140       348
  Other Current Assets .............................        40        47
                                                       -------   -------
                                                         1,345     1,440

OFFICE EQUIPMENT (Net of Depreciation) .............        52        22

OTHER ASSETS (Principally Investment in and Advances
to Subsidiaries ....................................   $72,729   $69,255
                                                       -------   -------

  TOTAL ASSETS .....................................   $74,126   $70,717
                                                       =======   =======

LIABILITIES AND SHAREHOLDERS' EQUITY

CURRENT LIABILITIES ................................   $22,832   $28,602

LONG TERM DEBT .....................................     8,623     2,190
DEFERRED INCOME TAX LIABILITIES ....................       980     1,478

DEFERRED CHARGES ...................................     1,898     1,996

TOTAL SHAREHOLDERS' EQUITY .........................   $39,793   $36,451
                                                       -------   -------

Total Liabilities and Shareholders' Equity .........   $74,126   $70,717
                                                       =======   =======
</TABLE>


                                      -71-

<PAGE>



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

<TABLE>
<CAPTION>

                                                    Year Ended December 31
                                                 1998        1997        1996
                                               --------    --------    --------
                                                  (In Thousands of Dollars)
                                               --------    --------    --------

<S>                                            <C>         <C>         <C>     
Cash Provided From (Used In) Operating .....   $  1,049    $    (25)   $    469
Activities
                                               --------    --------    --------

INVESTING ACTIVITIES:
 Investment in Lynch Manufacturing .........      3,000       1,135       1,683
 Investment and Advances to Brighton .......       --           (17)     (2,053)
Communications
 Loan to Spinnaker Industries, Inc. ........       --          --         1,330
 Investment in Brown-Bridge Industries, Inc.       --          --           407
 Investment in and Advances to PCS .........      3,692      (8,628)    (14,315)
Partnerships
 Other .....................................       (176)        (94)        667
                                               --------    --------    --------
NET CASH PROVIDED FROM (USED IN) INVESTING
ACTIVITIES .................................      6,516      (7,604)    (12,281)
                                               --------    --------    --------

FINANCING ACTIVITIES:
Net Borrowings
 Lines of Credit ...........................     (7,564)      7,179       8,627
 Issuance of Long Term Debt ................       --          --         2,000
 Sale of Treasury Stock ....................       --           672         754
 Other .....................................       --          --             1
                                               --------    --------    --------

NET CASH PROVIDED FROM FINANCING ACTIVITIES      (7,564)      7,851      11,382
                                               --------    --------    --------

TOTAL INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS ................................          1         222        (430)

CASH AND CASH EQUIVALENTS AT BEGINNING OF ..        290          68         498
YEAR
                                               --------    --------    --------

CASH AND CASH EQUIVALENTS AT END OF YEAR ...   $    291    $    290    $     68
                                               ========    ========    ========
</TABLE>

                                             
                                      -72-

<PAGE>



                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                 LYNCH CORPORATION AND SUBSIDIARIES YEARS ENDED
                        DECEMBER 31, 1998, 1997 AND 1996
                        --------------------------------

<TABLE>
<CAPTION>

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

<S>                            <C>          <C>          <C>             <C>                    <C> 
YEAR ENDED DECEMBER 31, 1998
ALLOWANCE FOR UNCOLLECTIBLE    $1,448,000   $  723,000   $        0      $  866,000(B)          $1,305,000

YEAR ENDED DECEMBER 31, 1997
ALLOWANCE FOR UNCOLLECTIBLE    $1,525,000   $  742,000   $        0      $  819,000(B)          $1,448,000

YEAR ENDED DECEMBER 31, 1996
ALLOWANCE FOR UNCOLLECTIBLE    $1,732,000   $1,900,000   $   75,000(A)   $2,182,000(A)(B)))))   $1,525,000

(A) ALLOCATION OF PURCHASE PRICE OF ACQUIRED COMPANY.
(B) UNCOLLECTIBLE ACCOUNTS WRITTEN OFF ARE NET OF RECOVERIES.

                                      -73-
</TABLE>

<PAGE>



                                   SIGNATURES

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

LYNCH CORPORATION

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

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

         Signature                        Capacity                             Date
         ---------                        --------                             ----
<S>                                    <C>                                   <C> 
* MARIO J. GABELLI ..................   Chairman of the Board of
  ----------------
  MARIO J. GABELLI                      Directors and Chief                 March 30, 1999
                                          Executive Officer
                                          (Principal Executive Officer)

* E. VAL CERUTTI ....................   Director                            March 30, 1999
  --------------
  E. VAL CERUTTI

* PAUL J. EVANSON ...................   Director                            March 30, 1999
  --------------
  PAUL J. EVANSON

* JOHN C. FERRARA ...................   Director                            March 30, 1999
  --------------
  JOHN C. FERRARA

* DAVID C. MITCHELL .................   Director                            March 30, 1999
  --------------
  DAVID C. MITCHELL

* SALVATORE MUOIO ...................   Director                            March 30, 1999
  --------------
  SALVATORE MUOI0

* RALPH R. PAPITTO ..................   Director                            March 30, 1999
  --------------
  RALPH R. PAPITTO

s/ROBERT E. DOLAN ...................   Chief Financial Officer
  ---------------
  ROBERT E. DOLAN                       (Principal Financial
                                        and Accounting Officer)             March 30, 1999


*s/ROBERT A. HURWICH
--------------------
   ROBERT A. HURWICH
   Attorney-in-fact

</TABLE>


                                      -74-

<PAGE>



                                  EXHIBIT INDEX
                                  -------------



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

3     (a) 

               Restated Articles of Incorporation of Registrant (incorporated by
               reference to Exhibit 3(a) of the  Registrant's  Annual  Report on
               Form 10-K for the year ended December 31, 1987).


     (b)

               By-Laws of the  Registrant,  (incorporated  by  reference  to the
               Exhibit 3(b) of the  Registrant's  Annual Report on Form 10-K for
               the year ended  December  31,  1987).  4 (a) Loan  Agreement  and
               Revolving Loan Note of Lynch Telephone Corporation, dated October
               18,  1989,  (incorporated  by  reference  to Exhibit  4(d) of the
               Registrant's Form 10-K for the year ended December 31, 1989).

     (b)

               Purchase  Agreement,   dated  October  18,  1996  (the  "Purchase
               Agreement")   among  Spinnaker   Industries,   Inc.,  a  Delaware
               corporation  ("Spinnaker"),   Brown-Bridge  Industries,  Inc.,  a
               Delaware corporation ("Brown-Bridge), Central Products Company, a
               Delaware corporation ("Central Products"),  and Entoleter,  Inc.,
               ("Entoleter")   and  together  with   Brown-Bridge   and  Central
               Products,  the "Guarantors")  and BT Securities  Corporation (the
               "Initial Purchaser") (incorporated by reference to Exhibit 4.1 to
               Registrant's Form 8-K, dated October 23, 1996).

     (c)

               Indenture  dated,   October  23,  1996,   among  Spinnaker,   the
               Guarantors and the Chase Manhattan Bank, as Trustee (incorporated
               by reference to Exhibit 4.3 to Registrant's Form 8-K, dated April
               19, 1996).

     (c)(i)

               First  Supplemental  Indenture  dates as of March 17,1998,  among
               Spinnaker,  Central Products Company,  Entoleter, Inc., Spinnaker
               Coating,  Inc.,  Spinnaker  Coating-Maine,  Inc.  and  The  Chase
               Manhattan Bank, as Trustee  (incorporated by reference to Exhibit
               99.6 to the Form 8-K of Spinnaker  Industries,  Inc.  dated as of
               March 17,1998).

     (d)

               Credit Agreement (the "Spinnaker Credit Agreement") amended as of
               December 31,  1997,  among  Central  Products,  Brown-Bridge  and
               Entoleter,  as Borrowers,  Spinnaker,  as Guarantor,  each of the
               financial   institutions   listed  on  Schedule  1  thereto,   BT
               Commercial Corporation,  as Agent,  Transamerican Business Credit
               Corporation, as Collateral Agent,

                                      -75-

<PAGE>



               and  Bankers  Trust  Company as  Issuing  Bank  (incorporated  by
               reference to Exhibit 99.1 to Registrant's  Form 8-K dated October
               23, 1996).

     (d)(i) 

               Fourth Amendment to the Spinnaker Credit Agreement  (incorporated
               by  reference  to  Exhibit  9.3 to  the  Form  8-K  of  Spinnaker
               Industries, Inc. dated as of March 17,1998).

     (d)(ii)

               Fifth Amendment to the Spinnaker Credit  Agreement  (incorporated
               by  reference  to  Exhibit  9.4 to  the  Form  8-K  of  Spinnaker
               Industries, Inc. dated as of March 17,1998).

     (d)(iii)

               Sixth Amendment to the Spinnaker Credit  Agreement  (incorporated
               by  reference  to  Exhibit  9.5 to  the  Form  8-K  of  Spinnaker
               Industries,  Inc. dated as of March 17,1998). 

The  Registrant,  by signing this Form 10-K Annual Report,  agrees to furnish to
the Securities and Exchange  Commission a copy of any long-term debt  instrument
where the  amount of the  securities  authorized  thereunder  does not exceed 10
percent of the total assets of the Registrant on a consolidated basis.

10   (a)

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

     *(b)

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

     (c)

               Stock Purchase Agreement,  dated May 13, 1993, whereby Registrant
               acquired  J.B.N.   Telephone  Company,   Inc.   (incorporated  by
               reference to Exhibit  2(a) of the  Registrant's  Form 8-K,  dated
               December 13, 1993).+

     (d)

               Stock  Purchase  Agreement,   dated  January  19,  1994,  between
               Registrant  and Mario J.  Gabelli  (incorporated  by reference to
               Exhibit II of Amendment  Number 36 to Schedule 13D filed by Mario
               J. Gabelli and affiliated companies on January 19, 1994).

     (f)

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

                                      -76-

<PAGE>



               dated March 14, 1994).

     (g)

               Acquisition    Agreement   between    Brown-Bridge    Acquisition
               Corporation and Kimberly-Clark  Corporation,  dated June 15, 1994
               (exhibit omitted)  (incorporated by reference to Exhibit 10(c) to
               Registrant's Form 10-Q for the quarter ended June 10, 1994).+
     
     *(g)

               Management  Agreement,  dated as of June 10,  1994,  by and among
               Boyle,  Fleming,  George & Co., Inc. and Safety  Railway  Service
               Corporation  (incorporated  by  reference  by Exhibit  7.1 to the
               Registrant's Form 8-K, dated June 13, 1994).

     (h)

               Warrant  Purchase  Agreement,  dated as of June 10, 1994,  by and
               among  Boyle,  Fleming,  George & Co.,  Inc.  and Safety  Railway
               Service Corporation  (incorporated by reference by Exhibit 7.1 to
               the Registrant's Form 8-K, dated June 13, 1994).

     (i)

               A Warrant,  dated as of June 10, 1994, executed by Safety Railway
               Service Corporation  (incorporated by reference to Exhibit 7.1 to
               Registrant's Form 8-K, dated June 12, 1994).

     (j)(i)

               Asset  Purchase  Agreement,  dated as of June 15,  1994,  between
               Kimberly-Clark  Corporation and  Brown-Bridge  Acquisition  Corp.
               (Exhibits omitted) (incorporated by reference to Exhibit 10(c) to
               Registrant's Form 10-Q for the quarter ended June 30, 1994).+

     (j)(ii)

               Amendments  Nos. 1-3 to Asset  Purchase  Agreement by and between
               Kimberly-Clark  Corporation  and  Brown-Bridge  Industries,  Inc.
               (formerly   Brown-Bridge   Acquisition  Corp.)  (incorporated  by
               reference to Registrant's Form 8-K, dated September 19, 1994).

     (k)

               Stock  Purchase  Agreement,  dated as of August 26,  1994,  among
               Brighton Communications Corporation,  Lynch Telephone Corporation
               VII,   Universal   Service  Telephone  Company  and  InterDigital
               Communications  Corporation  (Exhibits omitted)  (incorporated by
               reference  to  Exhibit  7.1  to  Registrant's   Form  8-K,  dated
               September 26, 1994).+

     *(l)

               Stock  Purchase  and Loan Program  (incorporated  by reference to
               Exhibit  10(p) to  Registrant's  Form  10-K  for the  year  ended
               December 31, 1994).

     (m)

               Shareholders'  and Voting  Agreement,  dated  September 16, 1994,
               among   Safety   Railway   Service   Corporation,    Brown-Bridge
               Industries, Inc. and the other

                                      -77-

<PAGE>



               stockholders  of  Brown-Bridge   (incorporated  by  reference  to
               Exhibit  10(q) to  Registrant's  Form  10-K  for the  year  ended
               December 31, 1994).

     (n)

               Put Option  Agreements,  dated  September 16, 1994,  among Safety
               Railway Service Corporation,  Brown-Bridge  Industries,  Inc. and
               certain  stockholders of Brown Bridge  (incorporated by reference
               to  Exhibit  10(q) to  Registrant's  Form 10-K for the year ended
               December 31, 1994).

     *(o)

               Directors Stock Plan

     *(p)

               Amended Phantom Stock Plan  (incorporated by reference to Exhibit
               10(p) to Registrant's  Form 10-Q for the year ended September 30,
               1998).

     (q)

               Stock and Asset  Purchase  Agreement,  dates as of September  27,
               1995, by and among Central Products Acquisition Corp.,  Unisource
               Worldwide,  Inc. and Alco Standard  Corporation  (incorporated by
               reference to Exhibit 7.1 to  Registrant's  Form 8-K dated October
               18, 1995).+

     (r)

               Stock  Purchase  Agreement,  dated as of November 1, 1995,  among
               Brighton Communications Corporation,  Lynch Telephone Corporation
               VIII and certain other persons (excluding exhibits) (incorporated
               by reference to Exhibit 10(v) to  Registrant's  Form 10-K for the
               year ended December 31, 1995).+

     (s)(i)

               Loan Agreement,  dated as of November 6, 1995,  between Lynch PCS
               Corporation  A and Aer Force  Communications  L.P.  (now Fortunet
               Wireless,  L.P.) (four  similar  loan  agreements  with  Fortunet
               Wireless,  L.P. increase the total potential  commitment to $41.8
               million)   (incorporated   by  reference  to  Exhibit   10(w)  to
               Registrant's Form 10-K for the year ended December 31, 1995.

     (s)(ii)

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

     (t)

               Agreement and Plan of Merger (Brown-Bridge Minority Interest), by
               and among Spinnaker,  BB Merger Corp.,  Brown-Bridge  Industries,
               Inc. and the  stockholders  of Brown-Bridge  Industries,  Inc. on
               Exhibit A thereto  (incorporated  by reference to Exhibit 99.2 to
               Registrant's Form 8-K, dated April 19, 1996).+

                                      -78-

<PAGE>




     (u)(i)

               Loan  Agreement,  dated as of August 12,  1996,  between  Gabelli
               Funds, Inc. and Registrant  (incorporated by reference to Exhibit
               10(u)(i) of  Registrant's  Form 10-K for the year ended  December
               31, 1996.

     (u)(i)(a)

               Correction  to  Loan  Agreement  (incorporated  by  reference  by
               Exhibit  10(u)(i)(a) to Registrant's Form 10-K for the year ended
               December 31, 1997.

     (u)(ii)

               Pledge and Security  Interest  Agreement,  dated as of August 12,
               1996, by and between Gabelli Funds,  Inc.  Registrant and certain
               subsidiaries of Registrant  (incorporated by reference to Exhibit
               10(u)(ii) to  Registrant's  Form 10-K for the year ended December
               31, 1996).

     (u)(iii)

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

     (u)(iv)

               Letter  Agreement  dated as of December 16, 1998  between  Rivgam
               Communicators, L.L.P. and Lynch PCS Corporation G.

     (w)

               Loan  Agreement,  dated as of August 12, 1996  between  Lynch PCS
               Corporation F and Aer Force Communications B, L.P.  (incorporated
               by reference to Exhibit  10(u)(ii) to Registrant's  Form 10-K for
               the year ended December 31, 1996).

     (x)

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

     (y)

               Letter  Agreement,  dated  January 20,  1998,  between  Lynch PCS
               Corporation G and BCK/Rivgam,  L.L.C.  (incorporated by reference
               to  Exhibit  10(y) to  Registrant's  Form 10-K for the year ended
               December 31, 1987).
          
     *(z)

               Employment Agreement,  dated February 2, 1998, between Registrant
               and Mark Feldman  (incorporated  by reference to Exhibit 10(z) to
               Registrant's  Form 10-K for the year ended December  31,1997.  

10   (a)(a) 

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

                                      -79-

<PAGE>



     (b)(b)(i)

               Asset  Purchase  Agreement  dated as of November 18, 1997, by and
               between   S.D.   Warren   Company    ("Seller")   and   Spinnaker
               (incorporated  by  reference  to  Exhibit  2.1 to the Form 8-K of
               Spinnaker Industries, Inc. dated as of March 17,1998).+

     (b)(b)(ii)

               First Amendment to Asset Purchase Agreement dated March 17, 1998,
               by and between Seller and Spinnaker (incorporated by reference to
               Exhibit 4.2 to the Form 8-K of Spinnaker  Industries,  Inc. dated
               as of March 17,1998).+

     (b)(b)(iii)

               Subordinated  Note dated March 17,  1998,  issued by Spinnaker to
               Seller in the  original  principal  amount of $7 million  bearing
               interest at a rate of 10% per annum (incorporated by reference to
               Exhibit 4.1 to the Form 8-K of Spinnaker  Industries,  Inc. dated
               as of March 17,1998).

     (b)(b)(iv)

               Site  Separation  and Service  Agreement  dated  March 17,  1998,
               between  Seller  and  Spinnaker  (incorporated  by  reference  to
               Exhibit 99.1 to the Form 8-K of Spinnaker Industries,  Inc. dated
               as of March 17,1998).

     (b)(b)(v)

               Lease  Agreement  dated  March  17,  1998,   between  Seller  and
               Spinnaker  (Incorporated by reference to Exhibit 99.2 to the Form
               8-K of Spinnaker Industries, Inc. dated as of March 17,1998).

     (c)(c)
     
               Letter Agreement dated November 11, 1998,  between Registrant and
               Gabelli & Company, Inc. 
16

               Letter  Re:  Change in  Certifying  Accountant  (incorporated  by
               reference to Exhibit 16 to Registrant's Form 8-K, dated March 19,
               1996).

21   Subsidiaries of the Registrant.

23   Consents of Independent Auditors.
         -  Ernst & Young LLP
         -  McGladrey & Pullen, LLP(2)
         -  Deloitte & Touche LLP
         -  Johnson Mackowiak Moore & Myott, LLP - Frederick & Warinner, L.L.C.
         -  Frederick & Warinner, L.L.C.

24   Powers of Attorney.

99   Report of Independent Auditors.
         -        Report of McGladrey & Pullen, LLP on the
                  Financial Statements of Capital

                                      -80-

<PAGE>


                  Communications  Corporation  for the year ended  December  31,
                  1996.
         -        Report of McGladrey & Pullen, LLP on the Financial  Statements
                  of  Coronet  Communications  Corporation  for the  year  ended
                  December 31, 1996.
         -        Report of Deloitte & Touche LLP on the Financial Statements of
                  Central Products Company for the year ended December 31, 1996.
         -        Report  of  Johnson  Mackowiak  Moore  &  Myott,  LLP  on  the
                  Consolidated   Financial  Statements  of  Dunkirk  &  Fredonia
                  Telephone  Company for the period  November  21, 1996  through
                  December 31, 1996.
         -        Report of Frederick & Warinner, L.L.C.
                  on the Financial Statements of CLR
                  Video, Inc.
--------------------
*    Management contract or compensatory or arrangement.

+ Registrant  agrees to furnish a supplemental  copy of any omitted  schedule to
the Securities and Exchange Commission upon request.


The Exhibits  listed above have been filed  separately  with the  Securities and
Exchange  Commission in conjunction with this Annual Report on Form 10-K or have
been  incorporated  by  reference  into this Annual  Report on Form 10-K.  Lynch
Corporation  will furnish to each of its shareholders a copy of any such Exhibit
for a fee equal to Lynch Corporation's cost in furnishing such Exhibit. Requests
should be  addressed  to the Office of the  Secretary,  Lynch  Corporation,  401
Theodore Fremd Avenue, Rye, New York 10580.



                                      -81-