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SECURITIES & EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2002

or

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

For the transition period from _________________   to  ___________________

Commission File No. 1-106

LYNCH CORPORATION

(401) 453-2007

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes   X      No

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

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INDEX

LYNCH CORPORATION AND SUBSIDIARIES

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Part 1 — FINANCIAL INFORMATION -
Item 1 — Financial Statements

LYNCH CORPORATION AND SUBSIDIARIES

See accompanying 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 B.

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PART I – FINANCIAL INFORMATION
Item 1 — Financial Statements

LYNCH CORPORATION AND SUBSIDIARIES

See accompanying 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 B.

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PART I – FINANCIAL INFORMATION
ITEM 1 – Financial Statements

LYNCH CORPORATION AND SUBSIDIARIES

See accompanying 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 B.

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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A.  Subsidiaries of the Registrant

As of September 30, 2002, the Subsidiaries of the Registrant are as follows:

B.  Basis of Presentation

     The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments (consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for the three month and nine month period ended September 30, 2002 are not necessarily indicative of the results that may be expected for the year ended December 31, 2002.

     The balance sheet at December 31, 2001 has been derived from the audited financial statements at that date but does not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements.

     For further information, refer to the consolidated financial statements and footnotes thereto included in the Registrant Company and Subsidiaries’ annual report on Form 10-K for the year ended December 31, 2001.

     Prior to September 30, 2001, the Company owned 47.6% of the equity of Spinnaker Industries, Inc. (60.4% voting control), an entity engaged in the manufacture of adhesive-backed material; as such, under accounting principles generally accepted in the United States, Spinnaker was a consolidated entity and Lynch (the “Company”) was required to record all of the losses of Spinnaker since the non-Company 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 accounts for its ownership of Spinnaker using the equity method of accounting.

     Accordingly, the Company’s nine month 2002 results of operations do not include the operating results of Spinnaker and the balance sheet at September 30, 2002 and December 31, 2001 does not contain the assets and liabilities of Spinnaker. The deconsolidation had 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, which represented the Company’s interest in Spinnaker’s accumulated deficit at the date of deconsolidation. This remaining interest that represented losses in excess of investment was recorded as a deferred credit on the Company’s balance sheet.

     Lynch determined that the Spinnaker shares were worthless as a result of Spinnaker’s on-going reorganization under Chapter 11 of the bankruptcy code. Therefore, on September 23, 2002, Lynch transferred all of its’ remaining shareholdings in Spinnaker Industries, Inc. to a New York brokerage firm for $1.00 consideration. As a result of this transfer of shares, the $19,420,000 “loss in excess of investment” was recognized in the income statement as a non-cash operating income item.

     Note that certain reclassifications have been made to the September 30, 2001 and December 31, 2001 financial statements to conform with the current year presentation.

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C.  Adoption of Accounting Pronouncements

     The Company does not have any indefinite-lived intangible assets; accordingly, the adoption of FAS 142 had no material impact during the three and nine-month periods ended September 30, 2002.

D.  Investments

     The following is a summary of available for-sale securities held by the Company (in thousands):

E.  Inventories

     Inventories are stated at the lower of cost or market value. At September 30, 2002, inventories were valued by two methods: last-in, first-out (LIFO) – 51%, and first-in, first-out (FIFO) – 49%. At December 31, 2001, inventories were valued by the same two methods: LIFO – 58%, and FIFO — 42%.

     Current costs exceed LIFO value of inventories by $1,045,000 and $991,000 respectively at September 30, 2002 and December 31, 2001.

F.  Indebtedness

     Lynch Systems, Inc. and M-tron Industries, Inc. maintain their own credit facilities. Lynch Systems’ facility is backed by an unsecured parent company guarantee. M-tron’s revolving credit agreement was renewed on August 31, 2002 with an April 30, 2003 maturity date. M-tron’s facility is backed by a $1 million Letter of Credit issued by Fleet Bank to First National Bank of Omaha that is secured by the Company’s $1.1 million deposit in a Fleet Treasury Fixed Income Fund and a parent cash infusion of $500,000.

     In general, the credit facilities are secured by property, plant and equipment, inventory, receivables and common stock of certain subsidiaries and contain certain covenants restricting distributions to the Company.

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

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G.  Earnings Per Share and Stockholders’ Equity

     The Company’s basic and diluted earnings per share are equivalent as the Company has no dilutive securities at the present time because the options issued in May 2002 to purchase 228,000 shares of the Company’s common stock were anti-dilutive throughout 2002.

     On December 10, 2001, the Board of Directors approved, subject to shareholder approval at the May 2002 Annual Meeting, 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. Although the grants were approved by the shareholders on May 2, 2002, the shares are not considered issued until exercised or in the money, neither event having transpired to-date. 180,000 of these options are fully vested, with the remaining options vesting quarterly over the next three years.

     On May 2, 2002, the stockholders approved an amendment to the Articles of Incorporation changing the Company’s authorized common stock from shares having no par value into shares having a par value of $0.01. The Company’s September 30, 2002 and December 31, 2001 balance sheets have been modified in accordance with this change.

H.  Other Comprehensive Income (Loss)

     Total comprehensive income was $19,259,000 for the three months ended September 30, 2002, as opposed to a total comprehensive income of $23,082,000 in the third quarter of 2001.

     Total comprehensive income was $18,977,000 in the nine months ended 9/30/02 and a loss of ($21,661,000) at 9/30/01. Other comprehensive income, which resulted from gains on available for sale securities, was $110,000 through September 30, 2002 including an $8,000 loss in the third quarter.

I.  Segment Information

     The Company has two reportable business segments in 2002. The largest segment is Lynch Systems, a glass manufacturing equipment business. Frequency control devices (quartz crystals and oscillators) manufactured and sold by M-tron is the second segment. Spinnaker Coating and Entoleter results are shown only for the nine month period ending September 30, 2001 pursuant to the “deconsolidation” of Spinnaker on September 30, 2001 (see Note B). The businesses are located domestically.

     EBITDA (after corporate allocation) is equal to operating profit before interest, taxes, depreciation, amortization, and cash restructuring charges. EBITDA is presented because it is a widely accepted financial indicator of value and ability to incur and service debt. EBITDA is not a substitute for operating income or cash flows from operating activities in accordance with generally accepted accounting principles.

     Operating profit (loss) is equal to revenues less operating expenses, unallocated general corporate expenses, gains on the disposition of Spinnaker, and restructuring charges. The Company allocates a portion of its general corporate expenses to its operation segments. Such allocation was $50,000 and $75,000 in the third quarter of 2002 and 2001, and $150,000 and $225,000 respectively in the nine months of 2002 and 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.

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I.  Segment Information (continued)

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I.  Segment Information (continued)

J.  Asset Impairment and Restructuring Charges

     Prior to the deconsolidation of Spinnaker on September 30, 2001 (see Note B), the Company recognized certain restructuring charges in the first half and third quarter of 2001 related to Spinnaker of $38.1 million and $0.2 million respectively. $36.8 million of the $38.3 million nine month total was a non-cash charge. 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; (b) impairment of goodwill associated with the acquisition of Coating — Maine in 1998; and (c) severance and related costs.

K.  Spinnaker Chapter 11 Reorganization Proceedings

     On November 13, 2001 (the “Filing Date”), Spinnaker and its Spinnaker Coating, Inc., Spinnaker Coating-Maine, Inc. and Entoleter, Inc. subsidiaries filed voluntary petitions for relief under Chapter 11 of the United States Bankruptcy Code (11 U.S.C. & 101 et. al.) in the United States Bankruptcy Court for the Southern District of Ohio, Dayton Division (the “Court”). The cases are being jointly administered under Case No. 01-38066. Effective December 28, 2001, Spinnaker’s Common Stock and Class A Common Stock were de-listed from the American Stock Exchange. Spinnaker also filed a Form 15 with the Securities and Exchange Commission to terminate its obligations to file periodic reports under the Securities Exchange Act of 1934.

     On December 31, 2001, Spinnaker entered into a letter of intent (the “Letter of Intent”) with WR Capital Partners, LLC (“WR Capital”) whereby SP Acquisition LLC (“SP Acquisition”), and its acquisition entity established by WR Capital, agreed to purchase substantially all of Spinnaker’s (and its subsidiaries’) assets (and assumption of substantial liabilities) for an amount not to exceed $25,763,000 (including assumed obligations), subject to adjustment. Entoleter’s assets were not included in the sale. On January 4, 2002, Spinnaker filed a motion with the Court to approve the sale of substantially all of its assets, subject to higher and better offers, to SP Acquisition. On January 17, 2002, the Court entered an order (I) approving bid procedures, including a break-up fee and expense reimbursement, (ii) setting an auction date of March 4, 2002, and (iii) setting a date to issue an order approving the sale of such assets for March 5, 2002.

     On January 18, 2002, Spinnaker entered into that certain Asset Purchase Agreement (the “Asset Purchase Agreement”) with SP Acquisition as contemplated by the Letter of Intent. On March 6, 2002, the Court entered an order approving the sale of substantially all of Spinnaker’s assets to SP Acquisition. The closing of the Asset Purchase Agreement occurred on March 28, 2002.

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     On March 28, 2002, the Court approved the sale of substantially all of Entoleter’s assets to Welton LLC for $920,000 in cash plus certain assumed obligations. The closing of the sale occurred on April 16, 2002.

     In either case, there will be a minimal distribution to unsecured creditors and no return to equity holders.

     As a result, the Company eliminated its remaining interest in Spinnaker by transferring its remaining Spinnaker stockholdings to a broker on September 23, 2003 for $1.00. At that time, the $19,420,000 “loss in excess of investment” on the Company’s balance sheet became a non-cash income item and increased shareholders’ equity by the same amount.

L.  Commitments and Contingencies

1.     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.

2.     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 has until November 25, 2002, to respond to Interactive’s motions.

     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. 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.

3.     On or about June 26, 2001, in anticipation of the July 15, 2001 closure of Spinnaker’s Westbrook, Maine facility, 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 01-232. 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 claim 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, $1,048,0003.00. The Court denied this Motion but permitted PACE the opportunity to obtain an attachment after all defendants had no opportunity to respond and after hearing.

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     Before any further action was taken with respect to PACE’s Third Motion for Attachment, the Spinnaker Defendants had filed for relief under Chapter 11 of the Bankruptcy Code. The Spinnaker Defendants then filed a second notice of removal, creating United States District Court for the District of Maine case number C.V. No. 02-7. Upon entry of an order confirming automatic reference, the C.V. No. 02-7 was referred to the United States Bankruptcy Court, District of Maine, and assigned Adv. Pro. No. 02-2007. This litigation was resolved as follows:

     Pace’s case is proceeding 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. A granting of Lynch’s Motion for Summary Judgment would render PACE’s Third Motion for Attachment moot. PACE has not yet filed an opposition to Lynch’s Motion for Summary Judgment nor has the Superior Court scheduled a hearing on either the Motion for Summary Judgment or on the Third Motion for Attachment.

     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.

M.  Accrued Liabilities