LGL GROUP INC - Quarter Report: 2006 March (Form 10-Q)

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UNITED STATES
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 March 31, 2006
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/ / TRANSITION REPORT PURSUANT TO SECTION 13 OF 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

For the transition period from to
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Commission File No. 1-106

LYNCH CORPORATION
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(Exact name of Registrant as Specified in Its Charter)

Indiana 38-1799862
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(State or Other Jurisdiction of I.R.S. Employer
Incorporation or Organization) Identification No.)

140 Greenwich Avenue, 4th Floor, Greenwich, CT 06830
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(Address of principal executive offices) (Zip Code)

(203) 622-1150
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Registrant's telephone number, including area code

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(Former address, changed since last report)

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

Yes /X/ No / /

Indicate by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of "accelerated
filer and large accelerated filer" in Rule 12b-2 of the Exchange Act.

Large accelerated filer / / Accelerated filer / / Non-accelerated filer /X/

Indicate by check mark whether the registrant is an a shell company (as defined
in Rule 12b-2 of the Exchange Act).

Yes / / No /X/

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

Class Outstanding at May 8, 2006
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Common Stock, $0.01 par value 2,154,702

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INDEX

LYNCH CORPORATION AND SUBSIDIARIES

PART I. FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets at March 31, 2006
and December 31, 2005 .......................................... 3
Consolidated Statements of Operations for the three months
ended March 31, 2006 and 2005 .................................. 4
Consolidated Statements of Cash Flows for the three months
ended March 31, 2006 and 2005 .................................. 5
Notes to Condensed Consolidated Financial Statements................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................... 14
Item 3. Quantitative and Qualitative Disclosure About Market Risk........... 20
Item 4. Controls and Procedures............................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................... 20
Item 6. Exhibits and Reports on Form 8-K.................................... 21

PART 1 -- FINANCIAL INFORMATION -
ITEM 1 -- FINANCIAL STATEMENTS

LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS -- UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
March 31, December 31,
2006 2005 (A)
----------- ------------
ASSETS
Current Assets
Cash and cash equivalents............................................... $ 3,465 $ 5,512
Restricted cash (Note E)................................................ 650 650
Investments - marketable securities (Note F)............................ 3,242 2,738
Accounts receivable, less allowances of $300 and $325, respectively..... 7,653 7,451
Unbilled accounts receivable (Note I)................................... 1,880 902
Inventories (Note G).................................................... 7,250 7,045
Deferred income taxes................................................... 111 111
Prepaid expense and other current assets................................ 509 461
---------- ----------
Total Current Assets................................................ 24,760 24,870
Property, Plant and Equipment
Land.................................................................... 855 855
Buildings and improvements.............................................. 5,767 5,767
Machinery and equipment................................................. 14,659 14,606
---------- ----------
21,281 21,228
Less: accumulated depreciation.......................................... (14,332) (14,025)
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6,949 7,203
Other assets............................................................ 564 591
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Total Assets......................................................... $ 32,273 $ 32,664
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
Current Liabilities:
Notes payable to bank (Note H)................................................$ 2,381 $ 2,838
Trade accounts payable........................................................ 2,739 2,900
Accrued warranty expense (Note I)............................................. 365 357
Accrued compensation expense.................................................. 1,567 1,372
Accrued income taxes.......................................................... 742 673
Accrued professional fees..................................................... 292 574
Margin liability on marketable securities..................................... - 330
Other accrued expenses........................................................ 1,233 1,312
Commitments and contingencies (Note M)........................................ 34 859
Customer advances............................................................. 1,403 515
Current maturities of long-term debt (Note H)................................. 845 1,215
---------- ----------
Total Current Liabilities.................................................. 11,601 12,945
Long-term debt (Note H)........................................................... 4,835 5,031
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Total Liabilities.......................................................... 16,436 17,976
Shareholders' Equity
Common stock, $0.01 par value - 10,000,000 shares authorized; 2,188,510
shares issued; 2,154,702 shares outstanding.................................. 22 22
Additional paid-in capital.................................................... 21,053 21,053
Accumulated deficit........................................................... (6,210) (6,576)
Accumulated other comprehensive income (Note K)............................... 1,618 835
Treasury stock, at cost, of 33,808............................................ (646) (646)
---------- ----------
Total Shareholders' Equity................................................. 15,837 14,688
---------- ----------
Total Liabilities and Shareholders' Equity.................................$ 32,273 $ 32,664
========== ==========

(A) The Balance Sheet at December 31, 2005 has been derived from the audited
financial statements at that date, but does not include all of the information
and footnotes required by accounting principles generally accepted in the United
States for complete financial statements.

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PART I -- FINANCIAL INFORMATION

ITEM 1 -- FINANCIAL STATEMENTS

LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS -- UNAUDITED
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)

Three Months Ended
March 31,
------------------------------
2006 2005
-------------- ---------------

REVENUES...................................... $ 12,091 $ 10,595
Cost and expenses:
Manufacturing cost of sales................. 8,544 7,318
Selling and administrative.................. 3,161 3,050
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OPERATING PROFIT.............................. 386 227
Other income (expense):
Investment income........................... 235 10
Interest expense............................ (163) (185)
Other income................................ (8) 3
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64 (172)
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INCOME BEFORE INCOME TAXES.................... 450 55
Provision for income taxes.................... (84) (5)
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NET INCOME.................................... $ 366 $ 50
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Weighted average shares outstanding........... 2,154,702 1,632,126
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BASIC AND DILUTED INCOME PER SHARE:........... $ 0.17 $ 0.03
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SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

PART I -- FINANCIAL INFORMATION

ITEM 1 -- FINANCIAL STATEMENTS

LYNCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS -- UNAUDITED
(IN THOUSANDS)

Three Months Ended
March 31,
-------------------------
2006 2005
----------- ------------

OPERATING ACTIVITIES
Net income ....................................................................... $ 366 $ 50
Adjustments to reconcile net income to net cash (used in) provided by operating
activities:
Depreciation ..................................................................... 307 304
Amortization of definite-lived intangible assets ................................. 27 21
Gain realized on sale of marketable securities ................................... (202) -
Changes in operating assets and liabilities:
Receivables .................................................................... (1,180) (631)
Inventories .................................................................... (205) (172)
Accounts payable and accrued liabilities ....................................... (250) (119)
Commitments and contingencies .................................................. (825) -
Other assets/liabilities ....................................................... 840 604
------- -------
Net cash (used in) provided by operating activities .............................. (1,122) 57
------- -------

INVESTING ACTIVITIES
Capital expenditures ............................................................. (53) (31)
Restricted cash .................................................................. - 125

Proceeds from sale of marketable securities ...................................... 423 -
Net repayment of margin liability on marketable securities ....................... (330) -
------- -------
Cash provided by investing activities ............................................ 40 94
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FINANCING ACTIVITIES
Net repayment of notes payable ................................................... (457) (198)
Repayment of long-term debt ...................................................... (566) (198)
Other ............................................................................ 58 21
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Net cash used in financing activities ............................................ (965) (375)
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Decrease in cash and cash equivalents ............................................ (2,047) (224)
Cash and cash equivalents at beginning of period ................................. 5,512 2,580
------- -------
Cash and cash equivalents at end of period ....................................... $ 3,465 $ 2,356
======= =======

SEE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

A. SUBSIDIARIES OF THE REGISTRANT

As of March 31, 2006, the Subsidiaries of the Registrant are as follows:

Owned by Lynch
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Lynch Systems, Inc............................................... 100.0%
M-tron Industries, Inc........................................... 100.0%
M-tron Industries, Ltd................................... 100.0%
Piezo Technology, Inc.................................... 100.0%
Piezo Technology India Private Ltd. 99.9%

Lynch Corporation (the "Company") has three principal operating
subsidiaries, M-tron Industries, Inc. ("Mtron"), Piezo Technology, Inc. ("PTI")
and Lynch Systems, Inc. ("Lynch Systems"). The combined operations of Mtron and
PTI are referred to herein as "Mtron/PTI."

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 period ended March 31, 2006
are not necessarily indicative of the results that may be expected for the year
ending December 31, 2006.

The balance sheet at December 31, 2005 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, 2005.

C. ADOPTION OF ACCOUNTING PRONOUNCEMENTS

On January 1, 2006 the Company adopted revised Statement of Financial
Accounting Standards No. 123 ("SFAS No. 123-R"), "Share-Based Payments." SFAS
No. 123-R impacts the Company's accounting for its stock option plan. Because
all of the Company's stock options were fully vested at December 31, 2005 and
there were no new options issued in the first quarter of 2006, there was no
impact on the Company's 2006 financial statements from the adoption of this
standard.

D. ACQUISITION

On October 15, 2004, the Company acquired, through its wholly-owned
subsidiary, Mtron, 100% of the common stock of PTI. The acquisition was
effective September 30, 2004. PTI manufactures and markets high-end oscillators,
crystals, resonators and filters used in electronic and communications systems.
The purchase price was approximately $8,736,000 (before deducting cash acquired,
and before adding acquisition costs and transaction fees). The Company funded
the purchase price by (a) new notes payable and long-term debt of $6,936,000 and
(b) proceeds of $1,800,000 received from the sale of Lynch Stock to Venator
Merchant Fund ("Venator"), which is controlled by the Company's Chairman, Marc
Gabelli.

E. RESTRICTED CASH

At March 31, 2006 and December 31, 2005, the Company had $650,000, of
Restricted Cash that secures a Letter of Credit issued by Bank of America to the
First National Bank of Omaha as collateral for its Mtron subsidiary's loans.

F. INVESTMENTS

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

Gross Gross Estimated
Unrealized Unrealized Fair
Equity Securities Cost Gains Losses Value
-------------------------------------------------------------------- ---------- ----------- ------------- ---------
March 31, 2006..................................................... $ 1,770 $ 1,472 -- $ 3,242
December 31, 2005.................................................. $ 1,991 $ 747 -- $ 2,738

The Company had a margin liability against this investment of $330,000 at
December 31, 2005 which must be settled upon the disposition of the related
securities whose fair value is based on quoted market prices. The Company paid
off the margin liability in January 2006. The Company has designated these
investments as available for sale pursuant to SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities".

FAIR VALUE OF FINANCIAL INSTRUMENTS - INTEREST RATE SWAP HEDGING

The Company has an interest rate swap agreement to reduce the interest
exposure on the $3,030,000 RBC Term Loan that is described in Note H. This
agreement eliminates the variability of cash flows in the interest payments for
100% of the total variable-rate term loan effectively changing the Company's
exposure from a variable interest rate to a fixed interest rate.

The Company has designated the agreement as a cash flow hedge. The critical
terms of the swap and the term loan coincide (notional amount, interest rate
reset dates, maturity/expiration date and underlying index) and the hedge is
expected to exactly offset changes in expected cash flows due to fluctuations in
the LIBOR Base Rate over the term of the loan. Accordingly, this swap qualifies
for the short-cut method and therefore changes in the fair value of the swap
will be recorded directly in the other comprehensive income. The fair value of
the interest rate swap at March 31, 2006 is $47,000 which is included in other
current assets on the balance sheet with the offset reflected within other
comprehensive income, net of tax.

G. INVENTORIES

Inventories are stated at the lower of cost or market value. At March 31,
2006, inventories were valued by two methods: last-in, first-out ("LIFO") - 52%,
and first-in, first-out ("FIFO") - 48%. At December 31, 2005, inventories were
valued by the same two methods: LIFO - 52%, and FIFO - 48%.

March 31, December 31,
2006 2005
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(in thousands)
Raw materials..................................... $ 2,707 $ 2,817
Work in process................................... 2,307 2,232
Finished goods.................................... 2,236 1,996
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Total Inventories............................... $ 7,250 $ 7,045
======== ========

Current costs exceed LIFO value of inventories by $1,110,000 and $1,075,000
at March 31, 2006 and December 31, 2005, respectively.

H. NOTES PAYABLE TO BANKS AND LONG-TERM DEBT

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

March 31, December 31,
2006 2005
---- ----
Notes Payable: (in Thousands)
Mtron bank revolving loan (First National Bank of Omaha) at variable interest
rates (greater of prime or 4.5%; 7.75% at March 31, 2006), due May 2006 $ 1,625 $ 2,082
Lynch Systems working capital revolving loan (BB&T) at variable interest rates,
(One Month LIBOR + 2.75%; 7.39% at March 31, 2006), due October 2006 756 756
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$ 2,381 $ 2,838
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Long-term debt:
Lynch Systems term loan (SunTrust), repaid in February 2006 $ - $ 378
Mtron term loan (RBC) due October 2010. The Company entered into a five-year
interest rate swap to hedge the variable interest rate volatility. Under
the terms of the interest rate swap the variable interest Term Loan will be
essentially converted to a 7.51% fixed rate loan 3,013 3,030
Mtron term loan (First National Bank of Omaha) at variable interest rates
(greater of prime plus 50 basis points or 4.5%; 8.00% at March 31, 2006),
due October 2007 1,531 1,612
Mtron commercial bank term loan at variable interest rates (8.00% at March 31,
2006), due April 2007 398 456
South Dakota Board of Economic Development at a fixed rate of 3%, due December
2007 259 262
Yankton Areawide Business Council loan at a fixed interest rate of 5.5%, due
November 2007 72 74
Rice University Promissory Note at a fixed interest rate of 4.5%, due August
2009 258 275
Smythe Estate Promissory Note at a fixed interest rate of 4.5% due August 2009 149 159
------- -------
5,680 6,246
Current maturities (845) (1,215)
------- -------
$ 4,835 $ 5,031
======= =======

Lynch Systems and Mtron/PTI maintain their own short-term line of credit
facilities. 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. The Lynch
Systems credit facility includes an unsecured parent Company guarantee.
Mtron/PTI's credit facility includes an unsecured parent Company guarantee and
is supported by a $650,000 Letter of Credit that is secured by a $650,000
deposit at Bank of America.

The Company is in compliance with all financial covenants at March 31,
2006.

On June 30, 2005, Mtron/PTI renewed its credit agreement with First
National Bank of Omaha extending the due date to May 31, 2006. At March 31,
2006, Mtron/PTI's short-term credit facility provides for a line of credit in
the maximum principal amount of $5,500,000, of which $3,725,000 was available
under the line of credit.

Effective October 6, 2005, Lynch Systems entered into a loan agreement (the
"BB&T Loan Agreement") with Branch Banking and Trust Company ("BB&T"). The BB&T
Loan Agreement provides for a line of credit in the maximum principal amount of
$3,500,000. At March 31, 2006, there were no outstanding Letters of Credit and
$2,744,000 was available under the line of credit. This line of credit replaces
the working capital revolving loan that Lynch Systems had with SunTrust Bank,
which loan expired by its terms on September 30, 2005. Borrowings under the BB&T
Loan Agreement bear interest at the One Month LIBOR Rate plus 2.75% and accrued

interest is payable on a monthly basis, with the principal balance due to be
paid on the first anniversary of the Loan Agreement.

The BB&T Loan Agreement contains a variety of affirmative and negative
covenants of types customary in an asset-based lending facility, including those
relating to reporting requirements, maintenance of records, properties and
corporate existence, compliance with laws, incurrence of other indebtedness and
liens, restrictions on certain payments and transactions and extraordinary
corporate events. The BB&T Loan Agreement also contains financial covenants
relating to maintenance of levels of minimal tangible net worth, a debt to worth
ratio, and restricting the amount of capital expenditures. In addition, the BB&T
Loan Agreement provides that the following will constitute events of default
thereunder, subject to certain grace periods: (i) payment defaults; (ii) failure
to meet reporting requirements; (iii) breach of other obligations under the BB&T
Loan Agreement; (iv) default with respect to other material indebtedness; (v)
final judgment for a material amount not discharged or stayed; and (vi)
bankruptcy or insolvency.

During 2005, the Company executed various amendments and extensions with
one of Lynch Systems' commercial lenders, SunTrust. As a result, certain
required repayments were made on amounts owed to SunTrust, and the expiring
working capital loan was not renewed. Additionally it was agreed that the
Company's remaining obligation to SunTrust, a $378,000 term note would be
payable on March 1, 2006. This amount was repaid in full in February 2006.

On September 30, 2005, Mtron/PTI entered into a Loan Agreement with RBC
Centura Bank ("RBC"). The Loan Agreement provides for a loan in the amount of
$3,040,000 (the "RBC Term Loan"), the proceeds of which were used to pay off the
$3,000,000 bridge loan with First National Bank of Omaha which had been due
October 2005. The RBC Term Loan bears interest at LIBOR Base Rate plus 2.75% and
is to be repaid in monthly installments based on a twenty year amortization,
with the then remaining principal balance to be paid on the fifth anniversary.
The RBC Term Loan is secured by a mortgage on PTI's premises. In connection with
this RBC Term Loan, Mtron/PTI entered into a five-year interest rate swap to
hedge the variable interest rate volatility. Under the terms of the interest
rate swap, the variable interest rate RBC Term Loan will be essentially
converted to a 7.51% fixed rate loan. The Company has designated this swap as a
cash flow hedge in accordance with FASB 133 "Accounting for Derivative
Instruments and Hedging Activities". The fair value of the interest rate swap at
March 31, 2006 is $47,000 which is included in other current assets on the
balance sheet with the offset reflected within other comprehensive income, net
of tax.

In connection with the completion of the acquisition of PTI, on October 14,
2004, Mtron and PTI, each wholly-owned subsidiaries of Lynch Corporation,
entered into a Loan Agreement with First National Bank of Omaha. The Loan
Agreement provided for loans in the amounts of $2,000,000 (the "Term Loan") and
$3,000,000 (the "Bridge Loan"), together with a $5,500,000 Revolving Line of
Credit (the "Revolving Loan"). The Term Loan bears interest at the greater of
prime rate plus 50 basis points, or 4.5%, and is to be repaid in monthly
installments of $37,514, with the then remaining principal balance plus accrued
interest to be paid on the third anniversary of the Loan Agreement. The Bridge
Loan was repaid in 2005 from proceeds received from the RBC Term Loan. The
Revolving Loan was renewed on June 30, 2005 as previously discussed. The Loan
Agreement contains a variety of affirmative and negative covenants of types
customary in an asset-based lending facility. The Loan Agreement also contains
financial covenants relating to maintenance of levels of minimal tangible net
worth and working capital, and current, leverage and fixed charge ratios,
restricting the amount of capital expenditures.

The Company has guaranteed a letter of credit issued to the First National
Bank of Omaha on behalf of its subsidiary, Mtron Industries, Inc. As of March
31, 2006, the $650,000 letter of credit issued by Bank of America to The First
National Bank of Omaha was secured by a $650,000 deposit at Bank of America.

Both Mtron/PTI and Lynch Systems intend to renew the credit agreements that
expire on May 31 and October 1, 2006, respectively, with their incumbent
lenders.

I. LONG-TERM CONTRACTS AND WARRANTY EXPENSE

Lynch Systems, a 100% wholly-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 or (iii) negotiated terms of sale. 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 March 31,
2006 and December 31, 2005, unbilled accounts receivable were $1,880,000 and
$902,000, respectively.

Lynch Systems provides a full warranty to world-wide 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.
(in thousands)
Balance, December 31, 2005................................. $ 357
Warranties issued during the period........................ 49
Settlements made during the period......................... (41)
-------
Balance, March 31, 2006...................................... $ 365
=======

J. EARNINGS PER SHARE AND STOCKHOLDERS' EQUITY

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

Prior to January 1, 2006, the Company accounted for 2001 Equity Incentive
Plan ("the Plan") under the recognition and measurement principles of APB
Opinion No. 25, "Accounting for Stock Issued to Employees," and related
Interpretations. No stock-based employee compensation cost was 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 provided pro forma disclosures of the compensation expense determined
under the fair value provisions of SFAS No. 123, "Accounting for Stock-Based
Compensation."

On May 26, 2005, the Company's shareholders approved amendments to the Plan
to increase the total number of shares of the Company's Common Stock available
for issuance from 300,000 to 600,000 shares and to add provisions that require
terms and conditions of awards to comply with section 409A of the Internal
Revenue Code of 1986. Also on May 26, 2005, the Company granted options to
purchase 120,000 shares of Company common stock to certain employees and
directors of the Company at $13.17 per share. These options were anti-dilutive
and have lives of up to ten years. As of March 31, 2006 and December 31, 2005,
options to purchase 300,000 shares are outstanding and fully vested.

For purposes of pro forma disclosures under SFAS No. 123, the estimated
fair value of the options is amortized to expense over the options' vesting
period. The Company's pro forma information follows:

Three Months
Ended
March 31, 2005
(in thousands)
----------------
Net income as reported ...................................................... $ 50
Deduct: Total stock based employee compensation expense determined under
fair value based method for all awards, net of related tax effect ......... -
------
Pro-forma net income ........................................................ $ 50
======
Basic & diluted income per share:
As reported ................................................................. $ 0.03
Pro forma ................................................................... $ 0.03

The net income as reported in each period did not include any stock-based
compensation.

K. ACCUMULATED OTHER COMPREHENSIVE INCOME

Total comprehensive income was $1,149,000 in the three months ended March
31, 2006, compared to total comprehensive income of $493,000 in the three months
ended March 31, 2005. Included in total comprehensive income were unrealized
gains on available for sale securities of $724,000 and $422,000 in the three
months ended March 31, 2006 and 2005, respectively.

Three Months Ended
March 31,
-----------------------
2006 2005
----------- ----------

Net income as reported................................. $ 366 $ 50
Foreign currency translation........................... 12 21
Deferred gain on hedge contract........................ 47 -
Unrealized gain on available for sale securities....... 724 422
-------- --------
Total comprehensive income............................. $ 1,149 $ 493
======== ========

The components of accumulated other comprehensive income, net of related
tax, at March 31, 2006, December 31, 2005, and March 31, 2005 are as follows:

March 31, December 31, March 31,
2006 2005 2005
--------------- ---------------- -------------

Balance beginning of period..................................... $ 835 $ 849 $ 849
Foreign currency translation.................................... 12 75 21
Deferred gain (loss) on hedge contract ......................... 47 (1) -
Unrealized gain on available for-sale securities................ 724 (88) 422
------ ------- -------
Accumulated other comprehensive income.......................... $ 1,618 $ 835 $ 1,292
======= ======= =======

L. SEGMENT INFORMATION

The Company has two reportable business segments: 1) glass manufacturing
equipment business, which represents the operations of Lynch Systems, and 2)
frequency control devices (quartz crystals and oscillators) which represents
products manufactured and sold by Mtron/PTI. The Company's foreign operations in
Hong Kong and India are under the control of Mtron/PTI.

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 $125,000 in the three months ending
March 31, 2006 and 2005, respectively. Identifiable assets of each industry
segment are the assets used by the segment in its operations excluding general
corporate assets. General corporate assets are principally cash and cash
equivalents, short-term investments and certain other investments and
receivables.

Three Months Ended
March 31,
---------------------
2006 2005
--------- ----------
REVENUES
Glass manufacturing equipment - USA $ 530 $ 450
Glass manufacturing equipment - Foreign 1,813 1,761
-------- --------
Total Glass manufacturing equipment 2,343 2,211

Frequency control devices - USA 4,890 4,854
Frequency control devices - Foreign 4,858 3,530
-------- --------
Total Frequency control devices 9,748 8,384
-------- --------
Consolidated total revenues $ 12,091 $ 10,595
======== ========

OPERATING PROFIT (LOSS)
Glass manufacturing equipment $ (260) $ 74
Frequency control devices 975 579
-------- --------
Total manufacturing 715 653

Unallocated Corporate expense (329) (426)
-------- --------
Consolidated total operating profit $ 386 $ 227
======== ========

OTHER PROFIT (LOSS)
Investment income $ 235 $ 10
Interest expense
(163) (185)
Other (expense) income (8) 3
-------- --------
Consolidated total profit before taxes $ 450 $ 55
======== ========

CAPITAL EXPENDITURES
Glass manufacturing equipment $ -- $ 12
Frequency control devices 53 18
General Corporate -- 1
-------- --------
Consolidated total capital expenditures $ 53 $ 31
======== ========

TOTAL ASSETS
Glass manufacturing equipment $ 8,663 $ 11,613
Frequency control devices 17,656 17,281
General Corporate 5,954 5,510
-------- --------
Consolidated total assets $ 32,273 $ 34,404
======== ========

For the three months ended March 31, 2006 and 2005, significant foreign
revenues to specific countries were as follows:

Three Months Ended
March 31,
2006 2005
----------- ----------
Glass manufacturing equipment - Foreign Revenues
Brazil $ 623 $ -
Democratic Republic of the Congo 385 -
China 198 -
Pakistan 187 -
Indonesia - 1,161
All other foreign countries 420 600
----------- ----------
Total foreign revenues $ 1,813 $ 1,761

Three Months Ended
March 31,
2006 2005
----------- ----------
Frequency control devices - Foreign Revenues
China $ 1,083 $ 528
Canada 1,000 862
Thailand 531 -
Mexico - 477
All other foreign countries 2,244 1,663
----------- ----------
Total foreign revenues $ 4,858 $ 3,530

All other foreign countries includes countries with less than 10% of total
foreign revenues for each segment.

M. 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 adverse effect on
the Company's financial condition or operations. In addition, the Company and/or
one or more of its subsidiaries are parties to the following additional legal
proceedings:

QUI TAM LAWSUIT

Treasury by improperly participating in Federal Communications Commission
("FCC") spectrum auctions restricted to small businesses, as well as obtaining
"bidding credits" in other spectrum auctions allocated to "small" and "very
small" businesses. While the lawsuit seeks to recover an unspecified amount of
damages, which would be subject to mandatory trebling under the statute, a
report prepared for the relator (the private party who filed the action on
behalf of the United States) in February 2005 alleges damages of approximately
$91,000,000 in respect of "bidding credits", approximately $70,000,000 in
respect of government "financing" and approximately $206,000,000 in respect of
subsequent resales of licenses, in each case prior to trebling. The liability is
alleged to be joint and several. In September 2003, the court granted Lynch
Interactive's motion to transfer the action to the Southern District of New
York.

In September 2004, the court issued a ruling denying defendants' motion to
refer the issues in the action to the FCC. In December 2004, the defendants
filed a motion in the United States District Court in the District of Columbia
asking that court to compel the FCC to provide information subpoenaed by them to
enable them to conduct their defense. This motion was denied in May 2005, and
the defendants appealed. In November 2005, the court ruled that damages based on
profits from resales of licenses were not allowed under the False Claims Act. In
February 2006, the defendants and the FCC reached an agreement granting
defendants discovery of certain documents and other evidentiary materials.

Initially, in 2001, the Department of Justice notified the court that it
would not intervene in the case. In March 2005, however, in response to the
judge's ruling in November 2005 (described above), the DOJ petitioned the court
to allow it to intervene. The case had been tentatively scheduled for trial in
June 2006 but the trial may be delayed due to the government's intervention and
related issues. While Lynch Interactive and other defendants believe they have
meritorious defenses and have contested the case vigorously, Lynch Interactive
and the other defendants are involved in serious settlement negotiations in
order to avoid the further costs and uncertainties associated with a trial and
possible subsequent appeals. It is anticipated that any such settlement would
have a substantial adverse effect on Lynch Interactive and its consolidated
financial statements. While Lynch Interactive believes that it could raise
additional debt and/or equity and that it could also sell assets to satisfy such
a potential settlement, there is no assurance that such a plan could be
accomplished. Under the separation agreement between the Company and Lynch
Interactive pursuant to which Lynch Interactive was spun-off to the Company's
shareholders on September 1, 1999, Lynch Interactive would be obligated to
indemnify the Company for any losses or damaged incurred by the Company as a
result of this action. Lynch Interactive has agreed in writing to defend the
case on the Company's behalf and to indemnify the Company for any losses it may
incur. 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.

N. INCOME TAXES

The Company files consolidated federal income tax returns, which includes
all subsidiaries. The Company has a $1,954,000 net operating loss ("NOL")
carry-forward as of March 31, 2006. This NOL expires through 2024 if not
utilized prior to that date.

O. GUARANTEES

The Company presently guarantees (unsecured) the SunTrust Bank loans of its
subsidiary, Lynch Systems. The Company presently guarantees (unsecured) the
First National Bank of Omaha loans of its subsidiary, Mtron, and has guaranteed
a Letter of Credit issued to the First National Bank of Omaha on behalf of its
subsidiary, Mtron (see Note H - "Notes Payable to Banks and Long-term Debt"). As
of March 31, 2006, the $650,000 Letter of Credit issued by Bank of America to
The First National Bank of Omaha was secured by a $650,000 deposit at Bank of
America. (See Note E - "Restricted Cash".)

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

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.

CRITICAL ACCOUNTING POLICIES

The Company has identified the accounting policies listed below that we
believe are most critical to our financial condition and results of operations,
and that require management's most difficult, subjective and complex judgments
in estimating the effect of inherent uncertainties. This section should be read
in conjunction with Note 1 to the Consolidated Financial Statements, included in
the Company's Annual Report on Form 10-K for the year ended December 31, 2005,
which includes other significant accounting policies.

ACCOUNTS RECEIVABLE

Accounts receivable on a consolidated basis consists 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. 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.

We maintain 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 was 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 52% of
consolidated inventories at March 31, 2006 and December 31, 2005, respectively.
The balance of inventories are valued using the first-in-first-out (FIFO)
method. If actual market conditions are more or less favorable than those
projected by management, including the demand for our products, changes in
technology, internal labor costs and the costs of materials, 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; or (iii) negotiated terms of sale. 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 March 31,
2006, and December 31, 2005, unbilled accounts receivable were $1,880,000 and
$902,000 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.
These estimates include current customer contract specifications, related
engineering requirements and the achievement of project milestones. 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.
Favorable changes in estimates result in additional profit recognition, while
unfavorable changes in estimates result in the reversal of previously recognized
earnings to the extent of the error of the estimate. 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

RESULTS OF OPERATIONS
FIRST QUARTER
THREE MONTHS ENDED MARCH 31, 2006 COMPARED TO MARCH 31, 2005

CONSOLIDATED REVENUES AND GROSS MARGIN

Consolidated revenues for the first quarter 2006 increased $1,496,000, or
14%, to $12,091,000 from $10,595,000 for the comparable period in 2005. The
increase is attributable to both Mtron/PTI and Lynch Systems.

Revenues at Mtron/PTI increased by $1,364,000, or 16%, to $9,748,000 for
the first quarter 2006 from $8,384,000 for the comparable period in 2005. The
increase was primarily due to higher international revenues resulting from an
improved business environment.

Revenues at Lynch Systems increased by $132,000, or 6%, to $2,343,000 for
the first quarter 2006 from $2,211,000 for the comparable period in 2005. The
increase was primarily due to an increase in machine part sales.

The consolidated gross margin as a percentage of revenues for the first
quarter decreased slightly to 29.3%, from 30.9% for the comparable period in
2005. Mtron/PTI experienced slightly higher margins and Lynch Systems
experienced lower margins as compared to 2005.

Mtron/PTI's gross margin as a percentage of revenues for the first quarter,
increased to 30.8% from 29.8% for the comparable period in 2005. The improved
gross margin resulted from operational efficiencies.

Lynch Systems' gross margin as a percentage of revenues for the first
quarter, decreased to 23.4% from 35.1% for the comparable period in 2005. The
lower margin was primarily due to higher margin sales of CRT machines in the
first quarter of 2005.

OPERATING PROFIT (LOSS)

Operating profit was $386,000 for the first quarter 2006 compared to
$227,000 for the comparable period in 2005.

The operating profit at Mtron/PTI increased $396,000 to $975,000 for the
first quarter 2006 from $579,000 for the comparable period in 2005. The
operating profit improvement was primarily due to increased revenues and a
slight improvement in gross margin.

The operating loss at Lynch Systems increased $334,000 to an operating loss
of $260,000 for the first quarter 2006 from an operating profit of $74,000 for
the comparable period in 2005. The operating loss primarily resulted from lower
gross margins for the first quarter 2006.

Corporate expenses decreased $97,000 to $329,000 for the first quarter 2006
from $426,000 for the comparable period in 2005. The decline was primarily due
to lower professional fees.

OTHER INCOME (EXPENSE), NET

Investment income increased $225,000 to $235,000 for the first quarter 2006
from $10,000 for the comparable period in 2005 due to a $202,000 realized gain
on sale of marketable securities.

Interest expense decreased $22,000 to $163,000 for the first quarter 2006
from $185,000 for the comparable period in 2005, primarily due to a decrease in
debt outstanding which was partially offset by higher interest rates.

Other expense was $8,000 for the first quarter 2006 compared to other
income of $3,000 for the comparable period in 2005.

INCOME TAXES

The Company files consolidated federal income tax returns, which includes
all subsidiaries. The income tax expense for the three month period ended March
31, 2006 included federal, state and foreign taxes.

NET INCOME

Net income for the first quarter 2006 was $366,000 compared to net income
of $50,000 in the comparable period in 2005. As a result, for the first quarter
2006, fully diluted income per share was $0.17 compared to income of $0.03 per
share for the comparable period in 2005.

BACKLOG/NEW ORDERS

Total backlog of manufactured products at March 31, 2006 was $14,636,000, a
$776,000 increase compared to the backlog at December 31, 2005, and a $3,475,000
decline from the backlog at March 31, 2005.

Mtron/PTI had backlog orders of $9,660,000 at March 31, 2006 compared to
$8,906,000 at December 31, 2005 and $8,045,000 at March 31, 2005. Backlog
increased $754,000 from December 31, 2005 and increased $1,615,000 from March
31, 2005.

Lynch Systems had backlog orders of $4,976,000 at March 31, 2006 compared
to $4,954,000 at December 31, 2005 and $10,066,000 at March 31, 2005. Backlog
increased $22,000 from December 2005 and decreased $5,090,000 from March 31,
2005 due to the shipment of large CRT machines in 2005. At March 31, 2006 the
backlog of $4,976,000 comprised glass press machine orders and parts and did not
contain any CRT machine orders.

FINANCIAL CONDITION

The Company's cash, cash equivalents and investments in marketable
securities at March 31, 2006 was $7,357,000 (including $650,000 of restricted
cash) as compared to $8,900,000 at December 31, 2005. In addition, the Company
had a borrowing capacity of $6,469,000 under Lynch Systems' and Mtron/PTI's
revolving lines of credit at March 31, 2006, as compared to $5,327,000 at
December 31, 2005.

At March 31, 2006, the Company's net working capital was $13,159,000 as
compared to $11,925,000 at December 31, 2005. At March 31, 2006, the Company had
current assets of $24,760,000 and current liabilities of $11,601,000. At
December 31, 2005, the Company had current assets of $24,870,000 and current
liabilities of $12,945,000. The ratio of current assets to current liabilities
was 2.13 to 1.00 at March 31, 2006, compared to 1.92 to 1.00 at December 31,

2005. The increase in net working capital was primarily due to realized and
unrealized gains on marketable securities and improved operating results.

Cash used in operating activities was $1,122,000 for the three months ended
March 31, 2006, compared to cash provided by operating activities of $57,000 for
the three months ended March 31, 2005. The year to year unfavorable change in
operating cash flow of $1,179,000 was primarily due to payments relating to a
litigation settlement in the first quarter 2006 and net changes in receivables.
The Company and United Steelworkers of America Local 1069, formerly known as
PACE Local 1-1069 reached a settlement of their severance pay litigation, which
arose out of the July 2001 closure of the Spinnaker-Maine manufacturing plant in
Westbrook, Maine. The settlement includes payment of a total of $800,000 to
resolve the claims of 67 workers who lost their jobs in 2001. Capital
expenditures were $53,000 in the three months ended March 31, 2006, compared to
$31,000 for the comparable period in 2005.

At March 31, 2006, the Company had $2,381,000 in notes payable to banks
consisting of a revolving credit loan at Mtron/PTI for $1,625,000 due in May,
2006 and a working capital revolver at Lynch Systems for $756,000 due in
October, 2006. The Company intends to renew these facilities with the existing
banks, however, there can be no assurances the existing facilities will be
renewed. At March 31, 2006, the Company also had $845,000 in current maturities
of long-term debt. The Company believes that existing cash and cash equivalents,
cash generated from operations and available borrowings under its subsidiaries'
lines of credit, including the proposed renewals, will be sufficient to meet its
ongoing working capital and capital expenditure requirements for the foreseeable
future.

At March 31, 2006, total debt of $8,061,000 was $1,023,000 less than the
total debt at December 31, 2005 of $9,084,000. The debt decreased at both
Mtron/PTI and Lynch Systems due to repayments of revolving debt, repayment of
the SunTrust term loan and scheduled payments on long term debt. Debt
outstanding at March 31, 2006 effectively included $3,751,000 of fixed rate debt
at a quarter-end average interest rate of 6.8%, and $4,310,000 of variable rate
debt at a quarter-end average interest rate of 7.8%.

The Company is in compliance with all financial covenants at March 31,
2006.

The Company has guaranteed a letter of credit issued to the First National
Bank of Omaha on behalf of its subsidiary, Mtron. As of March 31, 2006, the
$650,000 letter of credit issued by Bank of America to The First National Bank
of Omaha was secured by a $650,000 deposit at Bank of America. As of December
31, 2005, the Company has a total of $2,500,000 of subordinated promissory notes
issued from Mtron/PTI.

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 2006. (See Note H to the Consolidated Financial Statements - "Notes Payable
to Banks and Long-term Debts" - for restrictions on the company's assets).

RIGHTS OFFERING

In December 2005, the Company completed its rights offering. The fully
subscribed rights offering resulted in the issuance of 538,676 additional shares
of common stock for proceeds to the Company of approximately $3,655,000, net of
$250,000 in fees. The offering granted holders of the Company's common stock
transferable subscription rights to purchase shares of the Company's common
stock at a subscription price of $7.25 per share.

Under the terms of the offering, holders of the Company's common stock were
entitled to one transferable subscription right for each share of common stock
held on the record date, November 9, 2005. Every three such rights entitled the
shareholder to subscribe for one common share at a subscription price of $7.25
per share. The rights were transferable and contained an oversubscription
privilege.

ADOPTION OF ACCOUNTING PRONOUNCEMENTS

On January 1, 2006 the Company adopted SFAS No. 123-R, "Share-Based
Payments." SFAS No. 123-R impacts the Company's accounting for its stock option
plan. Because all of the Company's stock options were fully vested at December

31, 2005 and there were no new options issued in the first quarter of 2006,
there was no impact on the Company's 2006 financial statements from the adoption
of this standard.

OFF-BALANCE SHEET ARRANGEMENTS

Aside from the Company's stand-by Letter of Credit in the amount of
$650,000, the Company does not have any off-balance sheet arrangements.

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.

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.

For a complete list of risk factors, see the Company's Annual Report on
Form 10-K for the year ended December 31, 2005.

FORWARD LOOKING INFORMATION

Included in this Management Discussion and Analysis of Financial Condition
and Results of Operations are certain forward looking financial and other
information, including without limitation matters relating to "Risks". It should
be recognized that such information are projections, estimates or forecasts
based on various assumptions, including without limitation, meeting its
assumptions regarding expected operating performance and other matters
specifically set forth, as well as the expected performance of the economy as it
impacts the Company's businesses, government and regulatory actions and
approvals, and tax consequences, and the risk factors and cautionary statements
set forth in reports filed by the Company with the Securities and Exchange
Commission. As a result, such information is subject to uncertainties, risks and
inaccuracies, which could be material.

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, whose
internet address is WWW.LYNCHCORP.COM.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT 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 and cash equivalents and restricted cash
(approximately $4,115,000 at March 31, 2006). The Company generally finances the
debt portion of the acquisition of long-term assets with fixed and variable
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, 2005.

As the Company's international sales are in U.S. Dollars, there is no
associated monetary risk.

At March 31, 2006, $4,310,000 of the Company's debt effectively bears
interest at variable rates. Accordingly, the Company's earnings and cash flows
are affected by changes in interest rates. In October 2005, in connection with
the RBC Term Loan, Mtron/PTI entered into a five-year interest rate swap from
which it will receive periodic payments at the LIBOR Base Rate and make periodic
payments at a fixed rate of 7.51% with monthly settlement and rate reset dates,
effectively reducing the variable rate debt to $4,310,000, from $7,323,000.

ITEM 4. CONTROLS AND PROCEDURES

The principal executive officer and principal 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 has 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.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

QUI TAM LAWSUIT

The Company, Lynch Interactive and numerous other parties have been named
as defendants in a lawsuit originally 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 in February
2001, and the seal was lifted at the initiative of one of the defendants in
January 2002. The Company was formally served with the complaint in July 2002.
The main allegation in the case is that the defendants participated in the
creation of "sham" bidding entities that allegedly defrauded the United States
Treasury by improperly participating in Federal Communications Commission
("FCC") spectrum auctions restricted to small businesses, as well as obtaining
"bidding credits" in other spectrum auctions allocated to "small" and "very
small" businesses. While the lawsuit seeks to recover an unspecified amount of
damages, which would be subject to mandatory trebling under the statute, a
report prepared for the relator (the private party who filed the action on
behalf of the United States) in February 2005 alleges damages of approximately
$91,000,000 in respect of "bidding credits", approximately $70,000,000 in
respect of government "financing" and approximately $206,000,000 in respect of
subsequent resales of licenses, in each case prior to trebling. The liability is
alleged to be joint and several. In September 2003, the court granted Lynch
Interactive's motion to transfer the action to the Southern District of New
York.

Initially, in 2001, the Department of Justice notified the court that it would
not intervene in the case. In March 2005, however, in response to the judge's
ruling in November 2005 (described above), the DOJ petitioned the court to allow
it to intervene. The case had been tentatively scheduled for trial in June 2006
but the trial may be delayed due to the government's intervention and related
issues. While Lynch Interactive and other defendants believe they have
meritorious defenses and have contested the case vigorously, Lynch Interactive
and the other defendants are involved in serious settlement negotiations in
order to avoid the further costs and uncertainties associated with a trial and
possible subsequent appeals. It is anticipated that any such settlement would
have a substantial adverse effect on Lynch Interactive and its consolidated
financial statements. While Lynch Interactive believes that it could raise
additional debt and/or equity and that it could also sell assets to satisfy such
a potential settlement, there is no assurance that such a plan could be
accomplished. Under the separation agreement between the Company and Lynch
Interactive pursuant to which Lynch Interactive was spun-off to the Company's
shareholders on September 1, 1999, Lynch Interactive would be obligated to
indemnify the Company for any losses or damaged incurred by the Company as a
result of this action. Lynch Interactive has agreed in writing to defend the
case on the Company's behalf and to indemnify the Company for any losses it may
incur. 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 6. EXHIBITS

Exhibits filed herewith:

31(a)* Certification by Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

31(b)* Certification by Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

32(a)* Certification by Principal Executive Officer and Principal Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

SIGNATURES

Pursuant to the requirements of the Securities and Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

LYNCH CORPORATION
(Registrant)

May 11, 2006 By: /s/ Eugene Hynes
-----------------------------
Eugene Hynes
Principal Financial Officer

EXHIBIT INDEX

Exhibit
No. Description
-------- -----------
31(a)* Certification by Principal Executive Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

31(b)* Certification by Principal Financial Officer pursuant to Section 302
of the Sarbanes-Oxley Act of 2002.

32(a)* Certification by Principal Executive Officer and Principal Financial
Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

* filed herewith

The Exhibits listed above have been filed separately with the Securities
and Exchange Commission in conjunction with this Quarterly Report on Form 10-Q
or have been incorporated by reference into this Quarterly Report on Form 10-Q.
Upon request, Lynch Corporation will furnish to each of its shareholders a copy
of any such Exhibit. Requests should be addressed to the Office of the
Secretary, Lynch Corporation, 140 Greenwich Avenue, 4th Floor, Greenwich CT
06830.