UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                                    FORM 10-Q/A



(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, 1998
                               -----------------
                                       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 September 10, 1999
------------------------                       ---------------------------------
Membership Common Stock,                                99,728 shares
$25 par value per share





                                        1

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

                                      INDEX

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

           Item 1.  Financial Statements (Unaudited)

           Condensed Consolidated Balance Sheets as of December 31, 1998 and June 30, 1998.....................   3

           Condensed Consolidated Statements of Operations and Retained Earnings for the three months
           and six months ended December 31, 1998 and December 31, 1997........................................   4

           Consolidated Statements of Comprehensive Income for the three months and six months ended
           December 31, 1998 and December 31, 1997.............................................................   5

           Condensed Consolidated Cash Flow Statements for the six months ended December 31, 1998
           and December 31, 1997...............................................................................   6

           Notes to Condensed Consolidated Financial Statements................................................   7

           Item 2.  Management's Discussion and Analysis of Financial Condition and
           Results of Operations...............................................................................  13

           Item 3.  Quantitative and Qualitative Disclosures About Market Risk.................................  21


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

           Item 4.  Submission of Matters to a Vote of Security Holders........................................  23

           Item 6.  Exhibits and Reports on Form 8-K...........................................................  23


           SIGNATURES..........................................................................................  24



</TABLE>












                                        2

<PAGE>




                          PART I. FINANCIAL INFORMATION
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
                      CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
                             (Thousands of Dollars)

<TABLE>
<CAPTION>
                                                                                   Restated             Restated
                                                                                  December 31,           June 30,
                                                                                     1998                 1998
                                                                                  ------------         ------------
ASSETS
------
<S>                                                                               <C>                 <C>
Current Assets:
     Trade accounts  receivable  (including  notes  receivable  of  $33,449  and
         $49,394, respectively), less allowance for doubtful accounts of
         $7,595 and $7,926, respectively........................................  $    144,261        $    203,637
     Leases receivable, less unearned income of $63,561 and
         $65,048, respectively..................................................       130,689             137,493
     Advances and other receivables.............................................        20,728              25,480
     Inventories:
         Raw materials..........................................................         9,346               7,576
         Finished goods.........................................................       141,652             139,861
         Goods in transit and supplies..........................................         5,995               1,777
                                                                                  ------------        -------------
              Total inventories.................................................       156,993             149,214
     Prepaid expenses and other assets..........................................        45,151              52,774
                                                                                  ------------        -------------
         Total current assets...................................................       497,822             568,598

Marketable securities available for sale........................................        36,854              36,412
Other security investments......................................................        52,050              51,761
Properties and equipment, net...................................................       214,396             213,795
Long-term leases receivable, less unearned income of $119,874 and
     $110,721, respectively.....................................................       382,363             357,777
Net pension asset...............................................................       186,592             176,792
Other assets....................................................................        17,346              12,159
                                                                                  ------------        -------------
              Total assets......................................................  $  1,387,423        $  1,417,294
                                                                                  ============        =============

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
     Notes payable..............................................................  $     76,700        $     65,100
     Current installments of long-term debt.....................................       120,694              99,173
     Current installments of subordinated debt..................................        59,621              75,589
     Accounts payable...........................................................       113,653             114,548
     Other current liabilities..................................................       106,788             114,311
                                                                                  ------------        -------------
         Total current liabilities..............................................       477,456             468,721

Long-term debt..................................................................       204,154             255,356
Subordinated debt...............................................................       411,378             386,607
Other liabilities...............................................................       104,975             100,381
                                                                                  ------------        -------------
         Total liabilities......................................................     1,197,963           1,211,065
Commitments and contingencies...................................................
Shareholders' equity:
     Preferred stock, net.......................................................        45,668              47,871
     Common stock, net..........................................................         2,532               2,571
     Accumulated other comprehensive income.....................................         1,017                 705
     Retained earnings..........................................................       140,243             155,082
                                                                                  ------------        -------------
         Total shareholders' equity.............................................       189,460             206,229
                                                                                  ------------        -------------
              Total liabilities and shareholders' equity........................  $  1,387,423        $  1,417,294
                                                                                  ============        =============

</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 EARNINGS
                                   (Unaudited)
                             (Thousands of Dollars)

<TABLE>
<CAPTION>

                                                    Three Months Ended                     Six Months Ended
                                                        December 31,                         December 31,
                                               ------------------------------       -----------------------------
                                                   1998              1997               1998             1997
                                               -------------    -------------       -------------    ------------
                                                 Restated                             Restated
<S>                                            <C>              <C>                 <C>              <C>
Net sales and revenues from:
     Product sales (including excise taxes)    $     292,398    $     333,602       $     571,359    $    648,011
     Leasing operations......................         17,583           16,346              34,496          32,108
     Insurance operations....................          7,597            6,966              14,563          13,823
                                               -------------    -------------       -------------    ------------
         Total net sales and revenues........        317,578          356,914             620,418         693,942

Cost and expenses from:
     Products and plant operations                   272,905          315,759             543,617         614,926
     Leasing operations......................          7,188            7,098              14,554          14,147
     Insurance operations....................          4,824            4,467               9,457           8,667
     Selling, general and administrative
       activities............................         38,473           31,251              73,882          62,815
                                               -------------    -------------       -------------    ------------
         Total operating costs and expenses..        323,390          358,575             641,510         700,555

Operating earnings (loss)....................         (5,812)          (1,661)            (21,092)         (6,613)
Interest expense, net........................         (8,214)          (7,136)            (15,737)        (14,011)
Other income, net............................          4,037            2,629              17,290           4,754
                                               -------------    -------------       -------------    ------------
Loss from operations before income taxes              (9,989)          (6,168)            (19,539)        (15,870)
Income tax benefit ..........................          3,112            2,506               6,392           4,584
                                               -------------    -------------       -------------    ------------

Loss from operations before cumulative
     effect of an accounting change..........         (6,877)          (3,662)            (13,147)        (11,286)

Cumulative effect on prior years of an
     accounting change, net of tax
     expense of $16,500......................              0                0                   0          28,956
                                               -------------    -------------       -------------    ------------
Net earnings (loss)..........................         (6,877)          (3,662)            (13,147)         17,670

Retained earnings balance, beginning of
     period..................................        148,812          138,903             155,082         117,571
Dividends....................................         (1,692)          (1,791)             (1,692)         (1,791)
                                               -------------    -------------       -------------    ------------
Retained earnings, end of period.............  $     140,243    $     133,450       $     140,243    $    133,450
                                               =============    =============       =============    ============

</TABLE>












     See accompanying notes to condensed consolidated financial statements.

                                        4

<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                   (Unaudited)
                             (Thousands of Dollars)

<TABLE>
<CAPTION>

                                                     Three Months Ended                     Six Months Ended
                                                        December 31,                         December 31,
                                               ------------------------------       -----------------------------
                                                   1998              1997               1998             1997
                                               -------------    -------------       -------------    ------------
                                                 Restated                             Restated
<S>                                            <C>              <C>                 <C>              <C>
Net earnings (loss).........................   $     (6,877)    $      (3,662)      $    (13,147)    $     17,670

Other comprehensive income, net of tax:
     Unrealized gains (losses) on
         available-for-sale securities:
         Unrealized holding gains (losses)
         arising during period..............           (243)               53                297              500
         Less:  Reclassification adjustment
         for gains (losses) included in
         net income.........................             31                23                (15)               1
                                               -------------    -------------       -------------    ------------

Other comprehensive income..................           (274)               30                312              499

Comprehensive (loss) income.................   $     (7,151)    $      (3,632)      $    (12,835)    $     18,169
                                               =============    =============       ============     ============

</TABLE>






























     See accompanying notes to condensed consolidated financial statements.

                                        5

<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,
                                                                                -----------------------------------
                                                                                    1998                  1997
                                                                                -------------        --------------
<S>                                                                             <C>                  <C>
Net cash flows provided by operating activities..............................   $     37,664         $         215

Cash flows provided by (used in) investing activities:
     Purchases of property, plant and equipment..............................        (10,394)              (17,473)
     Proceeds from disposal of property, plant and equipment                           1,544                 5,881
     Proceeds from sale of business..........................................         14,150                     0
     Cash paid for acquisitions of businesses................................         (6,720)               (1,458)
     Leases originated.......................................................       (119,754)             (116,557)
     Leases repaid...........................................................         98,362                95,262
     Proceeds from sale of marketable securities.............................          2,693                 8,427
     Purchases of marketable securities......................................         (2,822)               (8,790)
     Net redemption of investments in cooperatives...........................           (522)                1,378
                                                                                -------------        --------------

Net cash flows used in investing activities..................................        (23,463)              (33,330)


Cash flows provided by (used in) financing activities:
     Net change in short-term borrowings.....................................         11,380                36,690
     Proceeds from long-term debt............................................         11,880                60,225
     Repayment of long-term debt.............................................        (42,065)              (56,444)
     Proceeds from sale of subordinated debt.................................        102,680                74,946
     Maturity and redemption of subordinated debt............................        (93,879)              (71,932)
     Payments on capital leases..............................................           (113)                 (471)
     Redemption of stock, net ...............................................         (2,243)               (7,750)
     Cash dividends paid.....................................................         (1,841)               (2,149)
                                                                                -------------        --------------

Net cash flows (used in) provided by financing activities....................        (14,201)               33,115
                                                                                -------------        --------------

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.

                                        6

<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, 1998, are not  necessarily  indicative of the results that may
     be expected for the year ending June 30, 1999,  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, 1998.

     Accounting for Derivative Instruments and Hedging Activities
     In June 1998, the Financial  Accounting Standards Board issued Statement of
     Financial  Accounting  Standards (SFAS) No. 133, "Accounting for Derivative
     Instruments   and   Hedging   Activities."   This   statement   establishes
     comprehensive   accounting  and  reporting   requirements   for  derivative
     instruments  and hedging  activities.  SFAS No. 133  requires  companies to
     record derivatives on the balance sheet as assets or liabilities,  measured
     at fair value. The accounting for gains or losses resulting from changes in
     the values of those  derivatives  is dependent on the use of the derivative
     and the type of risk being  hedged.  The  statement  is  effective  for all
     quarters of fiscal  years  beginning  after June 15,  2000.  At the present
     time,  the  Company  has not  fully  analyzed  the  effect or timing of the
     adoption  of  SFAS  No.  133  on  the  Company's   consolidated   financial
     statements.


     Comprehensive Income
     Effective  July 1, 1998,  the  Company  adopted  SFAS No.  130,  "Reporting
     Comprehensive  Income." This pronouncement  requires the Company to report,
     among other things,  the effects of unrealized  investment holding gains or
     losses for available-for-sale  securities as "comprehensive income" for all
     periods presented.


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



     Restatement
     On July 8, 1999,  Agway  announced  that it had become aware of  accounting
     irregularities in its grain marketing  department.  As more fully discussed
     in Footnote 5, upon investigation,  Agway has determined that the financial
     statements  as  previously  filed for the quarter  ended  December 31, 1998
     required restatement.


                                        7

<PAGE>



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

              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                   (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, its subsidiaries,  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 guaranteed
     by the Company.  This  guarantee is full and  unconditional,  and joint and
     several.  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
                                                    December 31,                         December 31,
                                           -------------------------------    --------------------------------
                                                1998             1997              1998             1997
                                           -------------     -------------    -------------     --------------
         <S>                               <C>               <C>              <C>               <C>
         Net sales and revenues.........   $     235,094     $     265,839    $     444,928     $     498,375
         Operating earnings.............           3,326            10,896            3,192            13,423
         Net loss.......................          (7,373)           (2,280)         (19,805)           (9,651)


<CAPTION>
                                                                              December 31,          June 30,
                                                                                  1998               1998
                                                                              -------------     --------------
         <S>                                                                  <C>               <C>
         Current assets....................................................   $     463,482     $     524,800
         Properties and equipment, net.....................................         147,748           150,618
         Noncurrent assets.................................................         475,604           451,303
                                                                              -------------     --------------
         Total assets......................................................   $   1,086,834     $   1,126,721
                                                                              =============     ==============

         Current liabilities...............................................   $       5,757     $      15,173
         Short-term notes payable..........................................          76,700            65,100
         Current portion of long-term debt.................................         178,557           170,836
         Long-term debt....................................................         192,807           248,128
         Subordinated debt.................................................         411,378           386,607
         Noncurrent liabilities............................................          26,724            26,474
         Shareholder's equity..............................................         194,911           214,403
                                                                              -------------     -------------
         Total liabilities and shareholder's equity........................   $   1,086,834     $   1,126,721
                                                                              =============     =============

</TABLE>

                                        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
     ----------------------
     As of December 31, 1998, the Company had certain facilities  available with
     banking  institutions  whereby  lenders have agreed to provide  funds up to
     $377,000 to  separately  financed  units of the  Company as follows:  AFC -
     $75,000 and Telmark - $302,000. In addition, AFC may issue up to $50,000 of
     commercial paper under the terms of a separate agreement,  backed by a bank
     standby letter of credit.

     AFC
     As of December 31, 1998, AFC had bank facilities available which included a
     $50,000 short-term line of credit and a $25,000 long-term revolving line of
     credit.  These  facilities and AFC's ability to issue $50,000 of commercial
     paper require  collateralization  using  certain of the Company's  accounts
     receivable  and non-  petroleum  inventories  ("collateral").  The  maximum
     amounts  which can be drawn  under  these AFC  agreements  are subject to a
     limitation  based on a  specific  calculation  relating  to 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.  The  line of  credit  and  long-term
     revolving line of credit additionally  require the Company's  investment in
     bank stock as additional  collateral.  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  earnings.  As  described  in Footnote 5, due to the
     restatement of financial  results,  Agway violated certain of its covenants
     in its loan  agreements,  including  the interest  coverage  covenant as of
     December 1998,  March 1999, and June 1999 and a tangible net worth covenant
     as of November and December  1998.  Agway  disclosed  the  above-referenced
     losses  and  restatements,  and  causes  thereof,  to its  lenders  and has
     obtained  waivers  for  these  violations,  and the  covenants  in the loan
     agreements  have been amended through the remaining term of the agreements.
     There was $0 and $16,700  outstanding as of December 31, 1998,  under AFC's
     short-term line of credit and commercial  paper program,  respectively,  as
     compared  to  $0  and  $30,100,  respectively,  at  June  30,  1998.  AFC's
     short-term line of credit facility of $50,000  continues  through  December
     31,  1999,  but  provides  for an increase  to  $75,000,  which will become
     available  on  October  1,  1999,   to  assist  in   refinancing   maturing
     subordinated debt. AFC's current commercial paper program continues through
     December 31, 1999. The Company's $25,000 long-term revolving line of credit
     is available through January 1, 2001. At December 31, 1998, and at June 30,
     1998, $0 was outstanding under that revolving line of credit.  AFC annually
     renews its line of credit and commercial paper program in the quarter ended
     December  31. The  Company  expects to  continue  to have  appropriate  and
     adequate financing to meet its ongoing needs.



     In  addition,   Agway,   through  AFC,  offers  subordinated  money  market
     certificates  (and  previously  offered  subordinated  debentures)  to  the
     public.  AFC's subordinated debt is not redeemable by the holder.  However,
     AFC does have a practice  of  repurchasing  at face  value,  plus  interest
     accrued at the stated rate,  certain  subordinated debt whenever  presented
     for repurchase.  The foregoing debt bears interest payable semi-annually on
     January l and July 1 of each  year.  The  money  market  certificates  bear
     interest  at a rate that is the  greater of the stated rate or a rate based
     upon the average discount rate for U.S.  Treasury Bills, with maturities of
     26 weeks.  Subordinated money market  certificates due between October 1999
     and  October  2013 bear a weighted  average  interest  rate of 8.0%,  while
     subordinated debentures due between July 1999 and July 2003 bear a weighted
     average interest rate of 8.1%.



                                        9

<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
     As of December 31, 1998, Telmark had credit facilities available from banks
     which allow  Telmark to borrow up to an aggregate of $302,000.  Uncommitted
     short-term line of credit agreements permit Telmark to borrow up to $52,000
     on an  uncollateralized  basis with interest paid upon maturity.  The lines
     bear  interest  at  money  market  variable  rates.  A  committed  $250,000
     partially  collateralized  revolving line of credit 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 amount
     outstanding as of December 31, 1998,  under the short-term  lines of credit
     was $10,000 and under the revolving  term loan  facility was  $178,000,  of
     which  $128,000  was  long-term.  As of June 30,  1998,  the  total  amount
     outstanding was $20,000 under the short-term  lines of credit and under the
     revolving term loan facility was $165,000, of which $150,000 was long-term.
     The uncommitted  lines of credit expire within the next 12 months,  and the
     $250,000  revolving  term loan  facility is available  through  February 1,
     2000.

     Telmark had  balances  outstanding  on  uncollateralized  senior notes from
     private  placements  totaling  $162,000  and $169,000 at December 31 and at
     June 30, 1998,  respectively.  The principal  bears interest at fixed rates
     ranging  from 6.5% to 8.88%.  The payments  commence  March 1999 with final
     installment  due in May 2004.  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 contains  several  specific
     financial covenants.

     Telmark, through a wholly owned special purpose subsidiary, has two classes
     of lease-backed notes outstanding  totaling $14,700 and $17,700 at December
     31, 1998, and June 30, 1998, respectively,  payable to insurance companies.
     Interest rates on these classes of notes are 6.58% and 7.01%, respectively.
     The  notes  are  collateralized  by  leases,  which  Telmark  sold  to this
     subsidiary, having an aggregate present value of contractual lease payments
     equal to the principal  balance of the notes.  Final scheduled  maturity of
     these notes is December 2004.

     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 is allowed to be reinvested.

     Long-term  and  subordinated  debt  outstanding  at December 31,  1998,  as
     compared to June 30, 1998, is as follows:
<TABLE>
<CAPTION>
                                                            AFC
                                     Agway             (Excluding Telmark)        Telmark                  Total
                             ---------------------   ---------------------   --------------------   --------------------
                               12/98       6/98        12/98        6/98       12/98       6/98       12/98      6/98
                             ---------  ----------   ----------  ---------   ---------  ---------   ---------  ---------
     <S>                     <C>        <C>          <C>         <C>         <C>        <C>         <C>        <C>
     Long-term debt........  $  13,105  $   11,154   $    7,030  $   6,698   $ 304,713  $ 336,677   $ 324,848  $ 354,529
     Currently payable.....      1,758       3,926        1,120      1,661     117,816     93,586     120,694     99,173
                             ---------  ----------   ----------  ---------   ---------  ---------   ---------  ---------
     Net long-term debt....  $  11,347  $    7,228   $    5,910  $   5,037   $ 186,897  $ 243,091   $ 204,154  $ 255,356
                             =========  ==========   ==========  =========   =========  =========   =========  =========

     Subordinated debt.....  $       0  $        0   $  434,558  $ 428,190   $  36,441  $  34,006   $ 470,999  $ 462,196
     Currently payable.....          0           0       59,621     75,589           0          0      59,621     75,589
                             ---------  ----------   ----------  ---------   ---------  ---------   ---------  ---------
     Net subordinated debt.  $       0  $        0   $  374,937  $ 352,601   $  36,441  $  34,006   $ 411,378  $ 386,607
                             =========  ==========   ==========  =========   =========  =========   =========  =========


</TABLE>



                                       10

<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, 1998, 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  is  not   indemnified   for   existing
     environmental  cleanup  liability.   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.



                                       11
<PAGE>




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

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

5.   RESTATEMENT
     -----------
     On July 8, 1999,  Agway  announced  that it had become aware of  accounting
     irregularities in its grain marketing department.  An investigation,  under
     guidance from external legal counsel and including  internal legal counsel,
     internal financial staff, external auditors, and private investigators, was
     initiated. Reports on the investigation findings have been made directly to
     the Board of Directors.

     The investigation has determined that unauthorized speculative positions in
     commodity  instruments  were taken  within the  department  in violation of
     express policies,  which resulted in losses to Agway. Through falsification
     of market  values on inventory  held and on forward  contracts and improper
     accounting for premiums on options sold,  losses were concealed  within the
     department,  resulting  in  misreported  earnings  by Agway for the  fourth
     quarter of the year ended June 30,  1998,  and the first three  quarters of
     1999.  In  an  effort  to  recover  these  losses,  additional  speculative
     positions  in  commodity  instruments  were  taken  within  the  department
     throughout  1999.  In  addition,   while  the  unauthorized   activity  was
     occurring,   the  department  did  not  hedge  its  inventory  and  forward
     contracts,  in violation of express  policies,  which led to further losses
     from the department's operations.  To reflect these losses and their effect
     on the Company,  Agway has amended its  previously  filed annual  report on
     Form 10-K for the year ended June 30, 1998, and its 1999 quarterly  reports
     on Form  10-Q  with the SEC.  For the year  ended  June 30,  1998,  the net
     earnings of $41,754, as previously  reported,  have been reduced by $609 to
     $41,145  to  reflect  this  restatement.   The  after-tax  effects  of  the
     activities  described above on each of the first three quarters of 1999 are
     as follows:
<TABLE>
<CAPTION>

                                                                        Consolidated Net Earnings (Loss)
                                                              -----------------------------------------------------
                                                                    As            As Previously            Net
     Period                                                      Restated           Reported           Adjustment
     ------                                                   -------------       -------------      --------------
     <S>                                                      <C>                 <C>                <C>

     Three months ended September 1998......................  $      (6,270)      $     (2,570)      $      (3,700)
     Three months ended December 1998.......................         (6,877)            (7,336)                459
     Six-month period ended December 1998...................        (13,147)            (9,906)             (3,241)
     Three months ended March 1999..........................          2,769              3,255                (486)
     Nine-month period ended March 1999.....................        (10,378)            (6,651)             (3,727)
</TABLE>

     The total  pre-tax loss from  department  activities is $8,600 for the year
     ended June 30, 1999.  This compares to a pre-tax loss as restated of $1,100
     in 1998 and a $300 pre-tax loss in 1997. The 1999 loss includes $5,500 from
     unauthorized   speculation  in  commodity   instruments   and  $3,100  from
     operations,  due in part to not hedging  positions in inventory and forward
     contracts.

     The  results  of  operations,  as  restated,  violated  certain  of Agway's
     covenants in its loan agreements,  including an interest  coverage covenant
     as of December  1998,  March 1999,  and June 1999 and a tangible  net worth
     covenant  as  of  November  and  December   1998.   Agway   disclosed   the
     above-referenced  losses  and  restatements,  and  causes  thereof,  to its
     lenders and has obtained waivers for these violations, and the covenants in
     the loan  agreements  have been amended  through the remaining  term of the
     agreements.

     Subsequent to year-end, open unauthorized speculative commodity instruments
     were closed.  In addition,  inventory and open forward  contracts have been
     hedged.  During  the  period  it took to  restructure  and  hedge  the open
     positions of the department,  further market losses of approximately $1,300
     were  incurred,  which will be reflected in Agway's Form 10-Q for the first
     quarter  of  fiscal  2000.  Agway  has  restructured  its  grain  marketing
     activities, substantially  reducing their scope, and requiring that its net
     position at any point in time to be effectively hedged.





                                       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)


RESULTS OF OPERATIONS
---------------------
The Company is including the following cautionary statement in this Form 10-Q to
make  applicable  and take  advantage  of the "safe  harbor"  provisions  of the
Private  Securities  Litigation  Reform  Act of 1995  for any  forward-  looking
statement made by, or on behalf of, the Company.  Where any such forward-looking
statement  includes a statement  of the  assumptions  or basis  underlying  such
forward-looking  statement,  the Company  cautions that,  while it believes such
assumptions  or basis to be  reasonable  and makes them in good  faith,  assumed
facts or basis  almost  always vary from  actual  results,  and the  differences
between  assumed  facts or basis and actual  results can be material,  depending
upon the circumstances. Where, in any forward-looking statement, the Company, or
its management,  expresses an expectation or belief as to future  results,  such
expectation  or  belief  is  expressed  in good  faith  and  believed  to have a
reasonable  basis,  but  there  can  be  no  assurance  that  the  statement  of
expectation  or belief will result or be  achieved  or  accomplished.  The words
"believe,"   "expect,"  and  "anticipate"  and  similar   expressions   identify
forward-looking statements.

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
                                ------------------------------------   --------------------------------------
                                 Restated                 $ Increase     Restated                 $ Increase
                                 12/31/98     12/31/97    (Decrease)     12/31/98    12/31/97     (Decrease)
                                ----------   ---------   -----------   ----------   ---------   -------------
<S>                             <C>          <C>         <C>           <C>          <C>         <C>
NET SALES AND REVENUES
----------------------
Agriculture..................   $  137,851   $ 144,736   $    (6,885)  $  284,127   $ 304,324   $    (20,197)
Energy.......................      118,576     151,306       (32,730)     204,427     254,845        (50,418)
Retail.......................       47,779      52,257        (4,478)     105,928     113,772         (7,844)
Leasing......................       17,583      16,346         1,237       34,496      32,108          2,388
Insurance....................        7,597       6,966           631       14,563      13,823            740
Other (a)....................      (11,808)    (14,698)        2,890      (23,123)    (24,930)         1,807
                                ----------   ---------   -----------   ----------   ---------   ------------
                                $  317,578   $ 356,913   $   (39,335)  $  620,418   $ 693,942   $    (73,524)
                                ==========   =========   ===========   ==========   =========   ============

EARNINGS (LOSS) FROM
  OPERATIONS BEFORE
    INCOME TAXES
---------------------
Agriculture..................   $   (3,272)  $ (10,236)  $     6,964   $   (4,453)  $ (15,835)  $    11,382
Energy.......................        3,801       7,205        (3,404)        (164)      2,376        (2,540)
Retail.......................       (7,212)     (3,626)       (3,586)      (9,581)     (3,556)       (6,025)
Leasing......................        4,022       3,505           517        7,442       6,663           779
Insurance....................         (190)        162          (352)        (181)        168          (349)
Other (a)....................        1,076       3,958        (2,882)       3,135       8,325        (5,190)
                                ----------   ---------   -----------   ----------   ---------   -----------
Operating earnings (loss),
   plus other income, net....       (1,775)        968        (2,743)      (3,802)     (1,859)       (1,943)
Interest (expense), net of
   interest income...........       (8,214)     (7,136)       (1,078)     (15,737)    (14,011)       (1,726)
                                ----------   ---------   -----------   ----------   ---------   -----------
                                $   (9,989)  $  (6,168)  $    (3,821)  $  (19,539)  $ (15,870)  $    (3,669)
                                ==========   =========   ===========   ==========   =========   ===========

</TABLE>

   (a) Represents unallocated corporate items and intersegment eliminations.

                                       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)


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

CONSOLIDATED RESULTS
--------------------
Consolidated  net sales and  revenues of $317,600 and $620,400 for the three and
six months ended  December 31, 1998  decreased  $39,300 (11%) and $73,500 (11%),
respectively,  as compared to the same periods in the prior year.  The decreases
were  substantially  the result of a decline in sales in Energy and Agriculture,
principally  due to decreases in volume and pricing level of petroleum  products
and the pricing level of agricultural feed products.
See the detailed business segment discussion below.


Restated  net loss of $6,900 and  $13,100 for the three- and  six-month  periods
ended  December 31,  1998,  is higher than the  comparable  periods last year by
$3,200 (88%) and $30,800  (174%),  respectively.  Last year's  results  included
$29,000 of net income  from the  cumulative  effect of an  accounting  change in
pension  accounting.  Restated net loss from  operations  before income taxes of
$10,000  and  $19,500  for the three and six months  ended  December  31,  1998,
represents an increased  loss of $3,800 (62%) for the  three-month  period and a
$3,700 (23%) increased loss for the six-month period ended December 31, 1998, as
compared to the prior year.


The increase in net loss from operations before income taxes from the prior year
for the three-month period ended December 31, 1998,  resulted from a combination
of items. The net business unit operating results (discussed by business segment
below) improved by $100 and were offset by a $1,700 (27%) reduction in the level
of pension income, a $1,100 (45%) increase in corporate costs and a $1,100 (15%)
increase  in net  interest  expense.  The Company  amended  its defined  benefit
pension  plan  effective  July 1,  1998.  The  amendment  increased  the cost of
benefits,  the plan benefit obligations and related interest costs which reduced
net  pension  income  recognized  by the Company in the first six months of 1999
compared to the same period in the prior year.  The increase in total  corporate
costs was a result of new systems  costs and  professional  services  associated
with  several  projects  including  year 2000  readiness.  The  increase  in net
interest expense was due to a decline in interest revenue earned from receivable
balances  combined with an increase in interest  expense from a slightly  higher
average interest rate on outstanding debt.

The increase in the  restated  pre-tax  operating  loss for the six months ended
December 31, 1998, of $3,700 as compared to the same period in 1997,  reflects a
net increase in earnings of $10,400 from the sale of a seed  business  offset by
net reduction in business unit operating results of $7,200 (see below).  The net
reduction  in  business  unit  operating  results was  substantially  due to the
effects  of  unauthorized  activities  in AAP's  grain  marketing  business,  as
described further in Footnote 5.  Additionally,  a decline in pension credits of
$3,400  (27%)  increased  corporate  costs of  $1,800  (37%) and  increased  net
interest expense of $1,700 (12%) depressed  pre-tax operating results during the
six-month  period  as  compared  to the  same  period  in the  prior  year.  The
explanation  for these  unfavorable  non-operational  variances in the six-month
period as  compared  to the prior  year is the same as the  explanation  for the
variances in the three-month period note above.

Agriculture
-----------
Agriculture  consists  of Agway  Agricultural  Products  (AAP)  and the  Country
Products Group (CPG).  Total  Agriculture net sales and revenues of $137,900 and
$284,100 for the three and six months ended December 31, 1998,  decreased $6,900
(5%) and $20,200  (7%),  respectively,  as  compared to the same  periods in the
prior  year.  The  Agriculture  loss from  operations  of $3,300  for the second
quarter and $4,500 for the six months ended December 31, 1998, are  improvements
of $7,000 (68%) and $11,400 (72%), respectively, as compared to the same periods
in the prior 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)


AGRICULTURE (CONTINUED)
----------------------
AAP net sales and  revenues of $96,800 and $205,100 for the three and six months
ended December 31, 1998,  decreased $4,800 (5%) and $14,400 (7%),  respectively,
as  compared  to the same  periods  in the prior  year.  The AAP sales  decrease
results  principally  from the AAP  Enterprise  feed  business  as sales for the
three- and  six-month  periods  ended  December 31, 1998,  decreased  $6,300 and
$11,900,  respectively,  as  compared to the same  periods in the prior year.  A
decline in the pricing  levels of feed products in the global markets caused the
overall  decrease in feed sales.  The declining price level of feed products was
partially  offset by volume  improvements.  AAP  experienced an increase in feed
unit  volume  of 12% and 11%  during  the three and six  months  ended  December
31,1998,  respectively,  as compared to the same periods in the prior year.  The
increase in volume was from the  acquisition of a new business  during the first
quarter  of this  year  combined  with  improved  feed  sales  volume in the AAP
enterprises.

AAP Direct  marketing has also been negatively  impacted by the low market price
of agricultural commodities in feed and crop products. Sales in Direct marketing
improved $200 for the three months ended  December 31, 1998 and declined  $3,100
for the six months ended  December  31, 1998,  as compared to the same period in
the prior year.  The  three-month  period  reflects an improvement in commercial
vegetable  seed  sales,  which more than  offset the  decline  due to  commodity
pricing  during the quarter.  AAP  Enterprise  agronomy sales for the three- and
six-month   periods  ended  December  31,  1998  improved   $2,100  and  $2,200,
respectively,  as  compared  to the same  periods in the prior  year.  Favorable
weather  conditions during the second quarter of this year allowed for increased
sales of crop-related products.

CPG net sales and  revenues  of $41,000 and $79,000 for the three and six months
ended December 31, 1998 decreased $2,100 (5%) and $5,800 (7%), respectively,  as
compared to the same periods in the prior year.  The decrease in both periods is
substantially  due to the sale of a seed  business in the first  quarter of this
year. Sales were $3,900 and $5,400 lower in the three- and six-month  periods as
compared  to the same  periods in the prior year due to the sold  business.  The
lost  sales from sold  business  were  partially  offset by  increased  sales in
ongoing operations of $1,800 for the three months ended December 31, 1998, while
for the six-month  period ended December 31, 1998,  sales in ongoing  operations
declined  $400 as  compared  to the  prior  year.  The  improvement  to  ongoing
operations  in  the  second  quarter  was  principally  due to  CPG's  sunflower
operations  whose  sales  increased  $1,900  over  last  year  with  the help of
increased  capacity from a new processing  plant that was not operational in the
first six months of the prior year. For the six-month  period,  sales in produce
declined due to lower market  pricing,  and sales in flour declined due to lower
market  pricing  and lower unit  volume as  compared  to last year.  These sales
declines were more than offset by the improvement in sunflower operations.


AAP's restated operating loss of $5,500 and $18,900 for the three- and six-month
periods  ended  December  31,  1998  improved  $7,300  (57%)  and  $1,200  (7%),
respectively, as compared to the same periods in the prior year. The improvement
in operating results is substantially due to gross margin improvements of $8,200
(45%) and $3,400 (8%) for the three- and six-month  periods  ended  December 31,
1998,  respectively,  as  compared to the same  periods in the prior  year.  The
improvement in gross margins over the prior year periods is  principally  due to
lower unfavorable experience with exchange-traded futures in AAP's feed business
in the current  year and from the  combination  of  increased  feed  volumes and
improved  pricing  strategies  during the second  quarter of the current year in
comparison to the same period in the prior year. These gross margin improvements
were  negatively  impacted  in the  six-month  period by losses of $5,200 in the
grain  marketing   business   principally   from  the  effects  of  unauthorized
speculative  activities,  as  described  in  Footnote  5.  Contributing  to  the
improvement  in  operating  results in the current  year for both the three- and
six-month  period were higher  other  revenues of $1,300 which  included  higher
product  rebates and a gain on asset sales.  These  improvements  were partially
offset by  increased  expenses of $2,500 and $3,800 for the three and six months
ended December 31, 1998 mainly related to the increased cost of distributing and
selling a greater  volume of feed products than in the same periods in the prior
year.




                                       15

<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's  operating  earnings plus other income of $2,200 and $14,400 for the three
and six months  ended  December  31, 1998,  decreased  $400 (14%) and  increased
$10,100 (237%), respectively, as compared to the same periods in the prior year.
The decrease in the three-month period is due to an increase in costs associated
with  developing  and  marketing new  products,  which is partially  offset by a
$1,100  improvement  in  the  ongoing  operations,  principally  sunflower.  The
increase in operating  earnings  during the six-month  period as compared to the
prior year is attributable to the net improvement in results of $10,400 from the
sale of a seed business during the first quarter.

ENERGY
------
Net sales and  revenues of $118,600  and  $204,400  for the three and six months
ended December 31, 1998,  decreased  $32,700 (22%) and $50,400 (20%) as compared
to the same periods in the prior year.  Energy  commodity  costs  continue to be
lower than in the prior year, driving  competitive prices lower during the first
half of this year. The lower selling prices  decreased sales as compared to last
year by $19,500  during the second  quarter and $34,400 for the six months ended
December 31, 1998.  Sales decreases  compared to the prior year were also due to
volume  reductions,  particularly in heating oil and propane.  During the second
quarter and six months ended December 31, 1998,  sales  reductions due to volume
were  $13,300  and  $16,800,   respectively.   The  volume  reductions  resulted
principally  from warmer  weather in the second quarter of this year as compared
to the second quarter of last year.

Energy  earnings  (loss) from  operations of $3,800 and ($200) for the three and
six months ended  December 31, 1998  represents  an earnings  decrease of $3,400
(47%) and $2,500  (105%),  respectively,  as compared to the same periods in the
prior year.  The lower sales  dollars  decreased  overall  gross  margins on all
products  by $800 for the  second  quarter  and $300  for the six  months  ended
December  31,  1998,  as  compared  to  the  same  periods  in the  prior  year.
Distribution expense increases,  principally labor costs, represent the majority
of the operating expense increase.

RETAIL
------
Total net sales and  revenues  of  $47,800  and  $105,900  for the three and six
months  ended  December  31,  1998,  decreased  $4,500  (9%)  and  $7,800  (7%),
respectively, as compared to the same periods in the prior year. The decrease in
sales and revenues for the three- and six-month periods ended December 31, 1998,
were  substantially  all in wholesale sales due principally to the conversion of
the  historical  Agway  representative  retail  store  system  to a  new  system
including Agway  franchisees and Agway wholesale dealer  relationships.  Many of
the wholesale dealers are presently purchasing  non-Agway-branded  products from
other sources of supply which they had in the prior year purchased from Agway. A
loss in sales  volume due to this  change is likely to continue at some level at
least through this fiscal year as this new system is implemented. This change in
buying pattern has changed the mix of products  purchased,  resulting in a lower
average gross margin.

Retail  operating  loss of $7,200 and $9,600 for the three and six months  ended
December 31, 1998, increased $3,600 (99%) and $ 6,000 (169%),  respectively,  as
compared to the same periods in the prior year. The decline in operating results
was from reduced gross margins  dollars which  declined  $1,800 (13%) and $3,500
(11%) and increased  operating  expenses of $2,200 (13%) and $2,700 (8%) for the
three- and  six-month  periods  ended  December 31, 1998 as compared to the same
periods in the prior year.  The  reduction in  wholesale  sales  lowered  margin
dollars while  operating  expense  increased  from new locations  which were not
operational in the first six months of the prior year.



                                       16

<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
-------
Total revenue of $17,600 and $34,500 for the three and six months ended December
31, 1998 increased $1,200 (8%) and $2,400 (7%), respectively, as compared to the
same periods in the prior year.  These  increases  are  primarily  due to higher
investment in leases partly offset by a lower income rate on new and replacement
leases.  The company's  average net investment in leases increased $49,300 (10%)
and $50,500 (10%) in the second  quarter and six months ended  December 31, 1998
as compared to the same periods in the prior year.

Earnings  from  operations  of $4,000 and $7,400 for the second  quarter and six
months  ended   December  31,  1998   increased   $500  (15%)  and  $800  (12%),
respectively,  as compared to the same periods in the prior year.  Total revenue
increases noted above were partially  offset by an increase in total of expenses
of $700 (6%) and $1,600 (6%) for the three and six-month  periods ended December
31, 1998.  These  increases  were  substantially  due to increased  salaries and
payroll costs  required  managing the larger  portfolio as compared to the prior
year.

INSURANCE
---------
Insurance  net revenues of $7,600 and $14,600 for the three and six months ended
December 31, 1998, increased $600 (9%) and $700 (5%), respectively,  as compared
to the same periods in the prior year. The increase for the three- and six-month
periods is the result of higher earned premiums of Agway Insurance Company.

The operating  loss of $200 for the three and six months ended December 31, 1998
represents a decrease in earnings of $400 (217%) and $300 (208%),  respectively,
as compared to the same periods in the prior year.  Claims losses increased $300
and $800 in the second  quarter and six months as compared to the prior year due
to the effects of a windstorm  in Upstate New York.  Increased  expenses of $600
and $300 in the second quarter and six months as compared to the prior year were
both due to  increased  labor costs and lower  ceded  commission  income.  These
increased costs more than offset the higher earned premiums.

LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash  generated  from  operations  and external  borrowings  continues to be the
Company's  major  ongoing  source  of funds  to  finance  capital  improvements,
business acquisitions,  shareholder dividends,  and a growing lease portfolio at
Telmark.  The  following is a summary of net cash flows for the six months ended
December 31:
<TABLE>
<CAPTION>
                                                                                           1998           1997
                                                                                      -------------   ------------
<S>                                                                                   <C>             <C>
Net cash flows provided by (used in)
   Operating activities.............................................................  $      37,664   $        215
   Investing activities.............................................................        (23,463)       (33,330)
   Financing activities.............................................................        (14,201)        33,115
                                                                                      -------------   -------------
Net increase (decrease) in cash and equivalents.....................................  $           0   $          0
                                                                                      =============   =============
</TABLE>

Cash Flows Provided By Operating Activities
For the six months ended December 31, 1998, changes in working capital generated
cash of $41,400  compared to requiring cash of $5,100 for the same period in the
prior  year.  The  biggest  contributors  to this were from a larger  decline in
receivables  and a smaller  increase  in  inventories  during  this  year  (cash
provided) as compared to last year due  principally  to the lower prices of feed
and petroleum products in the current market environment.


Cash Flows Used In Investing Activities
The cash flows  required  for  investing  activities  decreased in the first six
months of 1999 by $9,900 as  compared to the first six months of the prior year.
The reason for the  decrease in cash used during the first six months of 1999 as
compared  to the prior  year was from the  generation  of cash of $14,200 on the
sale of a seed business in the Agriculture  segment,  which was partially offset
by cash paid for the acquisition of businesses  which  increased  $5,300 for the
six-month period in 1999 as compared to the prior year.

                                       17

<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 (CONTINUED)
------------------------------------------
Cash Flows Provided By (Used In) Financing Activities
Financing  activities for the six months ended December 31, 1998,  created a net
cash use of $14,200  compared to cash provided of $33,100 for the same period in
the prior  year.  This  $47,300  change in cash flows was  substantially  due to
$25,300  lower  short-term  borrowings  in the first six  months of this year as
compared  to the same  period in the prior  year.  The  increased  level of cash
generated  from the sale of  businesses in the first six months of 1999 and from
operations were the biggest reasons for this decline in borrowings.

The Company  finances it operations  and the  operations  of all its  continuing
business and subsidiaries, except Telmark and Insurance, 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 a commercial paper program. Telmark and Insurance finance themselves
through  operations  or  with a  combination  of  short-  and  long-term  credit
facilities.

Sources of longer-term financing include the following as of December 31, 1998:
<TABLE>
<CAPTION>
                                                                                       AFC
                                                                        Agway       (excluding
SOURCE OF DEBT                                                           Inc.        Telmark)          Telmark          Total
--------------                                                       ---------     ------------     ------------     -----------
<S>                                                                  <C>           <C>              <C>              <C>
Banks - due 1/99 to 8/01, interest at a weighted average
   rate of 6.9% with a range of 5.6% - 8.6%...................       $       0     $      1,600     $    128,000     $   129,600
Insurance companies - due 1/99 to 5/04, interest at a
   weighted average rate of 7.1% with a range of
   6.5% - 8.9%................................................               0                0          176,713         176,713
Capital leases and other - due 1999 to 2008, interest at a
   weighted average rate of 9.3% with a range of 6% to 12%....          13,105            5,430                0          18,535
                                                                     ----------    ------------     ------------     -----------
     Long-term debt...........................................          13,105            7,030          304,713         324,848
Subordinated  money  market  certificates  - due 10/99
  to 10/13, interest  at a weighted average rate of 8.0% with
  a range of 4.5% - 9.5%......................................               0          414,510                0         414,510
Subordinated debentures - due 7/99 to 7/03, interest at a
   weighted average rate of 8.1% with a range of 6.5%
   to 8.5%....................................................               0           20,048           36,441          56,489
                                                                     ----------    ------------     ------------     -----------
     Total debt...............................................       $  13,105     $    441,588     $    341,154     $   795,847
                                                                     ==========    ============     ============     ============
</TABLE>


For a further  description  of the  Company's  credit  facilities  available  at
December  31,  1998,  see  Footnote 3 to the  condensed  consolidated  financial
statements.   Also,  as  described  in  Footnote 5,  net  earnings, as restated,
resulted  in  a  violation  of  the  interest  coverage  and  tangible net worth
covenants which have been  waived by the banks.


OTHER MATTERS
-------------
Year 2000
The approach of the year 2000 presents potential issues to all organizations who
use  computers in the conduct of their  business or depend on business  partners
who use computers.  To the extent  computer use is  date-sensitive,  hardware or
software  that  recognizes  the  year by the  last two  digits  may  erroneously
recognize "00" as 1900 rather than 2000,  which could result in errors or system
failures.



                                       18

<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)


OTHER MATTERS (CONTINUED)
------------------------
Year 2000 (continued)
Agway  utilizes a number of computers and computer  software  ("systems") in the
conduct of its  business.  Many systems are for specific  business  segments and
others have broader  corporate-wide use. Systems are principally involved in the
flow  of  information  rather  than  in  the  processing,   manufacturing,   and
distributing  operations.  Agway initiated its year 2000  compliance  efforts in
January 1996. The initial focus of the Company's  compliance  efforts was on the
Company's  information systems,  including assessment of the issue, planning the
conversion to compliance, plan implementation, and testing. All critical systems
have been inventoried.  Those systems  determined to be at risk are prioritized,
and  plans  are in  place  to  upgrade  systems  by  remediation,  replacements,
outsourcing,  or  doing  without  these  systems.  Through  December  1998,  the
assessment   and  planning   phases,   as  well  as  certain   portions  of  the
implementation, have been completed. The remaining portion of these plans are in
process of  implementation,  with a completion  for specific  systems  scheduled
throughout this fiscal year in a manner that coordinates  implementation  around
the busy  operational  seasons  for the  respective  business  units and targets
completion  in September  1999.  Testing of systems is being  conducted for each
system as implemented.  The interaction of updated systems will be tested in the
enterprise-wide  testing  environment,  which is  planned  to be ready and start
testing by March 1999.

In addition to the  information  technology  systems  review  noted  above,  the
Company has also initiated processes to review and to modify, where appropriate,
other areas impacted by year 2000. These areas include,  but are not limited to,
hardware and software associated with end-user computing  functions,  vendor and
supplier  relationships,  external  interfaces  to internal  IT systems,  remote
location access to IT systems, facility management,  and certain non-information
technology  issues,  such as the  extent  to which  embedded  chips  are used in
machinery and equipment used in business  operations.  The Company has completed
significant  assessments in its major business  operations,  continues to assess
all of these areas,  and has developed  or, in some cases,  is in the process of
developing  the  implementation  plans to  address  the issues  identified.  The
Company  anticipates  that  solutions  to all  year  2000  areas  above  will be
implemented and tested no later than December 1999.

The Company engaged an  international  consulting firm in March 1998 to evaluate
the  Company's  approach  to year 2000  plans  and  implementation  compared  to
industry "best practices."  Based on this review,  the Company has increased the
involvement of higher-level  management to assure a focus on the  implementation
timetable and the development of specific  contingency  plans, and has initiated
development of a more comprehensive enterprise-wide testing environment to be in
place by  February  1999.  The  business  continuity  plans are  expected  to be
completed by February 1999.

The year 2000  compliance  issue is an uncertainty  that is  continuously  being
monitored as the Company  implements  its plans.  Based on the work performed to
date, the Company presently believes that the likelihood of the year 2000 having
a  material  effect  on the  results  of  operations,  liquidity,  or  financial
condition is remote.  Notwithstanding  the foregoing,  it is not presently clear
that all parts of the  country's  infrastructure,  including  such things as the
national   banking  systems,   electrical   power,   transportation   of  goods,
communications,  and governmental  activities,  will be fully functioning as the
year 2000 approaches. To the extent failure occurs in such activities, which are
outside the Company's  control,  it could affect the Company's sources of supply
and the  Company's  ability to service  its  customers  with the same  degree of
effectiveness  with which they are served presently.  The Company is identifying
elements  of  the  infrastructure  that  are  of  greater  significance  to  its
operations,  obtaining information on an ongoing basis as to their expected year
2000 readiness, and determining alternative solutions if required.



                                       19

<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)


OTHER MATTERS (CONTINUED)
-------------------------
Year 2000 (continued)
The  Company  expects  to  incur  significant  internal  staff  costs as well as
consulting and other expenses related to its year 2000 efforts. Due to the level
of effort  required  to  complete  remediation  for the year 2000,  non-business
critical system enhancements have been deferred until the year 2000 efforts have
been  completed.  The  conversion  and  testing  of  existing  systems  and  the
replacement of systems are expected to cost the Company  approximately  $18,900,
of which  $13,600 has been  incurred and $5,300 is expected to be incurred  from
December 1998 through December 1999.  Approximately 75% of these estimated costs
represent replacement costs and will be capitalized.  Additionally,  the Company
estimates  the costs to remediate  all other areas may  approximate  $4,200,  of
which $600 has been incurred and $3,600 is expected to be incurred from December
1998  through  December  1999.  However,  these  costs will vary as the  Company
continues  to assess and  implement  its plans or if the  Company is required to
invoke  contingency  plans. The Company treats non-capital costs associated with
year 2000 as period costs and they are expensed when incurred.


ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
------------------------------------------------------------
See Footnote 1 to the condensed consolidated financial statements.




                                       20

<PAGE>


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

       Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                   (Unaudited)
                             (Thousands of Dollars)






COMMODITY PRICE EXPOSURE
------------------------
In its normal course of operations, Agway has exposure to market risk from price
fluctuations  associated with commodity inventories,  product gross margins, and
anticipated transactions in its Agriculture and Energy businesses. To manage the
risk of market price fluctuations,  Agway uses commodity derivative instruments,
including  exchange-traded  futures  and  option  contracts  and,  in  limited
circumstances, over - the - counter  contracts  with  third  parties  (commodity
instruments). Agway  has  policies  with  respect to the use of these  commodity
instruments  that  specify  what  they  are to be used for and set limits on the
maturity of contracts entered into and the level of exposure to be hedged.

In the Energy segment,  exchange-traded  commodity  instruments  and, in certain
circumstances,   over-the-counter   contracts   with  third   parties  are  used
principally for gasoline,  distillate,  and propane.  They are entered into as a
hedge  against the price risk  associated  with Energy's  inventories  or future
purchases and sales of the commodities  used in its operations.  Generally,  the
price risk extends for a period of one year or less. A sensitivity  analysis has
been   prepared   to   estimate   Energy's   exposure  to  market  risk  of  its
exchange-traded  and  over-the-counter   commodity  instrument  position  as  of
December 31, and June 30, 1998.  The fair value of such  position is a summation
of the fair values  calculated  for each  commodity  instrument  by valuing each
position at quoted futures prices or, in the case of  options, a  delta-adjusted
calculated price. The market risk of the commodity  position is estimated as the
potential loss in fair value resulting  from a hypothetical 10% change in market
prices of the underlying commodities. This estimated loss in fair value does not
reflect  the  offsetting  impact  of  market  price  changes  to  the underlying
commodities that the commodity instruments are hedging.  As of December 31, 1998
and June 30,1998, assuming a 10% hypothetical change in the underlying commodity
price, the  potential  change  in  fair value of Energy's  commodity instruments
was  $100  and  $500, respectively.

In  the   Agriculture   segment's  feed  business,   exchange-traded   commodity
instruments are used principally to hedge  corn,  soy  complex, and  oats, which
can be sold directly as ingredients or included in feed products. Since November
1997, all  transactions  involving  derivative financial instruments in the feed
business are required to have a direct relationship to the price risk associated
with existing  inventories or  future  purchase  or  sale  of  its  products.  A
sensitivity analysis has been prepared to estimate  Agriculture's  feed business
exposure  to  market  risk  of  its  exchange-traded   instrument position as of
December 31, and June 30, 1998. The fair  value  of such position is a summation
of the fair values calculated  for each  commodity   instrument  by valuing each
position at quoted futures prices or, in the  case of options,  a delta-adjusted
calculated price.  The market risk of the commodity position is estimated as the
potential loss in  fair  value  resulting  from  a  hypothetical  10%  change in
market prices of the underlying commodities. This estimated loss in  fair  value
does not reflect the offsetting impact of market price changes to the underlying
commodities that the commodity instruments are hedging.  As of December 31,1998,
assuming a 10% hypothetical change in underlying commodity  price, the potential
change  in  fair  value  of  Agriculture's  feed  business commodity instruments
was $400.  As of June 30, 1998,  assuming  a  10%  hypothetical  change  in  the
underlying  commodity price, the potential change in fair value of Agriculture's
feed business commodity instruments was not material.

In the Agriculture segment's grain marketing business, exchange-traded commodity
instruments are used to hedge inventory and forward purchase and sales contracts
for grains,  principally corn, soy complex, oats, and wheat, which are purchased
and sold by the grain  marketing  department  (the  department).  The department
historically  entered into both forward  purchase  contracts  and forward  sales
contracts  (forward  contracts)  with  farmers  and others on a variety of grain
products.  Agway's  policy  requires that the  department  enter into  generally
matched  transactions  (in both  maturity and amount) using  offsetting  forward
contracts or commodity  instruments to hedge against price  fluctuations  in the
market  price  of  grains.  Agway  records  the  grain  marketing  program  on a
mark-to-market  basis by adjusting all outstanding forward contracts,  commodity
instruments, and inventory values to market value.




                                       21

<PAGE>



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

       Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
                                   (Unaudited)
                             (Thousands of Dollars)



COMMODITY PRICE EXPOSURE (continued)
------------------------------------
A sensitivity  analysis has been prepared to estimate the department's  exposure
to  market  risk of its  exchange-traded  commodity  instrument  position  as of
December 31, and June 30, 1998.  The fair value of such  position is a summation
of the fair values  calculated  for each  commodity  instrument  by valuing each
position at quoted futures prices or, in the  case  of options, a delta-adjusted
calculated price. The market risk of the commodity  position is estimated as the
potential loss in fair value resulting from a hypothetical  10% change in market
prices  of   the  underlying  commodities.  As  noted  above,  grain   marketing
historically enters  into generally matched  transactions to hedge against price
fluctuations. However,  as  previously  discussed,  during  the  fourth  quarter
of  1998 and throughout 1999,  unauthorized speculative   positions  were  taken
so that the commodity instrument activity of the department was not  effectively
hedging the underlying  commodities and forward contracts.  As  of  December 31,
and June 30,1998, assuming a 10% hypothetical change in the underlying commodity
price,  the  potential  change  in  fair  value  of  the department's  commodity
instruments was  $1,400  and $700, respectively.




                                       22


<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 12, 1998,  at
which a quorum was present in person or by proxy.  The following  Directors were
elected to three-year terms through December 2001:



         Nominee                  In Favor                      Opposed
--------------------------   -------------------      -------------------------
Keith H. Carlisle                  55,491                        2,132
D. Gilbert Couser                  55,491                        2,132
Andrew J. Gilbert                  55,491                        2,132
Thomas E. Smith                    55,491                        2,132
William W. Young                   55,491                        2,132

Eligible  additional  votes totaling 15,610 were not received at the time of the
annual  meeting  and are not  included  as  either  votes in  favor or  opposed.
Additionally,   these  15,610  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 November 12, 1998, Annual Meeting:

            Ralph H. Heffner          -  Chairman of the Board and Director
            Gary K. Van Slyke         -  Vice Chairman of the Board and Director
            Kevin B. Barrett          -  Director
            Keith H. Carlisle         -  Director
            D. Gilbert Couser         -  Director
            Andrew J. Gilbert         -  Director
            Peter D. Hanks            -  Director
            Robert L. Marshman        -  Director
            Jeffrey B. Martin         -  Director
            Samuel F. Minor           -  Director
            Carl D. Smith             -  Director
            Thomas E. Smith           -  Director
            Joel L. Wenger            -  Director
            Edwin C. Whitehead        -  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, 1998.

                                       23

<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      September 10, 1999                   /S/ PETER J. O'NEILL
         --------------------           ---------------------------------------
                                                 Peter J. O'Neill
                                              Senior Vice President,
                                               Finance & Control,
                                          (Principal Financial Officer and
                                             Chief Accounting Officer)











                                       24