<PAGE>

                UNITED STATES SECURITIES AND 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 December 31, 1996
                               -----------------

                                       OR

    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the transition period from                to
                               --------------    -------------
Commission file number 2-22791
                       -------

                                   AGWAY INC.
--------------------------------------------------------------------------------
             (Exact name of registrant as specified in its charter)


DELAWARE                                                             15-0277720
--------------------------------------------------------------------------------
(State or other jurisdiction of                                (I.R.S. Employer
incorporation or organization)                              Identification No.)


333 Butternut Drive, DeWitt, New York                                     13214
--------------------------------------------------------------------------------
(Address of principal executive offices)                             (Zip Code)


                                  315-449-6431
--------------------------------------------------------------------------------
              (Registrant's telephone number, including area code)




Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days.
Yes X   No
    --    --
Indicate the number of shares  outstanding  of each of the  issuer's  classes of
common stock, as of the latest practicable date.



        Class                                Outstanding at January 31, 1997
------------------------                     -------------------------------
Membership Common Stock,                              106,730  shares
$25 par value per share



                                        1

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

                                      INDEX
<TABLE>
<CAPTION>


                                                                                                             PAGE NO.
                                                                                                             --------
<S>        <C>                                                                                                      <C>
PART I.    FINANCIAL INFORMATION
-------    ---------------------

           Item 1.  Financial Statements (Unaudited)

           Condensed Consolidated Balance Sheets as of December 31, 1996 and June 30, 1996........................  3

           Condensed Consolidated Statements of Operations and Retained Margin for the three months
           and six months ended December 31, 1996 and December 31, 1995...........................................  4

           Condensed Consolidated Cash Flow Statements for the six months ended December 31, 1996
           and December 31, 1995..................................................................................  5

           Notes to Condensed Consolidated Financial Statements...................................................  6

           Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations........  11


PART II.   OTHER INFORMATION
--------   -----------------

           Item 4.  Submission of Matters to a Vote of Security Holders..........................................  16

           Item 6.  Exhibits and Reports on Form 8-K.............................................................  16


           SIGNATURES............................................................................................  17

</TABLE>













                                        2

<PAGE>



                          PART I. FINANCIAL INFORMATION
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Thousands of Dollars)
<TABLE>
<CAPTION>

                                                                    December 31,    June 30,
                                                                       1996          1996   
                                                                    ----------   ----------                        
ASSETS                                                              (Unaudited)
------                                                              
<S>                                                                 <C>          <C> 
Current Assets:
     Trade accounts receivable (including notes receivable of
       $25,882 and $35,182, respectively), less allowance for
       doubtful accounts of $9,575 and $10,062, respectively ....   $  159,287   $  207,327
     Leases receivable, less unearned income of $51,402 and
       $48,403, respectively ....................................      113,064      105,374
     Advances and other receivables .............................       38,657       35,900
     Inventories:
       Raw materials ............................................       19,300       16,161
       Finished goods ...........................................      168,402      128,770
       Goods in transit and supplies ............................       15,971       15,028
                                                                    ----------   ----------
         Total inventories ......................................      203,673      159,959
     Prepaid expenses ...........................................       49,797       57,551
                                                                    ----------   ----------
         Total current assets ...................................      564,478      566,111

Marketable securities available for sale ........................       35,679       34,115
Other security investments ......................................       44,483       42,406
Properties and equipment, net ...................................      219,996      237,015
Long-term leases receivable, less unearned income of
  $79,092 and $75,828, respectively .............................      280,813      268,815
Net pension asset ...............................................       91,680       84,757
Other assets ....................................................       10,825       12,672
                                                                    ----------   ----------
         Total assets ...........................................   $1,247,954   $1,245,891
                                                                    ==========   ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
     Notes payable ..............................................   $   94,600   $   62,200
     Current installments of long-term debt and subordinated debt      167,257      108,896
     Accounts payable ...........................................      113,368      116,519
     Other current liabilities ..................................      105,145      121,046
                                                                    ----------   ----------
         Total current liabilities ..............................      480,370      408,661

Long-term debt ..................................................      172,052      197,413
Subordinated debt ...............................................      373,328      400,284
Other liabilities ...............................................       68,619       66,811
                                                                    ----------   ----------
     Total liabilities ..........................................    1,094,369    1,073,169
Shareholders' equity:
  Preferred stock, net ..........................................       59,324       59,319
  Common stock, net .............................................        2,671        2,689
  Retained margin ...............................................       91,590      110,714
                                                                    ----------   ----------
     Total shareholders' equity .................................      153,585      172,722
Commitments and contingencies
         Total liabilities and shareholders' equity .............   $1,247,954   $1,245,891
                                                                    ==========   ==========
</TABLE>






     See accompanying notes to condensed consolidated financial statements.

                                        3

<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
       CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED MARGIN
                                   (Unaudited)
                             (Thousands of Dollars)
<TABLE>
<CAPTION>

                                            Three Months Ended         Six Months Ended
                                                December 31,             December 31,
                                          ----------------------    ----------------------
                                             1996         1995         1996         1995
                                          ---------    ---------    ---------    ---------
<S>                                       <C>          <C>          <C>          <C> 
Net sales and revenues from:
     Product sales ....................   $ 353,580    $ 347,637    $ 686,758    $ 654,090
     Leasing operations ...............      13,813       11,830       26,775       23,044
     Insurance operations .............       6,456        5,973       12,500       12,859
                                          ---------    ---------    ---------    ---------
         Total net sales and revenues .     373,849      365,440      726,033      689,993

Cost and expenses from:
     Products and plant operations ....     335,251      322,821      654,032      613,199
     Leasing operations ...............       5,981        5,159       11,937       10,416
     Insurance operations .............       4,035        8,020        7,987       12,811
     Selling, general and
       administrative activities ......      30,623       32,356       63,552       65,553
                                          ---------    ---------    ---------    ---------
         Total costs and expenses .....     375,890      368,356      737,508      701,979

Operating loss ........................      (2,041)      (2,916)     (11,475)     (11,986)
Interest expense, net .................       8,030        7,538       14,589       14,460
Other income, net .....................       3,135        5,950        4,108        7,953
                                          ---------    ---------    ---------    ---------
Loss from continuing operations
     before income taxes ..............      (6,936)      (4,504)     (21,956)     (18,493)
Income tax (benefit) expense ..........        (292)         424       (4,457)      (3,103)
                                          ---------    ---------    ---------    ---------
Loss from continuing operations .......      (6,644)      (4,928)     (17,499)     (15,390)

Discontinued operations:
     Gain on disposal of Hood,
     net of tax expense of $1,585
     and $1,624, respectively .........                    2,284                     2,017
                                          ---------    ---------    ---------    ---------
Net loss ..............................   $  (6,644)   $  (2,644)   $ (17,499)   $ (13,373)

Retained Margin:
     Balance at beginning of period,
         as previously reported .......      98,476       91,790      109,250      102,532
     Adjustment for the cumulative
         effect on prior years of
         applying retroactively the
         FIFO method of valuing
         Energy inventories, net of tax       1,464          402        1,464          402
                                          ---------    ---------    ---------    ---------
     Balance at beginning of period,
         as adjusted ..................      99,940       92,192      110,714      102,934
     Dividends ........................      (2,087)      (2,172)      (2,085)      (2,172)
     Adjustment to unrealized gains
         (losses) on available-for-sale
         securities, net of tax .......         381          795          460          782
                                          ---------    ---------    ---------    ---------
Balance at end of period ..............   $  91,590    $  88,171    $  91,590    $  88,171
                                          =========    =========    =========    =========
</TABLE>




     See accompanying notes to condensed consolidated financial statements.

                                        4

<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
                   CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
                                   (Unaudited)
                             (Thousands of Dollars)
<TABLE>
<CAPTION>


                                                                 Six Months Ended
                                                                    December 31,
                                                               --------------------
                                                                 1996        1995
                                                               --------    --------
<S>                                                            <C>         <C>      
Net cash flows used in operating activities ................   $(24,278)   $ (1,966)

Cash flows (used in) provided by investing activities:
     Purchases of property, plant and equipment ............     (8,306)     (7,518)
     Proceeds from disposal of businesses ..................     13,777
     Proceeds from disposal of property, plant and equipment      8,794       1,782
     Leases originated .....................................    (93,264)    (74,098)
     Leases repaid .........................................     70,237      60,841
     Proceeds from sale of marketable securities ...........     19,558       5,968
     Purchases of marketable securities ....................    (20,662)     (6,339)
     Net purchase of investments in related cooperatives ...     (2,077)        466
     Proceeds from disposal of discontinued operations .....     15,900
                                                               --------    --------

Net cash flows used in investing activities ................    (11,943)     (2,998)


Cash flows (used in) provided by financing activities:
     Net change in short-term borrowings ...................     32,400      15,800
     Proceeds from long-term debt ..........................     27,850      19,781
     Repayment of long-term debt ...........................    (29,331)    (19,585)
     Proceeds from sale of subordinated debt ...............     34,798      44,790
     Maturity and redemption of subordinated debt ..........    (25,101)    (49,304)
     Payments on capital leases ............................     (2,172)       (665)
     Redemption of stock, net ..............................        (13)     (3,443)
     Cash dividends paid ...................................     (2,210)     (2,410)
                                                               --------    --------

Net cash flows provided by financing activities ............     36,221       4,964
                                                               --------    --------


Net decrease in cash and equivalents .......................          0           0
Cash and equivalents at beginning of period ................          0           0
                                                               --------    --------


Cash and equivalents at end of period ......................   $      0    $      0
                                                               ========    ========
</TABLE>












     See accompanying notes to condensed consolidated financial statements.

                                        5

<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (Unaudited)
                             (Thousands of Dollars)


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------
     Basis of Presentation
     The accompanying  unaudited condensed  consolidated financial statements of
     Agway Inc. (the  "Company") 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  six-month  period  ended
     December 31, 1996 are not necessarily indicative of the results that may be
     expected  for the year ending June 30, 1997 due to the  seasonal  nature of
     certain major segments of the Company's business.  For further information,
     refer to the consolidated  financial  statements and notes thereto included
     in the annual report on Form 10-K for the year ended June 30, 1996.

     Inventories
     During the second  quarter of fiscal 1997,  the Company's  Energy  division
     changed its method of determining  the cost of liquid  product  inventories
     from the last-in, first-out (LIFO) method to the first-in, first-out (FIFO)
     method. The liquid product  inventories on a FIFO basis totaled $15,583 and
     $34,759 at June 30, 1996 and December 31, 1996, respectively, and represent
     10% and 17% of the  Company's  total  inventory  for the same periods noted
     above.

     As required by generally accepted  accounting  principles,  the Company has
     retroactively  adjusted prior years' financial  statements for this change.
     The Company has also applied to the Internal  Revenue  Service to change to
     the FIFO method of inventory  valuation for tax  purposes.  At the time the
     Company elected LIFO  accounting for its liquid  products  inventory in its
     Energy  division,  the Company owned a majority  interest in a refinery and
     maintained  significantly  higher  levels  of  liquid  product  inventories
     throughout  the Energy  distribution  system.  Since that time, the Company
     sold its interest in the  refinery  and has changed its  business  practice
     with respect to liquid product inventory  management.  As a result of these
     changes,  inventory  levels of liquid product  currently are  substantially
     less and the inventory turns in approximately 15 days. Accordingly, FIFO is
     a preferable  method of accounting for liquid product  inventories,  better
     reflecting  how the Company  currently  manages its  operations  and better
     matching revenues and costs.

     The  cumulative  effect of the change  (reported as an increase in retained
     earnings  as of June 30,  1995 for both the  Company  and  Agway  Financial
     Corporation)  of $402 represents the effect on net earnings of the reversal
     of the LIFO  reserve  at that  date.  There was no effect of the  change in
     accounting  method in net margin  (loss) for the three and six months ended
     December  31,  1996 and 1995.  The  restatement  of  income  as  previously
     reported for fiscal years ended June 30, 1996 and 1995 is as follows:

                                                              1996       1995
                                                            --------   --------

        Net margin (loss), as previously reported           $ 11,600   $(15,908)
        Effect of change in accounting method, net of tax      1,062        178
                                                            --------   --------
        Adjusted net margin (loss)                          $ 12,662   $(15,730)
                                                            ========   ========


     Reclassifications
     Certain  reclassifications  have been made to conform prior year  financial
     statements with the current year presentation.


                                        6

<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)


2.   AGWAY FINANCIAL CORPORATION
     ---------------------------
     Agway  Financial  Corporation  (AFC) is a wholly  owned  subsidiary  of the
     Company whose principal  business  activity is securing  financing  through
     bank borrowings and issuance of corporate debt instruments to provide funds
     for the Company and AFC's sole wholly owned subsidiary, Agway Holdings Inc.
     (AHI), and AHI's subsidiaries,  for general corporate purposes. The payment
     of principal  and interest on this debt is absolutely  and  unconditionally
     guaranteed by the Company. In an exemptive relief granted pursuant to a "no
     action  letter"  issued  by  the  staff  of  the  Securities  and  Exchange
     Commission,  AFC, as a separate  company,  is not required to file periodic
     reports with respect to these debt securities.  However, as required by the
     1934  Act,  the  summarized  financial   information   concerning  AFC  and
     Consolidated Subsidiaries is as follows:
<TABLE>
<CAPTION>

                                    Three Months Ended         Six Months Ended
                                        December 31,              December 31,
                                  ----------------------    ----------------------
                                     1996         1995         1996         1995
                                  ---------    ---------    ---------     --------
<S>                               <C>          <C>          <C>          <C>      
Net sales and revenues ........   $ 275,544    $ 265,507    $ 514,212    $ 486,865
Operating margin ..............       8,263        5,027        6,995        3,985
Loss from continuing operations        (454)      (4,943)      (3,270)     (12,376)
Net loss ......................        (454)      (2,658)      (3,270)     (10,359)

</TABLE>

                                             December 31,   June 30,
                                                 1996         1996
                                             ----------   ----------
Current assets ...........................   $  550,903   $  532,158
Properties and equipment, net ............      157,263      166,504
Noncurrent assets ........................      366,276      353,377
                                             ----------   ----------
    Total assets .........................   $1,074,442   $1,052,039
                                             ==========   ==========

Current liabilities ......................   $  306,338   $  227,782
Long-term debt ...........................      165,240      191,189
Subordinated debt ........................      373,328      400,284
Noncurrent liabilities ...................       16,715       17,152
Shareholder's equity .....................      212,821      215,632
                                             ----------   ----------
Total liabilities and shareholder's equity   $1,074,442   $1,052,039
                                             ==========   ==========


                                        7

<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)


3.   BORROWING ARRANGEMENTS
     ----------------------
     Agway and AFC
     As of December 31, 1996, the Company had certain facilities  available with
     banking  institutions  whereby  lenders have agreed to provide  funds up to
     $254,000 to  separately  financed  units of the  Company as follows:  AFC -
     $50,000 and Telmark - $204,000. In addition, AFC may issue up to $50,000 of
     commercial  paper  under the  terms of a  separate  agreement,  backed by a
     letter of credit.

     The  $50,000  line of  credit  available  to AFC and its  ability  to issue
     $50,000 of commercial paper require  collateralization using certain of the
     Company's accounts receivable and non-petroleum inventories ("collateral").
     Amounts which can be drawn under the AFC short-term  agreements are limited
     to a specific  calculation  based upon the collateral  available.  Adequate
     collateral  has existed  throughout the fiscal year to permit AFC to borrow
     amounts  to meet  the  ongoing  needs of the  Company  and is  expected  to
     continue to do so. In addition,  the agreements  include certain covenants,
     the most  restrictive  of which  requires the Company to maintain  specific
     quarterly  levels of  interest  coverage  and  monthly  levels of  tangible
     retained  margins.  The amounts  outstanding  as of December 31, 1996 under
     AFC's $50,000 line of credit and $50,000  commercial paper were $34,600 and
     $50,000,  respectively. In November 1996, the Company renegotiated its line
     of credit facility to extend the  availability  through January 1, 1998 and
     to provide seasonal increases in the line of credit which will be available
     so that total  availability  under  AFC's line of credit  will  increase to
     $60,000 at June 1, 1997 and  $75,000 at  October  1,  1997.  The  Company's
     commercial paper program expires December 31, 1997. The Company has ongoing
     discussions  with its lenders  and expects to continue to have  appropriate
     and adequate financing to meet its ongoing needs.

     Annually,  Agway and AFC offer  subordinated  debentures  and  subordinated
     money market  certificates to the public. Of Agway's and AFC's subordinated
     debt at December 31, 1996,  $418,600 is  redeemable  in whole or in part at
     the principal amount plus accrued interest, prior to maturity dates, at the
     option  of  the  Company.   The  foregoing  debt  bears  interest   payable
     semi-annually  on  January  l and July 1 of each  year.  The  money  market
     certificates'  interest rate is at the greater of the quoted rate or a rate
     based upon the discount  rate for U. S.  Government  Treasury  Bills,  with
     maturities of 26 weeks.  In October  1996,  $14,700 of  subordinated  money
     market certificates issued by AFC matured.  The Company has refinanced this
     debt  through  the  issuance  of  subordinated  debt  and  short-term  bank
     borrowings.

     Telmark
     As of  December  31,  1996,  Telmark  had two  separate  credit  facilities
     available  from banks which allow  Telmark to borrow up to an  aggregate of
     $204,000.  An  uncommitted  short-term  line of  credit  agreement  permits
     Telmark to borrow up to $4,000 on an  unsecured  basis with  interest  paid
     upon maturity.  The line bears interest at money market  variable  rates. A
     committed  $200,000 partially  collateralized  revolving term loan facility
     permits Telmark to draw short-term  funds bearing  interest at money market
     rates or draw long-term debt at rates  appropriate for the term of the note
     drawn.  The total amounts  outstanding  as of December 31, 1996,  under the
     short-term  line of credit and the revolving term loan facility were $4,000
     and $164,000, respectively.

     Telmark  borrows  under its  short-term  line of credit  agreement  and its
     revolving  term  agreement  from  time  to time  to  fund  its  operations.
     Short-term  debt  serves as interim  financing  between  the  issuances  of
     long-term  debt.  Telmark renews its lines of credit  annually.  The $4,000
     line of credit has been renewed  through  December  31, 1997.  The $200,000
     revolving  term agreement  loan facility is available  through  February 1,
     1998.

     At December 31, 1996,  Telmark also had balances  outstanding  on unsecured
     senior  note  private  placements  totaling  $114,300.  Interest is payable
     semiannually  on each senior note.  Principal  payments are both semiannual
     and annual. The note agreements are similar to one another and each contain
     specific financial covenants.

                                        8

<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)


3.   BORROWING ARRANGEMENTS (continued)
     ----------------------------------
     Telmark (continued)
     Telmark has registered with the SEC two shelf offerings of debentures.  The
     debentures are unsecured,  subordinated to all senior debt at Telmark,  and
     are not  guaranteed  by Agway nor any of Agway's  other  subsidiaries.  The
     interest on the debt is payable quarterly on January 1, April 1, July 1 and
     October 1. The offering of debentures is continuing and the proceeds of the
     offerings  will  be  used  to  provide   financing  for  Telmark's  leasing
     activities.

     The Company believes Telmark will continue to have appropriate and adequate
     short-term and long-term financing to meet its ongoing needs.

     Long-term  and  subordinated  debt  outstanding  at December 31,  1996,  as
     compared to June 30, 1996, amounted to:
<TABLE>
<CAPTION>

                            Agway & AFC             Telmark                Total
                        -------------------   -------------------   -------------------
                          12/96       6/96      12/96      6/96       12/96      6/96
                        --------   --------   --------   --------   --------   --------
<S>                     <C>        <C>        <C>        <C>        <C>        <C>     
Long-term debt ......   $ 15,555   $ 18,666   $272,457   $273,000   $288,012   $291,666
Currently payable ...      5,172      6,065    110,788     88,188    115,960     94,253
                        --------   --------   --------   --------   --------   --------
Net long-term debt ..   $ 10,383   $ 12,601   $161,669   $184,812   $172,052   $197,413
                        ========   ========   ========   ========   ========   ========

Subordinated debt ...   $395,452   $390,669   $ 29,173   $ 24,258   $424,625   $414,927
Currently payable ...     51,297     14,643                           51,297     14,643
                        --------   --------   --------   --------   --------   --------
Net subordinated debt   $344,155   $376,026   $ 29,173   $ 24,258   $373,328   $400,284
                        ========   ========   ========   ========   ========   ========
</TABLE>




                                        9

<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)


4.   COMMITMENTS AND CONTINGENCIES
     -----------------------------
     Environmental
     The Company is subject to a number of governmental  regulations  concerning
     environmental matters,  either directly or as a result of the operations of
     its  subsidiaries.  The Company  expects that it will be required to expend
     funds to participate in the  remediation of certain sites,  including sites
     where the  Company  has been  designated  by the  Environmental  Protection
     Agency  (EPA)  as  a   potentially   responsible   party  (PRP)  under  the
     Comprehensive  Environmental  Response,   Compensation  and  Liability  Act
     (CERCLA)  and sites with  underground  fuel storage  tanks,  and will incur
     other expenses associated with environmental compliance.

     The Company  continually  monitors its operations with respect to potential
     environmental  issues,  including changes in legally mandated standards and
     remediation   technologies.   Agway's  recorded  liability  reflects  those
     specific  issues where  remediation  activities are currently  deemed to be
     probable and where the cost of remediation  is estimable.  Estimates of the
     extent of the Company's degree of  responsibility  relating to a particular
     site and the method and ultimate  cost of  remediation  require a number of
     assumptions  for  which  the  ultimate  outcome  may  differ  from  current
     estimates.  At December 31, 1996, the Company had been  designated as a PRP
     under CERCLA or as a third party to the original PRPs in several  Superfund
     sites.  The liability  under CERCLA is joint and several,  meaning that the
     Company  could  be  required  to pay in  excess  of its pro  rata  share of
     remediation costs. The Company's understanding of the financial strength of
     other PRPs at these Superfund sites has been considered, where appropriate,
     in the  Company's  determination  of its estimated  liability.  The Company
     believes  that  its  past  experience   provides  a  reasonable  basis  for
     estimating  its liability.  As additional  information  becomes  available,
     estimates are adjusted as necessary.  While the Company does not anticipate
     that any such adjustment would be material to its financial statements,  it
     is  reasonably   possible   that  the  result  of  ongoing   and/or  future
     environmental  studies or other  factors could alter this  expectation  and
     require the  recording of additional  liabilities.  The extent or amount of
     such events,  if any,  cannot be estimated at this time.  The settlement of
     the reserves  established will cause future cash outlays over approximately
     five years based upon current  estimates,  and it is not expected that such
     outlays will materially impact the Company's liquidity position.

     Other
     The Company is also subject to various  investigations,  claims,  and legal
     proceedings  covering a wide range of  matters  that arise in the  ordinary
     course of its  business  activities.  Each of these  matters  is subject to
     various uncertainties, and it is possible that some of these matters may be
     resolved  unfavorably to the Company.  The Company has established accruals
     for matters for which payment is probable and amounts reasonably estimable.
     Management  believes  any  liability  that may  ultimately  result from the
     resolution of these matters in excess of amounts  provided  under the above
     stated  policy  will not have a material  adverse  effect on the  financial
     position, results of operations or liquidity of the Company.



                                       10

<PAGE>
                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

       Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                                   (Unaudited)
                             (Thousands of Dollars)


RESULTS OF OPERATIONS
---------------------
The  Company's net sales and revenues and  operating  results are  significantly
impacted by seasonal  fluctuations  due to the nature of its  operations and the
geographic  location of its service area,  which is primarily  the  Northeastern
United States.  Agriculture and Retail net sales and revenues are  traditionally
higher in the spring as  customers  acquire  products  to  initiate  the growing
season. Energy generally realizes significantly higher net sales and revenues in
the winter months due to cold winter  conditions.  Leasing and Insurance are not
materially impacted by seasonal fluctuations.
<TABLE>
<CAPTION>
                                                                  Results by Operating Segment
                                           ---------------------------------------------------------------------------
                                                    Three Months Ended                      Six Months Ended
                                           ------------------------------------   ------------------------------------
                                                                     $ Increase                             $ Increase
                                            12/31/96    12/31/95     (Decrease)   12/31/96     12/31/95     (Decrease)
                                           ---------    ---------    ---------    ---------    ---------    ---------
Net Sales and Revenues
----------------------
<S>                                        <C>          <C>          <C>          <C>          <C>          <C>      
Agriculture                                $ 150,974    $ 164,266    $ (13,292)   $ 337,104    $ 329,075    $   8,029
Retail                                        49,335       56,556       (7,221)     111,928      114,575       (2,647)
Energy                                       167,567      140,199       27,368      275,511      237,679       37,832
Leasing                                       14,142       12,169        1,973       27,459       23,695        3,764
Insurance                                      6,735        6,344          391       13,049       13,587         (538)
Other (a)                                    (14,904)     (14,094)        (810)     (39,018)     (28,618)     (10,400)
                                           ---------    ---------    ---------    ---------    ---------    ---------
                                           $ 373,849    $ 365,440    $   8,409    $ 726,033    $ 689,993    $  36,040
                                           =========    =========    =========    =========    =========    =========

Margin (Loss) from Continuing Operations
----------------------------------------
   before Income Taxes
   -------------------
Agriculture                                $  (7,691)   $  (1,903)   $  (5,788)   $ (16,430)   $  (8,381)   $  (8,049)
Retail                                        (1,138)      (1,859)         721         (451)      (1,752)       1,301
Energy                                         5,172        5,628         (456)         273          856         (583)
Leasing                                        3,257        2,965          292        6,042        5,399          643
Insurance                                        316       (3,856)       4,172          252       (3,885)       4,137
Other (a)                                      1,178        2,059         (881)       2,947        3,730         (783)
                                           ---------    ---------    ---------    ---------    ---------    ---------
Operating margin (loss)
   plus other income, net                      1,094        3,034       (1,940)      (7,367)      (4,033)      (3,334)
Interest (expense), net of
   interest income                            (8,030)      (7,538)        (492)     (14,589)     (14,460)        (129)
                                           ---------    ---------    ---------    ---------    ---------    ---------
                                           $  (6,936)   $  (4,504)   $  (2,432)   $ (21,956)   $ (18,493)   $  (3,463)
                                           =========    =========    =========    =========    =========    =========
</TABLE>
(a) Represents unallocated corporate items and intersegment eliminations.

Numbers in the  following  narrative  have been  rounded to the nearest  hundred
thousand.

Consolidated Results
--------------------
Consolidated  net sales and  revenues of $373,800 and $726,000 for the three and
six months  ended  December  31, 1996  increased  $8,400 (2%) and $36,000  (5%),
respectively,  as compared to the same periods in the prior year.  The increases
were the result of (1) higher sales prices,  due to increased  product costs, in
Agriculture  for feed products and in Energy for heating  oils,  diesel fuel and
propane; (2) delayed spring sales of crop-related  services by Agriculture which
increased  sales in the first quarter of fiscal 1997;  and (3)  increased  lease
portfolio  revenues,  as compared to the prior year,  from a higher  average net
lease  investment  with higher  revenue rates at Telmark.  These  increases were
partially  offset by the  weather-related  decline in demand for bird food which
significantly  reduced sales to consumers in the Retail business.  Additionally,
the sale of businesses  within CPG during the prior year and first six months of
fiscal 1997 has reduced the overall sales level in CPG.


                                       11
<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

       Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                                   (Unaudited)
                             (Thousands of Dollars)


Consolidated Results (continued)
--------------------------------
Net loss from continuing  operations  before taxes of $6,900 and $22,000 for the
three and six months ended December 31, 1996  increased  $2,400 (54%) and $3,500
(19%),  respectively,  as  compared to the same  periods in the prior year.  The
Company's results through the six months ended December 31, 1996 reflect ongoing
operations  improving $2,100 over the same period in the prior year. During this
period,  several one-time  impacts to the financial  results occurred which more
than offset the ongoing operation improvement.  The adoption of a new accounting
pronouncement on the impairment of long-lived assets;  one-time net charges from
the sale of the pet food  manufacturing  brands and business and the  transition
cost from outsourcing the retail distribution center management;  and a delay in
the timing of  recognizing  patronage  refunds from  fertilizer  purchases  have
decreased  pre-tax  earnings  for the six months ended  December  31,  1996,  as
compared to the same period in the prior year, by $5,600.

In addition to the one-time items noted above,  Agriculture's  operating results
were affected by increased commodity costs and less favorable experience than in
the prior year with exchange-traded futures. The net decline of Agriculture,  as
compared to the prior year, was  substantially  offset by improved  underwriting
results in Insurance,  continued  strong earnings in Telmark and improvements in
Retail.

Agriculture
-----------
Agriculture  consists  of Agway  Agricultural  Products  (AAP)  and the  Country
Products Group (CPG).  Total  Agriculture net sales and revenues of $151,000 and
$337,100 for the three and six months ended December 31, 1996 decreased  $13,300
(8%) and increased $8,000 (2%), respectively, as compared to the same periods in
the prior year.  The  decrease  in net sales and  revenues  for the  three-month
period, as compared to the same period in the prior year, resulted from a $2,400
(2%) increase in AAP net sales and  revenues,  offset by a $15,600 (30%) decline
in CPG net sales and  revenues.  The  increase in net sales and revenues for the
six-month  period ended December 31, 1996, as compared to the same period in the
prior  year,  resulted  from a  $33,000  (15%)  increase  in AAP net  sales  and
revenues, offset by a $25,000 (24%) decline in CPG total net sales and revenues.

The increase in AAP sales for the three- and six-month  periods  ended  December
31, 1996 was the result of  increased  feed  product  prices and delayed  spring
sales of  crop-related  services  which rolled into the first  quarter of fiscal
1997.  The  decline  in CPG sales for the  three- and  six-month  periods  ended
December 31, 1996  represents the decline in sales volume of $9,900 and $23,400,
respectively, from lines of business sold, mainly during the prior year, as part
of CPG's  strategic  plan,  which included  Pro-Lawn,  a laboratory  animal diet
business,  Sacramento Valley Milling and Roberts Seed.  Additionally,  net sales
and revenues for the ongoing CPG speciality products operations also declined in
the six-month  period ended December 31, 1996, as compared to the same period in
the  prior  year,  mainly  due to  declines  in  sunflower  seed  sales  for the
production  of bird foods.  Lower than normal snow  coverage in the Northeast in
November and December caused less demand for this product. The remaining ongoing
operations of CPG  generated net sales and revenues  during the six months ended
December 31, 1996 that were equivalent to the same period in the prior year.

The net loss before  income taxes of  Agriculture  of $7,700 and $16,400 for the
three and six months ended December 31, 1996 increased  $5,800 (300%) and $8,000
(96%),  respectively,  as compared to the same periods in the prior year.  AAP's
second quarter loss of $9,300 was a $5,700 (162%)  increase over the same period
in the prior year,  and the $18,000  six-month  loss was a $6,900 (62%) increase
over the first six months of the prior year. However, AAP enterprise  operations
experienced   $3,100  in   improvements   to   operating   results  and  reduced
administrative  costs by $1,200 over the six months ended  December 31, 1996, as
compared to the same period in the prior year. These improvements were more than
offset by decreased  gross margins,  due to increased  commodity  costs and less
favorable  experience  with  exchange-traded  futures;  the timing of  patronage
refunds  recognized  in the second  quarter  last year which are expected in the
third quarter in the current year;  and the impact of adopting a new  accounting
pronouncement on the impairment of long-lived assets.



                                       12

<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

       Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                                   (Unaudited)
                             (Thousands of Dollars)


Agriculture (continued)
-----------------------
CPG net income of $1,600 for both the three and six months  ended  December  31,
1996  decreased  $100 (30%) and $1,100 (43%),  respectively,  as compared to the
same periods in the prior year. The net income has been adversely  impacted by a
$600 decline in the sunflower seed margins due to a drop in prices combined with
lower  sales  volumes;  a $400  decline in potato  margins  resulted  from price
reductions in the potato  industry;  and the cost of net asset  write-downs  and
other one-time costs  attributable  to the sale of CPG's pet food  manufacturing
brands and business.  These adverse items were partially offset by improvements,
as compared to the prior year, in other continuing operations.

Retail
------
Total net sales and  revenues  of  $49,300  and  $111,900  for the three and six
months  ended  December  31,  1996  decreased  $7,200  (13%)  and  $2,600  (2%),
respectively,  as  compared to the same  periods in the prior  year.  The second
quarter decline of $7,200 resulted from a significant reduction in bird food and
ice melter salt sales due to the  relatively  light snow cover in  November  and
December in many parts of the  Northeast.  Additionally,  sales of water systems
were  significantly  reduced,  as compared to the prior year, as Retail  entered
into an  agreement  under which a third party would sell these  products and pay
Retail a commission.  The second  quarter  decline in sales,  as compared to the
prior year,  more than offset the first quarter sales  improvements in pet food,
bird food and lawn and garden seeds and the improved sale of wood pellets in the
second quarter.

Net loss  before  income  taxes of $1,100  and $500 for the three and six months
ended December 31, 1996 improved $700 (39%) and $1,300 (74%), respectively, over
the same periods in the prior year.  Gross  margin  dollars were down 6% for the
second  quarter,  as  compared  to the prior  year,  due to the decline in sales
dollars;  however,  margin  percentages  have improved  through  product mix and
pricing  strategy  changes since the prior year.  Total  expenses for the second
quarter and for the six-month  period ended December 31, 1996  decreased  $1,500
(9%) and $1,700 (5%), respectively, as compared to the same periods in the prior
year.  The most  significant  decline in both the three- and  six-month  periods
ended December 31, 1996 was in selling expenses.  Advertising expenses have been
either  reduced or delayed to provide for  enhancement  to sales  efforts in the
upcoming   spring  season.   Additionally,   reductions  in   distribution   and
manufacturing  expenses  were more than  offset by  one-time  costs  incurred to
transfer distribution center management and from the costs of acquisition of new
businesses or improvements to current stores.

Energy
------
Net sales and  revenues of $167,600  and  $275,500  for the three and six months
ended December 31, 1996 increased $27,400 (20%) and $37,800 (16%), respectively,
as compared to the same periods in the prior year. The increase,  as compared to
the prior year, is  substantially  due to higher commodity prices in the current
year in heating  oils,  diesel fuel and propane as a result of strong demand and
low industry  inventories in the marketplace.  Energy's average selling price of
all  products  increased  19.5% in the three months and 14.5% for the six months
ended  December 31, 1996, as compared to the same periods in the prior year. The
total  unit  volume of all  products  for both the three  and six  months  ended
December 31, 1996 shows slight  improvements,  despite temperatures being warmer
than the prior year.

Margin before income taxes of $5,200 and $300 for the three and six months ended
December 31, 1996 decreased $500 (8%) and $600 (68%), respectively,  as compared
to the same periods in the prior year.  Gross margin dollars  decreased $400 and
$300 for the second  quarter and six months ended December 31, 1996, as compared
to the same periods in the prior year, as a result of product cost increases not
being able to be absorbed by the marketplace. Total operating expenses increased
for the three and six months ended  December  31, 1996,  as compared to the same
periods  in the prior  year,  as the  result  of  increased  distribution  costs
partially offset by reduced selling and  administrative  costs.  Finally,  other
revenue  increased over the prior year due to gains on the sale of assets in the
current year.


                                       13

<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

       Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                                   (Unaudited)
                             (Thousands of Dollars)


Leasing
-------
Telmark total revenues of $14,100 and $27,500 for the three and six months ended
December 31, 1996  increased  $2,000 (16%) and $3,800  (16%),  respectively,  as
compared to the same periods in the prior year. The increased revenues over both
periods,  as compared to the same periods in the prior year, are the result of a
higher average net investment with higher revenue rates  associated with current
period  leases.  The net investment  increased  $22,700 (6%) to $417,000 for the
six-month  period ended December 31, 1996, as compared to an increase of $12,700
(4%) to $361,000 for the same period in the prior year.  Revenue as a percent of
average net  investment  increased 3% in the six months ended December 31, 1996,
as compared to the same period in the prior year.

Margin  before  income  taxes of $3,300  and $6,000 for the three and six months
ended December 31, 1996 increased  $300 (10%) and $600 (12%),  respectively,  as
compared to the same periods prior year. Total revenue  increases were partially
offset by an  increase  in total  expenses  for the three and six  months  ended
December 31, 1996 of $1,700 (18%) and $3,200 (17%), respectively, as compared to
the same  periods in the prior  year.  The larger net  investment  during  those
periods,  as  compared  to the same  periods in the prior  year,  has  increased
interest expense, selling, general and administrative expenses and the provision
for credit losses in the current year.

Insurance
---------
Net  revenues  (earned  premiums)  of $6,700 and  $13,000  for the three and six
months ended  December 31, 1996  increased  $400 (6%) and  decreased  $500 (4%),
respectively,   as  compared  to  the  same  periods  in  the  prior  year.  The
fluctuations  are the  result of  increased  reinsurance  costs  being  incurred
earlier  over the six months  ended  December  31, 1996 as compared to the prior
year. The increased  reinsurance costs will further limit Insurance's  potential
loss exposure.

Margin  before  income  taxes of $300 for both the  three and six  months  ended
December 31, 1996 increased  $4,200 (108%) and $4,100 (107%),  respectively,  as
compared to the same periods in the prior year. The increase has been the result
of improvement in loss  development.  In the first six months of the prior year,
Insurance  experienced adverse development in older claims and certain unusually
large  farmowner  and auto  liability  casualty  losses.  These types of adverse
developments did not occur during the first six months of the current year.


                                       14

<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

       Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULTS OF OPERATIONS
                                   (Unaudited)
                             (Thousands of Dollars)


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash Flows from Operating Activities
Cash flows from operating  activities for the six months ended December 31, 1996
were a net  cash use of  $24,300,  a  decrease  in cash  flows of  approximately
$22,500 as compared to the same period in the prior year.  This decrease was due
primarily to larger  increases in inventory and  receivables  over the six-month
period ended  December  31, 1996,  as compared to the same period in prior year,
from higher commodity  market prices in Agriculture and Energy,  and from higher
Energy  inventory levels  maintained due to the low industry  inventories in the
marketplace.

Cash Flows from Investing Activities
Net cash flows used in the Company's investing activities totaled  approximately
$11,900 for the six months ended  December  31, 1996,  as compared to $3,000 for
the six months  ended  December 31, 1995,  an increased  outflow of $8,900.  The
Company  has a  growing  leasing  business  and  cash  required  to  fund  lease
origination  growth in excess of lease  repayments  and leases sold  amounted to
$23,000 for the six months ended  December 31, 1996,  as compared to $13,300 for
the  six  months  ended  December  31,  1995,  a net  cash  outflow  of  $9,700.
Additionally,  purchases  of fixed  assets and the net  purchase  of  marketable
securities and investments in related  cooperatives  during the six months ended
December 31, 1996  increased  $4,100 over the prior year.  These  increased uses
were  partially  offset by proceeds of $22,600 from  businesses and fixed assets
sold during the six months ended  December 31, 1996 that were $4,900 higher than
the  cash  generated   from  the  same  activity,   including  the  disposal  of
discontinued operations, in the same period in the prior year.

Cash Flows from Financing Activities
The Company  finances its  operations  and the  operations of all its continuing
businesses and subsidiaries, except Telmark and Agway Insurance Company, through
Agway Financial  Corporation (AFC). External sources of short-term financing for
the Company and all its other  continuing  operations  include  revolving credit
lines,  letters of credit,  and  commercial  paper  programs.  Telmark and Agway
Insurance  Company finance  themselves  through  operations or direct  borrowing
arrangements. Each is financed with a combination of short- and long-term credit
facilities.  In  addition,  Telmark  has  occasionally  sold blocks of its lease
portfolio. Sources of longer-term financing include the following as of December
31, 1996:


                                                   Agway &    
Source of debt                                       AFC      Telmark     Total 
--------------                                    --------   --------   --------
Banks - due 11/97 to 2/01 with interest
  from 6.0% - 8.5% ............................   $  2,975   $158,000   $160,975
Insurance companies - due 3/97 to 11/00
  with interest from 5.9% - 9.2% ..............               114,333    114,333
Capital leases & other - due 1997 to 2007
  with interest from 6% to 12% ................     12,580        124     12,704
                                                  --------   --------   --------
    Long-term debt ............................     15,555    272,457    288,012
Subordinated money market certificates - due
  10/97 to 10/08 with interest from 4.5% - 9.5%    373,020     29,173    402,193
Subordinated debentures - due 1999 to 2003 with
  interest at 7.0% to 8.5% ....................     22,432                22,432
                                                  --------   --------   --------
    Total debt ................................   $411,007   $301,630   $712,637
                                                  ========   ========   ========

For a complete  description  of the  Company's  credit  facilities  available at
December  31,  1996,  see  Footnote 3 to the  condensed  consolidated  financial
statements.



                                       15

<PAGE>



                           PART II. OTHER INFORMATION
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
                             (Thousands of Dollars)


Item 4.  Submission of Matters to a Vote of Security Holders
------------------------------------------------------------
The Company held its annual  meeting of  shareholders  on November 13, 1996,  at
which a quorum was present in person or by proxy.  The following  Directors were
elected to three-year terms through December 1999:

                    Nominee               In Favor         Opposed
               ------------------         --------         -------
               Robert L. Marshman          62,404           4,695
               Peter D. Hanks              62,404           4,695
               Carl D. Smith               62,404           4,695
               Kevin B. Barrett            62,404           4,695
               Samuel F. Minor             62,404           4,695
               Joel L. Wenger              62,404           4,695

Eligible  additional  votes totaling 17,736 were not received at the time of the
annual  meeting  and are not  included  as  either  votes in  favor or  opposed.
Additionally,   these  17,736  eligible   additional  votes  may  be  considered
abstentions  and were not included for purposes of  determining  a quorum at the
annual meeting.

The following is a list of directors  whose terms as Directors  continued  after
the Annual Meeting:

   Ralph H. Heffner                 - Chairman of the Board and Director
   Robert L. Marshman               - Vice Chairman of the Board and Director
   Kevin B. Barrett                 - Director
   Keith H. Carlisle                - Director
   Vyron M. Chapman                 - Director
   D. Gilbert Couser                - Director
   Andrew J. Gilbert                - Director
   Peter D. Hanks                   - Director
   Frederick A. Hough               - Director
   Samuel F. Minor                  - Director
   Carl D. Smith                    - Director
   Thomas E. Smith                  - Director
   Gary K. Van Slyke                - Director
   Joel L. Wenger                   - Director
   Edwin C. Whitehead               - Director
   Christian F. Wolff, Jr           - Director
   William W. Young                 - Director

Item 6.  Exhibits and Reports on Form 8-K
-----------------------------------------
There were no reports on Form 8-K  required to be filed  during the three months
ended December 31, 1996.



                                       16

<PAGE>


SIGNATURES
----------

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




                                                      AGWAY INC.
                                       ----------------------------------------
                                                    (Registrant)





Date      February 4, 1997                    /s/ PETER J. O'NEILL
      ----------------------           ----------------------------------------
                                                  Peter J. O'Neill
                                               Senior Vice President,
                                                 Finance & Control,
                                              Treasurer and Controller
                                          (Principal Financial Officer and
                                              Chief Accounting Officer)










                                       17