<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 March 31, 1997
                               --------------
                                       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 May 2, 1997
------------------------------------------------    --------------------------
Membership Common Stock, $25 par value per share            105,966 shares




                                        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 March 31, 1997 and June 30, 1996...........................  3

           Condensed Consolidated Statements of Operations and Retained Margin for the three months
           and nine months ended March 31, 1997 and March 31, 1996................................................  4

           Condensed Consolidated Cash Flow Statements for the nine months ended March 31, 1997
           and March 31, 1996.....................................................................................  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 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>

                                                                     March 31,    June 30,
                                                                       1997         1996
                                                                    ----------   ----------
                                                                    (Unaudited)                                           
ASSETS
------
<S>                                                                 <C>          <C> 
Current Assets:
     Trade accounts receivable (including notes receivable of
       $17,669 and $35,182, respectively), less allowance for
       doubtful accounts of $9,481 and $10,062, respectively ....   $  152,502   $  207,327
     Leases receivable, less unearned income of $54,186 and
       $48,403, respectively ....................................      118,126      105,374
     Advances and other receivables .............................       30,557       35,900
     Inventories:
       Raw materials ............................................       14,176       16,161
       Finished goods ...........................................      195,899      128,770
       Goods in transit and supplies ............................       21,782       15,028
                                                                    ----------   ----------
         Total inventories ......................................      231,857      159,959
     Prepaid expenses ...........................................       45,799       57,551
                                                                    ----------   ----------
         Total current assets ...................................      578,841      566,111

Marketable securities available for sale ........................       36,057       34,115
Other security investments ......................................       49,589       42,406
Properties and equipment, net ...................................      215,848      237,015
Long-term leases receivable, less unearned income of
  $85,726 and $75,828, respectively .............................      293,451      268,815
Net pension asset ...............................................       94,931       84,757
Other assets ....................................................       10,250       12,672
                                                                    ----------   ----------
         Total assets ...........................................   $1,278,967   $1,245,891
                                                                    ==========   ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
     Notes payable ..............................................   $   90,800   $   62,200
     Current installments of long-term debt and subordinated debt      170,259      108,896
     Accounts payable ...........................................      150,370      116,519
     Other current liabilities ..................................      109,357      121,046
                                                                    ----------   ----------
         Total current liabilities ..............................      520,786      408,661

Long-term debt ..................................................      157,593      197,413
Subordinated debt ...............................................      373,217      400,284
Other liabilities ...............................................       69,932       66,811
                                                                    ----------   ----------
     Total liabilities ..........................................    1,121,528    1,073,169
Shareholders' equity:
  Preferred stock, net ..........................................       57,645       59,319
  Common stock, net .............................................        2,658        2,689
  Retained margin ...............................................       97,136      110,714
                                                                    ----------   ----------
     Total shareholders' equity .................................      157,439      172,722
Commitments and contingencies
         Total liabilities and shareholders' equity .............   $1,278,967   $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             Nine Months Ended
                                                    March 31,                     March 31,
                                           --------------------------    --------------------------
                                               1997           1996          1997            1996
                                           -----------    -----------    -----------    -----------
<S>                                        <C>            <C>            <C>            <C> 
Net sales and revenues from:
     Product sales .....................   $   406,747    $   408,632    $ 1,091,730    $ 1,061,343
     Leasing operations ................        14,290         12,052         41,748         35,746
     Insurance operations ..............         6,834          6,475         19,883         20,063
                                           -----------    -----------    -----------    -----------
         Total net sales and revenues ..       427,871        427,159      1,153,361      1,117,152

Cost and expenses from:
     Products and plant operations .....       378,934        371,730      1,032,422        984,928
     Leasing operations ................         4,958          4,387         16,895         14,803
     Insurance operations ..............         4,181          4,943         12,168         17,754
     Selling, general and
       administrative activities .......        31,656         34,860         95,208        100,413
                                           -----------    -----------    -----------    -----------
         Total costs and expenses ......       419,729        415,920      1,156,693      1,117,898

Operating margin (loss) ................         8,142         11,239         (3,332)          (746)
Interest expense, net ..................        (8,902)        (8,454)       (23,491)       (22,912)
Other income, net ......................        11,631         11,505         15,742         19,457
                                           -----------    -----------    -----------    -----------
Margin (loss) from continuing operations
     before income taxes ...............        10,871         14,290        (11,081)        (4,201)
Income tax (benefit) expense ...........         4,856          8,264            399          5,162
                                           -----------    -----------    -----------    -----------
Margin (loss) from continuing operations         6,015          6,026        (11,480)        (9,363)

Discontinued operations:
     Gain on disposal of Hood,
     net of tax expense of $1,624 ......                                                      2,017
                                           -----------    -----------    -----------    -----------
Net margin (loss) ......................   $     6,015    $     6,026    $   (11,480)   $    (7,346)

Retained Margin:
     Balance at beginning of period,
         as previously reported ........        91,590         88,171        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
                                           -----------    -----------    -----------    -----------
     Balance at beginning of period,
         as adjusted ...................        91,590         88,171        110,714        102,934
     Dividends .........................                                      (2,087)        (2,172)
     Adjustment to unrealized gains
         (losses) on available-for-sale
         securities, net of tax ........          (469)        (1,085)           (11)          (304)
                                           -----------    -----------    -----------    -----------
Balance at end of period ...............   $    97,136    $    93,112    $    97,136    $    93,112
                                           ===========    ===========    ===========    ===========

</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>


                                                                  Nine Months Ended
                                                                       March 31,
                                                               -----------------------
                                                                  1997         1996
                                                               ----------   ----------
<S>                                                            <C>          <C>       
Net cash flows provided by (used in) operating activities ..   $  28,683    $  (6,467)

Cash flows provided by (used in) investing activities:
     Purchases of property, plant and equipment ............     (15,274)     (14,683)
     Proceeds from disposal of businesses ..................      20,385       26,276
     Proceeds from disposal of property, plant and equipment       7,103        2,594
     Cash paid for acquisitions ............................        (973)
     Leases originated .....................................    (152,617)    (114,399)
     Leases repaid .........................................     109,672       92,484
     Proceeds from sale of marketable securities ...........      20,622        6,505
     Purchases of marketable securities ....................     (22,572)      (6,108)
     Net purchase of investments in related cooperatives ...     (12,100)      (6,687)
     Proceeds from disposal of discontinued operations .....                   15,900
                                                               ---------    ---------

Net cash flows provided by (used in) investing activities ..     (45,754)       1,882


Cash flows provided by (used in) financing activities:
     Net change in short-term borrowings ...................      28,600       11,500
     Proceeds from long-term debt ..........................      28,402       23,663
     Repayment of long-term debt ...........................     (52,854)     (29,364)
     Proceeds from sale of subordinated debt ...............      54,107       72,190
     Maturity and redemption of subordinated debt ..........     (32,626)     (61,259)
     Payments on capital leases ............................      (2,554)      (1,306)
     Redemption of stock, net ..............................      (1,707)      (6,257)
     Cash dividends paid ...................................      (4,297)      (4,582)
                                                               ---------    ---------

Net cash flows provided by financing activities ............      17,071        4,585
                                                               ---------    ---------


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 nine-month period ended March
     31, 1997 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.

     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                 Nine Months Ended
                                                     March 31,                          March 31,
                                          ------------------------------     ------------------------------
                                               1997              1996             1997             1996
                                          -------------     ------------     -------------     ------------

     <S>                                  <C>               <C>              <C>               <C>         
     Net sales and revenues.............  $     317,414     $    304,716     $     831,626     $    791,581
     Operating margin...................         20,433           19,930            27,428           23,914
     Margin (loss) from continuing
         operations.....................         (1,212)           2,386            (4,482)          (9,990)
     Net margin (loss)..................         (1,212)           2,386            (4,482)          (7,973)
</TABLE>

                                              March 31,    June 30,
                                                1997         1996
                                             ----------   ----------
Current assets ...........................   $  525,767   $  532,158
Properties and equipment, net ............      155,028      166,504
Noncurrent assets ........................      383,493      353,377
                                             ----------   ----------
    Total assets .........................   $1,064,288   $1,052,039
                                             ==========   ==========

Current liabilities ......................   $  310,417   $  227,782
Long-term debt ...........................      150,945      191,189
Subordinated debt ........................      373,217      400,284
Noncurrent liabilities ...................       18,568       17,152
Shareholder's equity .....................      211,141      215,632
                                             ----------   ----------
Total liabilities and shareholder's equity   $1,064,288   $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 March 31, 1997,  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 March 31, 1997 under AFC's
     $50,000  line of credit and $50,000  commercial  paper were $0 and $39,400,
     respectively.  The  Company's  current  line of credit  facility  continues
     through  January 1, 1998 and  provides  seasonal  increases  in the line of
     credit which will be available so that total  availability under AFC's line
     of credit will  increase to $70,000 at June 1, 1997 and $100,000 at October
     1, 1997. The Company's  current  commercial paper program continues through
     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 March 31, 1997,  $380,800 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.

     Telmark
     As of March 31, 1997, 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 March 31, 1997,  under the short-term line
     of credit and the  revolving  term loan  facility were $4,000 and $185,400,
     respectively.  On April 23, 1997,  Telmark completed a private placement of
     debt  totaling  $38,000.  Proceeds  of the notes were used to pay down debt
     under the Telmark lines of credit.

     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 March 31,  1997,  Telmark  also had  balances  outstanding  on unsecured
     senior notes from private placements totaling $111,222. 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)
     Annually,  Telmark  offers  subordinated  debentures  to  the  public.  The
     debentures  are unsecured and  subordinated  to all senior debt at Telmark.
     The interest on the debt is payable quarterly on January 1, April 1, July 1
     and October 1, 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 March 31, 1997, as compared
     to June 30, 1996, amounted to:
<TABLE>
<CAPTION>

                            Agway & AFC             Telmark                Total
                        -------------------   -------------------   -------------------
                          3/97       6/96       3/97       6/96       3/97       6/96
                        --------   --------   --------   --------   --------   --------
<S>                     <C>        <C>        <C>        <C>        <C>        <C>     
Long-term debt ......   $ 15,331   $ 18,666   $249,330   $273,000   $264,661   $291,666
Currently payable ...      5,280      6,065    101,788     88,188    107,068     94,253
                        --------   --------   --------   --------   --------   --------
Net long-term debt ..   $ 10,051   $ 12,601   $147,542   $184,812   $157,593   $197,413
                        ========   ========   ========   ========   ========   ========

Subordinated debt ...   $405,658   $390,669   $ 30,750   $ 24,258   $436,408   $414,927
Currently payable ...     52,223     14,643     10,968     63,191     14,643
                        --------   --------   --------   --------   --------   --------
Net subordinated debt   $353,435   $376,026   $ 19,782   $ 24,258   $373,217   $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 March 31,  1997,  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                            Nine Months Ended
                                           -----------------------------------------    -----------------------------------------
                                                                         $ Increase                                   $ Increase
                                             3/31/97        3/31/96      (Decrease)       3/31/97        3/31/96      (Decrease)
                                           -----------    -----------    -----------    -----------    -----------    ----------- 
Net Sales and Revenues
----------------------
<S>                                        <C>            <C>            <C>            <C>            <C>            <C>         
Agriculture                                $   156,711    $   187,791    $   (31,080)   $   493,856    $   516,875    $   (23,019)
Retail                                          45,454         49,162         (3,708)       157,359        163,616         (6,257)
Energy                                         212,372        191,603         20,769        487,882        429,282         58,600
Leasing                                         14,290         12,052          2,238         41,748         35,746          6,002
Insurance                                        6,834          6,475            359         19,883         20,063           (180)
Other (a)                                       (7,790)       (19,924)        12,134        (47,367)       (48,430)         1,063
                                           -----------    -----------    -----------    -----------    -----------    -----------
                                           $   427,871    $   427,159    $       712    $ 1,153,361    $ 1,117,152    $    36,209
                                           ===========    ===========    ===========    ===========    ===========    ===========

Margin (Loss) from Continuing Operations
----------------------------------------
   before Income Taxes
   -------------------
Agriculture                                $    (1,800)   $     4,650    $    (6,450)   $   (18,075)   $    (3,626)   $   (14,449)
Retail                                          (3,337)        (3,339)             2         (3,942)        (5,197)         1,255
Energy                                          19,931         20,347           (416)        20,205         21,203           (998)
Leasing                                          3,745          3,260            485          9,787          8,659          1,128
Insurance                                           76         (1,226)         1,302            327         (5,110)         5,437
Other(a)                                         1,158           (948)         2,106          4,108          2,782          1,326
                                           -----------    -----------    -----------    -----------    -----------    -----------
Operating margin (loss)
   plus other income, net                       19,773         22,744         (2,971)        12,410         18,711         (6,301)
Interest (expense), net of
   interest income                              (8,902)        (8,454)          (448)       (23,491)       (22,912)          (579)
                                           -----------    -----------    -----------    -----------    -----------    -----------
                                           $    10,871    $    14,290    $    (3,419)   $   (11,081)   $    (4,201)   $    (6,880)
                                           ===========    ===========    ===========    ===========    ===========    ===========
</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 $427,900 and $1,153,400 for the three and
nine  months  ended  March 31,  1997  increased  $700  (.2%) and  $36,200  (3%),
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 1996 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,  primarily  due to a
higher  average net lease  investment.  These  increases in sales 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  the  Country  Products  Group  component  of
Agriculture (CPG) during the prior year and first nine 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 income  (loss) from  continuing  operations  before taxes of $10,900 for the
three months ended March 31, 1997  decreased  $3,400  (24%),  as compared to the
same  period  in the prior  year;  and the net  income  (loss)  from  continuing
operations  before taxes of  ($11,100)  for the nine months ended March 31, 1997
represents  a loss that is $6,900  (164%)  greater than the loss during the same
period in the prior year.  The Company's  results  through the nine months ended
March 31, 1997 reflect certain ongoing  operational  improvements of $9,800 over
the same period in the prior year from Agway  Agricultural  Products (AAP) field
operations, Insurance, Retail and Leasing. However, these improvements were more
than offset  mostly by decreased  gross margins that resulted from a combination
of increased  commodity  costs and unfavorable  experience with  exchange-traded
futures.  The  remaining  offsets were (1) the net charges from the current year
sale of the pet food  manufacturing  brands and businesses of CPG as compared to
significant gains on the sales of CPG businesses generated in the prior year and
(2)  a  charge  for  the  adoption  of a new  accounting  pronouncement  on  the
impairment of long-lived assets.

Agriculture
-----------
Agriculture  consists  of Agway  Agricultural  Products  (AAP)  and the  Country
Products Group (CPG).  Total  Agriculture net sales and revenues of $156,700 and
$493,900  for the three and nine months ended March 31, 1997  decreased  $31,100
(17%) and $23,000  (4%),  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 an $18,500 (14%)
decrease in AAP net sales and  revenues and a $12,600  (25%)  decline in CPG net
sales and  revenues.  The decrease in net sales and revenues for the  nine-month
period ended March 31,  1997,  as compared to the same period in the prior year,
resulted from a $15,300 (4%) increase in AAP net sales and revenues, offset by a
$38,300 (25%) decline in CPG total net sales and revenues.

The  increase  in AAP sales  for the  nine-month  period  ended  March 31,  1997
resulted  primarily  from  increased feed product prices and delayed spring 1996
sales of  crop-related  services which  increased  sales in the first quarter of
fiscal 1997. In the third quarter,  this was offset by a decrease in grain sales
resulting  from a poor wheat yield.  The decline in CPG sales for the three- and
nine-month  periods ended March 31, 1997  represents the decline in sales volume
of $6,300 and $29,700, respectively,  from lines of business sold, mainly during
the  prior  year,  as part of  CPG's  strategic  plan,  which  included  Agway's
laboratory animal diet business, Pro-Lawn, Sacramento Valley Milling and Roberts
Seed.  Additionally,  net sales  and  revenues  for the  ongoing  CPG  specialty
products operations also declined in the nine-month period ended March 31, 1997,
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 caused less demand for this product.

The net loss before  income taxes of  Agriculture  of $1,800 and $18,100 for the
three and nine months ended March 31, 1997  increased  $6,500 (138%) and $14,500
(403%),  respectively,  as compared to the same periods in the prior year. AAP's
third  quarter loss of $3,500 was $3,000 (545%) larger than the loss in the same
period in the prior  year,  and the  $21,400  nine-month  loss was $9,900  (86%)
larger than the loss in the first nine months of the prior year.  AAP enterprise
field operations  experienced $3,400 in improvements to operating results during
the nine  months  ended  March 31,  1997,  as compared to the same period in the
prior year. These  improvements  were more than offset mostly by decreased gross
margins,  due to  increased  commodity  costs and  unfavorable  experience  with
exchange-traded  futures,  and also by the impact of  adopting a new  accounting
pronouncement on the impairment of long-lived  assets.  Due to the volatility of
the  commodities  market,  the  gain  or  losses  experienced  from  the  use of
exchange-traded  futures  contracts may or may not be realized at the same level
in future periods.



                                       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 $1,700 and $3,300 for the three and nine  months  ended  March
31, 1997 decreased $3,500 (67%) and $4,600 (58%),  respectively,  as compared to
the same periods in the prior year. The sale of the Pro-Lawn business in January
1996 generated a significant  gain, which accounts for $3,000 of the decrease in
net income for the three and nine months  ended March 31,  1997.  The net income
was adversely  impacted in 1997 by a $300 decline in the sunflower  seed margins
due to lower bird food sales volumes;  a decline in potato margins resulted from
price reductions in the potato industry;  and the cost of net asset  write-downs
and  other  costs  attributable  to the  current  year  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 $45,500  and  $157,400  for the three and nine
months ended March 31, 1997 decreased $3,700 (8%) and $6,200 (4%), respectively,
as compared to the same periods in the prior year.  The  declines are  primarily
attributable  to a mild and  relatively  snow-free  winter in many  parts of the
Northeast.  This resulted in a significant reduction in bird food and ice melter
salt sales. 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 third
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 $3,300 and $3,900 for the three and nine months
ended March 31, 1997 showed no change and improved  $1,300 (25%),  respectively,
over the same periods in the prior year.  Gross margin  dollars were down 4% for
the third  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 third
quarter and for the  nine-month  period ended March 31, 1997 decreased $600 (4%)
and $2,300  (4%),  respectively,  as compared  to the same  periods in the prior
year. The most  significant  decline in both the three- and  nine-month  periods
ended March 31, 1997 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 transition  costs  incurred to
outsource  distribution  center  management and from the costs of acquisition of
new businesses or improvements to current stores.

Energy
------
Net sales and  revenues of $212,400  and  $487,900 for the three and nine months
ended March 31, 1997 increased $20,800 (11%) and $58,600 (14%), 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 8.2% for the nine months ended March 31, 1997, as compared to
the same  periods in the prior year.  The total unit volume of all  products for
both the three and nine months ended March 31, 1997 shows  slight  improvements,
despite temperatures being warmer than the prior year.

Margin  before income taxes of $19,900 and $20,200 for the three and nine months
ended March 31,  1997  decreased  $400 (2%) and $1,000  (5%),  respectively,  as
compared to the same periods in the prior year.  Gross margin dollars  decreased
$3,400 and $3,700 for the third quarter and nine months ended March 31, 1997, as
compared  to the same  periods in the prior  year,  as a result of product  cost
increases not being passed on to the marketplace  through higher product prices.
Total operating expenses decreased for the three and nine months ended March 31,
1997,  as  compared  to the same  periods  in the prior  year,  as the result of
decreased distribution costs, principally payroll costs, due to staff reductions
and a decrease in overtime. 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 $14,300  and  $41,700 for the three and nine months
ended March 31, 1997 increased $2,200 (18%) and $6,000 (17%),  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  primarily the
result of a higher average net investment associated with current period leases.
The net investment increased $41,400 (11%) to $435,800 for the nine-month period
ended March 31, 1997, as compared to an increase of $21,000 (6%) to $369,400 for
the same period in the prior year.

Margin  before  income  taxes of $3,700 and $9,800 for the three and nine months
ended March 31, 1997  increased  $500 (16%) and $1,100 (13%),  respectively,  as
compared to the same periods in the prior year.  Total  revenue  increases  were
partially  offset by an increase in total expenses for the three and nine months
ended March 31, 1997 of $1,800 (20%) and $4,900 (18%), 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
---------
Insurance consists of Agway Insurance Company, a property and casualty insurance
subsidiary,  and Agway General Agency,  a subsidiary  which markets accident and
health insurance and long-term care products.

Insurance net revenues (earned premiums) of $6,800 and $19,900 for the three and
nine months ended March 31, 1997  increased  $400 (6%) and decreased  $200 (1%),
respectively,  as compared to the same  periods in the prior year.  The increase
for the three-month period is the result of decreased reinsurance costs. For the
nine months ended March 31, 1997,  the increase in net revenues due to decreased
reinsurance  costs of the Insurance  Company was offset by a decline in the fees
from third-party insurers received by Agway General Agency.

Margin  before  income taxes of $80 and $300 for the three and nine months ended
March 31, 1997  increased  $1,300  (104%) and $5,400  (106%),  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 nine 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 nine 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  provided from  operating  activities for the nine months ended March
31,  1997 were a net of  $28,700,  an  increase  in cash flows of  approximately
$35,200 as compared to the same period in the prior year.  This  increase is due
primarily to a smaller increase in inventory  ($14,800) and a larger decrease in
receivables  ($26,500)  over the  nine-month  period  ended March 31,  1997,  as
compared to the same period in the prior year.

Cash Flows from Investing Activities
Net cash flows used in the Company's investing activities totaled  approximately
$45,800 for the nine months ended March 31, 1997, as compared to $1,900 provided
for the nine months ended March 31, 1996, an increased  outflow of $47,700.  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
$42,900 for the nine months ended March 31, 1997, as compared to $21,900 for the
nine months  ended March 31,  1996,  a net  increase in cash outflow of $21,000.
Proceeds of $27,500 from businesses and fixed assets sold during the nine months
ended March 31, 1997 were  $17,300  less 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 March
31, 1997:

Source of debt                                  Agway & AFC   Telmark     Total
--------------                                  -----------  --------   --------
Banks - due 11/97 to 2/01 with interest
  from 6.0% - 8.5% ............................   $  2,695   $138,000   $140,695
Insurance companies - due 5/97 to 11/00
  with interest from 5.9% - 9.2% ..............               111,222    111,222
Capital leases & other - due 1997 to 2007
  with interest from 6% to 12% ................     12,636        108     12,744
                                                  --------   --------   --------
    Long-term debt ............................     15,331    249,330    264,661
Subordinated money market certificates - due
  10/97 to 10/08 with interest from 4.5% - 9.5%    383,458     30,750    414,208
Subordinated debentures - due 1999 to 2003 with
  interest at 7.0% to 8.5% ....................     22,200                22,200
                                                  --------   --------   --------
    Total debt ................................   $420,989   $280,080   $701,069
                                                  ========   ========   ========

For a complete description of the Company's credit facilities available at March
31, 1997, see Footnote 3 to the condensed consolidated financial statements.



                                       15

<PAGE>



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


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 March 31, 1997.



                                       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            May 5, 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