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SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549




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Form 10-K

|   |  |                                                                                                 
|-- |  | ------------------------------------------------------------------------------------------------
|þ  |  | ANNUAL REPORT PURSUANT TO SECTION 13 OR
    15(d) OF
    THE SECURITIES EXCHANGE ACT OF 1934    
|   |  | For the fiscal year ended December 31,
    2003           Commission
    file number 1-106      
|  
|OR
|o  |  | TRANSITION REPORT PURSUANT TO SECTION 13 OR
    15(d)
    OF THE SECURITIES EXCHANGE ACT OF 1934
|  
|   |  | For the transition period
    from           to                                                 

LYNCH CORPORATION

(Exact name of Registrant as specified in its
charter)


|                                                                   |  |                                         
|------------------------------------------------------------------ |  | ----------------------------------------
|Indiana                                                            |  | 38-1799862                              
|(State or other jurisdiction of
    Incorporation or organization) |  | (I.R.S. Employer
    Identification No.)
|                                                                  
|50 Kennedy Plaza, Suite 1250,
    Providence, RI                   |  | 02903(Zip Code)                         
|(Address of principal executive
    offices)                       |  |                                         

Registrants telephone number, including
area code:

(401) 453-2007


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

|                              |  |                                          
|----------------------------- |  | -----------------------------------------
|Title of each class           |  | Name of each exchange on which registered
|                              |  |                                          
|Common Stock, $0.01 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 þ          No o

Indicate by check 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.     o

Indicate by check mark whether the registrant is
an accelerated filer (as defined) in Rule 12b-2 under the
Securities Act of
1934).     Yes o          No þ

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 June 30, 2003 of $9.90 per share)
was $10.0 million. (In determining this figure, the
Registrant has assumed that all of the Registrants
directors and officers are affiliates. This assumption shall not
be deemed conclusive for any other purpose.)

The number of outstanding shares of the
Registrants Common Stock was 1,495,483 as of
March 12, 2004.

DOCUMENTS INCORPORATED BY REFERENCE:

Certain portions of Registrants definitive
Proxy Statement for the 2004 Annual Meeting of Shareholders,
which will be filed with the Securities and Exchange Commission
not later than April 13, 2004, are incorporated by
reference in Part III of this Report.



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FORWARD LOOKING INFORMATION

This document contains forward-looking statements
within the meaning of the Private Securities Litigation Reform
Act of 1995. When used in this discussion and throughout this
document, words, such as intends, plans,
estimates, believes,
anticipates and expects or similar
expressions are intended to identify forward-looking statements.
These statements are based on the Registrants current
plans and expectations and involve risks and uncertainties, over
which the Registrant has no control, that could cause actual
future activities and results of operations to be materially
different from those set forth in the forward-looking
statements. Important factors that could cause actual future
activities and operating results to differ include fluctuating
demand for capital goods such as large glass presses, delay in
the recovery of demand for components used by telecommunications
infrastructure manufacturers, and exposure to foreign economies.
Important information regarding risks and uncertainties is also
set forth elsewhere in this document, including in Item 7.
Managements Discussion and Analysis of Financial
Condition and Results of Operations. Readers are cautioned
not to place undue reliance on these forward-looking statements,
which speak only as of the date hereof. The Registrant
undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future
events or otherwise. All subsequent written or oral
forward-looking statements attributable to the Registrant or
persons acting on its behalf are expressly qualified in their
entirety by these cautionary statements. Readers are also urged
to carefully review and consider the various disclosures made by
the Registrant, in this document, as well as the
Registrants periodic reports on Forms 10-K, 10-Q and
8-K, filed with the Securities and Exchange Commission
(SEC).

The Registrant makes available, free of charge,
its annual report on Form 10-K, Quarterly Reports on
Form 10-Q, and current reports, if any, on Form 8-K.

The Registrant also makes this information
available on its website, whos internet address is
www.lynchcorp.com.

PART I



|        |         
|------- | --------
|Item 1. | Business

The Registrant, Lynch Corporation (hereinafter
referred to as Registrant, Company or
Lynch), incorporated in 1928 under the laws of the
State of Indiana, is a diversified holding company with
subsidiaries engaged in manufacturing. Lynchs executive
offices are located at 50 Kennedy Plaza, Suite 1250,
Providence, RI 02903. Its telephone number is
(401) 453-2007.

Lynch has two wholly owned subsidiaries, M-tron
Industries, Inc., a Delaware corporation
(M-tron), and Lynch Systems, Inc., a South
Dakota corporation (LS or Lynch Systems).

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. As used herein, the Registrant
includes subsidiary corporations.

A.     Lynch
Systems, Inc.



| |         
| | --------
| | Overview

Lynch Systems, Inc. (LS or
Lynch Systems), a 100% owned subsidiary of
Registrant, 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.



| |                                   
| | ----------------------------------
| | Selected Financial
    Information

For financial reporting purposes, Lynch Systems
comprises the Registrants glass manufacturing
equipment segment. For information about this
segments net sales, profit or loss, and total assets for
each of

2



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the last three fiscal years, please see
Note 15 Segment Information to the
Registrants Consolidated Financial Statements.




| |                         
| | ------------------------
| | Lynch Systems Objectives

LS intends to continue to build on its name
recognition and reputation as one of the worlds leading
manufacturers of glass forming machinery. LS is the only
independent supplier in the CRT (cathode ray tube) glass forming
field and it is LSs intention to use this strength to form
closer partnerships with its customers in their pursuit of
innovative glass making machinery. In addition, LS will use its
expertise to provide technical assistance to other glass product
manufacturers.

LSs long term intentions are to monitor the
market direction and to be at the forefront of technology in
order to respond to market demand for new and innovative types
of machinery needed to produce glass. LS intends to continue to
research and develop state-of-the-art machinery within its core
competence, and also to seek new markets, such as container
ware, where its experience and proven success can be utilized to
develop new products and increase its growth.

LS also intends to continue to expand on its
expertise in the feeder and shear markets obtained from its
former joint venture partner, Lynch AMAV LLC, and to reduce the
cost of its raw materials by continuing to search for cheaper
suppliers of materials, especially from foreign markets. In
addition, LS intends to continue its own in-house cost cutting
programs by eliminating redundant or superfluous operations,
improving its factory quality and yield rates and better
utilization of its current personnel. By increasing its
efficiency and shortening its delivery rate, LS hopes to
increase the number of turns giving a positive effect to its
financial performance. There is no assurance that LS can attain
these objectives.



| |                           
| | --------------------------
| | Products and Manufacturing

LS manufactures glass-forming presses and
electronic controls to provide high-speed automated systems to
form different sizes of face panels and CRT display tubes for
television screens and computer monitors, including presses to
build large screen televisions for the HDTV (high definition
television) market. LS also manufactures and installs forming
equipment that sizes, cuts, and forms tableware such as glass
tumblers, plates, cups, saucers and commercial optical glass.
Additionally, LS manufactures and installs fire polishing,
electronic controls and retrofit systems for CRT display and
consumer glass presses.

At year-end 1998, LS, through a subsidiary,
entered into a joint venture, Lynch-AMAV LLC, with AMAV GmbH of
Germany to develop and manufacture glass-manufacturing equipment
for the tableware industry. The joint venture designed and
developed feeders, shears and presses, most of which were
manufactured for the joint venture by LS. LS believes that this
joint venture expanded LSs glass tableware equipment
business, particularly in Europe. LS had a 75% interest in the
joint venture until June 13, 2002 when LS completed the
planned AMAV technology transfer and acquired the remaining
interests in the joint venture. All international business is
now directed from Bainbridge, Georgia and all equipment is
produced in the United States.

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.

In 2003, LS sold three large glass press machines
with an aggregate value of $7.3 million. Using the
percentage of completion method, $5.5 million was
recognized in 2003 revenue with the balance expected to be
recognized in 2004.

In 2001 LS sold four additional large TV glass
press machines that were delivered in 2002. These machines sold
for an aggregate of $14 million, of which $5.5 million
was recognized as revenue in 2001 using the percentage of
completion method with the balance of $8.5 million
recognized in 2002 upon delivery and acceptance of these
machines. At December 31, 2002, the Company had sold two
machines for approximately $1.5 million, of which
$0.7 million was recognized in 2002 using the percentage of
completion accounting method with the balance recognized in 2003
upon delivery and acceptance of these machines.

3



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LSs worldwide customers require capital
equipment that produces a wide variety of Tableware products to
remain competitive. In support of this market demand, Lynch
Systems has invested in Research & Development
(R&D) programs to manufacture new lines of capital equipment
such as Stretch Machines for one-piece Stemware, Firepolishers
for high quality Tableware and Spinning Machines for high speed,
high quality Dishware.

To further expand LSs Tableware product
lines, additional product lines have been acquired through
royalty partnerships with leading industry concerns. In 1999, LS
acquired the H-28 Press and Blow machine from Emhart Glass SA.
This high production machine produces both round and geometric
design Tumblers and is now marketed by LS as the LH-28 with
numerous Electronic Control improvements. In accordance with the
terms of the agreement, LS is obligated to pay Emhart a royalty
of 13% on parts sales up to $2 million a year, a 5% royalty
rate on all parts sales in excess of $2 million, and 5% on
all machine sales through 2008. In 2000, the Eldred product line
of Burnoff Machines, used to fire finish the rims of the H-28
Tumblers, and four-color Decorating Machines were acquired by
LS. In accordance with the terms of the agreement, LS is
obligated to pay Eldred a royalty of 10% on sales up to
$300,000 per year and 8% royalty on sales over
$300,000 per year until 2010. All Tableware capital
equipment requires moulds in the production of any article. In
2002, agreement was reached with Merkad Glassware Mould, Ltd., a
producer of high quality moulds, to represent and distribute
moulds throughout North and South America. LS has no contractual
obligations to Merkad.



| |                    
| | -------------------
| | International Sales

LSs revenues from international sales were
$9.1 million, $13.2 million and $23.1 million for
2003, 2002 and 2001, respectively, representing approximately
71%, 88% and 89% of LSs net sales for 2003, 2002 and 2001,
respectively. International sales the past three years were
mainly to customers in China, South Korea, Lithuania, and the
Netherlands. The profitability of international sales is
approximately 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 foreign country, the Registrant believes that most
of the credit risks commonly associated with doing business in
international markets are minimized. The Registrant avoids
currency exchange risk by transacting substantially all
international sales in United States dollars.



| |        
| | -------
| | Backlog

LS had an order backlog of approximately
$2.8 million at December 31, 2003, compared to
$3.9 million at December 31, 2002. Backlog declined
due to the lack of orders from television and tableware
manufactures. All of LSs $2.8 million backlog as of
December 31, 2003 is scheduled to be delivered in 2004. LS
includes as backlog only those orders which are subject to
written contract or written purchase orders.



| |            
| | -----------
| | Competition

LS believes that in the worldwide pressware
market it is the largest supplier to glass companies that do not
manufacture their own pressware machines. 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.



| |          
| | ---------
| | Customers

Although one customer accounted for 27% of Lynch
Systems 2003 revenue, and three customers accounted for 66% of
2003 sales, its pool of potential customers is diverse and LS
does not believe it is dependent upon a single customer.

4



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| |              
| | -------------
| | Raw Materials

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



| |                         
| | ------------------------
| | Research and Development

Research and development expense was $180,000 in
2003, $220,000 in 2002 and $146,000 in 2001. 2003 R&D
expense was for television related activities while prior year
R&D was mainly for stemware.



| |                      
| | ---------------------
| | Intellectual Property

Lynch Systems owns patents and proprietary
know-how which are important to its business and the maintenance
of its competitive position. Its most important patent is for a
rotary glass-molding press with cushioned trunnion mounted
hydraulic drive, expiring October, 2012. Lynch Systems
investment in Lynch-AMAV, discussed above, has given Lynch
Systems access to important proprietary know-how and technology
that has enabled Lynch Systems to expand its product offerings
and customer base.



| |          
| | ---------
| | Employees

Lynch Systems employs 68 employees at its
Bainbridge, Georgia facility, and 2 in Germany, none of whom
belong to a union.

B.     M-tron
Industries, Inc. (M-tron)



| |         
| | --------
| | Overview

M-tron, a wholly-owned subsidiary of Lynch, is a
designer, manufacturer and marketer of custom designed
electronic components that are used primarily to control the
frequency or timing of electronic signals in communications
equipment. Its devices, which are commonly called frequency
control devices, crystals or oscillators, support fixed and
mobile wireless, copper wire, coaxial cable, wide area networks,
local area networks and fiber optic systems. It sells its
products to original equipment manufacturers, contract
manufacturers and to distributors.

M-trons products are quartz crystal based
frequency control devices consisting of packaged quartz crystals
and oscillators incorporating those crystals. Its products
enable communications equipment manufacturers and network
equipment manufacturers to meet the increasing demands of their
customers because they produce an electrical signal that is:



| |   |                                                                                                                                                 
| | - | ------------------------------------------------------------------------------------------------------------------------------------------------
| |  | accurate  the frequency of the signal
    does not change significantly over a period of time;                                                 
|
| |  | stable  the frequency of the signal
    does not vary significantly when our product is subjected to a
    range of operating temperatures; and
|
| |  | has low electronic noise  the signal
    does not add interfering signals that can degrade the
    performance of the electronics system.      

In addition, M-tron sells crystals and
oscillators which are used outside the communications industry.
These frequency control devices are used in microprocessor and
computer applications, industrial controls, medical
instrumentation, automotive products and military applications.

In October 2002, M-tron acquired certain assets,
technology and customer orders backlog from Champion
Technologies, Inc. (Champion). Champions
product line includes crystals, clock oscillators, specialized
crystal oscillators, and timing solutions that will further
broaden M-trons product offering and customer base. See
Note 2  Acquisitions  to
the Registrants Consolidated Financial Statements.

M-tron has over 35 years of experience
designing, manufacturing and marketing crystal based frequency
control products. Its customers rely on the skills of
M-trons engineering and design team to help them solve
frequency control problems during all phases of their
products life cycles, including product design,
prototyping, manufacturing and subsequent product improvements.

5



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| |                                   
| | ----------------------------------
| | Selected Financial
    Information

For financial reporting purposes, M-tron
comprises the Registrants frequency control
devices segment. For information about this segments
net sales, profit or loss, and total assets for each of the last
three fiscal years, please see Note 15 Segment
Information to the Registrants Consolidated
Financial Statements.



| |                  
| | -----------------
| | M-tron Objectives

M-trons objective is to build on the
strength of its core expertise in packaged quartz crystal and
oscillator technologies to become the supplier of choice to
original equipment manufacturers who supply infrastructure
equipment to the communications and networking industries.

M-tron intends to increase its investment in
technical resources, including design and engineering personnel
to enable it to provide a higher level of design and engineering
support to its customers and potential customers. It believes
that technical participation with its original equipment
manufacturers customers in the early stages of their design
process will lead to M-trons frequency control devices
being designed into their products more regularly.

M-tron has a long-standing relationship with
offshore contract manufacturers who have added capacity on its
behalf. M-trons near term objective is to reduce the time
it takes to manufacture its products, which will result in
better service to its customers.

M-tron believes that it can significantly enhance
its business opportunities by acquiring technology, product
portfolios and/or customer bases. Some of these may offer
immediate sales opportunities while others may meet longer term
objectives. It plans to pursue these opportunities by making
strategic acquisitions or by acquiring or licensing technology.

M-tron intends to design, manufacture and sell
devices that offer higher frequencies or greater precision than
its current products. It intends to achieve this through a
combination of focused research and development and strategic
acquisitions, if they are appropriate.

There is no assurance that M-tron can achieve
these objectives.



| |         
| | --------
| | Products

M-trons products are high quality,
reliable, technically advanced frequency control devices,
including packaged quartz crystals and oscillators incorporating
those crystals. The October 2002 acquisition of
Champion provided M-tron an entry to the timing
modules market.

M-tron designs and produces a wide range of
packaged quartz crystals and quartz crystal based oscillators.
There are a variety of features in its product family. The
Packaged Crystal is a single crystal in a hermetically sealed
package and is used by electronic equipment manufacturers, along
with their own electronic circuitry, to build oscillators for
frequency control in their electronic devices. The Clock
Oscillator is the simplest of its oscillators. It is a
self-contained package with a crystal and electronic circuitry
that is used as a subsystem by electronic equipment
manufacturers to provide frequency control for their devices.
The Voltage Controlled Crystal Oscillator (VCXO) is a
variable frequency oscillator whose frequency can be changed by
varying the control voltage to the oscillator. The Temperature
Compensated Crystal Oscillator (TCXO) is an oscillator
designed for use over a range of temperatures. The Digitally
Compensated Crystal Oscillator (DCXO) is a temperature
compensated oscillator in which the compensation electronics are
digital and offer greater frequency stability than the TCXO over
a range of temperatures. This variety of features in
M-trons product family offers the designers at electronic
equipment manufacturers a range of options as they create the
needed performance in their products.

Currently, M-trons oscillator products
operate at frequencies ranging from 2 kilohertz to over
2.5 gigahertz that constitutes most of the oscillator
frequencies that are now used in communications equipment.
However, many of its products, through amplification or other
means, are ultimately incorporated into those products that
operate at higher frequencies.

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M-trons products are employed in numerous
applications within the communications industry, including
computer and telephone network switches, high-speed gigabit
Ethernet, modems, wireless transmitters/receivers, multiplexers,
data recovery/regeneration devices, fiber channel networks,
repeaters, data transceivers, line interface devices and base
station controllers. Its products are incorporated into end
products that serve all elements of the communications industry.

The crystals and oscillators M-tron sells for use
in non-communications applications are used in industrial
applications such as security systems, metering systems,
electronic test instruments and industrial control systems. They
are used in military and medical instrumentation applications as
well as in various computer peripheral equipment such as
printers, modems, monitors, video cards and sound cards.

M-trons timing module, an electronic
subsystem, is a pre-assembled circuit that integrates several
different functions into a small single self-contained module
for control of timing in a circuit. Today, timing modules are
frequently used for the synchronization of timing signals in
digital circuits, particularly in wireless and optical carrier
network systems.



| |                         
| | ------------------------
| | Research and Development

At December 31, 2003, M-tron employed 7
engineers and technicians in South Dakota who devoted most of
their time to research and development. Its research and
development expense was approximately $565,000 in 2003, $724,000
in 2002, and $1,348,000 in 2001. M-tron expects to increase its
spending on research and development by up to 15% during 2004.



| |          
| | ---------
| | Customers

M-tron markets and sells its frequency control
devices primarily to:



| |   |                                                                                          
| | - | -----------------------------------------------------------------------------------------
| |  | original equipment manufacturers of
    communications and networking equipment;         
|
| |  | contract manufacturers for original equipment
    manufacturers; and                     
|
| |  | distributors who sell to original equipment
    manufacturers and contract manufacturers.

In 2003, a Distributor accounted for
approximately 13% of M-trons net sales, compared to less
than 8% in 2002. No other customer accounted for more than 7% of
its 2003 revenues. Sales to its ten largest customers accounted
for approximately 44% of net sales in 2003, compared to
approximately 60% of net sales for 2002 and 2001.



| |                    
| | -------------------
| | International Sales

M-trons revenues from international sales
were $7.9 million, $5.8 million, and
$10.8 million for 2003, 2002 and 2001, representing
approximately 52%, 51%, and 50% of its net sales for 2003, 2002
and 2001, respectively. In 2003, these revenues included
approximately 12% from customers in Canada, 24% from customers
in Asia, 9% from customers in Western Europe and 5% from
customers in Mexico. M-tron has increased its international
sales efforts by adding distributors and manufacturers
representatives in Western Europe and Asia. As anticipated, the
Champion products acquisition improved the Companys market
position in Western Europe by doubling year over year sales. See
Note 2  Acquisitions to the
Registrants Consolidated Financial Statements. The
Registrant avoids currency exchange risk by transacting
substantially all international sales in United States dollars.



| |        
| | -------
| | Backlog

M-tron had backlog orders of approximately
$2.8 million at December 31, 2003, compared to
$2.3 million at December 31, 2002. The
$0.5 million improvement is mainly the result of purchased
oscillator bookings stemming from M-trons becoming more
price competitive by moving the production of components
requiring less engineering content to lower cost offshore
contractors. M-tron includes as backlog those orders which are
subject to specific production release orders under written
contracts, verbal and written orders from

7



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distributors with which it has had long-standing
relationships, as well as written purchase orders from sales
representatives. Its customers may cancel or defer orders
without significant penalty.




| |            
| | -----------
| | Competition

Frequency control devices are sold in a highly
competitive industry. There are numerous domestic and
international manufacturers who are capable of providing custom
designed quartz crystals and oscillator modules comparable in
quality and performance to its products. Competitors include
Vectron International (a division of Dover Corporation),
CTS Corporation and Saronix. M-tron does not operate in the
same markets as high volume manufacturers of standard products;
rather it focuses on manufacturing lower volumes of custom
designed frequency control devices. Many of its competitors and
potential competitors have substantially greater financial,
engineering, manufacturing and marketing resources than it does.
M-tron seeks to manufacture custom designed, high performance
crystals and oscillators, which it believes it can sell
competitively based upon performance, quality, order response
time and a high level of engineering support.



| |              
| | -------------
| | Manufacturing

M-tron has one manufacturing facility in Yankton,
South Dakota, and has established long-term relationships with
two contract manufacturers in Asia, with one contract
manufacturer currently enjoying all of M-trons business.
M-tron maintains a rigorous quality control system and is an ISO
9001 qualified manufacturer. M-trons Hong Kong subsidiary
(M-tron Industries, Limited) does not manufacture, but acts as a
buying agent and sales representative for its parent company.

In 1986, M-tron established a working
relationship with a contract manufacturer located in South
Korea, and in 1994, it established a working relationship with a
contract manufacturer located in the Peoples Republic of
China. While it does not have written long term agreements with
them, M-tron believes that it is potentially their largest
customer and, as such, believes that from time to time it
received preferential treatment on production scheduling matters.

M-tron attempts to utilize standard parts and
components that are available from multiple vendors located in
the United States or internationally; however, some components
used in its products are available from only a limited number of
sources.



| |                      
| | ---------------------
| | Intellectual Property

M-tron has no patents, trademarks or licenses
that are considered to be important to M-trons business or
operations. Rather, M-tron believes that its technological
position depends primarily on the technical competence and
creative ability of its engineering and technical staff in areas
of product design and manufacturing processes as well as
proprietary know-how and information.



| |          
| | ---------
| | Employees

As of December 31, 2002, M-tron employed 136
people, including 6 in its Hong Kong subsidiary. None of its
employees is represented by a labor union and it considers its
employee relations to be good.

C.     Spinnaker
Industries, Inc. (Spinnaker)

Until September 23, 2002, Lynch (through its
subsidiary LS) owned 1,829,063 shares of the Class A
Common Stock and 1,237,203 shares of the Common Stock of
Spinnaker Industries, Inc. (Spinnaker),
representing 41.8% and 49.5% of the equity and voting power of
Spinnaker, respectively. On September 23, 2002, the Company
sold its remaining interest in Spinnaker to an independent,
international brokerage firm in New York City. The transfer
was made for nominal consideration because Lynch determined that
the Spinnaker shares had no value as a result of
Spinnakers ongoing reorganization under Chapter 11 of
the Bankruptcy Code. As a result of this transfer, Lynch
recorded a $19,420,000 non-cash gain and consequently an
increase in shareholders equity of $19,420,000 in the
third quarter of 2002. This action increased Lynchs

8



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total shareholders equity to approximately
$11,644,000 at September 30, 2002 from a deficit of
$7,615,000 on June 30, 2002.




| |                
| | ---------------
| | Deconsolidation

Prior to September 30, 2001, Lynch owned 48%
and 60%, respectively, of the equity and voting power of
Spinnaker. As such, under accounting principles generally
accepted in the United States, Lynch consolidated the results of
Spinnaker and was required to record all of the losses of
Spinnaker, since the non-Lynch interests were not required to
absorb their shares of losses (52%) after their investment was
fully absorbed by losses. On September 26, 2001, Lynch
caused LS to make a charitable disposition of
430,000 shares of Spinnakers Class A Common
Stock. As a result of that transaction: (a) Lynchs
equity interest and voting power in Spinnaker were reduced to
41.8% and 49.5%, respectively, (b) Lynch deconsolidated
Spinnaker for financial reporting purposes, effective
September 30, 2001, (c) Lynch recorded a non-cash gain
of $27,406,000 on September 30, 2001, (d) from
September 30, 2001 until September 23, 2002, Lynch
accounted for its ownership of Spinnaker using the equity method
of accounting and (e) Lynch did not record any additional
losses from Spinnaker, as Lynch had no obligation to further
fund such losses.

Upon the disposition of its remaining Spinnaker
shares on September 23, 2002 as described above, Lynch
completed the deconsolidation of Spinnaker and no longer has any
economic interest in Spinnaker or affiliation with Spinnaker.

D.     Other
Information

While the Registrant holds licenses and patents
of various types, Registrant does not believe they are critical
to its overall operations. See respective Intellectual
Property sections above for each of Lynch Systems and
M-tron.

The Registrant conducts product development
activities with respect to each of its major lines of business.
Currently, such activities are directed principally toward the
improvement of existing products, the development of new
products and/or diversification. In the last three years, M-tron
has accounted for the vast majority of Registrants product
development costs.

The capital expenditures, earnings and
competitive position of Registrant have not been materially
affected to date 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.

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

In 2003, the largest single customer accounted
for 12% of consolidated sales, while the next largest customer
represented 10% of revenue. In 2002, a single customer, who
represented 42% of Lynch Systems sales, accounted for 24% of
consolidated net sales, while the next largest customer
represented less than 8% of consolidated revenue. There were no
customers in 2001 that represent 10% or more of consolidated
revenues. The Registrant does not believe that it is dependent
on any single customer.

Additional information with respect to each of
the Registrants lines of business is included in
Note 15 Segment Information to the
Registrants Consolidated Financial Statements included as
Item 15(a) below.

E.     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 I of this Annual Report on
Form 10-K in lieu of being included in the Proxy Statement
for the 2003 Annual Meeting of Shareholders. Such list sets
forth the names and ages of all

9



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##### 



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.


|                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |     |    | 
|------------------ |  | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | --- | -- | 
|Name               |  | Offices and Positions Held                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |  | Age
|                   |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |  |    
|Ralph R. Papitto   |  | Chairman and Chief Executive Officer (since
    August 2001) of the Corporation; Chief Executive Officer of
    Avtek Inc., since 2002, a private holding company controlled by
    Mr. Papitto; Chairman and Chief Executive Officer of AFC
    Cable Systems, Inc., a NASDAQ listed manufacturer and
    supplier of electrical distribution products (1990-1999);
    Founder, Chairman and Chief Executive Officer of
    Nortek, Inc., a NYSE listed manufacturer of construction
    products (1967-1990); Chairman of the Board of Trustees of Roger
    Williams University; Former Director of Lynch Interactive
    Corporation and Spinnaker Industries, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |  |     | 77 | 
|Mario J. Gabelli   |  | Chairman (1986 to August 2001) and Chief
    Executive Officer (1986 to January 2000; and April 2001 to
    August 2001) and Vice Chairman (since August 2001) of Lynch;
    Chairman, Chief Executive Officer and a Director of Lynch
    Interactive Corporation (since September 1999); Chairman and
    Chief Executive Officer of Gabelli Group Capital Partners (since
    1980), a private Corporation which makes investments for its own
    account; Chairman and Chief Executive Officer of Gabelli Asset
    Management Inc. (since 1999), a NYSE listed holding corporation
    for subsidiaries engaged in various aspects of the securities
    business; Director/Trustee and/or President of all registered
    investment companies managed by Gabelli Funds, LLC (since 1986);
    Governor of the American Stock Exchange; Overseer of Columbia
    University Graduate School of Business; Trustee of Fairfield
    University, Roger Williams University, Winston Churchill
    Foundation and E.L. Wigend Foundation; Director of The National
    Italian American Foundation and The American-Italian Cancer
    Foundation; Chairman, Patrons Committee of Immaculate
    Conception School; and former trustee of Fordham Preparatory
    School. |  |     | 61 | 
|Richard E. McGrail |  | President and Chief Operating Officer (since
    October 2001) of Lynch; President of Avtek Inc., since 2001, a
    private holding company controlled by Ralph R. Papitto; Division
    President of AFC Cable Systems, Inc., a NASDAQ listed
    manufacturer and supplier of electrical distribution products
    (1993 to 2001); Prior general and marketing management
    experience with Digital Equipment Corporation (DEC).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |  |     | 49 | 
|Raymond H. Keller  |  | Chief Financial Officer, Vice President and
    Secretary (since October 2001) of Lynch; Chief Financial Officer
    of Avtek Inc., since 2000, a private holding company controlled
    by Ralph R. Papitto; Director and Chief Financial Officer of AFC
    Cable Systems, Inc., a NASDAQ listed manufacturer and
    supplier of electrical distribution products (1989 to 2000);
    Trustee of Roger Williams University; Prior financial management
    experience with Microdot, Inc.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |  |     | 66 | 

10



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##### 



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 year and until their respective successors are
chosen and qualified.



|        |           
|------- | ----------
|Item 2. | Properties

Lynchs principal executive offices in
Providence, Rhode Island are leased and shared with Avtek Inc.,
a private holding company controlled by Ralph R. Papitto.
Mr. Papitto is Chairman and Chief Executive Officer of
Lynch.

Lynch Systems operations are housed in two
adjacent buildings totaling 95,840 square feet situated on
4.86 acres of land in Bainbridge, Georgia. Finished office
area in the two buildings totals approximately
17,000 square feet. Additionally, the Company has
18,604 square feet that is utilized for warehouse and
storage. 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 51,000 square feet in the aggregate.
The manufacturing facility that is owned by M-tron contains
approximately 35,000 square feet, is situated on
approximately 15 acres of land and is subject to security
deeds relating to loans. The other facility is leased and
contains approximately 16,000 square feet. The lease
expires on September 30, 2006, with no options to extend
the lease.

M-trons Hong Kong office contains
approximately 1,500 square feet; the lease expires
October 5, 2005 and does not include renewal options.

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

In the normal course of business, subsidiaries of
the Registrant are defendants in certain product liability,
worker claims and other litigation in which the amounts being
sought may exceed insurance coverage levels. The resolution of
these matters is not expected to have a material adverse effect
on the Registrants consolidated financial condition or
operations. In addition, Registrant and/or one or more of its
subsidiaries are parties to the following additional legal
proceedings:

1.     In re:
Spinnaker Coating, Inc., Debtor/ PACE
Local 1-1069 v. Spinnaker Coating, Inc., and
Lynch Corporation, U.S. Bankruptcy Court, District of
Maine, Chapter 11, Adv. Pro. No. 02-2007, and PACE
Local 1-1069 v. Spinnaker Industries, Inc.,
Spinnaker Coating, Inc., and Spinnaker
Coating-Maine, Inc., Cumberland County Superior Court,
CV-2001-00352

On or about June 26, 2001, in anticipation
of the July 15, 2001 closure of Spinnakers Westbrook,
Maine facility, Plaintiff PACE Local 1-1069
(PACE) filed a three count complaint in Cumberland
County Superior Court, CV-2001-00352 naming the following
defendants: Spinnaker Industries, Inc., Spinnaker
Coating, Inc., and Spinnaker Coating-Maine, Inc.
(collectively, the Spinnaker Entities) and Lynch.
The complaint alleged that under Maines Severance Pay Act
both the Spinnaker Entities and Lynch would be liable to pay
approximately $1,166,000 severance pay under Maines
Severance Pay Act in connection with the plant closure. The
Defendants filed a notice of removal, thereby creating United
States District Court Civil Action C.V. No. 01-236. The
case was remanded to state court. The Spinnaker Entities also
filed a separate complaint challenging the constitutionality of
the Maine Severance Pay Act, United States District Court Civil
Action No. 01-232 which later was dismissed by stipulation
of the Spinnaker Entities. PACE also filed three separate
Motions for Ex-Parte Attachment against the Spinnaker Entities
and Lynch. PACE filed the First Motion for Attachment with its
original Complaint. PACE sought to attach $1,166,483.44, an
amount large enough to cover the claims of all PACEs
members seeking severance. The Court denied that Motion as being
premature. PACE then filed a Second Motion against the Spinnaker
Entities and Lynch for an attachment large enough to cover the
claims of eight individual employees seeking severance pay in
the amount of $120,736.27. On August 20, 2001, the Court
granted that Motion in the amount of $118,500. On

11



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##### 



April 4, 2002, PACE subsequently recorded
this attachment through UCC-1 filings with the Maine Secretary
of State against Lynch Manufacturing and Lynch Corporation. PACE
filed a Third Motion for Ex-Parte Attachment on August 29,
2001. This Motion sought an attachment large enough to cover the
severance pay claimed by the remaining PACE members, $1,048,003.
The Court denied this Motion but permitted PACE the opportunity
to obtain an attachment after all defendants had an opportunity
to respond and after hearing.


Before any further action was taken with respect
to PACEs Third Motion for Attachment, the Spinnaker
Defendants filed for relief under Chapter 11 of the
Bankruptcy Code. Following a series of filings in the United
States District Court for the District of Maine and the United
States Bankruptcy Court for the District of Maine which, like
United States District Court Case No. 01-236, later were
dismissed by the parties with prejudice and without costs,
PACEs case continues to proceed against Lynch in
Cumberland County Superior Court in Maine on the issue of
whether Lynch has liability to PACEs members under the
Maine Severance Pay Act.

On September 30, 2002, PACE requested a
ruling from the Superior Court on its Third Motion for
Attachment. On October 21, 2002, Lynch filed a Motion for
Summary Judgment which incorporated its prior objection to any
attachment. PACE filed an Opposition to Lynchs Motion for
Summary Judgment,which included a request for summary
judgment in its favor, and a Motion for Leave to Further Amend
the Complaint on November 12, 2002. Lynch thereafter filed
a Reply Memorandum in Support of its Motion for Summary Judgment
on November 26, 2002 and an opposition to PACEs
Motion for Leave to Further Amend the Complaint on
December 3, 2002. On December 31, 2002, the Superior
Court held a hearing on all pending Motions. The Superior Court
requested that arguments focus on Lynchs Motion for
Summary Judgment since the granting of that Motion would render
PACEs Third Motion for Attachment and Motion to Further
Amend the Complaint moot.

On July 28, 2003, the Superior Court issued
an Order deciding both Lynchs and PACEs Motions for
Summary Judgment. The Court denied Lynchs Motion for
Summary Judgment, finding that there remained a disputed issue
of material fact regarding one of Lynchs primary defenses.
The Court granted partial summary judgment in favor of PACE to
the extent that the Court found Lynch was an
employer subject to potential liability under
Maines Severance Pay Act. The Court held, however, that
PACE must still prove its entitlement to severance pay under the
Act. In a separate ruling also issued on July 28, 2003, the
Court denied PACEs Third Motion for Attachment.

On March 8, 2004, Lynch filed a Motion for
Summary Judgment on the issue of an exemption under the Maine
Severance Pay Act based upon the nexus between the plant closure
in Westbrook, Maine and the Spinnaker Defendants
bankruptcy filing. PACE concurrently filed a Motion for Summary
Judgment on Count II of the Complaint on March 8, 2004.

Lynch believes that, in addition to other
defenses, it is not subject to the Maine Severance Pay Act, as
now in effect. Management does not believe that the resolution
of this case will have a material adverse effect on the
Registrants consolidated financial condition and
operations.

The Company does not believe that it has any
other contingent liabilities related to Spinnaker.



|   |                
|-- | ---------------
|2. | Qui Tam Lawsuit

Lynch Corporation, Lynch Interactive Corporation
(Interactive), and several other parties have been
named as defendants in a lawsuit brought under the so-called
qui tam provisions of the federal False Claims Act
in the United States District Court for the District of
Columbia. The complaint was filed under seal with the court on
February 14, 2001, and the seal was lifted on
January 11, 2002. The Company was formally served with the
complaint on July 9, 2002. The main allegation in the case
is that the defendants participated in the creation of
sham bidding entities that allegedly defrauded the
federal Treasury by improperly participating in Federal
Communications Commission spectrum auctions restricted to small
businesses, as well as obtaining bidding credits in other
spectrum auctions allocated to small and very
small businesses. The lawsuit seeks to recover an
unspecified amount of damages, which would be subject to
mandatory trebling under the statute. On September 19,
2002, Interactive, on behalf of itself and Lynch, filed two
Motions with

12



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##### 



the court: a Motion to Transfer the Action to the
Southern District of New York and a Motion to Dismiss the
Lawsuit. The relator filed an opposition reply to
Interactives Motion to Dismiss and, on December 5,
2002, Interactive filed a Reply in Support of Its Motion to
Dismiss. On September 30, 2003, the Court granted
Interactives Motion to Transfer the Action to the Southern
District of New York. A Court mandated scheduling
conference was held on February 10, 2004, following which
the Court issued a scheduling order setting forth a timetable
for the discovery process.


The U.S. Department of Justice has notified
the court that is has declined to intervene in the case. The
defendants strongly believe that the lawsuit is completely
without merit and intend to defend the suit vigorously.
Furthermore, under the separation agreement between the Company
and Interactive pursuant to which Interactive was spun-off to
the Companys shareholders on September 1,
1999, Interactive would be obligated to indemnify the
Company for any losses or damaged incurred by the Company as a
result of this lawsuit; and Interactive has, in fact, agreed in
writing to defend the case on Lynchs behalf and to
indemnify Lynch for any losses it may incur as a result of the
lawsuit. Interactive has retained legal counsel to defend the
claim on behalf of Lynch and Interactive at the expense of
Interactive. Nevertheless, the Company cannot predict the
ultimate outcome of the litigation nor can the Company predict
the effect that the lawsuit or its outcome will have on the
Companys business or plan of operation.



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

Not applicable.

13



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##### 



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 highs and lows in consolidated trading of the
Common Stock during the two years ended December 31, 2003
and 2002 are as follows:

|     |  |                    |      |         |  |              |       |             |  |  |       |  |  |  |       | 
|---- |  | ------------------ | ---- | ------- |  | ------------ | ----- | ----------- |  |  | ----- |  |  |  | ----- | 
|     |  |                   
|     |  | Three Months Ended
|     |  |                   
|2003 |  | March 31           |      | June 30 |  | September 30 |       | December 31
|     |  |                    |      |         |  |              |       |            
|High |  |                    | 9.05 |         |  |              | 13.00 |             |  |  | 12.35 |  |  |  | 11.38 | 
|Low  |  |                    | 7.71 |         |  |              | 6.30  |             |  |  | 8.24  |  |  |  | 9.10  | 

|     |  |          |       |         |  |              |       |             |  |  |       |  |  |  |      | 
|---- |  | -------- | ----- | ------- |  | ------------ | ----- | ----------- |  |  | ----- |  |  |  | ---- | 
|2002 |  | March 31 |       | June 30 |  | September 30 |       | December 31
|     |  |          |       |         |  |              |       |            
|High |  |          | 21.50 |         |  |              | 17.25 |             |  |  | 12.51 |  |  |  | 9.50 | 
|Low  |  |          | 14.75 |         |  |              | 12.25 |             |  |  | 9.60  |  |  |  | 5.60 | 

At March 12, 2004, the Company had
806 shareholders of record.

Dividend Policy

The Board of Directors has adopted a policy of
not paying cash dividends, a policy which 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 2004. Substantially all of the subsidiaries assets
are restricted under the companies current credit
agreements and limit the companies ability to pay
dividends.

Equity Compensation Plan Information

On May 2, 2002, the Companys
shareholders approved the 2001 Equity Incentive Plan and the
issuance of up to 300,000 options to purchase shares of Company
common stock. The options approved included the grant of 180,000
fully vested options to the Registrants Chairman and Chief
Executive Officer, Ralph R. Papitto, and 24,000 options that
vest over three years starting in 2002 to each of Raymond H.
Keller, the Registrants Chief Financial Officer, and to
Richard E. McGrail, the Registrants President and Chief
Operating Officer.

The following table sets forth the Equity
Compensation Plan information required by Item 201(d) of
Regulation S-K at the end of fiscal 2003:

|                                                               |  |                               |                             |                           |  |                                |                 |  |  |  |                            | 
|-------------------------------------------------------------- |  | ----------------------------- | --------------------------- | ------------------------- |  | ------------------------------ | --------------- |  |  |  | -------------------------- | 
|                                                               |  |                               |                             |                           |  | Number of Securities Remaining
|                                                               |  | Number of Securities to Be    |                             | Weighted-Average Exercise |  | Available for Future Issuance 
|                                                               |  | Issued upon Exercise of       |                             | Price of Outstanding      |  | Under Equity Compensation     
|                                                               |  | Outstanding Options, Warrants |                             | Options, Warrants and     |  | Plans (Excluding Securities   
|                                                               |  | and Rights                    |                             | Rights                    |  | Reflected in Column (a))      
|                                                               |  |                               |                             |                           |  |                               
|Plan Category                                                  |  | (a)                           |                             | (b)                       |  | (c)                           
|                                                               |  |                               |                             |                           |  |                               
|Equity compensation plans approved by security
    holders     |  |                               | 228,000 shares Common Stock |                           |  | $                              | 17.50 per share |  |  |  | 72,000 shares Common Stock | 
|Equity compensation plans not approved by
    security holders |  |                               |                            |                           |  |                                |                |  |  |  |                           | 
|Total                                                          |  |                               | 228,000 shares Common Stock |                           |  | $                              | 17.50 per share |  |  |  | 72,000 shares Common Stock | 
|                                                               |  |                               |                             |                           |  |                                |                 |  |  |  |                            | 

14



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##### 





|        |                        
|------- | -----------------------
|Item 6. | Selected Financial Data

LYNCH CORPORATION AND SUBSIDIARIES

CONSOLIDATED SELECTED FINANCIAL DATA

(Adjusted to Reflect Discontinued Operations
and Spin Off of Lynch Interactive Corporation)


(In thousands, except per share
amounts)


The following selected financial data is
qualified by reference to, and should be read in conjunction
with, the financial statements, including the notes thereto, and
Managements Discussion and Analysis of Financial Condition
and Results of Operations included elsewhere in this Annual
Report.

|                                                                                                                  |                                                                              |                           |        |       |      |       |        |      |       |      |         |   |        |   |         |   |       |   |         |   |       |  
|----------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------- | ------------------------- | ------ | ----- | ---- | ----- | ------ | ---- | ----- | ---- | ------- | - | ------ | - | ------- | - | ----- | - | ------- | - | ----- | -
|                                                                                                                  |                                                                              |                          
|                                                                                                                  |                                                                              | Year Ended December 31(a)
|                                                                                                                  |                                                                              |                          
|                                                                                                                  |                                                                              | 2003*                     |        | 2002* |      | 2001* |        | 2000 |       | 1999
|                                                                                                                  |                                                                              |                           |        |       |      |       |        |      |       |     
|Revenues                                                                                                          |                                                                              | $                         | 27,969 |       |      | $     | 26,386 |      |       | $    | 141,073 |   |        | $ | 219,196 |   |       | $ | 194,222 |  
|Operating profit (loss)(b)                                                                                        |                                                                              |                           | (832   | )     |      |       | 16,168 |      |       |      | (19,240 | ) |        |   | 2,352   |   |       |   | 1,043   |  
|Net financial activities (loss)                                                                                   |                                                                              |                           | 252    |       |      |       | (80    | )    |       |      | (7,357  | ) |        |   | (12,751 | ) |       |   | (9,528  | )
|Gain (loss) on sale of subsidiary stock and other
    operating assets                                            |                                                                              |                           | 35     |       |      |       | (92    | )    |       |      |        |   |        |   |        |   |       |   |        |  
|Gain on release of customer related contingency                                                                   |                                                                              |                           | 728    |       |      |       |       |      |       |      |        |   |        |   |        |   |       |   |        |  
|                                                                                                                  |                                                                              |                           |        |       |      |       |        |      |       |      |         |   |        |   |         |   |       |   |         |  
|Income (loss) from continuing operations before
    income taxes, minority interests and discontinued operations: |                                                                              |                           | 183    |       |      |       | 15,996 |      |       |      | (26,597 | ) |        |   | (10,399 | ) |       |   | (8,485  | )
|(Provision) benefit for income taxes                                                                              |                                                                              |                           | (73    | )     |      |       | 1,967  |      |       |      | (358    | ) |        |   | 181     |   |       |   | 2,189   |  
|Minority interests                                                                                                |                                                                              |                           |       |       |      |       |       |      |       |      | 4,017   |   |        |   | 6,780   |   |       |   | 2,347   |  
|                                                                                                                  |                                                                              |                           |        |       |      |       |        |      |       |      |         |   |        |   |         |   |       |   |         |  
|Income (loss) from continuing operations before
    discontinued operations:                                      |                                                                              |                           | 110    |       |      |       | 17,963 |      |       |      | (22,938 | ) |        |   | (3,438  | ) |       |   | (3,949  | )
|Operations of Lynch Interactive Corporation(e)                                                                    |                                                                              |                           |       |       |      |       |       |      |       |      |        |   |        |   |        |   |       |   | (7,493  | )
|Discontinued operations(c)                                                                                        |                                                                              |                           |       |       |      |       |       |      |       |      |        |   |        |   |        |   |       |   | (572    | )
|Gain on sale of Spinnakers industrial tape
    segment(c)                                                        |                                                                              |                           |       |       |      |       |       |      |       |      |        |   |        |   |        |   |       |   | 10,431  |  
|                                                                                                                  |                                                                              |                           |        |       |      |       |        |      |       |      |         |   |        |   |         |   |       |   |         |  
|Net income (loss)                                                                                                 |                                                                              | $                         | 110    |       |      | $     | 17,963 |      |       | $    | (22,938 | ) |        | $ | (3,438  | ) |       | $ | (1,583  | )
|                                                                                                                  |                                                                              |                           |        |       |      |       |        |      |       |      |         |   |        |   |         |   |       |   |         |  
|Per Common Share:(d)                                                                                              |                                                                              |                           |        |       |      |       |        |      |       |      |         |   |        |   |         |   |       |   |         |  
|                                                                                                                  | Income (loss) from continuing operations before
    discontinued operations: |                           |        |       |      |       |        |      |       |      |         |   |        |   |         |   |       |   |         |   |      
|                                                                                                                  |                                                                              | Basic                     |        | $     | 0.07 |       |        | $    | 11.99 |      |         | $ | (15.24 | ) |         | $ | (2.31 | ) |         | $ | (2.79 | )
|                                                                                                                  |                                                                              | Diluted                   |        |       | 0.07 |       |        |      | 11.99 |      |         |   | (15.24 | ) |         |   | (2.31 | ) |         |   | (2.79 | )
|                                                                                                                  | Net income (loss):                                                           |                           |        |       |      |       |        |      |       |      |         |   |        |   |         |   |       |   |         |   |      
|                                                                                                                  |                                                                              | Basic                     |        |       | 0.07 |       |        |      | 11.99 |      |         |   | (15.24 | ) |         |   | (2.31 | ) |         |   | (1.12 | )
|                                                                                                                  |                                                                              | Diluted                   |        |       | 0.07 |       |        |      | 11.99 |      |         |   | (15.24 | ) |         |   | (2.31 | ) |         |   | (1.12 | )
|Cash, securities and short-term Investments(f)                                                                    |                                                                              | $                         | 6,292  |       |      | $     | 6,847  |      |       | $    | 4,247   |   |        | $ | 10,543  |   |       | $ | 13,106  |  
|Restricted cash(f)(g)                                                                                             |                                                                              |                           | 1,125  |       |      |       | 1,125  |      |       |      | 4,703   |   |        |   | 6,500   |   |       |   | 56,026  |  
|Total assets (net of discontinued
    Operations)(c)(e)(f)                                                        |                                                                              |                           | 23,019 |       |      |       | 23,430 |      |       |      | 31,615  |   |        |   | 162,820 |   |       |   | 211,192 |  
|Long-term debt, exclusive of current portion(f)                                                                   |                                                                              |                           | 833    |       |      |       | 1,089  |      |       |      | 1,678   |   |        |   | 61,350  |   |       |   | 116,765 |  
|Shareholders equity (deficiency)(e)(f)                                                                           |                                                                              |                           | 11,033 |       |      |       | 10,934 |      |       |      | (7,451  | ) |        |   | 15,432  |   |       |   | 15,991  |  

Notes:



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Effective September 30, 2001, the
    Companys ownership and voting interest of Spinnaker
    Industries, Inc. was reduced to 41.8% and 49.5%
    respectively, due to the disposition of shares of Spinnaker. As
    a result, effective September 30, 2001, the Company
    relinquished control of Spinnaker and has deconsolidated
    Spinnaker. On September 23, 2002, the Company disposed of
    its remaining interest in Spinnaker. See Note 1 to the
    Consolidated Financial Statements  Basis of
    Presentation.

15



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##### 





|    |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          
|--- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) |  | The data presented herein reflect the spin off of
    Lynch Interactive Corporation (Interactive) from the Company and
    the sale by Spinnaker Industries, Inc. (Spinnaker), of its
    industrial tape units, all of which transactions occurred in the
    third quarter of 1999. Accordingly, the operating results of
    both Interactive and the industrial tape segment have been
    segregated from continuing operations of the Company and are
    reported as separate line items. The data presented also
    includes results of the business acquired from S.D. Warren (name
    changed Spinnaker Coating-Maine, Inc.) from March 17,
    1998, the date of its acquisition and Champion
    Technologies, Inc. from October 18, 2002, the date of
    its acquisition.
|   
|(b) |  | Operating profit (loss) is revenues less
    operating expenses, which excludes investment income, interest
    expense, extraordinary items, minority interests and taxes.
    Included are asset impairment and restructuring charges and the
    gain on deconsolidation (see Note g).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                
|   
|(c) |  | Discontinued operations of the industrial tape
    segment of Spinnaker Corporation.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     
|   
|(d) |  | Based on weighted average number of common shares
    outstanding.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(e) |  | No cash dividends have been declared over the
    period. In 1999 for each share of Lynch Common Stock,
    shareholders received one share of Lynch Interactive Corporation
    in a Spin Off of the multimedia and transportation business (See
    Note 4 to Financial Statements 
    Discontinued Operations.                                                                                                                                                                                                                                                                                                                                                                                                                                                                    
|   
|(f) |  | 2003, 2002 and 2001 exclude Spinnaker Industries
    as a result of the September 30, 2001 deconsolidation of
    Spinnaker resulting from the Companys disposition of
    shares of Spinnaker that reduced its ownership and voting
    interest of Spinnaker Industries, Inc. to 41.8% and 49.5%
    respectively, and the Companys subsequent disposition of
    its remaining interest in Spinnaker on September 23, 2002.                                                                                                                                                                                                                                                                                                                                                         
|   
|(g) |  | See discussion of Restricted Cash and Notes
    Payable and Long-Term Debt in Note 6 to the Consolidated
    Financial Statements.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|   
|(h) |  | For three-year trend data of revenues and
    operating profit (loss) by segment, see Note 15 to the
    Consolidated Financial Statements  Segment
    Information.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  



|        |                                                                                          
|------- | -----------------------------------------------------------------------------------------
|Item 7. | Managements Discussion and Analysis
    of Financial Condition and Results of Operations

Critical Accounting Policies

The Companys significant accounting
policies are described in Note 1 to the Consolidated
Financial Statements included in Item 8 of this
Form 10-K. The Companys discussion and analysis of
its financial condition and results of operations are based upon
the Companys consolidated financial statements, which have
been prepared in accordance with accounting principles generally
accepted in the United States. The preparation of these
financial statements requires the Company to make estimates and
judgments that affect the reported amounts of assets,
liabilities, revenues and expenses, and related disclosure of
contingent assets and liabilities. On an on-going basis, the
Company evaluates its estimates, including those related to the
carrying value of inventories, realizability of outstanding
accounts receivable, percentage of completion of long-term
contracts, and the provision for income taxes. The Company bases
its estimates on historical experience and on various other
assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying values of assets and liabilities
that are not readily apparent from other sources. In the past,
actual results have not been materially different from the
Companys estimates. However, results may differ from these
estimates under different assumptions or conditions.

The Company has identified the following as
critical accounting policies, based on the significant judgments
and estimates used in determining the amounts reported in its
consolidated financial statements:



| |                    
| | -------------------
| | Accounts Receivable

Accounts receivable on a consolidated basis
consist principally of amounts due from both domestic and
foreign customers. Credit is extended based on an evaluation of
the customers financial condition and collateral is not
generally required except at Lynch Systems. The Company
considers concentrations of credit risk to be minimal due to the
Companys diverse customer base. In relation to export
sales, the Company requires letters of credit supporting a
significant portion of the sales price prior to production to
limit exposure

16



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##### 



to credit risk. Certain subsidiaries and business
segments have credit sales to industries that are subject to
cyclical economic changes. The Company maintains an allowance
for doubtful accounts at a level that management believes is
sufficient to cover potential credit losses.


The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of
our clients to make required payments. We base our estimates on
our historical collection experience, current trends, credit
policy and relationship of our accounts receivable and revenues.
In determining these estimates, we examine historical write-offs
of our receivables and review each clients account to
identify any specific customer collection issues. If the
financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payment,
additional allowances may be required. Our failure to estimate
accurately the losses for doubtful accounts and ensure that
payments are received on a timely basis could have a material
adverse effect on our business, financial condition, and results
of operations.



| |                    
| | -------------------
| | Inventory Valuation

Inventories are stated at the lower of cost or
market value. Inventories valued using the last-in, first-out
(LIFO) method comprised approximately 73% and 63% of
consolidated inventories at December 31, 2003 and 2002,
respectively. The balance of inventories at December 31,
2003 and 2002 are valued using the first-in-first-out
(FIFO) method. If actual market conditions are more or less
favorable than those projected by management, adjustments may be
required.



| |                                                               
| | --------------------------------------------------------------
| | Revenue Recognition and Accounting for
    Long-Term Contracts

Revenues, with the exception of certain long-term
contracts discussed below, are recognized upon shipment when
title passes. Shipping costs are included in manufacturing cost
of sales.

Lynch Systems, a 100% 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 30%
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 compared to total
estimated project costs (cost to cost basis). At
December 31, 2003 and 2002, unbilled accounts receivable
(included in accounts receivable) were $2.4 million and
$0.7 million, respectively.

The percentage of completion method is used since
reasonably dependable estimates of the revenues and costs
applicable to various stages of a contract can be made, based on
historical experience and milestones set in the contract.
Financial management maintains contact with project managers to
discuss the status of the projects and, for fixed-price
engagements, financial management is updated on the budgeted
costs and required resources to complete the project. These
budgets are then used to calculate revenue recognition and to
estimate the anticipated income or loss on the project. In the
past, we have occasionally been required to commit unanticipated
additional resources to complete projects, which have resulted
in lower than anticipated profitability or losses on those
contracts. We may experience similar situations in the future.
Provisions for estimated losses on contracts are made during the
period in which such losses become probable and can be
reasonably estimated. To date, such losses have not been
significant.



| |                 
| | ----------------
| | Warranty Expense

Lynch Systems provides a full warranty to
worldwide customers who acquire machines. The warranty covers
both parts and labor and normally covers a period of one year or
thirteen months. Based upon

17



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##### 



experience, the warranty accrual is based upon
three to five percent of the selling price of the machine. The
Company periodically assesses the adequacy of the reserve and
adjusts the amounts as necessary.


|                                                                                                |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | - | ------ | -
|Balance, beginning of the period                                                                |  | $ | 1,595  |  
|Warranties issued during the period                                                             |  |   | 426    |  
|Settlements made during the period                                                              |  |   | (1,383 | )
|Changes in liabilities for pre-existing
    warranties during the period, including expirations |  |   | (53    | )
|                                                                                                |  |   |        |  
|Balance, end of the period                                                                      |  | $ | 585    |  
|                                                                                                |  |   |        |  



| |             
| | ------------
| | Income Taxes

The Company accounts for income taxes in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 109, Accounting for Income
Taxes, which requires recognition of deferred tax assets
and liabilities for the expected future tax consequences of
events that have been included in the financial statements or
tax returns. A valuation allowance is recorded for deferred tax
assets whose realization is not likely. As of December 31,
2003 and December 31, 2002, a valuation allowance of
$1,034,000 and $967,000, respectively, was recorded.

The carrying value of the Companys net
deferred tax asset at December 31, 2003 of $57,000 is equal
to the amount of the Companys carry-forward alternative
minimum tax (AMT) at that date.



| |                                                    
| | ---------------------------------------------------
| | Earnings Per Share and Stock Based
    Compensation

The Companys basic and diluted earnings per
share are equivalent, as the Company has no dilutive securities.

At December 31, 2003, the Company has a
stock-based employee compensation plan which is described in
Note 9 to the Consolidated Financial Statements 
Stock Options Plans. The Company accounts for the
plan under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. The Company
provides pro forma disclosures of the compensation expense
determined under the fair value provisions of Financial
Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation. See
Notes 1 and 9 to the Consolidated Financial Statements.



| |                                            
| | -------------------------------------------
| | Recent Issued Accounting
    Pronouncements

In November 2002, the FASB issued Interpretation
No. 45 (FIN 45), Guarantors Accounting and
Disclosure Requirements for Guarantees, Including Indirect
Indebtedness of Others. FIN 45 will significantly
change current practice in the accounting for, and disclosure
of, guarantees. FIN 45 requires certain guarantees to be
recorded at fair value, which is different from current
practice, which is generally to record a liability only when a
loss is probably and reasonably estimable, as those terms are
defined in FASB Statement No. 5, Accounting for
Contingencies(FAS 5). FIN 45 also requires a
guarantor to make significant new disclosures, even when the
likelihood of making any payments under the guarantee is remote,
which is another change from current practice.

The Company presently guarantees
(unsecured) the SunTrust Bank loans of its subsidiary,
Lynch Systems, and has guaranteed a Letter of Credit issued to
the First National Bank of Omaha on behalf of its subsidiary,
M-tron Industries, Inc. (see Note 6 to the
Consolidated Financial Statements  Notes
Payable to Banks and Long-term Debt). These guarantees are
subject to FIN 45s disclosure requirement only. As of
December 31, 2003, there were no obligations to the
SunTrust Bank. As of December 31, 2003, the $1,000,000
Letter of Credit issued by Fleet Bank to The First National Bank
of Omaha was secured by a

18



---



##### 



$1,125,000 deposit in a Fleet Bank Treasury Fixed
Income Fund. (See Restricted Cash included in
Note 1 to the Consolidated Financial Statements.)


There are no other financial, performance,
indirect guarantees or indemnification agreements.

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51
(FIN 46). FIN 46 clarifies the application
of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties. The
consolidation requirements of FIN 46, as revised, are
required to be applied for periods ending after
December 15, 2003 for interests in structures that are
commonly referred to as special-purpose entities while the
application of this Interpretation for all other types of
variable interest entities is required for periods ending after
March 15, 2004. The Company does not have any interests in
variable interest entities.

Results of Operations



| |                           
| | --------------------------
| | Year 2003 Compared to 2002



| |          
| | ---------
| | Net Sales

Consolidated revenues for the year ended
December 31, 2003 of $28.0 million, represented an
improvement of $1.6 million, or 6.1%, over Fiscal Year
2002. This improvement was attributable to Lynchs M-tron
unit, whose additional revenue more than offset declines at
Lynch Systems.

Lynch Systems revenues declined by
$2.2 million, or 14.7%, to $12.8 million due to low
order in-flow. In spite of an improving general economy,
producers of television and computer-monitor screens and other
devices that incorporate electronic display ordered few glass
press machines. Sales of glass press machines and their related
spare parts of $11.9 million were $1.5 million less
than 2002.

Although Lynch Systems 2003 orders of
$12.7 million exceeded 2002 by $6.9 million, Lynch
Systems backlog declined by $1.1 million from
December 31, 2002 to $2.8 million at December 31,
2003 due to the low opening backlog caused by low order-input in
the last half of 2002.

M-trons served market, the infrastructure
segment of the telecommunications industry, has improved in
relation to the downward correction in 2001 and 2002 of
worldwide overcapacity caused by the internet bubble. Revenues
at M-tron increased by $3.8 million, or 33.3%, to
$15.2 million for fiscal 2003 due partly to the acquisition
on October 18, 2002, of certain assets of an industry
competitor, Champion Technologies, Inc.
(Champion).

M-tron has successfully completed the integration
of Champions manufacturing lines, incorporating the
products of this acquisition with M-trons pre-existing
products. As a result of this investment in M-trons
production capacity and the expanded product line, M-tron has
signed preferred-supplier agreements with two of the leading,
worldwide manufacturers of telecommunications systems, and
strengthened its relationship with a third customer.
M-trons December 31, 2003 backlog improved by
$0.5 million to $2.8 million from the prior year-end
backlog of $2.3 million, and improved by $1.4 million
compared to the backlog at December 31, 2001, partly due to
the Champion acquisition in October 2002.



| |                 
| | ----------------
| | Operating Profit

Consolidated operating loss was $0.8 million
in 2003, compared to an operating profit of $16.2 million
in 2002. Fiscal 2002 operating profit includes a
$19.4 million non-recurring gain on deconsolidation of
Spinnaker. (See Note 1 to the Consolidated Financial
Statements  Basis of Presentation).
Excluding the $19.4 million non-recurring gain in 2002, the
2003 operating loss of $0.8 million represented an
improvement of $2.4 million on $1.6 million additional
revenue.

M-trons operating loss of $0.2 million
was $2.4 million less than the $2.6 million loss in
2002 due mainly to $2.2 million additional gross profit
caused mainly by $3.8 million additional revenue and
manufacturing efficiencies.

19



---



##### 



Lynch Systems 2003 operating profit of
$0.8 million was less than 2002 by $0.1 million due to
$2.2 million, or 15%, less revenue that resulted in
$1.5 million less gross profit. To help offset the 26%
decline in gross profit, selling and administrative expenses
were reduced by $1.4 million.



| |                      
| | ---------------------
| | Other Income/ Expense

Investment income of $534,000 at
December 31, 2003 represented an increase of $413,000 from
the previous year, of which $483,000 was attributable to
realized gains on the sale of marketable securities. Less cash
invested in money market funds and low interest rates on
invested funds were factors in reducing investment income by
$70,000 in relation to 2002.

Interest expense of $282,000 was $81,000 more
than the prior year, primarily due to Letter of Credit fees of
$39,000; margin account interest of $9,000; borrowings to
finance the Champion acquisition of $18,000 and
higher average borrowing to fund losses.

2003 other income of $763,000 was comprised of
(a) $728,000 realized upon the expiration of a credit memo
that was originally the consequence of a $2.4 million
custom glass press order cancellation in 1998; (b) $14,000
for insurance related matters; (c) $13,000 for currency
gains; (d) fee income of $5,000 for collecting accounts
receivable on behalf of Champions bank; and (e) other
miscellaneous matters.

2002 other expense of $92,000 was mainly the
result of a $108,000 loss on disposing certain fixed assets at
Lynch Systems that was partly offset by gains of $13,000 related
to the Champion purchase transaction.

Income tax benefit (expense) includes
federal, state, local and foreign taxes. The Company has a
$2,735,000 net operating loss (NOL) carry
forward as of 12/31/03. This NOL expires in 2024 if not utilized
prior to that date. There was no state income tax provision in
2003 due to deductions applicable to the Companys Georgia
business. There was no federal tax benefit as a result of
2003 net operating losses because the Company utilized its
applicable carry-back (NOL) in 2003 and there is
uncertainty regarding the utilization of the NOL carry-forward.
The $73,000 tax expense recorded in 2003 represents the
applicable tax at the Hong Kong tax rate on M-trons
foreign subsidiaries earnings.

Because the 2002 gain on deconsolidation in the
amount of $19.4 million is non-taxable, the Company
incurred a taxable loss of $3.4 million in 2002. As a
result, the Company recorded a tax benefit of $2.0 million,
which includes a $0.9 million tax benefit as a result of a
capital loss carry-back on the Companys investment in
Spinnaker Industries disposed of in 2002. In spite of a net loss
for the year 2001, there was a $358,000 tax expense as
Spinnakers loss did not provide any tax benefits to Lynch.

Net income for the year ended December 31,
2003 was $110,000, or $0.07 per share compared to net
income of $18.0 million in 2002, or $11.99 per share.
Net income for 2003 included non-recurring gains ($452,000
realized on settlement of customer contingency, and $319,000
gain on sale of marketable securities) totaling $771,000. Net
income for 2002 of $18.0 million was due primarily to the
$19.4 million gain on the final deconsolidation of
Spinnaker Industries and related tax benefit of
$0.9 million.

Total backlog of manufactured products at
December 31, 2003 was $5.6 million, which represents a
decrease of $0.6 million from the comparable backlog of
$6.2 million at December 31, 2002. The backlog at
Lynch Systems declined from $3.9 million to
$2.8 million due to the continuation of weak demand from
the CRT and tableware industries. Meanwhile, the backlog at
M-tron increased to $2.8 million from $2.3 million due
to M-trons becoming more competitive by moving more
production of high volume oscillators to lower cost offshore
contract manufacturers.



| |                                                                                                                 
| | ----------------------------------------------------------------------------------------------------------------
| | Year 2002 Compared to 2001 (including
    results of Spinnaker for the nine months ended
    September 30, 2001)

Effective September 30, 2001, the
Companys ownership and voting interest of Spinnaker
Industries, Inc. was reduced to 41.8% and 49.5%
respectively, due to the disposition of shares of Spinnaker. As
a result, effective September 30, 2001, the Company
relinquished control of Spinnaker and has deconsolidated
Spinnaker. On September 23, 2002, Lynch disposed of its
remaining interest in Spinnaker. See Note 1 to the

20



---



##### 



Consolidated Financial Statements 
Basis of Presentation. Accordingly, Spinnaker
results of operations have only been included for nine months in
2001.




| |          
| | ---------
| | Net Sales

Consolidated revenues for the year ended
December 31, 2002 were $26.4 million, a reduction of
$114.7 million from Fiscal Year 2001, due mainly to the
previously described deconsolidation of Spinnaker.
Spinnakers net sales for the nine month period ending
September 30, 2001 of $93.4 million accounted for 81%
of the year over year unfavorable revenue variance.

Lynch Systems revenues declined by
$11.1 million, or 42.5%, to $15.0 million due to low
order in-flow. In spite of a substantial increase in quotations,
producers of television and computer-monitor screens and other
devices that incorporate electronic display did not order glass
press machines. Sales of glass press machines and their related
spare parts of $13.4 million were $7.3 million less
than 2001. In addition, tableware machine sales of
$0.7 million were $2.4 million less than last year,
reflecting worldwide weaknesses in the glass industry. The
remaining reduction of $1.4 million was related to various
businesses and due to general weakness in the economy.

Due to these industry weaknesses, Lynch
Systems backlog declined by $8.0 million from
December 31, 2001 to $3.9 million at December 31,
2002. See Note 17 to the Consolidated Financial
Statements  Subsequent Events relating to
increases in the backlog in early 2003.

M-trons served market, the infrastructure
segment of the telecommunications industry, continued to be
deeply depressed by the major correction of world-wide
overcapacity caused by the internet bubble. M-tron could not
overcome the dramatic reduction in spending by its customers who
use M-trons quartz crystals and oscillators in their
communication and networking equipment. As a result, M-tron
suffered a sales decline of $10.2 million, or 47.2%, from
$21.6 in 2001 to $11.4 million in 2002. Partly as a result
of the Companys acquisition of Champion
Technologies, Inc., described in Note 2 to the
Consolidated Financial Statements, M-trons
December 31, 2002 backlog improved by $0.9 million to
$2.3 million from the prior year-end backlog of
$1.4 million.



| |                 
| | ----------------
| | Operating Profit

Consolidated operating profit was
$16.2 million in 2002, compared to an operating loss of
$19.2 million in 2001. Fiscal 2002 operating profit
includes a $19.4 million gain on deconsolidation of
Spinnaker, while 2001 results included an operating loss of
$19.8 million at Spinnaker, which included an asset
impairment and restructuring charge of $41.7 million, and a
$27.4 million gain on deconsolidation (see Note 1 to
the Consolidated Financial Statements  Basis of
Presentation).

M-trons operating loss of $2.6 million
was equivalent to the 2001 loss of $2.5 million despite a
47.1% reduction in sales. Personnel reductions throughout 2002
(108 personnel at December 31, 2002 versus 136 personnel at
December 31, 2001), and salary rate reductions helped to
control costs.

Lynch Systems 2002 operating profit of
$0.9 million was less than 2001 by $3.8 million due to
$11.1 million, or 42%, less revenue including the loss of
higher margin repair parts business. To help offset the 42%
decline in revenue, headcount at Lynch Systems was reduced to 70
at December 31, 2002 from 100 at December 31, 2001.



| |                      
| | ---------------------
| | Other Income/ Expense

Investment income of $121,000 at
December 31, 2002 represented a reduction of $263,000 from
the previous year, of which $184,000 was attributable to
Spinnaker. Low interest rates on invested funds was also a
factor in reducing investment income.

Interest expense of $201,000 was
$7.5 million less than the prior year, primarily due to
Spinnaker, which represented $7.4 million of 2001s
interest expense.

21



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##### 



Other expense of $92,000 was mainly the result of
a $108,000 loss on disposing certain fixed assets at Lynch
Systems, offset by foreign exchange gains and fees received from
Champions lending bank for collecting accounts receivable
on its behalf.

Income tax benefit (expense) includes
federal, state and local taxes. Because the 2002 gain on
deconsolidation in the amount of $19.4 million is
non-taxable, the Company incurred a taxable loss of
$3.4 million. As a result, the Company recorded a tax
benefit of $2.0 million that includes a $0.9 million
tax benefit as a result of a capital loss carry-back on the
Companys investment in Spinnaker Industries disposed of in
2002. In spite of a net loss for the year 2001, there was a
$358,000 tax expense as Spinnakers loss did not provide
any tax benefits to Lynch.

There was no minority interest income or losses
in 2002. However, minority interests reduced fiscal 2001 losses
by $4.0 million as a result of losses at Spinnaker that
were allocable to the minority interests to the extent of their
investment in Spinnaker.

Net income for the year ended December 31,
2002 was $18.0 million, or $11.99 per share, which
compared to a net loss of $22.9 million or
($15.24) per share for the same period of 2001.
2002 net income of $18.0 million was due primarily to
the $19.4 million gain on the final deconsolidation of
Spinnaker Industries.

The net loss for the year ended December 31,
2001 of $22.9 million was due primarily to Spinnakers
9-month loss of $54.5 million that was partly offset by the
$27.4 million that gain on deconsolidation. See Note 1
to the Consolidated Financial Statements  Basis
of Presentation.

Total backlog of manufactured products at
December 31, 2002 was $6.2 million, which represents a
decrease of $7.2 million from the comparable backlog of
$13.4 million at December 31, 2001. Not included in
this backlog is $1.3 million and $1.5 million at
December 31, 2002 and 2001 respectively, representing a
payment from a customer for a glass press order at Lynch
Systems, which was subsequently cancelled. The customer can use
this amount for future orders and, if not utilized, will be
forfeited to Lynch Systems in 2003. The backlog at Lynch Systems
declined sharply from $12.0 million to $3.9 million
due to depressed demand from the CRT and tableware industries.
(See Note 17 to the Consolidated Financial
Statements  Subsequent Events.)
Meanwhile, the backlog at M-tron increased to $2.3 million
from $1.4 million due to the acquisition of Champion
Technologies, Inc. in October 2002.

Liquidity and Capital Resources

The Companys total cash, cash equivalents
and investments in marketable securities at December 31,
2003, total $7.4 million (including $1.1 million of
restricted cash). In addition, the Company had a
$2.4 million borrowing capacity under LSs and
M-trons revolving line of credit. Therefore, gross cash
and securities and availability under the LS and M-tron loans
total $9.8 million and exceed the combined outstanding debt
and margin liability on marketable securities of
$4.8 million by $5.0 million.

At December 31, 2003, the Company had
current assets of $18.6 million and current liabilities of
$11.2 million. Working capital was therefore
$7.4 million as compared to $8.0 million at
December 31, 2002. The ratio of current assets to current
liabilities was 1.66 to 1.00 at December 31, 2003,
unfavorable when compared to 1.79 to 1.00 ratio at
December 31, 2002, by 0.13 to 1.00.

An obligation to First National Bank of Omaha
that matures September 30, 2004 is now included in its
entirety in current liabilities. This $676,000 reclassification
from long-term debt accounts for 0.10 to 1.00 of the 0.13 to
1.00 year-over-year unfavorable variance in the ratio of
current assets to current liabilities. The Company expects to
renew the expiring loan at terms that will allow it to classify
the majority of the debt as a long-term obligation.

Cash used in operating activities was
approximately $0.5 million in 2003, compared to cash
provided of approximately $3.6 million in 2002. The year
over year unfavorable change in operating cash flow of
$4.1 million was mainly the result of $0.9 million
additional income being more than offset by $4.7 million of
restricted cash that was released for use in
operations in 2002.

Capital expenditures, on a comparable basis, were
$141,000 in 2003 and $223,000 in 2002. The Company anticipates
that it will have sufficient cash flow from operations and
borrowing availability under various credit facilities at the
subsidiaries to fund 2004 capital expenditures that could
approximate $0.7 million.

22



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##### 



At December 31, 2003, total debt of
$3.8 million was $0.3 million less than total debt at
December 31, 2002 of $4.1 million. Debt outstanding at
December 31, 2003 included $1.0 million of fixed rate
debt at an 4.0% interest rate, and $2.8 million of variable
rate debt (year-end 2003 average rate of 4.6%).

On May 30, 2003, Lynch Systems renewed its
loan agreement with its bank for a $7 million line of
credit to be used for the issuance of standby letters of credit
and/ or up to $2 million revolving credit. This line of
credit is secured by accounts receivable and inventories.
Amounts available under this line of credit will be used to fund
letters of credit securing customer advances, certain warranty
coverages and working capital. This loan includes an unsecured
parent company guarantee. At December 31, 2003, there were
outstanding Letters of Credit of $1.3 million and no
borrowings under the working capital line. There were no parent
company obligations to SunTrust Bank as of December 31,
2003. This $7 million line of credit with SunTrust Bank has
a May 29, 2004 maturity date. The Company expects to renew
this credit in its present form.

On August 4, 2003, Lynch Systems entered
into a new term loan agreement with SunTrust Bank. The new loan
is in the amount of $498,000 and is secured by a lien on Lynch
Systems real estate. The new loan has a 10-year term with
interest at 5.5%. Principal payments are $4,150 per month
for 120 months commencing August 2003. The loan proceeds
were used to retire the First Port City loan that was due in its
entirety on August 5, 2003 in the amount of $554,000.

On April 30, 2003, M-trons long-time
lending bank, First National Bank of Omaha, renewed the
revolving credit loan that now matures on April 30, 2004.
The renewed loan includes the following conditions:



| |                                                                                                                                                                                                                                                                                                                                                                                                                            
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Effective May 20, 2003, the Company
    subordinates its October 3, 2002, $200,000 loan to M-tron
    to the bank, bringing the subordinated total to $700,000;                                                                                                                                                                                                                                                        
|
| | (b) The bank reduces the minimum net worth
    and subordinated debt limit from $3.1 million to
    $2.9 million. In return, the Company has committed to fund
    any shortfall with an equity or subordinated debt cash infusion
    within 45 days of the quarter end. Since M-trons
    subordinated debt and equity total $3,020,000 at
    December 31, 2003, no additional cash infusion is currently
    required.

The Company has guaranteed a Letter of Credit
issued to the First National Bank of Omaha on behalf of its
subsidiary, M-tron Industries, Inc. As of December 31,
2003, the $1,000,000 Letter of Credit issued by Fleet Bank to
The First National Bank of Omaha was secured by a $1,125,000
deposit in a Fleet Bank Treasury Fixed Income Fund. The
Companys outstanding Letter of Credit in the amount of
$1.0 million for the benefit of the bank can be reduced to
$500,000 when M-tron is profitable for 5 of 6 consecutive months
and the cumulative after tax profit equals or exceeds $500,000.
The remaining $500,000 Letter of Credit will be released when
the earning parameters are met for a second time. These
thresholds were not met in 2003 and there is no assurance they
will be met in 2004.

Funding for the Champion transaction was provided
by the South Dakota Board of Economic Development, Yankton Area
Progressive Growth, Inc. and the Areawide Business Council
in the amount of $296,000, $250,000, and $100,000 respectively.
These loans, which total $646,000, are secured by M-trons
real estate and have maturity dates of December 19, 2007;
April 21, 2005; and November 10, 2007 respectively.
$525,000 is outstanding on these three loans as of
December 31, 2003. Principal payments under three loans
will total $120,000 in 2004. The average interest rate in 2004
for these fixed rate loans will be 2.58%. (See Note 6 to
the Consolidated Financial Statements  Notes
Payable to Bank and Long-term Debt).

There are no other financial, performance,
indirect guarantees or indemnification agreements.

Restrictions on dividends under the M-tron loan
with the First National Bank of Omaha disallow distributions to
the parent company without consent of the bank. Lynch Systems,
under its loan with SunTrust Bank, may pay a cash dividend to
the parent company equal to 50% of LSs net income for the
prior fiscal year, subject to the minimum net worth covenant in
the loan agreement. In addition, LS may pay an annual management
fee to the parent company in an amount not to exceed $250,000,
and LS may reimburse the parent company for expenses and taxes
paid by the parent on its behalf. Under the M-tron loan
agreement, advances to the parent company are disallowed without
the prior written consent of the lending bank.

The Company does not at present have credit
facilities at the parent company level. The Company believes
that existing cash and cash equivalents, cash generated from
operations and available borrowings

23



---



##### 



under its subsidiaries lines of credit will be
sufficient to meet its on-going working capital and capital
expenditures requirements for the foreseeable future.


At December 31, 2003, the Companys
total cash, cash equivalents and investments in marketable
securities total $7.4 million (including $1.1 million
of restricted cash). In addition, the Company had a
$2.4 million borrowing capacity under LSs and
M-trons revolving line of credit. Therefore, gross cash
and securities and availability under the LS and M-tron loans
total $9.8 million and exceed the combined outstanding debt
and margin liability on marketable securities of
$4.8 million by $5.0 million.

The Board of Directors has adopted a policy of
not paying cash dividends, a policy which is reviewed annually.
This policy takes into account the long-term growth objectives
of the Company, especially in 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 2004. (See Note 6 to the Consolidated Financial
Statements  Notes Payable to Banks and
Long-term Debts  for restrictions on the
companies assets).

Off-Balance Sheet Arrangements

Aside from the Companys stand-by letter of
credit, the Company does not have any off-balance sheet
arrangements.

Aggregate Contractual Obligations

Details of the Companys contractual
obligations for short-term debt, long-term debt, leases,
purchases and other long term obligations are as follows (see
Notes 6 and 14 to the Consolidated Financial Statements):

|                                                                                       |       |                                             |           |           |  |       |           |           |  |           |         |           |  |   |         |         |  |   |         |         | 
|-------------------------------------------------------------------------------------- | ----- | ------------------------------------------- | --------- | --------- |  | ----- | --------- | --------- |  | --------- | ------- | --------- |  | - | ------- | ------- |  | - | ------- | ------- | 
|                                                                                       |       |                                            
|                                                                                       |       | Payments Due by Period  Including Interest
|                                                                                       |       |                                            
|                                                                                       |       |                                             |           | Less Than |  | 1-3   |           | 3-5       |  | More Than
|Contractual Obligations                                                                |       | Total                                       |           | 1 Year    |  | Years |           | Years     |  | 5 Years  
|                                                                                       |       |                                             |           |           |  |       |           |           |  |          
|Short-term Debt                                                                        |       | $                                           | 2,007,000 |           |  | $     | 2,007,000 |           |  |           |        |           |  |   |        |         |  |   |        |        
|Long-term Debt Obligations                                                             |       |                                             | 2,087,000 |           |  |       | 1,063,000 |           |  | $         | 702,000 |           |  | $ | 125,000 |         |  | $ | 197,000 |        
|Capital Lease Obligations                                                              |       |                                             |          |           |  |       |          |           |  |           |        |           |  |   |        |         |  |   |        |        
|Operating Lease Obligations                                                            |       |                                             | 630,000   |           |  |       | 274,000   |           |  |           | 356,000 |           |  |   |        |         |  |   |        |        
|Purchase Obligations                                                                   |       |                                             |          |           |  |       |          |           |  |           |        |           |  |   |        |         |  |   |        |        
|Other Long-term Liabilities Reflected on the
    Registrants Balance Sheet under GAAP |       |                                             |          |           |  |       |          |           |  |           |        |           |  |   |        |         |  |   |        |        
|                                                                                       |       |                                             |           |           |  |       |           |           |  |           |         |           |  |   |         |         |  |   |         |        
|                                                                                       | TOTAL |                                             | $         | 4,724,000 |  |       | $         | 3,344,000 |  |           | $       | 1,058,000 |  |   | $       | 125,000 |  |   | $       | 197,000 | 
|                                                                                       |       |                                             |           |           |  |       |           |           |  |           |         |           |  |   |         |         |  |   |         |        

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 $5.0 million at
December 31, 2003). The Company generally finances the debt
portion of the acquisition of long-term assets with fixed rate,
long-term debt. 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.
There has been no significant change in market risk since
December 31, 2003.

Since the Companys international sales are
in U.S. Dollars, there is no monetary risk.

At December 31, 2003, approximately
$2.8 million of the Companys debt bears interest at
variable rates. Accordingly, the Companys earnings and
cash flows are slightly affected by changes in interest rates.
Assuming the current level of borrowings for variable rate debt,
and assuming a two percentage point increase in the 2003 average
interest rate under these borrowings, it is estimated that the
Companys interest expense

24



---



##### 



would change by less than $0.1 million. In
the event of an adverse change in interest rates, management
would take actions to further mitigate its exposure.


Concentrations of Credit Risk

Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist
principally of cash, investments, and trade accounts receivable.

The Company maintains cash and cash equivalents
and short-term investments with various financial institutions.
These financial institutions are located throughout the country
and the Companys policy is designed to limit exposure to
any one institution. The Company performs periodic evaluations
of the relative credit standing of those financial institutions
that are considered in the Companys investment strategy.
Other than certain accounts receivable, the Company does not
require collateral on these financial instruments. In relation
to export sales, the Company requires letters of credit
supporting a significant portion of the sales price prior to
production to limit exposure to credit risk. The Company
maintains an allowance for doubtful accounts at a level that
management believes is sufficient to cover potential credit
losses.

Risk Factors

Certain subsidiaries and business segments of the
Company sell to industries that are subject to cyclical economic
changes. Any downturns in the economic environment would have a
financial impact on the Company and its consolidated
subsidiaries and may cause the reported financial information
herein not to be indicative of future operating results,
financial condition or cash flows.

Future activities and operating results may be
adversely affected by fluctuating demand for capital goods such
as large glass presses, delay in the recovery of demand for
components used by telecommunications infrastructure
manufacturers, disruption of foreign economies and the inability
to renew or obtain new financing for expiring loans.



|         |                                                              
|-------- | -------------------------------------------------------------
|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 15(a).



|        |                                                                                         
|------- | ----------------------------------------------------------------------------------------
|Item 9. | Changes in and Disagreements with
    Accountants on Accounting and Financial Disclosure

Not applicable.



|         |                        
|-------- | -----------------------
|Item 9A. | Controls and Procedures

The Chief Executive Officer and Chief Financial
Officer have concluded that the Companys disclosure
controls and procedures were effective as of the end of the
period covered by this report based on the evaluation of these
controls and procedures required by Exchange Act
Rule 13a-15.

There have been no changes in the
Registrants internal control over financial reporting that
occurred during the Registrants last fiscal quarter that
has materially affected, or is reasonably likely to materially
affect, the Registrants internal control over financial
reporting.

25



---



##### 



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) Beneficial Ownership Reporting
Compliance in Registrants Proxy Statement for its
Annual Meeting of Shareholders for 2004, which information is
incorporated herein by reference.

The Registrants audit committee chairman,
Mr. Anthony R. Pustorino, is an audit committee
financial expert as defined in Item 401(h) of
Regulation S-K. Mr. Pustorino is
independent as defined in the American Stock
Exchange Listing Standards.

The Registrant has adopted a code of ethics,
within the meaning of Item 406(b) of Regulation S-K,
which applies to its Chief Executive Officer and Chief Financial
Officer, as well as the Companys President, subsidiary
Presidents, and subsidiary Financial Officers. In addition,
Registrant has amended and restated its Business Conduct Policy
which applies to all employees and which is filed herewith as
Exhibit 99.1. Certain employees are required to certify
their compliance and understanding with this policy on a regular
basis.



|         |                       
|-------- | ----------------------
|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 2004, which information is incorporated herein
by reference.



|         |                                                                   
|-------- | ------------------------------------------------------------------
|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 2004,
which information is included herein by reference.



|         |                                                   
|-------- | --------------------------------------------------
|Item 13. | Certain Relationships and Related
    Transactions

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



|         |                                           
|-------- | ------------------------------------------
|Item 14. | Principal Accountant Fees and
    Services

The information required by this Item 14 is
included under the caption Fees Billed to the Company by
Ernst and Young, LLP, in the Registrants Proxy
Statement for its Annual Meeting of Shareholders for 2004, which
information is included herein by reference.

PART IV



|         |                                                                                          
|-------- | -----------------------------------------------------------------------------------------
|Item 15. | Exhibits, Financial Statements, 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 at December 31,
    2003 and 2002                                                                     
|
| | Consolidated Statements of Operations 
    Years ended December 31, 2003, 2002 and 2001                                          

26



---



##### 





| |                                                                                                        
| | -------------------------------------------------------------------------------------------------------
| | Consolidated Statements of Shareholders
    Equity  Years ended December 31, 2003, 2002, and
    2001
|
| | Consolidated Statements of Cash Flows 
    Years ended December 31, 2003, 2002, and 2001              
|
| | Notes to Consolidated Financial Statements                                                             



| |     |                                                                                                                        
| | --- | -----------------------------------------------------------------------------------------------------------------------
| | (2) | Financial Statement Schedules as of
    December 31, 2003 and 2002 and for the three years
    ended December 31, 2003:



| |                                                               
| | --------------------------------------------------------------
| | 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.



| |     |                                                                                                                                                                                                        
| | --- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (b) | Reports on Form 8-K: A report on
    Form 8-K was filed on November 11 2003 as a press
    release announcing Lynchs results of operations for the
    third quarter period ending September 30, 2003.
|
| | (c) | The following Exhibits listed in the
    Exhibit Index are filed with this Form 10-K Annual
    Report:                                                                                                



| |            |                                                                                                                                                        
| | ---------- | -------------------------------------------------------------------------------------------------------------------------------------------------------
| | 10(hh)    | Mortgage dated October 21, 2002 by
    Mortgagor, M-tron Industries, Inc., to Mortgagee, Yankton
    Area Progressive Growth, Inc.                     
|
| | 10(ii)    | Promissory Note between M-tron
    Industries, Inc. and Yankton Area Progressive
    Growth, Inc. dated October 21, 2002.                              
|
| | 10(jj)    | Standard Loan Agreement by and between M-tron
    Industries, Inc. and Areawide Business Council, Inc.
    dated October 10, 2002 and Exhibits thereto.
|
| | 10(kk)    | Loan Agreement by and between M-tron
    Industries, Inc. and South Dakota Board of Economic
    Development dated December 19, 2002.                  
|
| | 10(ll)    | Promissory Note between M-tron
    Industries, Inc. and South Dakota Board of Economic
    Development dated December 19, 2002.                        
|
| | 10(mm)    | Employment Agreement by and between M-tron
    Industries, Inc. and South Dakota Board of Economic
    Development dated December 19, 2002.            



| |                                               
| | ----------------------------------------------
| | 21       
    Subsidiaries of the Registrant.
|
| | 23       
    Consent of Ernst & Young LLP.  
|
| | 24       
    Powers of Attorney.            



| |            |                                                                                                                                                            
| | ---------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------
| | 31        | Certifications of Registrants principal
    executive and principal chief financial officers required by
    Exchange Act Rule 13a-14(a).                 
|
| | 32        | Section 1350 Certifications of
    Registrants principal executive and principal executive
    financial officers required by Exchange Act Rule 13a-14(b).



| |                                                             
| | ------------------------------------------------------------
| | 99.1      Amended
    and Restated Business Conduct Policy.

(d) Financial Statement Schedules:

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

27



---



##### 



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, 2003 and 2002, and the related consolidated
statements of operations, shareholders equity, and cash
flows for each of the three years in the period ended
December 31, 2003. Our audits also included the financial
statement schedules listed in the index at Item 15(a).
These financial statements and schedules are the responsibility
of the Companys management. Our responsibility is to
express an opinion on these financial statements and schedules
based on our audits.

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

In our opinion, 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, 2003 and 2002
and the consolidated results of their operations and their cash
flows for each of the three years in the period ended
December 31, 2003, in conformity with accounting principles
generally accepted in the United States. Also, in our opinion,
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

Providence, Rhode Island

April 9, 2004


28



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES



CONSOLIDATED BALANCE SHEETS


|                                         |                                                                                                                             |                             |                                            |              |        |        |        |        |        |        | 
|---------------------------------------- | --------------------------------------------------------------------------------------------------------------------------- | --------------------------- | ------------------------------------------ | ------------ | ------ | ------ | ------ | ------ | ------ | ------ | 
|                                         |                                                                                                                             | December 31,                |                                            | December 31,
|                                         |                                                                                                                             | 2003                        |                                            | 2002        
|                                         |                                                                                                                             |                             |                                            |             
|                                         |                                                                                                                             |                            
|                                         |                                                                                                                             | (In thousands, except share
|                                         |                                                                                                                             | amounts)                   
|ASSETS                                  
|Current Assets:                          |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                         | Cash and cash equivalents                                                                                                   |                             | $                                          | 3,981        |        |        | $      | 5,986  |       
|                                         | Restricted cash (Note 1)                                                                                                    |                             |                                            | 1,125        |        |        |        | 1,125  |       
|                                         | Investments  Marketable Securities                                                                                         |                             |                                            | 2,311        |        |        |        | 861    |       
|                                         | Trade accounts receivable, less allowances of $91
    and $91, respectively (Note 1)                                        |                             |                                            | 5,797        |        |        |        | 3,524  |       
|                                         | Inventories                                                                                                                 |                             |                                            | 4,911        |        |        |        | 5,624  |       
|                                         | Recoverable income taxes                                                                                                    |                             |                                            |             |        |        |        | 532    |       
|                                         | Deferred income taxes                                                                                                       |                             |                                            | 57           |        |        |        | 207    |       
|                                         | Prepaid expense                                                                                                             |                             |                                            | 456          |        |        |        | 324    |       
|                                         |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                         |                                                                                                                             |                             | Total Current Assets                       |              |        | 18,638 |        |        |        | 18,183 | 
|Property, Plant and Equipment            |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                         | Land                                                                                                                        |                             |                                            | 291          |        |        |        | 291    |       
|                                         | Buildings and improvements                                                                                                  |                             |                                            | 4,198        |        |        |        | 4,198  |       
|                                         | Machinery and equipment                                                                                                     |                             |                                            | 11,377       |        |        |        | 11,841 |       
|                                         |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                         |                                                                                                                             |                             | 15,866                                     |              |        |        | 16,330 |       
|                                         | Less: Accumulated depreciation                                                                                              |                             |                                            | 11,689       |        |        |        | 11,504 |       
|                                         |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                         |                                                                                                                             |                             | 4,177                                      |              |        |        | 4,826  |       
|                                         | Other assets                                                                                                                |                             |                                            | 204          |        |        |        | 421    |       
|                                         |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                         |                                                                                                                             |                             | Total Assets                               |              | $      | 23,019 |        |        | $      | 23,430 | 
|                                         |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                        
|LIABILITIES AND SHAREHOLDERS
    EQUITY
|Current Liabilities:                     |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                         | Notes payable to banks                                                                                                      |                             | $                                          | 1,976        |        |        | $      | 2,228  |       
|                                         | Trade accounts payable                                                                                                      |                             |                                            | 2,054        |        |        |        | 927    |       
|                                         | Accrued warranty expense                                                                                                    |                             |                                            | 585          |        |        |        | 1,595  |       
|                                         | Accrued compensation expense                                                                                                |                             |                                            | 1,219        |        |        |        | 921    |       
|                                         | Accrued income taxes                                                                                                        |                             |                                            | 716          |        |        |        | 1,053  |       
|                                         | Accrued professional fees                                                                                                   |                             |                                            | 273          |        |        |        | 327    |       
|                                         | Accrued commissions                                                                                                         |                             |                                            | 429          |        |        |        | 214    |       
|                                         | Margin liability on marketable securities                                                                                   |                             |                                            | 1,033        |        |        |        | 251    |       
|                                         | Other accrued expenses                                                                                                      |                             |                                            | 664          |        |        |        | 659    |       
|                                         | Customer advances                                                                                                           |                             |                                            | 1,206        |        |        |        | 1,147  |       
|                                         | Current maturities of long-term debt                                                                                        |                             |                                            | 998          |        |        |        | 832    |       
|                                         |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                         |                                                                                                                             |                             | Total Current Liabilities                  |              |        | 11,153 |        |        |        | 10,154 | 
|                                         | Long-term debt                                                                                                              |                             |                                            | 833          |        |        |        | 1,089  |       
|                                         | Other long-term liabilities                                                                                                 |                             |                                            |             |        |        |        | 1,253  |       
|                                         |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                         |                                                                                                                             | Total Liabilities           |                                            |              | 11,986 |        |        |        | 12,496 |       
|Commitments and Contingencies (Note 14)  |                                                                                                                             |                             |                                            |              |        |        |        |       
|Shareholders Equity                     |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                         | Common stock, $0.01 par value 
    10,000,000 shares authorized; 1,513,191 shares issued;
    1,497,883 shares outstanding |                             |                                            | 15           |        |        |        | 15     |       
|                                         | Additional paid-in capital                                                                                                  |                             |                                            | 15,645       |        |        |        | 15,645 |       
|                                         | (Accumulated deficit)                                                                                                       |                             |                                            | (4,460       | )      |        |        | (4,570 | )     
|                                         | Accumulated other comprehensive Income                                                                                      |                             |                                            | 291          |        |        |        | 302    |       
|                                         | Treasury stock of 15,308 shares at cost                                                                                     |                             |                                            | (458         | )      |        |        | (458   | )     
|                                         |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                         |                                                                                                                             |                             | Total Shareholders Equity                 |              |        | 11,033 |        |        |        | 10,934 | 
|                                         |                                                                                                                             |                             |                                            |              |        |        |        |       
|                                         |                                                                                                                             |                             | Total Liabilities and Shareholders Equity |              | $      | 23,019 |        |        | $      | 23,430 | 
|                                         |                                                                                                                             |                             |                                            |              |        |        |        |       



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Effective September 30, 2001, the
    Companys ownership and voting interest of Spinnaker
    Industries, Inc. was reduced to 41.8% and 49.5%
    respectively, due to the disposition of shares of Spinnaker. As
    a result, effective September 30, 2001, the Company
    relinquished control of Spinnaker and has deconsolidated
    Spinnaker. On September 23, 2002, the Company disposed of
    its remaining interest in Spinnaker. See Note 1 to the
    Consolidated Financial Statements  Basis of
    Presentation.

29



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF
OPERATIONS


|                                                             |                                            |                                           |           |        |   |      |           |        |   |   |           |         |  
|------------------------------------------------------------ | ------------------------------------------ | ----------------------------------------- | --------- | ------ | - | ---- | --------- | ------ | - | - | --------- | ------- | -
|                                                             |                                            |                                          
|                                                             |                                            | Years Ended December 31,                 
|                                                             |                                            |                                          
|                                                             |                                            | 2003                                      |           | 2002   |   | 2001
|                                                             |                                            |                                           |           |        |   |     
|                                                             |                                            |                                          
|                                                             |                                            | (In thousands, except share and per-share
|                                                             |                                            | amounts)                                 
|SALES AND REVENUES                                           |                                            | $                                         | 27,969    |        |   | $    | 26,386    |        |   | $ | 141,073   |        
|Costs and expenses:                                          |                                            |                                           |           |        |   |      |           |        |   |   |           |        
|                                                             | Manufacturing cost of sales                |                                           |           | 20,319 |   |      |           | 19,437 |   |   |           | 130,290 |  
|                                                             | Selling and administrative                 |                                           |           | 8,482  |   |      |           | 10,201 |   |   |           | 19,157  |  
|                                                             | Asset impairment and restructuring charges |                                           |           |       |   |      |           |       |   |   |           | 38,272  |  
|                                                             |                                            |                                           |           |        |   |      |           |        |   |   |           |        
|                                                             |                                            |                                           | 28,801    |        |   |      | 29,638    |        |   |   | 187,719   |        
|Gain on deconsolidation (Note 1)                             |                                            |                                           |          |        |   |      | 19,420    |        |   |   | 27,406    |        
|                                                             |                                            |                                           |           |        |   |      |           |        |   |   |           |        
|OPERATING PROFIT (LOSS)                                      |                                            |                                           | (832      | )      |   |      | 16,168    |        |   |   | (19,240   | )      
|Other income (expense):                                      |                                            |                                           |           |        |   |      |           |        |   |   |           |        
|                                                             | Investment income                          |                                           |           | 534    |   |      |           | 121    |   |   |           | 384     |  
|                                                             | Interest expense                           |                                           |           | (282   | ) |      |           | (201   | ) |   |           | (7,741  | )
|                                                             | Other income (expense)                     |                                           |           | 763    |   |      |           | (92    | ) |   |           |        |  
|                                                             |                                            |                                           |           |        |   |      |           |        |   |   |           |        
|                                                             |                                            |                                           | 1,015     |        |   |      | (172      | )      |   |   | (7,357    | )      
|                                                             |                                            |                                           |           |        |   |      |           |        |   |   |           |        
|INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY
    INTERESTS |                                            |                                           | 183       |        |   |      | 15,996    |        |   |   | (26,597   | )      
|(Provision) Benefit for income taxes                         |                                            |                                           | (73       | )      |   |      | 1,967     |        |   |   | (358      | )      
|Minority interests                                           |                                            |                                           |          |        |   |      |          |        |   |   | 4,017     |        
|                                                             |                                            |                                           |           |        |   |      |           |        |   |   |           |        
|NET INCOME (LOSS)                                            |                                            | $                                         | 110       |        |   | $    | 17,963    |        |   | $ | (22,938   | )      
|                                                             |                                            |                                           |           |        |   |      |           |        |   |   |           |        
|Weighted average shares outstanding                          |                                            |                                           | 1,497,900 |        |   |      | 1,497,900 |        |   |   | 1,505,300 |        
|BASIC AND DILUTED INCOME (LOSS) PER SHARE                    |                                            | $                                         | 0.07      |        |   | $    | 11.99     |        |   | $ | (15.24    | )      
|                                                             |                                            |                                           |           |        |   |      |           |        |   |   |           |        



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Effective September 30, 2001, the
    Companys ownership and voting interest of Spinnaker
    Industries, Inc. was reduced to 41.8% and 49.5%
    respectively, due to the disposition of shares of Spinnaker. As
    a result, effective September 30, 2001, the Company
    relinquished control of Spinnaker and has deconsolidated
    Spinnaker. On September 23, 2002, the Company disposed of
    its remaining interest in Spinnaker. See Note 1 to the
    Consolidated Financial Statements  Basis of
    Presentation.

See accompanying notes

30



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF SHAREHOLDERS
EQUITY


For the Three Years Ended December 31,
2003


|                                    |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |         |         |  
|----------------------------------- | -------------------------- | ------------------------------------------------ | --------- | ------ | - | ---------- | ------ | -------- | - | ---------- | ------ | ------------- | - | -------- | ------- | ------- | - | - | ---- | - | - | - | --- | --- | - | - | ---- | - | - | - | ------ | ------- | ------- | -
|                                    |                            | Shares of                                        |           |        |   |            |        |          |   |            |        | Accumulated   |   |          |         |        
|                                    |                            | Common                                           |           |        |   | Additional |        |          |   | Officers  |        | Other         |   |          |         |        
|                                    |                            | Stock                                            |           | Common |   | Paid-In    |        | Retained |   | Note       |        | Comprehensive |   | Treasury |         |        
|                                    |                            | Outstanding                                      |           | Stock  |   | Capital    |        | Earnings |   | Receivable |        | Income        |   | Stock    |         | Total  
|                                    |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |        
|                                    |                            |                                                 
|                                    |                            | (In thousands except for shares of common stock)
|BALANCE AT DEC. 31, 2000            |                            |                                                  | 1,510,183 |        |   | $          | 5,139  |          |   | $          | 10,403 |               |   | $        | 405     |         |   | $ | (382 | ) |   | $ | (71 | )   |   | $ | (62  | ) |   | $ | 15,432 |        
|Comprehensive Income (Loss):        |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |        
|                                    | Net loss for year          |                                                  |           |       |   |            |        |         |   |            |        |              |   |          |         | (22,938 | ) |   |      |  |   |   |     |    |   |   |      |  |   |   |        | (22,938 | )      
|                                    | Other comprehensive income |                                                  |           |       |   |            |        |         |   |            |        |              |   |          |         |        |   |   |      |  |   |   |     | 69  |   |   |      |  |   |   |        | 69      |        
|                                    |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |        
|                                    |                            | Comprehensive Loss                               |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |         | (22,869 | )
|Acquisition of Treasury Stock       |                            |                                                  | (12,300   | )      |   |            |       |          |   |            |       |               |   |          |        |         |   |   | 382  |   |   |   |    |     |   |   | (396 | ) |   |   | (14    | )      
|                                    |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |        
|BALANCE AT DEC. 31, 2001            |                            |                                                  | 1,497,883 |        |   | $          | 5,139  |          |   | $          | 10,403 |               |   | $        | (22,533 | )       |   | $ |     |   |   | $ | (2  | )   |   | $ | (458 | ) |   | $ | (7,451 | )      
|Assign $0.01 par value (Note 10)    |                            |                                                  |          |        |   |            | (5,124 | )        |   |            | 5,124  |               |   |          |        |         |   |   |     |   |   |   |    |     |   |   |     |   |   |   |       |        
|Comprehensive Income (Loss):        |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |        
|                                    | Net income for year        |                                                  |           |       |   |            |        |         |   |            |        |              |   |          |         | 17,963  |   |   |      |  |   |   |     |    |   |   |      |  |   |   |        | 17,963  |        
|                                    | Other comprehensive income |                                                  |           |       |   |            |        |         |   |            |        |              |   |          |         |        |   |   |      |  |   |   |     | 304 |   |   |      |  |   |   |        | 304     |        
|                                    |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |        
|                                    |                            | Comprehensive Income                             |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |         | 18,267  |  
|Unredeemed minority interest Shares |                            |                                                  |          |        |   |            |       |          |   |            | 118    |               |   |          |        |         |   |   |     |   |   |   |    |     |   |   |     |   |   |   | 118    |        
|                                    |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |        
|BALANCE AT DEC. 31, 2002            |                            |                                                  | 1,497,883 |        |   | $          | 15     |          |   | $          | 15,645 |               |   | $        | (4,570  | )       |   | $ |     |   |   | $ | 302 |     |   | $ | (458 | ) |   | $ | 10,934 |        
|                                    |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |        
|Comprehensive Income (Loss):        |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |        
|                                    | Net income for year        |                                                  |           |       |   |            |        |         |   |            |        |              |   |          |         | 110     |   |   |      |  |   |   |     |    |   |   |      |  |   |   |        | 110     |        
|                                    | Other comprehensive loss   |                                                  |           |       |   |            |        |         |   |            |        |              |   |          |         |        |   |   |      |  |   |   |     | (11 | ) |   |      |  |   |   |        | (11     | )      
|                                    |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |        
|                                    |                            | Comprehensive Income                             |           |        |  |            |        |          |  |            |        |               |  |          |         |         |  |   |      |   |  |   |     |     |  |   |      |   |  |   |        |         | 99      |  
|                                    |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |        
|BALANCE AT DEC. 31, 2003            |                            |                                                  | 1,497,883 |        |   | $          | 15     |          |   | $          | 15,645 |               |   | $        | (4,460  | )       |   | $ |     |   |   | $ | 291 |     |   | $ | (458 | ) |   | $ | 11,033 |        
|                                    |                            |                                                  |           |        |   |            |        |          |   |            |        |               |   |          |         |         |   |   |      |   |   |   |     |     |   |   |      |   |   |   |        |        



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Effective September 30, 2001, the
    Companys ownership and voting interest of Spinnaker
    Industries, Inc. was reduced to 41.8% and 49.5%
    respectively, due to the disposition of shares of Spinnaker. As
    a result, effective September 30, 2001, the Company
    relinquished control of Spinnaker and has deconsolidated
    Spinnaker. On September 23, 2002, the Company disposed of
    its remaining interest in Spinnaker. See Note 1 to the
    Consolidated Financial Statements  Basis of
    Presentation.

See accompanying notes.

31



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES



CONSOLIDATED STATEMENTS OF CASH
FLOWS


|                                                                                                       |                                          |                          |        |        |   |      |         |        |   |   |         |         |  
|------------------------------------------------------------------------------------------------------ | ---------------------------------------- | ------------------------ | ------ | ------ | - | ---- | ------- | ------ | - | - | ------- | ------- | -
|                                                                                                       |                                          |                         
|                                                                                                       |                                          | Years Ended December 31,
|                                                                                                       |                                          |                         
|                                                                                                       |                                          | 2003                     |        | 2002   |   | 2001
|                                                                                                       |                                          |                          |        |        |   |     
|                                                                                                       |                                          |                         
|                                                                                                       |                                          | (In thousands)          
|OPERATING ACTIVITIES                                                                                   |                                          |                          |        |        |   |      |         |        |   |   |         |        
|Net income (loss)                                                                                      |                                          | $                        | 110    |        |   | $    | 17,963  |        |   | $ | (22,938 | )      
|Adjustments to reconcile net income (loss) to net
    cash provided by (used in) operating activities: |                                          |                          |        |        |   |      |         |        |   |   |         |        
|Gain on deconsolidation                                                                                |                                          |                          |       |        |   |      | (19,420 | )      |   |   | (27,406 | )      
|Restricted operating cash                                                                              |                                          |                          |       |        |   |      | 4,703   |        |   |   | 1,797   |        
|Loss on disposal of fixed assets                                                                       |                                          |                          |       |        |   |      | 145     |        |   |   |        |        
|Loss on donation of shares                                                                             |                                          |                          |       |        |   |      |        |        |   |   | 366     |        
|Asset impairment and restructuring charges                                                             |                                          |                          |       |        |   |      |        |        |   |   | 38,272  |        
|Gain realized on sale of marketable securities                                                         |                                          |                          | (483   | )      |   |      |        |        |   |   |        |        
|Depreciation                                                                                           |                                          |                          | 982    |        |   |      | 1,044   |        |   |   | 4,315   |        
|Amortization of definite-lived intangible assets                                                       |                                          |                          | 257    |        |   |      | 206     |        |   |   | 244     |        
|Amortization of deferred financing charges                                                             |                                          |                          |       |        |   |      |        |        |   |   | 703     |        
|Deferred taxes                                                                                         |                                          |                          | 150    |        |   |      | 202     |        |   |   | 501     |        
|Recoverable income taxes                                                                               |                                          |                          |       |        |   |      | (532    | )      |   |   |        |        
|Minority interests                                                                                     |                                          |                          |       |        |   |      |        |        |   |   | (4,017  | )      
|Other                                                                                                  |                                          |                          | (22    | )      |   |      |        |        |   |   | 761     |        
|Changes in operating assets and liabilities:                                                           |                                          |                          |        |        |   |      |         |        |   |   |         |        
|                                                                                                       | Receivables                              |                          |        | (2,273 | ) |      |         | 6,294  |   |   |         | 10,861  |  
|                                                                                                       | Inventories                              |                          |        | 503    |   |      |         | 194    |   |   |         | 13,430  |  
|                                                                                                       | Accounts payable and accrued liabilities |                          |        | 1,617  |   |      |         | (7,620 | ) |   |         | (14,269 | )
|                                                                                                       | Other assets/liabilities                 |                          |        | (1,385 | ) |      |         | 414    |   |   |         | 4,727   |  
|                                                                                                       |                                          |                          |        |        |   |      |         |        |   |   |         |        
|Net cash provided by (used in) operating
    activities                                                |                                          |                          | (544   | )      |   |      | 3,593   |        |   |   | 7,347   |        
|INVESTING ACTIVITIES                                                                                   |                                          |                          |        |        |   |      |         |        |   |   |         |        
|Acquisition of minority interest (Note 7)                                                              |                                          |                          |       |        |   |      | (220    | )      |   |   |        |        
|Capital Expenditures                                                                                   |                                          |                          | (141   | )      |   |      | (223    | )      |   |   | (1,104  | )      
|Restricted investing cash                                                                              |                                          |                          |       |        |   |      | (1,125  | )      |   |   |        |        
|Reduction in cash due to deconsolidation                                                               |                                          |                          |       |        |   |      |        |        |   |   | (5,728  | )      
|Acquisition (See Note 2)                                                                               |                                          |                          |       |        |   |      | (850    | )      |   |   |        |        
|Proceeds from sale of marketable securities                                                            |                                          |                          | 1,041  |        |   |      |        |        |   |   |        |        
|Payment on margin liability on marketable
    securities                                               |                                          |                          | (454   | )      |   |      |        |        |   |   |        |        
|Purchase of marketable securities                                                                      |                                          |                          | (1,565 | )      |   |      | (306    | )      |   |   |        |        
|Other                                                                                                  |                                          |                          |       |        |   |      | (214    | )      |   |   | (860    | )      
|                                                                                                       |                                          |                          |        |        |   |      |         |        |   |   |         |        
|Net cash used in investing activities                                                                  |                                          |                          | (1,119 | )      |   |      | (2,938  | )      |   |   | (7,692  | )      
|FINANCING ACTIVITIES                                                                                   |                                          |                          |        |        |   |      |         |        |   |   |         |        
|Net borrowings (repayments) of notes payable                                                           |                                          |                          | (252   | )      |   |      | 1,453   |        |   |   | (7,587  | )      
|Repayment of long-term debt                                                                            |                                          |                          | (884   | )      |   |      | (369    | )      |   |   | (420    | )      
|Proceeds from long-term debt                                                                           |                                          |                          | 794    |        |   |      |        |        |   |   | 1,987   |        
|Other                                                                                                  |                                          |                          |       |        |   |      |        |        |   |   | 69      |        
|                                                                                                       |                                          |                          |        |        |   |      |         |        |   |   |         |        
|Net cash provided by (used in) financing
    activities                                                |                                          |                          | (342   | )      |   |      | 1,084   |        |   |   | (5,951  | )      
|                                                                                                       |                                          |                          |        |        |   |      |         |        |   |   |         |        
|Increase (decrease) in cash and cash equivalents                                                       |                                          |                          | (2,005 | )      |   |      | 1,739   |        |   |   | (6,296  | )      
|Cash and cash equivalents at beginning of year                                                         |                                          |                          | 5,986  |        |   |      | 4,247   |        |   |   | 10,543  |        
|                                                                                                       |                                          |                          |        |        |   |      |         |        |   |   |         |        
|Cash and cash equivalents at end of year                                                               |                                          | $                        | 3,981  |        |   | $    | 5,986   |        |   | $ | 4,247   |        
|                                                                                                       |                                          |                          |        |        |   |      |         |        |   |   |         |        



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | Effective September 30, 2001, the
    Companys ownership and voting interest of Spinnaker
    Industries, Inc. was reduced to 41.8% and 49.5%
    respectively, due to the disposition of shares of Spinnaker. As
    a result, effective September 30, 2001, the Company
    relinquished control of Spinnaker and has deconsolidated
    Spinnaker. On September 23, 2002, the Company disposed of
    its remaining interest in Spinnaker. See Note 1 to the
    Consolidated Financial Statements  Basis of
    Presentation.

See accompanying notes

32



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES



NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS


December 31, 2003




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



| |             
| | ------------
| | Organization

Lynch Corporation (the Company or
Lynch) is a diversified holding company with
subsidiaries engaged in manufacturing primarily in the United
States. The Company has two wholly-owned subsidiaries (Lynch
Systems, Inc. (Lynch Systems and M-tron
Industries, Inc. (M-tron)) and until
September 23, 2002, an investment in Spinnaker
Industries, Inc. (Spinnaker); see discussion
below. Information on the Companys operations by segment
and geographic area is included in Note 15 
Segment Information.



| |                      
| | ---------------------
| | Basis of Presentation

Prior to September 30, 2001, the Company
owned 47.6% of the equity of Spinnaker (60.4% voting control),
an entity engaged in the manufacture of adhesive-backed
material. Under accounting principles generally accepted in the
United States, Spinnaker was a consolidated entity and the
Company was required to record all of the losses of Spinnaker
since the non-Company investors interests were not required to
absorb their share of the losses (52.4%) after their investment
was fully absorbed by losses (which occurred in the first
quarter of 2001).

Effective September 30, 2001, the Company
donated 430,000 shares of Spinnaker Class A common
stock to a university on whose board several of the
Companys executives serve as Trustees, thereby
relinquishing control of such securities. This resulted in the
reduction of the Companys ownership and voting interests
in Spinnaker to 41.8% and 49.5%, respectively. As a result,
effective September 30, 2001, the Company deconsolidated
Spinnaker and prospectively accounted for its ownership of
Spinnaker using the equity method of accounting. On
September 23, 2002, the Company disposed of its remaining
investment in Spinnaker (See Note 8 to the Consolidated
Financial Statements  Spinnaker
Industries, Inc.).

As a result, the Companys results of
operations include the operating results of Spinnaker through
September 30, 2001 (date of deconsolidation). The balance
sheet at December 31, 2002 does not contain the assets and
liabilities of Spinnaker due to the deconsolidation. This
deconsolidation resulted in a non-cash gain of $27,406,000 being
recorded on September 30, 2001 to reduce the Companys
negative investment in Spinnaker to $19,420,000. This remaining
interest, which represents losses in excess of investment, was
recorded as a deferred credit on the Companys balance
sheet until the Company disposed of its remaining interests in
Spinnaker on September 23, 2002. This deferred credit of
$19,420,000 was recognized in earnings in 2002.



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

The consolidated financial statements include the
accounts of Lynch Corporation and entities in which Lynch had
majority voting control. All material intercompany transactions
and accounts have been eliminated in consolidation.



| |                  
| | -----------------
| | Uses of Estimates

The preparation of consolidated financial
statements in conformity with accounting principles generally
accepted in the United States requires management to make
estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results
could differ from those estimates.

33



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                 
| | ----------------
| | Cash Equivalents

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

At December 31, 2003 and 2002, assets of
$1.9 million and $2.2 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.



| |                
| | ---------------
| | Restricted Cash

At December 31, 2003 and 2002, the Company
had $1.1 million of Restricted Cash. (See Note 6 to
the Consolidated Financial Statements  Notes
Payable to Banks and Long-term Debt). The
$1.1 million restricted cash secures a Letter of Credit
issued to the Bank of Omaha as collateral for M-trons
loans.



| |            
| | -----------
| | Investments

The following is a summary of marketable
securities (investments) held by the Company (in thousands):

|                  |  |      |       |            |  |            |     |           |  |  |   |  |  |   |       | 
|----------------- |  | ---- | ----- | ---------- |  | ---------- | --- | --------- |  |  | - |  |  | - | ----- | 
|                  |  |      |       | Gross      |  | Unrealized |     | Estimated
|                  |  |      |       | Unrealized |  | Gross      |     | Fair     
|Equity Securities |  | Cost |       | Gains      |  | Losses     |     | Value    
|                  |  |      |       |            |  |            |     |          
|December 31, 2003 |  | $    | 2,020 |            |  | $          | 291 |           |  |  |  |  |  | $ | 2,311 | 
|December 31, 2002 |  | $    | 559   |            |  | $          | 302 |           |  |  |  |  |  | $ | 861   | 

The Company has a margin liability against this
investment of $1,033,000 as of December 31, 2003 that must
be settled upon the disposition of the related securities, whose
fair value is based on quoted market prices. The Company has
designated these investments as available for sale pursuant to
Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity
Securities.



| |                    
| | -------------------
| | Accounts Receivable

Accounts receivable on a consolidated basis
consist principally of amounts due from both domestic and
foreign customers. Credit is extended based on an evaluation of
the customers financial condition and collateral is not
generally required except at Lynch Systems. The Company
considers concentrations of credit risk to be minimal due to the
Companys diverse customer base. In relation to export
sales, the Company requires letters of credit supporting a
significant portion of the sales price prior to production to
limit exposure to credit risk. Certain subsidiaries and business
segments have credit sales to industries that are subject to
cyclical economic changes. The Company maintains an allowance
for doubtful accounts at a level that management believes is
sufficient to cover potential credit losses.

The Company maintains allowances for doubtful
accounts for estimated losses resulting from the inability of
our clients to make required payments. We base our estimates on
our historical collection experience, current trends, credit
policy and relationship of our accounts receivable and revenues.
In determining these estimates, we examine historical write-offs
of our receivables and review each clients account to
identify any specific customer collection issues. If the
financial condition of our customers were to deteriorate,
resulting in an impairment of their ability to make payment,
additional allowances may be required. Our failure to estimate
accurately the losses for doubtful accounts and ensure that
payments are received on a timely basis could have a material
adverse effect on our business, financial condition, and results
of operations.

34



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



| |                                       
| | --------------------------------------
| | Property, Plant and Equipment,
    Net

Property, plant and equipment are recorded at
cost less accumulated depreciation 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
5 years to 35 years for buildings and improvements,
and for 3 to 10 years for other fixed assets. Property,
plant, and equipment are periodically reviewed for indicators of
impairment. If any such indicators were noted, the Company would
assess the appropriateness of the assets carrying value and
record any impairment at that time.



| |                    
| | -------------------
| | Revenue Recognition

Revenues, with the exception of certain long-term
contracts discussed below, are recognized upon shipment when
title passes. Shipping costs are included in manufacturing cost
of sales.



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

Lynch Systems, a 100% 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 30%
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 compared to total
estimated project costs (cost to cost basis). At
December 31, 2003 and 2002, unbilled accounts receivable
(included in accounts receivable) were $2.4 million and
$0.7 million, respectively.

The percentage of completion method is used since
reasonably dependable estimates of the revenues and costs
applicable to various stages of a contract can be made, based on
historical experience and milestones set in the contract.
Financial management maintains contact with project managers to
discuss the status of the projects and, for fixed-price
engagements, financial management is updated on the budgeted
costs and required resources to complete the project. These
budgets are then used to calculate revenue recognition and to
estimate the anticipated income or loss on the project. In the
past, we have occasionally been required to commit unanticipated
additional resources to complete projects, which have resulted
in lower than anticipated profitability or losses on those
contracts. We may experience similar situations in the future.
Provisions for estimated losses on contracts are made during the
period in which such losses become probable and can be
reasonably estimated. To date, such losses have not been
significant.



| |                 
| | ----------------
| | Warranty Expense

Lynch Systems provides a full warranty to
worldwide customers who acquire machines. The warranty covers
both parts and labor and normally covers a period of one year or
thirteen months. Based upon experience, the warranty accrual is
based upon three to five percent of the selling price of the
machine. The Company periodically assesses the adequacy of the
reserve and adjusts the amounts as necessary.

|                                                                                                |  |   |        |  
|----------------------------------------------------------------------------------------------- |  | - | ------ | -
|Balance, beginning of the period                                                                |  | $ | 1,595  |  
|Warranties issued during the period                                                             |  |   | 426    |  
|Settlements made during the period                                                              |  |   | (1,383 | )
|Changes in liabilities for pre-existing
    warranties during the period, including expirations |  |   | (53    | )
|                                                                                                |  |   |        |  
|Balance, end of the period                                                                      |  | $ | 585    |  
|                                                                                                |  |   |        |  

35



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



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

Research and development costs are charged to
operations as incurred. Such costs were $745,000, $944,000, and
$1,772,000, in 2003, 2002, and 2001, respectively.



| |                    
| | -------------------
| | Advertising Expense

The cost of advertising is expensed as incurred.
The Company incurred $136,000, $191,000 and $177,000, in
advertising costs during 2003, 2002 and 2001, respectively.



| |                                                    
| | ---------------------------------------------------
| | Earnings Per Share and Stock Based
    Compensation

The Companys basic and diluted earnings per
share are equivalent, as the Company has no dilutive securities.

At December 31, 2003, the Company has a
stock-based employee compensation plan that is described in
Note 9 to the Consolidated Financial Statements 
Stock Options Plans. The Company accounts for the
plan under the recognition and measurement principles of
Accounting Principles Board Opinion No. 25,
Accounting for Stock Issued to Employees, and
related Interpretations. No stock-based employee compensation
cost is reflected in net income, as all options granted under
those plans had an exercise price equal to the market value of
the underlying common stock on the date of grant. The Company
provides pro forma disclosures of the compensation expense
determined under the fair value provisions of Financial
Accounting Standards Board Statement No. 123,
Accounting for Stock-Based Compensation.

For purposes of pro forma disclosures, the
estimated fair value of the options is amortized to expense over
the options vesting period. The Companys pro forma
information follows (in thousands, except for earnings per share
information):

|                                                                                                                                                   |  |      |       |      |  |      |        |   |  |   |         |  
|-------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- | ----- | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                                                                                                                   |  | 2003 |       | 2002 |  | 2001
|                                                                                                                                                   |  |      |       |      |  |     
|Net income (loss) as reported                                                                                                                      |  | $    | 110   |      |  | $    | 17,963 |   |  | $ | (22,938 | )
|Deduct: Total stock-based employee compensation
    expense determined under fair value based method for all awards,
    net of related tax effect |  |      | (154  | )    |  |      | (1,260 | ) |  |   | 0       |  
|                                                                                                                                                   |  |      |       |      |  |      |        |   |  |   |         |  
|Pro forma net income (loss)                                                                                                                        |  | $    | (44   | )    |  | $    | 16,703 |   |  | $ | (22,938 | )
|                                                                                                                                                   |  |      |       |      |  |      |        |   |  |   |         |  
|Basic and diluted earnings (loss) per share:                                                                                                       |  |      |       |      |  |      |        |   |  |   |         |  
|As reported                                                                                                                                        |  | $    | 0.07  |      |  | $    | 11.99  |   |  | $ | (15.24  | )
|Pro forma                                                                                                                                          |  | $    | (0.03 | )    |  | $    | 11.15  |   |  | $ | (15.24  | )



| |                    
| | -------------------
| | Segment Information

The Company reports segment information in
accordance with Statement of Financial Accounting Standards
No. 131, Disclosures About Segments of an Enterprise
and Related Information (SFAS 131).
SFAS No. 131 requires companies to report financial
and descriptive information for each operating segment based on
managements internal organizational decision-making
structure. See Note 15 to the Consolidated Financial
Statements  Segment
Information  for the detailed presentation of
business segments report.



| |            
| | -----------
| | Impairments

The Company accounts for impairments of
long-lived assets in accordance with the provisions of
SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets. 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.

36



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

For assets to be held and used, 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. If indicators
of impairment are present, and we do not expect the estimated
undiscounted cash flows to be derived from the related assets to
be sufficient to recover the assets carrying amount, an
impairment loss is charged to expense in the period identified
based upon the difference between the carrying amount and the
discounted cash flows. The rates that would be utilized to
discount the net cash flows to net present value would take into
account the time value of money and investment risk factors. See
Note 3 to the Consolidated Financial Statements 
Asset Impairment and Restructuring
Charges  regarding Spinnakers
restructuring costs for fiscal year 2001.

In June 2001, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards
No. 141, Business Combinations
(FAS 141), and Statement of Financial
Accounting Standards No. 142, Goodwill and Other
Intangible Assets (FAS 142). FAS 141
requires that the purchase method of accounting be used for all
business combinations initiated after June 30, 2001.
FAS 141 also includes guidance on the initial recognition
and measurement of goodwill and intangible assets arising from
business combinations completed after June 30, 2001.
FAS 142 requires that these assets be reviewed for
impairment at least annually. Intangible assets with finite
lives will continue to be amortized over their estimated useful
lives. Additionally, FAS 142 requires that goodwill
included in the carrying value of equity method investments no
longer be amortized. Note that the Company has indefinite-lived
intangibles arising from the acquisition of Champion
in October, 2002 in the amount of $40,000.



| |                      
| | ---------------------
| | Financial Instruments

Cash and cash equivalents, trade accounts
receivable, short-term borrowings, trade accounts payable and
accrued liabilities are carried at cost which approximates fair
value due to the short-term maturity of these instruments. The
carrying account 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.

Financial instruments that potentially subject
the Company to significant concentrations of credit risk consist
principally of cash, investments and trade accounts receivable.

The Company maintains cash and cash equivalents
and short-term investments with various financial institutions.
These financial institutions are located throughout the country
and the Companys policy is designed to limit exposure to
any one institution. The Company performs periodic evaluations
of the relative credit standing of those financial institutions
that are considered in the Companys investment strategy.
Other than certain accounts receivable, the Company does not
require collateral on these financial instruments.



| |                  
| | -----------------
| | Reclassifications

Certain amounts in the 2002 and 2001 financial
statements have been reclassified to conform to the 2003
presentation. These other reclassifications are immaterial to
the consolidated financial statements taken as a whole.



| |           
| | ----------
| | Guarantees

The Company presently guarantees
(unsecured) the SunTrust Bank loans of its subsidiary,
Lynch Systems, and has guaranteed a Letter of Credit issued to
the First National Bank of Omaha on behalf of its subsidiary,
M-tron Industries, Inc. (see Note 6 to the
Consolidated Financial Statements  Notes
Payable to Banks and Long-term Debt). As of
December 31, 2003, there were no obligations to the
SunTrust Bank. As of December 31, 2003, the $1,000,000
Letter of Credit issued by Fleet Bank to The First National Bank
of

37



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##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Omaha was secured by a $1,125,000 deposit in a
Fleet Bank Treasury Fixed Income Fund. (See Restricted
Cash included in Note 1 to the Consolidated Financial
Statements.)

There are no other financial, performance,
indirect guarantees or indemnification agreements.



| |                                            
| | -------------------------------------------
| | Recent Issued Accounting
    Pronouncements

In January 2003, the FASB issued Interpretation
No. 46, Consolidation of Variable Interest Entities,
an Interpretation of ARB No. 51
(FIN 46). FIN 46 clarifies the application
of Accounting Research Bulletin No. 51, Consolidated
Financial Statements, to certain entities in which equity
investors do not have the characteristics of a controlling
financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional
subordinated financial support from other parties, as revised,
are required to be applied for periods ending after
December 15, 2003 for interests in structures that are
commonly referred to as special-purpose entities while the
application of this Interpretation for all other types of
variable interest entities is required for periods ending after
March 15, 2004. The Company does not have any interests in
variable interest entities.



|   |             
|-- | ------------
|2. | Acquisitions

On October 18, 2002, the Companys
subsidiary, M-tron Industries, Inc., acquired certain
assets of an industry competitor, Champion
Technologies, Inc., from U.S. Bank in a transaction
accounted for as a purchase. Champions product line
includes crystals, clock oscillators, specialized crystal
oscillators, and timing solutions. The $850,000 purchase price
included inventories, fixed assets, and the customers order
backlog. There were no assumed liabilities in this transaction.
A 7.5% royalty will be applicable to certain sales through
December 31, 2004. Financing for this transaction includes
$646,000 in new loans from State and local agencies and a
$200,000 parent Company cash infusion (See Note 6 to the
Consolidated Financial Statements  Notes
Payable to Banks and Long-term Debt).

The purchase price was allocated to the acquired
assets based on their estimated fair value at the date of
acquisition to Current Assets and Property, Plant &
Equipment in the amounts of $558,000 and $292,000 respectively.
In September, 2003, the acquirer initiated a new study of the
fair value of the acquired assets and has reallocated the
purchase price of $850,000 as follows: Property,
Plant & Equipment $728,000; Goodwill $40,000; and
Current Assets $82,000.



|   |                                               
|-- | ----------------------------------------------
|3. | Asset Impairment and Restructuring
    Charges

Prior to the deconsolidation of Spinnaker on
September 30, 2001 (see Note 1 to the Consolidated
Financial Statements  Basis of
Presentation), the Company recognized certain
restructuring charges in 2001 related to Spinnaker, totaling
$41.8 million. The charges resulted from (a) the
write-down to estimated fair market value of fixed assets to be
taken out of service and held for sale or disposal of
$16.0 million; (b) impairment of goodwill associated
with the acquisition of Coating  Maine of
$20.8 million; (c) severance and related costs of
$1.5 million; and (d) inventory write-downs of
$3.5 million (recorded through manufacturing costs of
sales).



|   |                                              
|-- | ---------------------------------------------
|4. | Spin-Off of Lynch Interactive
    Corporation

On August 12, 1999, the Board of Directors
approved a plan to distribute the stock of Lynch Interactive
Corporation on a one for one basis to the shareholders of Lynch
Corporation (spin off). Lynch completed the spin off
of Lynch Interactive Corporation (Interactive) on
September 1, 1999, to stockholders of record on
August 23, 1999.

Lynch Interactive and Lynch have entered into
certain agreements governing various ongoing relationships,
including the provision of support services and a tax allocation
agreement. The tax allocation agreement provides for the
allocation of tax attributes to each company as if it had
actually filed with the respective tax

38



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

authority. At the spin off, the employees of the
corporate office of Lynch Corporation became the employees of
Lynch Interactive Corporation and Lynch Interactive Corporation
began providing certain support services to Lynch. The Company
was charged a management fee for these services amounting to
approximately $180,000 and $265,000 in 2001 and 2000,
respectively. Note that this arrangement was terminated in
August, 2001.



|   |            
|-- | -----------
|5. | Inventories

Inventories are stated at the lower of cost or
market value. Inventories valued using the last-in, first-out
(LIFO) method comprised approximately 73% and 63% of
consolidated inventories at December 31, 2003 and 2002,
respectively. The balance of inventories at December 31,
2003 and 2002 are valued using the first-in-first-out
(FIFO) method.

|                           |       |                |       |       |  |   |       |       | 
|-------------------------- | ----- | -------------- | ----- | ----- |  | - | ----- | ----- | 
|                           |       |               
|                           |       | December 31,  
|                           |       |               
|                           |       | 2003           |       | 2002 
|                           |       |                |       |      
|                           |       |               
|                           |       | (In Thousands)
|Raw materials and supplies |       | $              | 1,394 |       |  | $ | 1,436 |      
|Work in progress           |       |                | 1,641 |       |  |   | 2,376 |      
|Finished goods             |       |                | 1,876 |       |  |   | 1,812 |      
|                           |       |                |       |       |  |   |       |      
|                           | Total |                | $     | 4,911 |  |   | $     | 5,624 | 
|                           |       |                |       |       |  |   |       |      

Current cost exceeded the LIFO value of
inventories by $930,000 and $1,212,000 at December 31, 2003
and 2002, respectively.



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

Notes payable to banks and long-term debt
consists of:

|                                                                                                                     |  |                |       |      |  |   |       |  
|-------------------------------------------------------------------------------------------------------------------- |  | -------------- | ----- | ---- |  | - | ----- | -
|                                                                                                                     |  |               
|                                                                                                                     |  | December 31,  
|                                                                                                                     |  |               
|                                                                                                                     |  | 2003           |       | 2002
|                                                                                                                     |  |                |       |     
|                                                                                                                     |  |               
|                                                                                                                     |  | (In Thousands)
|Notes payable:                                                                                                       |  |                |       |      |  |   |       |  
|M-tron bank revolving loan at variable interest
    rates (4.75% at December 31, 2003), due May 2004                 |  | $              | 1,976 |      |  | $ | 2,228 |  
|Lynch Systems bank revolving loan at variable
    interest rates, due June 2004                                      |  |                |      |      |  |   |      |  
|                                                                                                                     |  |                |       |      |  |   |       |  
|                                                                                                                     |  | $              | 1,976 |      |  | $ | 2,228 |  
|                                                                                                                     |  |                |       |      |  |   |       |  
|Long-term debt:                                                                                                      |  |                |       |      |  |   |       |  
|M-tron commercial bank term loan at variable
    interest rates (4.25% at December 31, 2003), due September
    2004 |  | $              | 829   |      |  | $ | 1,001 |  
|Yankton Area Progressive Growth loan at 0.0%
    interest, due April 2005                                            |  |                | 150   |      |  |   | 250   |  
|Yankton Areawide Business Council loan at a fixed
    interest rate of 5.5%, due November 2007                       |  |                | 90    |      |  |   | 98    |  
|South Dakota Board of Economic Development at a
    fixed rate of 3.0% due December 2007                             |  |                | 285   |      |  |   |      |  
|Lynch Systems term loan at a fixed interest rate
    of 5.5%, due August 2013                                        |  |                | 477   |      |  |   | 572   |  
|                                                                                                                     |  |                |       |      |  |   |       |  
|                                                                                                                     |  |                | 1,831 |      |  |   | 1,921 |  
|Current maturities                                                                                                   |  |                | (998  | )    |  |   | (832  | )
|                                                                                                                     |  |                |       |      |  |   |       |  
|                                                                                                                     |  | $              | 833   |      |  | $ | 1,089 |  
|                                                                                                                     |  |                |       |      |  |   |       |  

39



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

On a consolidated basis, at December 31,
2003, Lynch maintains short-term credit facilities totaling
$10.0 million, of which $3.5 million was available for
future borrowings, including up to $2.4 million for working
capital and/or up to $3.0 million for Letters of Credit.
These facilities 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
respective subsidiary borrower, and include various financial
covenants, which currently restrict the transfer of
substantially all the assets of the subsidiaries. At
December 31, 2003, the revolving credit facilities expire
within one year. The weighted average interest rate for
short-term borrowings at December 31, 2003 and 2002 was
4.5% and 5.2%, respectively. Cash of $1.1 million at
December 31, 2003 and 2002 has been disclosed as restricted
as required under an outstanding Letter of Credit issued by
Fleet Bank for the benefit of First National Bank of Omaha.

Lynch Systems renewed its loan agreement with
SunTrust Bank on May 30, 2003. The lender has provided a
$7 million Line of Credit, which can be used entirely for
stand-by Letters of Credit to secure customer advances and
certain warranty coverages or up to $2 million for domestic
revolving credit to finance working capital within the
$7 million line. The Lynch Systems Line of Credit is
secured by accounts receivable and inventories and bears an
interest rate of one month LIBOR plus 2.0%. At December 31,
2003, there were outstanding Letters of Credit of
$1.3 million and no Working Capital Loans or unsecured
parent company guarantees outstanding under this Line of Credit.
This credit line has a May 30, 2004 maturity date.

On August 4, 2003, Lynch Systems entered
into a new term loan agreement with SunTrust Bank. The new loan
is in the amount of $498,000 and is secured by a lien on Lynch
Systems real estate. The new loan has a 10-year term with
interest at 5.5%. Principal payments are $4,150 per month
for 120 months commencing August 2003. The loan proceeds
were used to retire the First Port City loan that was due in its
entirety on August 5, 2003 in the amount of $554,000.

On April 30, 2003, M-trons long-time
lending bank, First National Bank of Omaha, renewed the
revolving credit loan that now matures on April 30, 2004.
The renewed loan includes the following conditions:



| |                                                                                                                                                                                                                                                                                                                                                                                                                               
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a) Effective May 20, 2003, the Company
    subordinates its October 3, 2002, $200,000 loan to M-tron
    to the bank, bringing the subordinated total to $700,000;                                                                                                                                                                                                                                                           
|
| | (b) The bank reduces the minimum net worth
    and subordinated debt limit from $3.1 million to
    $2.9 million. In return, the Company has committed to fund
    any shortfall with an equity or subordinated debt cash infusion
    within 45 days of the quarter end. Since M-trons
    subordinated debt and equity total $3,020,000 as of
    December 31, 2003, no additional cash infusion is currently
    required.

The Company has guaranteed a Letter of Credit
issued to the First National Bank of Omaha on behalf of its
subsidiary, M-tron Industries, Inc. As of December 31,
2003, the $1,000,000 Letter of Credit issued by Fleet Bank to
The First National Bank of Omaha was secured by a $1,125,000
deposit in a Fleet Bank Treasury Fixed Income Fund. The
Companys outstanding Letter of Credit in the amount of
$1.0 million for the benefit of the bank can be reduced to
$500,000 when M-tron is profitable for 5 of 6 consecutive
months and the cumulative after tax profit equals or exceeds
$500,000. The remaining $500,000 Letter of Credit will be
released when the earning parameters are met for a second time.
These thresholds were not met in 2003 and there is no assurance
they will be met in 2004.

The M-tron Line of Credit is secured by accounts
receivable and inventories and carries an interest rate equal to
the First National Bank of Omahas national prime rate with
a minimum rate of 4.75%. At December 31, 2003, borrowings
under this line totaled $1,976,000 with $451,000 additional
availability.

First National Bank of Omaha previously extended
a $1,200,000 commercial loan to M-tron of which $829,000 was
outstanding on December 31, 2003. Interest is at the bank
rate (4.25% at December 31, 2003), with monthly payments
totaling $18,000 and a $765,000 balloon payment due in September
2004.

40



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

In conjunction with the acquisition of Champion
in October of 2002, M-tron entered into loan arrangements with
two Yankton, South Dakota agencies and a state agency to provide
$646,000 at a weighted average interest rate of 2.6%. Yankton
Area Progressive Growth, Inc. provided $250,000 at a 0%
interest rate and $100,000 was provided by the Areawide Business
Council, Inc. at a 5.5% interest rate. The South Dakota
Board of Economic Development loan of $296,000 is at a 3.0%
interest rate and includes a $250,000 balloon payment in
December 2007. Aggregate principal maturities of this
acquisition debt for each of the next five years are as follows:
2004  $120 thousand; 2005  $70 thousand;
2006  $21 thousand; and $315 thousand in 2007.
M-trons real estate is security for these local agency
loans as well as the South Dakota State loan.

Restrictions on dividends under the M-tron loan
with First National Bank of Omaha disallow distributions to the
parent company without consent of the bank. Lynch Systems, under
its loan with Sun Trust Bank, may pay a cash dividend to the
parent company equal to 50% of LSs net income for the
prior fiscal year. In addition, LS may pay an annual management
fee to the parent company in an amount not to exceed $250,000
and LS may reimburse the parent company for expenses and taxes
paid by the parent on behalf of LS. Under the M-tron loan
agreement, advances to the parent company are disallowed without
the prior written consent of the lending bank.

Both M-tron and Lynch Systems intend to renew the
credit agreements that expire on April 30, 2004 and
May 30, 2004 respectively with their incumbent lenders.

At December 31, 2003, the Companys
total cash, cash equivalents and investments in marketable
securities total $7.4 million (including $1.1 million
of restricted cash). In addition, the Company had a
$2.4 million borrowing capacity under M-trons and
LSs revolving lines of credit. Therefore, gross cash and
securities and availability under the revolving credit loans
total $9.8 million and exceed the combined outstanding debt
and margin liability of $4.8 million by $5.0 million.

Cash payments for interest were $282,000,
$272,000, and $2.0 million for the years ended
December 31, 2003, 2002 and 2001, respectively. Interest
payments in 2001 are substantially higher than 2003 and 2002
because 2001 included Spinnaker for the nine months prior to the
deconsolidation.

Aggregate principal maturities of long-term debt
for each of the next five years are as follows: 2004 
$998 thousand; 2005  $120 thousand; 2006 
$71 thousand; in 2007  $364 thousand; and $50
thousand in 2008.



|   |                                                      
|-- | -----------------------------------------------------
|7. | Minority Interests and Related Party
    Transactions



| |                   
| | ------------------
| | Minority Interests

On June 13, 2002, the Company acquired the
remaining 25% interest in Lynch AMAV, LLC, a joint venture
between Frank Haepe and Lynch International Holding Corporation,
by paying $220,000 and by settling certain other obligations. A
related definite-lived intangible is included in the
Companys balance sheet in Other Assets in the amount of
$164,000 and will be fully amortized in 2004.



| |                                                 
| | ------------------------------------------------
| | Transactions with Certain Affiliated
    Persons

Mario J. Gabelli, former Chairman of the Company
and current Vice Chairman of the Company, is affiliated with
various entities which he directly or indirectly controls and
which are engaged in various aspects of the securities business.
During 2003, the Company and its subsidiaries engaged in various
transactions with certain of these entities and the amount of
commissions, fees, and other remunerations paid to such
entities, was not material.

On October 1, 2001, the Company transferred
its principal executive offices to Providence, Rhode Island from
Rye, New York. These offices are shared with
Avtek, Inc. (Avtek) a private holding company
controlled by Mr. Papitto (Company Chairman). Since August
2001, Avtek and the Company have shared,

41



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##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

on an approximately equal basis, (i) all
occupancy costs of the shared premises and (ii) the salary
expense of certain persons employed by Avtek at the premises
(including Mr. McGrail, the Companys President and
Chief Operating Officer and Mr. Keller, the Companys
Chief Financial Officer, and other administrative and clerical
personnel) whose services are provided to both the Company and
Avtek. The Companys share of such occupancy and salary
costs was $344,000 in 2003 and $231,500 in 2002, a portion of
which represents compensation to Mr. McGrail and
Mr. Keller that is reported in the Summary Compensation
Table of the Proxy Statement.

In the opinion of management, the method of
allocating these costs was reasonable; however, the costs of
these services allocated to the Company are not necessarily
indicative of the costs that would have been included on a
stand-alone basis.



| |                    
| | -------------------
| | Equity Transactions

Effective July 31, 2001, Louis A.
Guzzetti, Jr. resigned from the Board of Directors of the
Company. In connection with Mr. Guzzettis
resignation, on August 9, 2001, the Company purchased
12,300 shares of its Common Stock for its treasury from
Mr. Guzzetti for a purchase price of $396,204. Such
purchase price was equal to the outstanding principal amount and
unpaid interest on the loans made by the Company to
Mr. Guzzetti on June 5, 2000 and September 20,
2000 to finance his original purchase of such Common Stock.
Mr. Gabellis loan to the Company in the amount of
$371,000 to fund the loan to Mr. Guzzetti, which was issued
in September, 2000 at an initial interest rate of 7.5% per
annum adjusted prospectively on each interest payment date to
two points below the prime rate, was repaid to Mr. Gabelli
by the Company on August 10, 2001.



|   |                           
|-- | --------------------------
|8. | Spinnaker Industries, Inc.

On September 23, 2002, Lynch disposed of its
remaining interest in Spinnaker for nominal consideration and
completed the deconsolidation that commenced on
September 30, 2001. The net result was the recording of a
non-cash gain on deconsolidation of $19.4 million in 2002
and $27.4 million in 2001. See Note 1 to the
Consolidated Financial Statements  Basis of
Presentation.



|   |                   
|-- | ------------------
|9. | Stock Option Plans

On May 2, 2002, the Companys
shareholders approved the 2001 Equity Incentive Plan and the
issuance of up to 300,000 options to purchase shares of Company
common stock to certain employees of the Company, of which
228,000 options were granted (subject to shareholder approval)
at $17.50 per share on December 10, 2001. Shareholders
approval was obtained on May 2, 2002. These options have
lives of five to ten years. 212,000 of these options are fully
vested, with the remaining options vesting quarterly in 2004.

Pro forma information regarding net income and
earnings per share is required by SFAS 123, which requires
that the information be determined as if the Company has
accounted for its employee stock options under the fair value
method of that Statement. The fair value for these options was
estimated at the date of grant using a Black-Scholes option
pricing model with the following weighted-average assumptions
for 2002 (no options outstanding in 2001 or 2000) risk-free
interest rate of 5.3%; dividend yield of 0.0%; volatility
factors of the expected market price of the Companys
common stock of .49 and weighted-average expected life of the
option of 10 years. See Note 1 to the Consolidated
Financial Statements  Basis of
Presentation.

42



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##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                     
|--- | --------------------
|10. | Shareholders Equity

At the Annual Meeting of Stockholders of the
Registrant held on May 2, 2002, the Stockholders approved
an amendment to the Restated Articles of Incorporation of
Registrant that effected a change of all 10,000,000 shares
of Registrants authorized Common Stock from shares without
par value into shares having a par value of $0.01 per share
for all purposes, without otherwise changing the designations,
rights, preferences, or limitations of such shares and without
increasing or decreasing the number of such shares. As a result,
common stock at par value is now valued at $15,000 resulting in
a $5.1 million reclassification to additional paid-in
capital.

The Board of Directors previously authorized the
purchase of up to 400,000 shares of Common Stock. Through
December 31, 2000, 238,991 shares had been purchased
at an average cost of $14.88 per share. There were no
purchases in 2001, 2002, and 2003.

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, 2003, a total of 4,126 shares
have been awarded under this program. No stock was issued for
compensation during 2001, 2002 and 2003.

Both M-tron and Lynch Systems have plans that
provided certain former shareholders with Stock Appreciation
Rights (SARs). These SARs are fully vested and
expire at the earlier of certain defined events or 2008 to 2010.
These SARs provide the participants a certain percentage,
ranging from 1-5%, of the increase in the defined value of
M-tron and Lynch Systems, respectively. Vested amounts are
payable at the holders option in cash or equivalent amount
of M-tron or Lynch Systems stock. Expense related to the
SARs was $70,000, $22,000, and $195,000, in 2003, 2002 and
2001 respectively. At December 31, 2003 and 2002, $399,000
and $329,000 was accrued for the SARs.



|    |             
|--- | ------------
|11. | Income Taxes

The Company files consolidated federal income tax
returns, which includes all subsidiaries excluding Spinnaker for
all periods.

The Company has a $2,735,000 net operating
loss (NOL) carry-forward as of December 31,
2003. This NOL expires in 2024 if not utilized prior to that
date.

Year 2003 income tax includes federal, state,
local, and foreign taxes. There was no state income tax
provision in 2003 due to deductions applicable to the
Companys Georgia business. There was no federal tax
benefit in 2003 as a result of 2003 net operating losses
because the Company utilized its carry-back (NOL) in
2003 and there is uncertainty regarding the utilization of the
NOL carry-forward. The Company recorded a $73,000 tax provision
in 2003 for foreign taxes at the Hong Kong tax rate on
M-trons foreign subsidiaries earnings.

The 2002 income tax benefit of $2.0 million
includes federal, as well as state, local, and foreign taxes.
$0.9 million of the 2002 tax benefit is the result of a
capital loss carry-back on the Companys investment in
Spinnaker Industries. The 2002 net tax benefit also
includes $.6 million for operating losses recovered through
carry-backs to prior periods. The 2003 and 2002 effective tax
rate differs from the statutory tax rate primarily due to
foreign tax rates and the tax benefit related to the Spinnaker
investment.

43



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Deferred income taxes for 2003 and 2002 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 carry-forwards
at December 31, 2003 and 2002 are as follows:

|                                                                                     |  |                   |        |                   |  |       |       |           |  |   |       |   |  |   |     | 
|------------------------------------------------------------------------------------ |  | ----------------- | ------ | ----------------- |  | ----- | ----- | --------- |  | - | ----- | - |  | - | --- | 
|                                                                                     |  |                   |        |                  
|                                                                                     |  | December 31, 2003 |        | December 31, 2002
|                                                                                     |  |                   |        |                  
|                                                                                     |  |                   |        |                  
|                                                                                     |  | Deferred Tax      |        | Deferred Tax     
|                                                                                     |  | Asset             |        | Liability         |  | Asset |       | Liability
|                                                                                     |  |                   |        |                   |  |       |       |          
|                                                                                     |  |                  
|                                                                                     |  | (In Thousands)   
|Inventory reserve                                                                    |  | $                 | 593    |                   |  | $     |      |           |  | $ | 768   |   |  | $ |    | 
|Fixed assets written up under Purchase accounting
    and tax over book depreciation |  |                   |       |                   |  |       | 337   |           |  |   |      |   |  |   | 275 | 
|Other reserves and accruals                                                          |  |                   | 577    |                   |  |       |      |           |  |   | 928   |   |  |   |    | 
|Other                                                                                |  |                   |       |                   |  |       | 729   |           |  |   |      |   |  |   | 454 | 
|Capital loss and other carry forwards                                                |  |                   | 987    |                   |  |       |      |           |  |   | 207   |   |  |   |    | 
|                                                                                     |  |                   |        |                   |  |       |       |           |  |   |       |   |  |   |     | 
|Total deferred income taxes                                                          |  |                   | 2,157  |                   |  |       | 1,066 |           |  |   | 1,903 |   |  |   | 729 | 
|                                                                                     |  |                   |        |                   |  |       |       |           |  |   |       |   |  |   |     | 
|Valuation allowance                                                                  |  |                   | (1,034 | )                 |  |       |       |           |  |   | (967  | ) |  |   |     | 
|                                                                                     |  |                   |        |                   |  |       |       |           |  |   |       |   |  |   |     | 
|                                                                                     |  | $                 | 1,123  |                   |  |       |       |           |  | $ | 936   |   |  |   |     | 
|                                                                                     |  |                   |        |                   |  |       |       |           |  |   |       |   |  |   |     | 

At December 31, 2003, the net deferred tax
asset of $57,000 presented in the Companys balance sheet
is comprised of deferred tax assets of $1,123,000 offset by
deferred tax liabilities of $1,066,000. At December 31,
2002, the net deferred tax asset of $207,000 was comprised of
deferred tax assets of $936,000 offset by deferred tax
liabilities of $729,000.

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

|               |                 |                |     |       |   |      |        |        |   |   |      |      |  
|-------------- | --------------- | -------------- | --- | ----- | - | ---- | ------ | ------ | - | - | ---- | ---- | -
|               |                 | 2003           |     | 2002  |   | 2001
|               |                 |                |     |       |   |     
|               |                 |               
|               |                 | (In Thousands)
|Current:       |                 |                |     |       |   |      |        |        |   |   |      |     
|               | Federal         |                | $   | (150  | ) |      | $      | (2,332 | ) |   | $    | (439 | )
|               | State and local |                |     |      |   |      |        | 144    |   |   |      | 274  |  
|               | Foreign         |                |     | 73    |   |      |        | 19     |   |   |      | 22   |  
|               |                 |                |     |       |   |      |        |        |   |   |      |     
|Total Current  |                 |                | (77 | )     |   |      | (2,169 | )      |   |   | (143 | )   
|               |                 |                |     |       |   |      |        |        |   |   |      |     
|Deferred:      |                 |                |     |       |   |      |        |        |   |   |      |     
|               | Federal         |                |     | 150   |   |      |        | 264    |   |   |      | 489  |  
|               | State and local |                |     | ____ |   |      |        | (62    | ) |   |      | 12   |  
|               |                 |                |     |       |   |      |        |        |   |   |      |     
|Total Deferred |                 |                | 150 |       |   |      | 202    |        |   |   | 501  |     
|               |                 |                |     |       |   |      |        |        |   |   |      |     
|               |                 | $              | 73  |       |   | $    | (1,967 | )      |   | $ | 358  |     
|               |                 |                |     |       |   |      |        |        |   |   |      |     

44



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

A reconciliation of the provision (benefit) 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 and extraordinary item:

|                                              |  |                |     |      |  |      |        |   |  |   |         |  
|--------------------------------------------- |  | -------------- | --- | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                              |  | 2003           |     | 2002 |  | 2001
|                                              |  |                |     |      |  |     
|                                              |  |               
|                                              |  | (In Thousands)
|Tax (benefit) at statutory rate               |  | $              | 62  |      |  | $    | 5,439  |   |  | $ | (9,043  | )
|Foreign tax rate differential                 |  |                | (81 | )    |  |      |       |   |  |   |        |  
|State and local taxes, net of federal benefit |  |                |    |      |  |      | 54     |   |  |   | 189     |  
|Spinnaker operating loss                      |  |                |    |      |  |      |       |   |  |   | 18,533  |  
|Deconsolidation gain                          |  |                |    |      |  |      | (6,603 | ) |  |   | (10,132 | )
|Foreign export sales benefit                  |  |                | (54 | )    |  |      | (142   | ) |  |   | (236    | )
|Capital loss utilization                      |  |                |    |      |  |      | (860   | ) |  |   |        |  
|Valuation allowance                           |  |                | 139 |      |  |      | 29     |   |  |   | 938     |  
|Other                                         |  |                | 7   |      |  |      | 116    |   |  |   | 109     |  
|                                              |  |                |     |      |  |      |        |   |  |   |         |  
|                                              |  | $              | 73  |      |  | $    | (1,967 | ) |  | $ | 358     |  
|                                              |  |                |     |      |  |      |        |   |  |   |         |  

Profit (loss) before income taxes from foreign
operations was $452,000, ($336,000), and $671,000 in 2003, 2002,
and 2001 respectively.

Federal, State and Foreign income tax payments
were $0.3, $0, and $1.2 million, for the years 2003, 2002
and 2001, respectively. Income tax recoveries were $532,000 in
2003 for tax loss carry-backs, and totaled $2,170,000 in 2002,
including refunds of 2001 estimated tax payments in the amount
of $700,000 and $1,470,000 for tax loss carry-backs.



|    |                                                  
|--- | -------------------------------------------------
|12. | Accumulated Other Comprehensive Income
    (Loss)

Total comprehensive income was $99,000 in the
twelve months ended December 31, 2003, including
other comprehensive loss of $11,000 for unrealized
losses on available for sale securities.

Total comprehensive income was $18,267,000 in the
twelve months ended 2002, including other
comprehensive income of $304,000 that was the result of
unrealized gains on available for sale securities.

The components of accumulated other comprehensive
income (loss), net of related tax, at December 31, 2003,
2002, and 2001 are as follows:

|                                                            |  |                |     |      |  |      |     |   |  |   |     |  
|----------------------------------------------------------- |  | -------------- | --- | ---- |  | ---- | --- | - |  | - | --- | -
|                                                            |  | 2003           |     | 2002 |  | 2001
|                                                            |  |                |     |      |  |     
|                                                            |  |               
|                                                            |  | (In Thousands)
|Balance beginning of year                                   |  | $              | 302 |      |  | $    | (2  | ) |  | $ | (71 | )
|Foreign currency translation                                |  |                |    |      |  |      |    |   |  |   | 69  |  
|Unrealized gain (loss) on available for-sale
    securities |  |                | (11 | )    |  |      | 304 |   |  |   |    |  
|                                                            |  |                |     |      |  |      |     |   |  |   |     |  
|Accumulated other comprehensive income (loss)               |  | $              | 291 |      |  | $    | 302 |   |  | $ | (2  | )
|                                                            |  |                |     |      |  |      |     |   |  |   |     |  

Note that no foreign currency translation remains
at December 31, 2003 or 2002 due to the acquisition of the
remaining minority interest of Lynch AMAV, LLC in 2002.



|    |                       
|--- | ----------------------
|13. | Employee Benefit Plans

The Company, through its operating subsidiaries,
has several defined contribution plans for the eligible
employees. The Companys former investee company,
Spinnaker, had various employee retirement type plans including
defined benefit, defined contribution, multi-employer, profit
sharing, and 401 (k) plans. The

45



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

following table sets forth the consolidated
expenses (including Spinnakers expenses through
September 30, 2001, prior to the deconsolidation) for these
plans:

|                            |                        |                |    |      |  |      |    |    |  |   |     |     | 
|--------------------------- | ---------------------- | -------------- | -- | ---- |  | ---- | -- | -- |  | - | --- | --- | 
|                            |                        | 2003           |    | 2002 |  | 2001
|                            |                        |                |    |      |  |     
|                            |                        |               
|                            |                        | (In Thousands)
|Defined contribution:       |                        |                |    |      |  |      |    |    |  |   |     |    
|                            | Lynch Systems & M-tron |                | $  | 48   |  |      | $  | 34 |  |   | $   | 17  | 
|                            | Spinnaker              |                |    |     |  |      |    |   |  |   |     | 346 | 
|Defined benefit (Spinnaker) |                        |                |   |      |  |      |   |    |  |   | 202 |    
|Multi-employer (Spinnaker)  |                        |                |   |      |  |      |   |    |  |   | 42  |    
|                            |                        |                |    |      |  |      |    |    |  |   |     |    
|Total                       |                        | $              | 48 |      |  | $    | 34 |    |  | $ | 607 |    
|                            |                        |                |    |      |  |      |    |    |  |   |     |    

Under the Lynch Systems and M-tron defined
contribution plan, the Company contributes up to a maximum of
62.5 percent of participants contributions that do
not exceed $800 per participant in the plan year. The
Company contribution occurs at the end of the plan year and the
participant is immediately vested in the employers
contribution.

Spinnaker and its subsidiaries had several
defined benefit plans (both Union and non-Union). Spinnaker also
had a defined contribution plan for substantially all employees.
No disclosures are made for 2003 and 2002 due to the
deconsolidation of Spinnaker (see Note 1 to the
Consolidated Financial Statements  Basis of
Presentation).



|    |                              
|--- | -----------------------------
|14. | Commitments and Contingencies

In the normal course of business, subsidiaries of
the Company are defendants in certain product liability, worker
claims and other litigation in which the amounts being sought
may exceed insurance coverage levels. The resolution of these
matters is not expected to have a material effect on the
Companys financial condition or operations.

On or about June 26, 2001, in anticipation
of the July 15, 2001 closure of Spinnakers Westbrook,
Maine facility, Plaintiff PACE Local 1-1069 (PACE)
filed a three count complaint in Cumberland County Superior
Court, CV-2001-00352 naming the following defendants: Spinnaker
Industries, Inc., Spinnaker Coating, Inc., and
Spinnaker Coating-Maine, Inc. (collectively, the
Spinnaker Entities) and Lynch. The complaint alleged
that under Maines Severance Pay Act both the Spinnaker
Entities and Lynch would be liable to pay approximately
$1,166,000 severance pay under Maines Severance Pay Act in
connection with the plant closure. The Defendants filed a notice
of removal, thereby creating United States District Court Civil
Action C.V. No. 01-236. The case was remanded to state
court. The Spinnaker Entities also filed a separate complaint
challenging the constitutionality of the Maine Severance Pay
Act, United States District Court Civil Action No. 01-232
which later was dismissed by stipulation of the Spinnaker
Entities. PACE also filed three separate Motions for Ex-Parte
Attachment against the Spinnaker Entities and Lynch. PACE filed
the First Motion for Attachment with its original Complaint.
PACE sought to attach $1,166,483.44, an amount large enough to
cover the claims of all PACEs members seeking severance.
The Court denied that Motion as being pre-mature. PACE then
filed a Second Motion against the Spinnaker Entities and Lynch
for an attachment large enough to cover the claims of eight
individual employees seeking severance pay in the amount of
$120,736.27. On August 20, 2001, the Court granted that
Motion in the amount of $118,500. On April 4, 2002, PACE
subsequently recorded this attachment through UCC-1 filings with
the Maine Secretary of State against Lynch Manufacturing and
Lynch Corporation. PACE filed a Third Motion for Ex-Parte
Attachment on August 29, 2001. This Motion sought an
attachment large enough to cover the severance pay claimed by
the remaining PACE members, $1,048,003.00. The Court denied this
Motion but permitted

46



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##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

PACE the opportunity to obtain an attachment
after all defendants had an opportunity to respond and after
hearing.

Before any further action was taken with respect
to PACEs Third Motion for Attachment, the Spinnaker
Defendants filed for relief under Chapter 11 of the
Bankruptcy Code. Following a series of filings in the United
States District Court for the District of Maine and the United
States Bankruptcy Court for the District of Maine which, like
United States District Court Case No. 01-236, later were
dismissed by the parties with prejudice and without costs,
PACEs case continues to proceed against Lynch in
Cumberland County Superior Court in Maine on the issue of
whether Lynch has liability to PACEs members under the
Maine Severance Pay Act.

On September 30, 2002, PACE requested a
ruling from the Superior Court on its Third Motion for
Attachment. On October 21, 2002, Lynch filed a Motion for
Summary Judgment which incorporated its prior objection to any
attachment. PACE filed an Opposition to Lynchs Motion for
Summary Judgment and a Motion for Leave to Further Amend the
Complaint on November 12, 2002. Lynch thereafter filed a
Reply Memorandum in Support of its Motion for Summary Judgment
on November 26, 2002 and an opposition to PACEs
Motion for Leave to Further Amend the Complaint on
December 3, 2002. On December 31, 2002, the Superior
Court held a hearing on all pending Motions. The Superior Court
requested that arguments focus on Lynchs Motion for
Summary Judgment since the granting of this Motion will render
PACEs Third Motion for Attachment and Motion to Further
Amend the Complaint moot.

On July 28, 2003, the Superior Court issued
an Order deciding both Lynchs and PACEs Motions for
Summary Judgement. The Court denied Lynchs Motion for
Summary Judgment, finding that there remained a disputed issue
of material fact regarding one of Lynchs primary defenses.
The Court granted partial summary judgment in favor of PACE to
the extent that the Court found Lynch was an
employer subject to potential liability under
Maines Severance Pay Act. The Court held, however, that
PACE must still prove its entitlement to severance pay under the
Act. In a separate ruling also issued on July 28, 2003, the
Court denied PACEs Third Motion for Attachment.

On March 8, 2004, Lynch filed a Motion for
Summary Judgement on the issue of an exemption under the Maine
Severance Pay Act based upon the nexus between the plant
closings in Westbrook, Maine and the Spinnaker Defendants
bankruptcy filing. PACE concurrently filed a Motion for Summary
Judgment on Count II of the Complaint on March 8, 2004.

Lynch believes that, in addition to other
defenses, it is not subject to the Maine Severance Pay Act, as
now in effect. At this time, management is unable to assess the
prospects for a favorable summary judgment decision, but firmly
believes that, under current law, the resolution of this case
will not have a material adverse effect on the Registrants
consolidated financial condition or operations.

Lynch Corporation, Lynch Interactive Corporation
(Interactive), and several other parties have been
named as defendants in a lawsuit brought under the so-called
qui tam provisions of the federal False Claims Act
in the United States District Court for the District of
Columbia. The complaint was filed under seal with the court on
February 14, 2001, and the seal was lifted on
January 11, 2002. The Company was formally served with the
complaint on July 9, 2002. The main allegation in the case
is that the defendants participated in the creation of
sham bidding entities that allegedly defrauded the
federal Treasury by improperly participating in Federal
Communications Commission spectrum auctions restricted to small
businesses, as well as obtaining bidding credits in other
spectrum auctions allocated to small and very
small businesses. The lawsuit seeks to recover an
unspecified amount of damages, which would be subject to
mandatory trebling under the statute. On September 19,
2002, Interactive, on behalf of itself and Lynch, filed two
Motions with the court: a Motion to Transfer the Action to the
Southern District of New York and a Motion to Dismiss the
Lawsuit. The relator filed an opposition reply to
Interactives Motion to Dismiss and, on December 5,
2002, Interactive filed a Reply in Support of Its Motion to
Dismiss. A court mandated scheduling conference

47



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

was held on February 10, 2004, following
which the Court issued a scheduling order setting forth a
timetable for the discovery process.

The U.S. Department of Justice has notified
the court that it has declined to intervene in the case. The
defendants strongly believe that the lawsuit is completely
without merit and intend to defend the suit vigorously.
Furthermore, under the separation agreement between the Company
and Interactive pursuant to which Interactive was spun-off to
the Companys shareholders on September 1,
1999, Interactive would be obligated to indemnify the
Company for any losses or damages incurred by the Company as a
result of this lawsuit; and Interactive has, in fact, agreed in
writing to defend the case on Lynchs behalf and to
indemnify Lynch for any losses it may incur as a result of the
lawsuit. Interactive has retained legal counsel to defend the
claim on behalf of Lynch and Interactive at the expense of
Interactive.

Rent expense under operating leases was $284,000,
$320,000, and $846,000 (including Spinnaker for nine months,
prior to the deconsolidation) for the years ended
December 31, 2003, 2002 and 2001, respectively. The Company
leases certain property and equipment, including warehousing and
sales and distribution equipment, under operating leases that
extend from one to three years. Certain of these leases have
renewal options and escalation provisions.

Future minimum rental payments under long-term
non-cancelable operating leases subsequent to December 31,
2003 are as follows (in thousands):

|     |  |   |     | 
|---- |  | - | --- | 
|2004 |  | $ | 274 | 
|2005 |  |   | 229 | 
|2006 |  |   | 127 | 
|     |  |   |     | 
|     |  | $ | 630 | 
|     |  |   |     | 



|    |                    
|--- | -------------------
|15. | Segment Information

The Company had two reportable business segments
in 2003 and 2002, Lynch Systems (glass manufacturing equipment)
and M-tron (frequency control devices).

The Company had four reportable business segments
in 2001. The largest was Spinnaker Coatings adhesive
backed label stock for labels and related applications. The
second largest segment was Lynch Systems glass manufacturing
equipment business. Frequency control devises (quartz crystals
and oscillators) manufactured and sold by M-tron was the third
segment. Entoleter (then a subsidiary of Spinnaker
Industries, Inc.) manufactured and sold industrial process
equipment and was the fourth segment. Spinnaker Coating and
Entoleter results for 2001 represent the nine-month period
ending September 30, 2001 pursuant to the
deconsolidation of Spinnaker on September 30,
2001 (see Note 1 to the Consolidated Financial
Statements  Basis of Presentation).
Except for M-trons Hong Kong subsidiary, which acts as a
buying agent and sales representative, the businesses are
located domestically and consolidated export sales (primarily
Canada and China) were approximately $17.0 million in 2003,
$19.0 million in 2002 and $45.8 million in 2001. For
the year ended December 31, 2003, one customer accounted
for $3.4 million or 27.0 percent of Lynch
Systems sales while one customer represented
$1.9 million or 12.7% of frequency control sales. The
Company considers concentrations of credit risk to be minimal
due to its diverse customer base and because it requires letters
of credit of most foreign customers to support a significant
portion of the purchase price.

M-tron attempts to utilize standard parts and
components that are available from multiple vendors located in
the United States or internationally; however, some components
used in its products are available from only a limited number of
sources.

48



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

Operating profit (loss) is equal to revenues less
operating expenses, excluding investment income, interest
expense, and income taxes. The Company allocates a negligible
portion of its general corporate expenses to its operating
segments. Such allocation was $175,000 in 2003, $200,000 in
2002, and $289,000 in 2001. 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.

|                                              |                                                 |                         |        |        |  |      |        |        |  |   |         |        | 
|--------------------------------------------- | ----------------------------------------------- | ----------------------- | ------ | ------ |  | ---- | ------ | ------ |  | - | ------- | ------ | 
|                                              |                                                 |                        
|                                              |                                                 | Years ended December 31
|                                              |                                                 |                        
|                                              |                                                 | 2003                    |        | 2002   |  | 2001
|                                              |                                                 |                         |        |        |  |     
|Revenues                                      |                                                 |                         |        |        |  |      |        |        |  |   |         |       
|                                             
|Adhesive-backed label stock  USA             |                                                 | $                       |       |        |  | $    |       |        |  | $ | 78,891  |       
|                                             
|Adhesive-backed label stock  Europe          |                                                 |                         |       |        |  |      |       |        |  |   |        |       
|Adhesive-backed label stock  Far East        |                                                 |                         |       |        |  |      |       |        |  |   |        |       
|Adhesive-backed label stock  Canada          |                                                 |                         |       |        |  |      |       |        |  |   | 10,652  |       
|Adhesive-backed label stock  All Other       |                                                 |                         |       |        |  |      |       |        |  |   | 620     |       
|                                              |                                                 |                         |        |        |  |      |        |        |  |   |         |       
|                                              | Total Adhesive-backed label stock 
    Foreign |                         |        |       |  |      |        |       |  |   |         | 11,272 | 
|                                             
|                                              | Total Adhesive-backed label stock               |                         |        |       |  |      |        |       |  |   |         | 90,163 | 
|                                             
|Glass manufacturing equipment  USA           |                                                 |                         | 3,677  |        |  |      | 1,790  |        |  |   | 2,906   |       
|                                             
|Glass manufacturing equipment  Europe        |                                                 |                         | 1,469  |        |  |      | 7,953  |        |  |   | 6,673   |       
|Glass manufacturing equipment  Far East      |                                                 |                         | 7,402  |        |  |      | 4,844  |        |  |   | 14,882  |       
|Glass manufacturing equipment  Canada        |                                                 |                         | 4      |        |  |      | 7      |        |  |   | 1       |       
|Glass manufacturing equipment  All
    Other |                                                 |                         | 234    |        |  |      | 380    |        |  |   | 1,585   |       
|                                              |                                                 |                         |        |        |  |      |        |        |  |   |         |       
|                                              | Glass manufacturing equipment  Foreign         |                         |        | 9,109  |  |      |        | 13,184 |  |   |         | 23,141 | 
|                                             
|                                              | Total Glass manufacturing equipment             |                         |        | 12,786 |  |      |        | 14,974 |  |   |         | 26,047 | 
|                                             
|Frequency control devices  USA               |                                                 |                         | 7,282  |        |  |      | 5,562  |        |  |   | 10,772  |       
|                                             
|Frequency control devices  Europe            |                                                 |                         | 1,405  |        |  |      | 657    |        |  |   | 1,536   |       
|Frequency control devices  Far East          |                                                 |                         | 3,700  |        |  |      | 2,166  |        |  |   | 2,361   |       
|Frequency control devices  Canada            |                                                 |                         | 1,847  |        |  |      | 1,938  |        |  |   | 6,257   |       
|Frequency control devices  All Other         |                                                 |                         | 949    |        |  |      | 1,089  |        |  |   | 667     |       
|                                              |                                                 |                         |        |        |  |      |        |        |  |   |         |       
|                                              | Total Frequency control devices 
    Foreign   |                         |        | 7,901  |  |      |        | 5,850  |  |   |         | 10,821 | 
|                                             
|                                              | Total Frequency control devices                 |                         |        | 15,183 |  |      |        | 11,412 |  |   |         | 21,593 | 
|                                             
|Industrial process equipment  USA            |                                                 |                         |       |        |  |      |       |        |  |   | 2,716   |       
|                                             
|Industrial process equipment  Europe         |                                                 |                         |       |        |  |      |       |        |  |   |        |       
|Industrial process equipment  Far East       |                                                 |                         |       |        |  |      |       |        |  |   |        |       
|Industrial process equipment  Canada         |                                                 |                         |       |        |  |      |       |        |  |   | 554     |       
|Industrial process equipment  All Other      |                                                 |                         |       |        |  |      |       |        |  |   |        |       
|                                              |                                                 |                         |        |        |  |      |        |        |  |   |         |       
|                                              | Industrial process equipment  Foreign          |                         |        |       |  |      |        |       |  |   |         | 554    | 
|                                             
|                                              | Total Industrial process equipment              |                         |        |       |  |      |        |       |  |   |         | 3,270  | 
|                                             
|Consolidated total                            |                                                 | $                       | 27,969 |        |  | $    | 26,386 |        |  | $ | 141,073 |       
|                                              |                                                 |                         |        |        |  |      |        |        |  |   |         |       

49



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)

|                                                          |  |                         |        |      |  |      |        |   |  |   |         |  
|--------------------------------------------------------- |  | ----------------------- | ------ | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                          |  |                        
|                                                          |  | Years ended December 31
|                                                          |  |                        
|                                                          |  | 2003                    |        | 2002 |  | 2001
|                                                          |  |                         |        |      |  |     
|Operating Profit (Loss)                                   |  |                         |        |      |  |      |        |   |  |   |         |  
|                                                         
|Adhesive-backed label stock                               |  | $                       |       |      |  | $    |       |   |  | $ | (7,860  | )
|Glass manufacturing equipment                             |  |                         | 822    |      |  |      | 936    |   |  |   | 4,778   |  
|Frequency control devices                                 |  |                         | (170   | )    |  |      | (2,574 | ) |  |   | (2,549  | )
|Industrial process equipment                              |  |                         |       |      |  |      |       |   |  |   | (22     | )
|Corporate manufacturing expenses                          |  |                         |       |      |  |      |       |   |  |   | (1,065  | )
|                                                          |  |                         |        |      |  |      |        |   |  |   |         |  
|Total manufacturing                                       |  |                         | 652    |      |  |      | (1,638 | ) |  |   | (6,718  | )
|Unallocated Corporate expense                             |  |                         | (1,484 | )    |  |      | (1,614 | ) |  |   | (1,656  | )
|Gain on deconsolidation                                   |  |                         |       |      |  |      | 19,420 |   |  |   | 27,406  |  
|Restructuring charge  Spinnaker                          |  |                         |       |      |  |      |       |   |  |   | (38,272 | )
|                                                          |  |                         |        |      |  |      |        |   |  |   |         |  
|                                                         
|Consolidated Total                                        |  | $                       | (832   | )    |  | $    | 16,168 |   |  | $ | (19,240 | )
|                                                          |  |                         |        |      |  |      |        |   |  |   |         |  
|                                                         
|Capital expenditures                                      |  |                         |        |      |  |      |        |   |  |   |         |  
|                                                         
|Adhesive-backed label stock                               |  | $                       |       |      |  | $    |       |   |  | $ | 430     |  
|Glass manufacturing equipment                             |  |                         | 74     |      |  |      | 89     |   |  |   | 217     |  
|Frequency control devices                                 |  |                         | 67     |      |  |      | 134    |   |  |   | 429     |  
|Industrial process equipment                              |  |                         |       |      |  |      |       |   |  |   | 28      |  
|General corporate                                         |  |                         |       |      |  |      |       |   |  |   |        |  
|                                                          |  |                         |        |      |  |      |        |   |  |   |         |  
|                                                         
|Consolidated Total                                        |  | $                       | 141    |      |  | $    | 223    |   |  | $ | 1,104   |  
|                                                          |  |                         |        |      |  |      |        |   |  |   |         |  
|                                                         
|Total Assets                                              |  |                         |        |      |  |      |        |   |  |   |         |  
|                                                         
|Adhesive-backed label stock                               |  | $                       |       |      |  | $    |       |   |  | $ |        |  
|Glass manufacturing equipment                             |  |                         | 12,207 |      |  |      | 13,181 |   |  |   | 22,496  |  
|Frequency control devices                                 |  |                         | 7,860  |      |  |      | 7,021  |   |  |   | 7,671   |  
|Industrial process equipment                              |  |                         |       |      |  |      |       |   |  |   |        |  
|General Corporate                                         |  |                         | 2,952  |      |  |      | 3,228  |   |  |   | 1,448   |  
|                                                          |  |                         |        |      |  |      |        |   |  |   |         |  
|                                                         
|Consolidated Total                                        |  | $                       | 23,019 |      |  | $    | 23,430 |   |  | $ | 31,615  |  
|                                                          |  |                         |        |      |  |      |        |   |  |   |         |  
|                                                         
|Total operating profit (loss) for reportable
    segments |  | $                       | (832   | )    |  | $    | 16,168 |   |  | $ | (19,420 | )
|Other profit or (loss):                                   |  |                         |        |      |  |      |        |   |  |   |         |  
|Investment income                                         |  |                         | 534    |      |  |      | 121    |   |  |   | 384     |  
|Interest expense                                          |  |                         | (282   | )    |  |      | (201   | ) |  |   | (7,741  | )
|Other income (expense)                                    |  |                         | 763    |      |  |      | (92    | ) |  |   |        |  
|                                                          |  |                         |        |      |  |      |        |   |  |   |         |  
|                                                         
|Income (loss) before income taxes                         |  | $                       | 183    |      |  | $    | 15,996 |   |  | $ | (26,597 | )
|                                                          |  |                         |        |      |  |      |        |   |  |   |         |  

On September 30, 2001, the Companys
ownership and voting interest of Spinnaker Industries, Inc.
was reduced to 41.8% and 49.5% respectively, due to the
disposition of shares of Spinnaker. As a result, effective
September 30, 2001, the Company relinquished control of
Spinnaker and has deconsolidated Spinnaker. On
September 23, 2002, the Company disposed of its remaining
interest in Spinnaker (see Note 1 to the Consolidated
Financial Statements  Basis of
Presentation).

50



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES


NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS  (Continued)



|    |                                                
|--- | -----------------------------------------------
|16. | Quarterly Results of Operations
    (unaudited)

The following is a summary of the quarterly
results of operations for the years ended December 31, 2003
and December 31, 2002, (in thousands, except per share
amounts):

|                                            |  |                         |        |         |  |         |       |         |  |   |       |  |  |   |       | 
|------------------------------------------- |  | ----------------------- | ------ | ------- |  | ------- | ----- | ------- |  | - | ----- |  |  | - | ----- | 
|                                            |  |                        
|                                            |  | 2003 Three Months Ended
|                                            |  |                        
|                                            |  | Mar. 31                 |        | June 30 |  | Sep. 30 |       | Dec. 31
|                                            |  |                         |        |         |  |         |       |        
|Sales and revenues                          |  | $                       | 4,744  |         |  | $       | 6,714 |         |  | $ | 7,716 |  |  | $ | 8,795 | 
|Gross profit                                |  |                         | 793    |         |  |         | 1,732 |         |  |   | 2,221 |  |  |   | 2,904 | 
|Operating profit (loss)                     |  |                         | (1,040 | )       |  |         | (278  | )       |  |   | 68    |  |  |   | 418   | 
|Net income (loss)                           |  |                         | (738   | )       |  |         | (173  | )       |  |   | 783   |  |  |   | 238   | 
|Basic and diluted earnings (loss) per share |  |                         | (0.49  | )       |  |         | (0.12 | )       |  |   | 0.52  |  |  |   | 0.16  | 

|                                            |  |                            |       |         |  |         |       |         |  |   |        |  |  |   |        |  
|------------------------------------------- |  | -------------------------- | ----- | ------- |  | ------- | ----- | ------- |  | - | ------ |  |  | - | ------ | -
|                                            |  |                           
|                                            |  | 2002 Three Months Ended(a)
|                                            |  |                           
|                                            |  | Mar. 31                    |       | June 30 |  | Sep. 30 |       | Dec. 31
|                                            |  |                            |       |         |  |         |       |        
|Sales and revenues                          |  | $                          | 7,003 |         |  | $       | 9,691 |         |  | $ | 5,040  |  |  | $ | 4,652  |  
|Gross profit                                |  |                            | 2,149 |         |  |         | 2,820 |         |  |   | 1,078  |  |  |   | 902    |  
|Operating profit (loss)                     |  |                            | (400  | )       |  |         | (193  | )       |  |   | 18,196 |  |  |   | (1,435 | )
|Net income (loss)                           |  |                            | (292  | )       |  |         | (108  | )       |  |   | 19,267 |  |  |   | (904   | )
|Basic and diluted earnings (loss) per share |  |                            | (0.19 | )       |  |         | (0.07 | )       |  |   | 12.86  |  |  |   | (0.60  | )



---

NOTE:



|   |                                                                                                                                                         
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------
|a) | Third quarter of 2002 includes $19,420 gain on
    deconsolidation. (See Note 1 to the Consolidated Financial
    Statements  Basis of Presentation).



|    |                  
|--- | -----------------
|17. | Subsequent Events

On February 4, 2004, Lynch announced that
the Board of Directors authorized the repurchase of up to
50,000 shares of the Companys outstanding stock. The
timing of the buy-back and the exact number of shares purchased
will depend on market conditions. The Company will buy back
shares through both public and private channels at prices
believed to be appropriate and in the best interest of
shareholders.

51



---



##### 



SCHEDULE I  CONDENSED FINANCIAL
INFORMATION OF

REGISTRANT LYNCH CORPORATION


CONDENSED BALANCE SHEET

|                                                                                            |                                     |                |        |       |  |   |        |       | 
|------------------------------------------------------------------------------------------- | ----------------------------------- | -------------- | ------ | ----- |  | - | ------ | ----- | 
|                                                                                            |                                     | 2003           |        | 2002 
|                                                                                            |                                     |                |        |      
|                                                                                            |                                     |               
|                                                                                            |                                     | (In Thousands)
|ASSETS                                                                                     
|CURRENT ASSETS                                                                              |                                     |                |        |       |  |   |        |      
|                                                                                            | Cash and Cash Equivalents(a)        |                | $      | 3,091 |  |   | $      | 3,412 | 
|                                                                                            | Investments  Marketable Securities |                |        | 2,311 |  |   |        | 861   | 
|                                                                                            | Dividend Receivable From Subsidiary |                |        | 28    |  |   |        | 6     | 
|                                                                                            | Deferred Income Taxes               |                |        | 166   |  |   |        | 166   | 
|                                                                                            | Other Current Assets                |                |        | 161   |  |   |        | 174   | 
|                                                                                            |                                     |                |        |       |  |   |        |      
|                                                                                            |                                     |                | 5,757  |       |  |   | 4,619  |      
|NET PROPERTY, PLANT & EQUIPMENT                                                             |                                     |                | 18     |       |  |   |       |      
|OTHER ASSETS (principally investment in and
    amounts due from wholly owned subsidiaries) |                                     |                | 9,945  |       |  |   | 9,942  |      
|                                                                                            |                                     |                |        |       |  |   |        |      
|TOTAL ASSETS                                                                                |                                     | $              | 15,720 |       |  | $ | 14,561 |      
|                                                                                            |                                     |                |        |       |  |   |        |      
|LIABILITIES AND SHAREHOLDERS
    EQUITY                                                   
|CURRENT LIABILITIES                                                                         |                                     | $              | 5,649  |       |  | $ | 4,589  |      
|LONG TERM LIABILITIES                                                                       |                                     |                | (962   | )     |  |   | (962   | )    
|TOTAL SHAREHOLDERS EQUITY                                                                  |                                     |                | 11,033 |       |  |   | 10,934 |      
|                                                                                            |                                     |                |        |       |  |   |        |      
|TOTAL LIABILITIES AND SHAREHOLDERS EQUITY                                                  |                                     | $              | 15,720 |       |  | $ | 14,561 |      
|                                                                                            |                                     |                |        |       |  |   |        |      



---

Notes:



|    |                                                                                                                                                                       
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(a) | Cash and cash equivalents includes $1,125,000
    restricted cash that secures the $1,000,000 Letter of Credit
    issued on behalf of Lynch to M-trons lending bank.



| |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 
| | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | * | On September 30, 2001, the Companys
    ownership and voting interest of Spinnaker Industries, Inc.
    was reduced to 41.8% and 49.5% respectively, due to the
    disposition of shares of Spinnaker. As a result, effective
    September 30, 2001, the Company relinquished control of
    Spinnaker and has deconsolidated Spinnaker. On
    September 23, 2002, the Company disposed of its remaining
    interest in Spinnaker ( See Note 1 to the Consolidated
    Financial Statements  Basis of
    Presentation).

52



---



##### 



LYNCH CORPORATION

CONDENSED FINANCIAL INFORMATION OF
REGISTRANT

CONDENSED STATEMENT OF OPERATIONS


|                                                                             |  |                        |       |      |  |      |        |   |  |   |         |  
|---------------------------------------------------------------------------- |  | ---------------------- | ----- | ---- |  | ---- | ------ | - |  | - | ------- | -
|                                                                             |  |                       
|                                                                             |  | Year Ended December 31
|                                                                             |  |                       
|                                                                             |  | 2003                   |       | 2002 |  | 2001
|                                                                             |  |                        |       |      |  |     
|                                                                             |  |                       
|                                                                             |  | (In Thousands)        
|Interest, Dividends & Gains on Sale of
    Marketable Securities             |  | $                      | 523   |      |  | $    | 40     |   |  | $ | 209     |  
|Dividend from Subsidiary                                                     |  |                        | 486   |      |  |      | 1,306  |   |  |   |        |  
|Interest & Other Income from Subsidiaries                                    |  |                        | 36    |      |  |      | 12     |   |  |   | 24      |  
|                                                                             |  |                        |       |      |  |      |        |   |  |   |         |  
|TOTAL INCOME                                                                 |  |                        | 1,045 |      |  |      | 1,358  |   |  |   | 233     |  
|Costs & Expenses:                                                            |  |                        |       |      |  |      |        |   |  |   |         |  
|Unallocated Corporate Administrative Expense                                 |  |                        | 1,309 |      |  |      | 1,414  |   |  |   | 1,001   |  
|Interest Expense                                                             |  |                        | 18    |      |  |      | 9      |   |  |   | 23      |  
|                                                                             |  |                        |       |      |  |      |        |   |  |   |         |  
|TOTAL COST AND EXPENSE                                                       |  |                        | 1,327 |      |  |      | 1,423  |   |  |   | 1,024   |  
|                                                                             |  |                        |       |      |  |      |        |   |  |   |         |  
|LOSS BEFORE INCOME TAXES AND EQUITY IN NET INCOME
    (LOSS) OF SUBSIDIARIES |  |                        | (282  | )    |  |      | (65    | ) |  |   | (791    | )
|Income Tax Benefit                                                           |  |                        | 96    |      |  |      | 20     |   |  |   | 269     |  
|Equity in Net Income (Loss) of Subsidiaries                                  |  |                        | 296   |      |  |      | 18,008 |   |  |   | (22,416 | )
|                                                                             |  |                        |       |      |  |      |        |   |  |   |         |  
|NET INCOME (LOSS)                                                            |  | $                      | 110   |      |  | $    | 17,963 |   |  | $ | (22,938 | )
|                                                                             |  |                        |       |      |  |      |        |   |  |   |         |  



---



|  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|* | On September 30, 2001, the Companys
    ownership and voting interest of Spinnaker Industries, Inc.
    was reduced to 41.8% and 49.5% respectively, due to the
    disposition of shares of Spinnaker. As a result, effective
    September 30, 2001, the Company relinquished control of
    Spinnaker and has deconsolidated Spinnaker. On
    September 23, 2002, the Company disposed of its remaining
    interest in Spinnaker.  See Note 1 to
    Consolidated Financial Statements  Basis of
    Presentation.

53



---



##### 



LYNCH CORPORATION

CONDENSED FINANCIAL INFORMATION OF
REGISTRANT

CONDENSED STATEMENTS OF CASH FLOW


|                                                                           |  |                        |       |      |  |      |       |   |  |   |        |  
|-------------------------------------------------------------------------- |  | ---------------------- | ----- | ---- |  | ---- | ----- | - |  | - | ------ | -
|                                                                           |  |                       
|                                                                           |  | Year Ended December 31
|                                                                           |  |                       
|                                                                           |  | 2003                   |       | 2002 |  | 2001
|                                                                           |  |                        |       |      |  |     
|                                                                           |  |                       
|                                                                           |  | (In Thousands)        
|CASH PROVIDED FROM (USED IN) OPERATING ACTIVITIES                          |  | $                      | 193   |      |  | $    | 910   |   |  | $ | (1,220 | )
|                                                                           |  |                        |       |      |  |      |       |   |  |   |        |  
|INVESTING ACTIVITIES:                                                      |  |                        |       |      |  |      |       |   |  |   |        |  
|Purchase of available for-sale Securities (net of
    proceeds from sales) |  |                        | (978  | )    |  |      | (306  | ) |  |   |       |  
|Dividend from subsidiaries                                                 |  |                        | 464   |      |  |      | 1,300 |   |  |   | 1,500  |  
|                                                                           |  |                        |       |      |  |      |       |   |  |   |        |  
|NET CASH PROVIDED FROM (USED IN) INVESTING
    ACTIVITIES                  |  |                        | (514  | )    |  |      | 994   |   |  |   | 1,500  |  
|                                                                           |  |                        |       |      |  |      |       |   |  |   |        |  
|FINANCING ACTIVITIES:                                                      |  |                        |       |      |  |      |       |   |  |   |        |  
|Loans to Subsidiary                                                        |  |                        |      |      |  |      | (700  | ) |  |   |       |  
|                                                                           |  |                        |       |      |  |      |       |   |  |   |        |  
|NET CASH (USED IN) FINANCING ACTIVITIES                                    |  |                        |      |      |  |      | (700  | ) |  |   |       |  
|                                                                           |  |                        |       |      |  |      |       |   |  |   |        |  
|TOTAL INCREASE (DECREASE) IN CASH AND CASH
    EQUIVALENTS                 |  |                        | (321  | )    |  |      | 1,204 |   |  |   | 280    |  
|CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                             |  |                        | 3,412 |      |  |      | 2,208 |   |  |   | 1,928  |  
|                                                                           |  |                        |       |      |  |      |       |   |  |   |        |  
|CASH AND CASH EQUIVALENTS AT END OF YEAR                                   |  | $                      | 3,091 |      |  | $    | 3,412 |   |  | $ | 2,208  |  
|                                                                           |  |                        |       |      |  |      |       |   |  |   |        |  

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  PURCHASE OF AVAILABLE
    FOR SALE SECURITIES

2003 proceeds from the sale of marketable
securities totaled $1,041,000. Purchases of securities and
payments on margin liabilities were $1,565,000 and $454,000
respectively.



| |                                         
| | ----------------------------------------
| | NOTE C  DIVIDENDS FROM
    SUBSIDIARIES

Dividends paid to Lynch Corporation from the
Registrants consolidated subsidiaries were $464,000 in
2003, $1,300,000 in 2002 and $1,500,000 in 2001.



| |                                   
| | ----------------------------------
| | NOTE D  LOANS TO
    SUBSIDIARIES

In 2002, Lynch Corporation (parent) lent its
subsidiary, M-tron Industries, Inc., $700,000 to support
its banking relationship and to fund M-trons acquisition
of Champion Technologies, Inc.



| |                                 
| | --------------------------------
| | NOTE E  INCOME TAX
    RECOVERY

2003 cash provided from operations includes
income tax recoveries of $532,000; 2002 cash provided from
operations includes income tax recoveries of $2,170,000.



| |                                                                                            
| | -------------------------------------------------------------------------------------------
| | NOTE F  SEE NOTES TO
    CONSOLIDATED FINANCIAL STATEMENTS FOR ADDITIONAL
    INFORMATION.

54



---



##### 



LYNCH CORPORATION AND SUBSIDIARIES

SCHEDULE II  VALUATION AND
QUALIFYING ACCOUNTS

YEARS ENDED DECEMBER 31, 2003, 2002 AND
2001


|                                                                                 |  |            |           |            |  |             |         |               |  |            |          |   |  |   |         |  |  |   |         | 
|-------------------------------------------------------------------------------- |  | ---------- | --------- | ---------- |  | ----------- | ------- | ------------- |  | ---------- | -------- | - |  | - | ------- |  |  | - | ------- | 
|                                                                                 |  |            |           |            |  |             |         |              
|Column A                                                                         |  | Column B   |           | Column C   |  | Column D    |         | Column E     
|                                                                                 |  |            |           |            |  |             |         |              
|                                                                                 |  |            |           |            |  |             |         |              
|                                                                                 |  |            |           | Additions  |  |             |         |              
|                                                                                 |  |            |           |            |  |             |         |              
|                                                                                 |  | Balance at |           | Charged to |  | Charged to  |         |               |  | Balance at
|                                                                                 |  | Beginning  |           | Costs and  |  | Other       |         |               |  | End of    
|Description                                                                      |  | Of Period  |           | Expenses   |  | Accounts(A) |         | Deductions(B) |  | Period    
|                                                                                 |  |            |           |            |  |             |         |               |  |           
|Year ended December 31, 2003 Allowance for
    uncollectible accounts receivable |  | $          | 91,000    |            |  | $           | 10,000  |               |  | $          | 0        |   |  | $ | 10,000  |  |  | $ | 91,000  | 
|                                                                                 |  |            |           |            |  |             |         |               |  |            |          |   |  |   |         |  |  |   |         | 
|Year ended December 31, 2002 Allowance for
    uncollectible accounts receivable |  | $          | 118,000   |            |  | $           | 7,000   |               |  | $          | 0        |   |  | $ | 34,000  |  |  | $ | 91,000  | 
|                                                                                 |  |            |           |            |  |             |         |               |  |            |          |   |  |   |         |  |  |   |         | 
|Year ended December 31, 2001 Allowance for
    uncollectible accounts receivable |  | $          | 1,582,000 |            |  | $           | 120,000 |               |  | $          | (589,000 | ) |  | $ | 995,000 |  |  | $ | 118,000 | 
|                                                                                 |  |            |           |            |  |             |         |               |  |            |          |   |  |   |         |  |  |   |         | 



---



|    |  |                                                                                                                                                                                 
|--- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|(A) |  | $589,000 is the result of the deconsolidation of
    Spinnaker Industries, Inc. on September 30, 2001 (as
    discussed in Note 1 to the Consolidated Financial
    Statements).
|   
|(B) |  | Uncollectible accounts receivable written off are
    net of recoveries (majority attributable to Spinnaker in 2001).                                                           

55



---



##### 



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



| |                  
| | -----------------
| | LYNCH CORPORATION



| |     |                     
| | --- | --------------------
| | By: | /s/ RALPH R. PAPITTO

| |                              
| | -----------------------------
| |                              
| | RALPH R. PAPITTO             
| | Chief Executive Officer      
| | (Principal Executive Officer)

April 13, 2004

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

|                                             |  |                                                                                  |  |               
|-------------------------------------------- |  | -------------------------------------------------------------------------------- |  | --------------
|Signature                                    |  | Capacity                                                                         |  | Date          
|                                             |  |                                                                                  |  |               
|                                            
|/s/ RALPH R. PAPITTORALPH R. PAPITTO         |  | Principal Executive Officer, Chairman of the
    Board of Directors and Director |  | April 13, 2004
|                                            
|                                            
|/s/ MARIO J. GABELLIMARIO J. GABELLI         |  | Vice Chairman of the Board of Directors and
    Director                         |  | April 13, 2004
|                                            
|                                            
|/s/ E. VAL CERUTTIE. VAL CERUTTI             |  | Director                                                                         |  | April 13, 2004
|                                            
|                                            
|/s/ MARC J. GABELLIMARC J. GABELLI           |  | Director                                                                         |  | April 13, 2004
|                                            
|                                            
|/s/ AVRUM GRAYAVRUM GRAY                     |  | Director                                                                         |  | April 13, 2004
|                                            
|                                            
|/s/ ANTHONY R. PUSTORINOANTHONY R. PUSTORINO |  | Director                                                                         |  | April 13, 2004
|                                            
|                                            
|/s/ RICHARD E. MCGRAILRICHARD E. MCGRAIL     |  | President, Chief Operating Officer and Director                                  |  | April 13, 2004
|                                            
|                                            
|/s/ RAYMOND H. KELLERRAYMOND H. KELLER       |  | Principal Financial and Accounting Officer and
    Director                      |  | April 13, 2004

56



---



##### 



EXHIBIT INDEX

|        |  |             |  |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------- |  | ----------- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  |            
|Exhibit |  |            
|No.     |  | Description
|        |  |            
|2       |  | (a)         |  | Asset Purchase Agreement (Asset Purchase
    Agreement) dated January 18, 2002 by and among
    Spinnaker Industries, Inc., Spinnaker Coating, Inc.,
    Spinnaker Coating-Maine, Inc. and SP Acquisition, LLC.                                                                                                                                                                                                                                                                                                                                                                                       
|        |  | (b)         |  | Asset Purchase Agreement Amendment No. 1
    dated February 15, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |  | (c)         |  | Asset Purchase Agreement Amendment No. 2
    dated February 25, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|        |  | (d)         |  | Asset Purchase Agreement Amendment No. 3
    dated March 5, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |  | (e)         |  | Asset Purchase Agreement Amendment No. 4
    dated March 8, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |  | (f)         |  | Asset Purchase Agreement Amendment No. 5
    dated March 18, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  | (g)         |  | Schedules to Asset Purchase Agreement dated
    January 18, 2002.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       
|        |  | (h)         |  | United States Bankruptcy Court Order dated
    March 6, 2002; In Re: Spinnaker Industries, Inc.,
    et al., C.A. No. 01-38066.                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|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)         |  | 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).
|        |  | (b)         |  | 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).                                                                                                                                                                                                                                                                                                                                                                                      
|        |  | (b)(i)      |  | First Supplemental Indenture dated as of
    March 17, 1998, among Spinnaker Industries, Inc.,
    Central Products Company, Entoleter, Inc., Spinnaker
    Coating, Inc., Spinnaker Coating-Maine, Inc. and the
    Chase Manhattan Bank, as Trustee (incorporated by reference by
    Exhibit 99.6 to the Form 8-K of Spinnaker
    Industries, Inc., dated as of March 17, 1998.)                                                                                                                                                                                                                    
|        |  | (c)         |  | Credit Agreement (the Spinnaker Credit
    Agreement) amended as of December 31, 1997, among
    Central Products Company, Brown-Bridge Industries, Inc. and
    Entoleter, Inc. as Borrowers, Spinnaker
    Industries, Inc. as Guarantor, each of the financial
    institutions listed on Schedule 1 thereto, BT Commercial
    Corporation, as Agent, Transamerican Business Credit
    Corporation, as Collateral Agent, and Bankers Trust Company as
    Issuing Bank (incorporated by reference to Exhibit 99.1 to
    Registrants Form 8-K dated October 23, 1996).                          
|        |  | (c)(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).                                                                                                                                                                                                                                                                                                                                                                                                                     
|        |  | (c)(ii)     |  | Fifth Amendment to 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).                                                                                                                                                                                                                                                                                                                                                                                                                          
|        |  | (c)(iii)    |  | Sixth Amendment to the Spinnaker Credit Agreement
    (incorporated by reference by Exhibit 9.5 to the
    Form 8-K of Spinnaker Industries, Inc. dated as of
    March 17, 1998).                                                                                                                                                                                                                                                                                                                                                                                                                      
|        |  | (d)         |  | Refinanced Credit Agreement among Spinnaker
    Coating, Inc., Spinnaker Coating-Maine, Inc. and
    Entoleter, Inc. as Borrowers, Spinnaker
    Industries, Inc. as Guarantor, each of the financial
    institutions listed as Schedule 1 hereto and Transamerica
    Business Corporation, as Agent, dated August 9, 1999 and
    the First, Second and Third Amendments thereto (incorporated by
    reference to Exhibits 10.5, 10.6, 10.7 and 10.8 to
    Spinnakers Form 10-K for the year ended
    December 31, 1999).                                                                        
|        |  | (d)(i)      |  | Fourth Amendment to financed Credit Agreement
    dated April 17, 2000 (incorporated by reference to
    Exhibit 10.1 to Spinnakers Form 10-Q for the
    quarter ended March 31, 2000).                                                                                                                                                                                                                                                                                                                                                                                                               

57



---



##### 



|                                                                                                                                                                                                                                                                                                                                    |  |             |  |                                                                                                                                                                                                                                                                                                                                                      
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                    |  |            
|Exhibit                                                                                                                                                                                                                                                                                                                             |  |            
|No.                                                                                                                                                                                                                                                                                                                                 |  | Description
|                                                                                                                                                                                                                                                                                                                                    |  |            
|                                                                                                                                                                                                                                                                                                                                    |  | (d)(ii)     |  | Fifth Amendment to Refinanced Credit Agreement
    dated September 30, 2000 (incorporated by reference to
    Exhibit 10.1 to Spinnakers Form 10-Q for the
    quarter ended September 30, 2000).                                                                                                                                                   
|                                                                                                                                                                                                                                                                                                                                    |  | (d)(iv)     |  | Sixth Amendment to Refinanced Credit Agreement
    dated March 2001 (incorporated by reference to
    Exhibit 10.16 to Spinnakers Form 10-K for the
    year ended December 31, 2001).                                                                                                                                                              
|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)*        |  | Lynch Corporation 401(k) Savings Plan.                                                                                                                                                                                                                                                                                                               
|                                                                                                                                                                                                                                                                                                                                    |  | (b)         |  | Acquisition Agreement between Brown-Bridge
    Acquisition Corporation and Kimberly-Clark Corporation, dated
    June 15, 1994 (exhibit omitted) (incorporated by reference
    to Exhibit 10® to Registrants Form 10-Q for
    the quarter ended June 10, 1994).                                                                                  
|                                                                                                                                                                                                                                                                                                                                    |  | (c)*        |  | 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).                                                                                                
|                                                                                                                                                                                                                                                                                                                                    |  | (d)         |  | Subscription Agreement dated March 9, 2000
    between Registrant and Mario J. Gabelli (incorporated by
    reference to Exhibit E to Amendment No. 41 to
    Schedule 13D of Registrant dated March 15, 2000 filed
    by Mario J. Gabelli et. al.).                                                                                                
|                                                                                                                                                                                                                                                                                                                                    |  | (e)         |  | 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).                                                                                           
|                                                                                                                                                                                                                                                                                                                                    |  | (f)         |  | 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).                                                                                                                                                           
|                                                                                                                                                                                                                                                                                                                                    |  | (g)         |  | 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® to Registrants
    Form 10-Q for the quarter ended June 30, 1994).                                                                             
|                                                                                                                                                                                                                                                                                                                                    |  | (h)         |  | 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).                                                                                                                                                                                                 
|                                                                                                                                                                                                                                                                                                                                    |  | (i)         |  | Shareholders and Voting Agreement, dated
    September 16, 1994, among Safety Railway Service
    Corporation, Brown-Bridge Industries, Inc. and the other
    stockholders of Brown-Bridge (incorporated by reference to
    Exhibit 10(q) to Registrants Form 10-K for the
    year ended December 31, 1994).                                    
|                                                                                                                                                                                                                                                                                                                                    |  | (j)         |  | Put Option Agreement, 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).                                                    
|                                                                                                                                                                                                                                                                                                                                    |  | (k)*        |  | Directors Stock Plan (incorporated by reference
    to Exhibit 10(o) to Registrants Form 10-K for
    the year ended December 31, 1997).                                                                                                                                                                                                            
|                                                                                                                                                                                                                                                                                                                                    |  | (l)         |  | Amended Phantom Stock Plan (incorporated by
    reference to Exhibit 10(p) to Registrants
    Form 10-Q for the year ended September 30, 1998).                                                                                                                                                                                                     
|                                                                                                                                                                                                                                                                                                                                    |  | (m)         |  | Stock and Asset Purchase Agreement, dated 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 19, 1995).                                                        
|                                                                                                                                                                                                                                                                                                                                    |  | (n)         |  | Agreement and Plan of Merger (Brown-Bridge
    Minority Interest), by and among Spinnaker
    Industries, Inc., BB Merger Corp., Brown-Bridge
    Industries, Inc. and the stockholder 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).
|                                                                                                                                                                                                                                                                                                                                    |  | (o)         |  | 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).                                                                                                                                                               

58



---



##### 



|        |  |             |  |                                                                                                                                                                                                                                                                                                                                          
|------- |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  |            
|Exhibit |  |            
|No.     |  | Description
|        |  |            
|        |  | (p)         |  | Asset Purchase Agreement, dated as of
    November 18, 1997, by and between S.D. Warren Company
    (Seller) and Spinnaker Industries, Inc.
    (incorporated by reference to Exhibit 2.1 to the
    Form 8-K of Spinnaker Industries, Inc., dated as of
    March 17, 1998).                                                          
|        |  | (p)(i)      |  | First Amendment to Asset Purchase Agreement,
    dated March 17, 1998, by and between S.D. Warren Company
    and Spinnaker Industries, Inc. (incorporated by reference
    by Exhibit 4.2 to the Form 8-K of Spinnaker
    Industries, Inc., dated as of March 17, 1998).                                                              
|        |  | (p)(ii)     |  | Subordinated Note, dated March 17, 1998,
    issued by Spinnaker Industries, Inc. to S.D. Warren Company
    in the original principal amount of $7 million bearing
    interest at a rate of 20% per annum (incorporated by
    reference to Exhibit 4.1 to the Form 8-K of Spinnaker
    Industries, Inc., dated as of March 17, 1998).
|        |  | (p)(iii)    |  | Site Separation and Service Agreement, dated
    March 17, 1998, between S.D. Warren Company and Spinnaker
    Industries, Inc. (incorporated by reference by
    Exhibit 99.1 to the Form 8-K of Spinnaker
    Industries, Inc., dated March 17, 1998).                                                                                 
|        |  | (p)(iv)     |  | Lease Agreement, dated March 17, 1998,
    between S.D. Warren Company and Spinnaker Industries, Inc.
    (incorporated by reference by Exhibit 99.2 to the
    Form 8-K of Spinnaker Industries, Inc., dated as of
    March 17, 1998.)                                                                                                 
|        |  | (q)         |  | Stock Purchase Agreement between Spinnaker
    Industries, Inc. and Intertape Polymer Group, Inc.,
    dated April 9, 2000 (incorporated by reference to
    Exhibit 2.1 to Spinnaker Industries, Inc.
    Form 8-K, dated August 16, 2000).                                                                                             
|        |  | (r)         |  | Asset Purchase Agreement by and among Registrant,
    Spinnaker Electrical Tape Company and Intertape Polymer
    Group, Inc., dated April 9, 2000 (incorporated by
    reference to Exhibit 2.2 to Spinnaker Industries, Inc.
    Form 8-K, dated August 16, 2000).                                                                     
|        |  | (s)         |  | Information Statement of Lynch Interactive
    Corporations (incorporated by reference to
    Exhibit 99.1 to Lynch Interactive Corporations
    Form 10-A-1, dated August 18, 2000).                                                                                                                                                  
|        |  | (t)         |  | Separation Agreement, dated as of August 31,
    2000, between Registrant and Lynch Interactive Corporation
    (incorporated by reference to Exhibit 2 to Lynch
    Interactive Corporations Form 10a-1, dated
    August 18, 2000).                                                                                                   
|        |  | (u)*        |  | Letter of Understanding between Registrant and
    Louis A. Guzzetti (incorporated by reference to Exhibit
    (u) to Registrants Form 10-K for the year ended
    December 31, 1999).                                                                                                                                                  
|        |  | (v)         |  | Note from Louis A. Guzzetti, Jr. to
    Registrant (incorporated by reference to Exhibit 10(v) to
    Registrants Form 10-K for the year ended
    December 31, 2000).                                                                                                                                                                  
|        |  | (w)*        |  | Agreement among Registrant, Mario J. Gabelli and
    Ralph R. Papitto dated August 17, 2001 pursuant to which,
    among other things, Registrant agreed to grant Mr. Papitto
    an option (incorporated by reference to Exhibit 10(w) to
    Registrants Form 8-K dated August 17, 2001).                                             
|        |  | (x)*        |  | Amendment dated February 7, 2002 among
    Registrant, Mario J. Gabelli and Ralph R. Papitto, amending the
    Agreement at Exhibit 10(w) to terminate Registrants
    obligation to grant an option to Mr. Papitto.                                                                                                                    
|        |  | (y)*        |  | Lynch Corporation 2001 Equity Incentive Plan
    adopted December 10, 2001.                                                                                                                                                                                                                                                              
|        |  | (z)         |  | Amended and Restated Credit Agreement by and
    between Lynch Systems, Inc. and SunTrust Bank dated as of
    June 10, 2002.                                                                                                                                                                                                            
|        |  | (aa)        |  | Unlimited Continuing Guaranty Agreement by
    Guarantor, Lynch Corporation, dated June 10, 2002.                                                                                                                                                                                                                                        
|        |  | (bb)        |  | Restated Loan and Security Agreement by and
    between M-tron Industries, Inc. and First National Bank of
    Omaha dated August 31, 2001.                                                                                                                                                                                              
|        |  | (cc)        |  | First Amendment to Restated Loan and Security
    Agreement by and between M-tron Industries, Inc. and First
    National Bank of Omaha dated August 31, 2001.                                                                                                                                                                           
|        |  | (dd)        |  | Second Amendment to Restated Loan and Security
    Agreement dated April 30, 2003 between M-tron
    Industries, Inc. and First National Bank of Omaha
    (incorporated by reference to Exhibit 10(dd) to
    Registrants Form 10-Q for the period ending
    June 30, 2003).                                                          

59



---



##### 



|        |  |             |  |                                                                                                                                                                                                                                                                  
|------- |  | ----------- |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|        |  |            
|Exhibit |  |            
|No.     |  | Description
|        |  |            
|        |  | (ee)        |  | First Amendment and Waiver to Amended and
    Restated Credit Agreement between Lynch Systems, Inc. and
    SunTrust Bank dated May 30, 2003 (incorporated by reference
    to Exhibit 10(ee) to Registrants Form 10-Q for
    the period ending June 30, 2003).
|        |  | (ff)        |  | Term Loan Promissory Note between Lynch
    Systems, Inc. and SunTrust Bank dated August 4, 2003
    (incorporated by reference to Exhibit 10(ff) to
    Registrants Form 10-Q for the period ending
    June 30, 2003).                                        
|        |  | (gg)        |  | Second Amendment to Security Deed and Agreement
    dated August 4, 2003 between Lynch Systems, Inc. and
    SunTrust Bank (incorporated by reference to Exhibit 10(gg)
    to Registrants Form 10-Q for the period ending
    June 30, 2003).                  
|        |  | (hh)        |  | Mortgage dated October 21, 2002 by
    Mortgagor, M-tron Industries, Inc., to Mortgagee, Yankton
    Area Progressive Growth, Inc.                                                                                                                             
|        |  | (ii)        |  | Promissory Note between M-tron
    Industries, Inc. and Yankton Area Progressive
    Growth, Inc., dated October 21, 2002.                                                                                                                                     
|        |  | (jj)        |  | Standard Loan Agreement by and between M-tron
    Industries, Inc. and Areawide Business Council, Inc.,
    dated October 10, 2002 and Exhibits thereto.                                                                                                       
|        |  | (kk)        |  | Loan Agreement by and between M-tron
    Industries, Inc. and South Dakota Board of Economic
    Development, dated December 19, 2002.                                                                                                                         
|        |  | (ll)        |  | Promissory Note between M-tron
    Industries, Inc. and South Dakota Board of Economic
    Development, dated December 19, 2002.                                                                                                                               
|        |  | (mm)        |  | Employment Agreement by and between M-tron
    Industries, Inc. and South Dakota Board of Economic
    Development, dated December 19, 2002.                                                                                                                   
|14      |  | (A)         |  | Code of Ethics for Senior Executive Personnel
    (incorporated by reference to Exhibit 14(A) to
    Registrants Form 8-K, dated August 14, 2003).                                                                                                              
|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      |  |             |  | Consent of Ernst & Young LLP.                                                                                                                                                                                                                                  
|24      |  |             |  | Powers of Attorney.                                                                                                                                                                                                                                            
|31      |  |             |  | Certifications of Registrants principal
    executive and principal chief financial officer required by
    Exchange Act Rule 13a-14(a).                                                                                                                      
|32      |  |             |  | Section 1350 Certifications of
    Registrants principal executive and principal financial
    officers required by Exchange Act
    Rule 13a-14(b).                                                                                                          
|99.1    |  |             |  | Amended and Restated Business Conduct
    Policy.                                                                                                                                                                                                              



---



|  |                                                 
|- | ------------------------------------------------
|* | Management contract or compensatory arrangement.



|   |                                                                                                                                         
|-- | ----------------------------------------------------------------------------------------------------------------------------------------
|  | Registrant agrees to furnish a supplemental copy
    of any omitted schedule to the Securities and Exchange
    Commission upon request.
|  
| | Filed herewith.                                                                                                                         

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, 50 Kennedy Plaza, Suite 1250, Providence, RI
02903.

60