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



(Mark One)
 X   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
----

ACT OF 1934
For the quarterly period ended September 30, 2001
                               ------------------

                                       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 November 9, 2001
------------------------                         -------------------------------
Membership Common Stock,                                  97,181 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 September 30, 2001 and June 30, 2001................     3

           Condensed Consolidated Statements of Operations and Retained Earnings for the three months
           ended September 30, 2001 and September 23, 2000.................................................     4

           Consolidated Statements of Comprehensive Income for the three months ended September 30, 2001
           and September 23, 2000..........................................................................     5

           Condensed Consolidated Cash Flow Statements for the three months ended September 30, 2001
           and September 23, 2000..........................................................................     6

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

           Item 2.  Management's Discussion and Analysis of Financial Condition and Results of Operations..    17

           Item 3.  Quantitative and Qualitative Disclosures About Market Risk.............................    24

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

           Item 1.  Legal Proceedings......................................................................    25

           Item 6.  Exhibits and Reports on Form 8-K.......................................................    25

           SIGNATURES......................................................................................    26
</TABLE>














                                        2

<PAGE>



                          PART I. FINANCIAL INFORMATION
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
                  Item 1. CONDENSED CONSOLIDATED BALANCE SHEETS
                             (Thousands of Dollars)
<TABLE>
<CAPTION>
                                                                                  September 30,         June 30,
ASSETS                                                                                2001                2001
------                                                                            -------------      --------------
                                                                                   (Unaudited)
Current Assets:
<S>                                                                               <C>                <C>
     Cash.......................................................................  $      2,548       $           0
     Trade accounts receivable (including notes receivable of $8,594 and
         $9,572, respectively), less allowance for doubtful accounts of
         $9,838 and $10,633, respectively.......................................       169,598             212,793
     Leases receivable, less unearned income of $79,260 and
         $78,126, respectively..................................................       171,902             165,348
     Advances and other receivables.............................................        29,293              19,941
     Inventories:
         Raw materials..........................................................         5,218               6,122
         Finished goods.........................................................        67,344              79,737
         Goods in transit and supplies..........................................         3,085               2,767
                                                                                  -------------      --------------
              Total inventories.................................................        75,647              88,626
     Restricted cash  ..........................................................         7,351               8,306
     Prepaid expenses and other assets..........................................        68,145              66,282
                                                                                  -------------      --------------
         Total current assets...................................................       524,484             561,296
Marketable securities available for sale........................................        38,956              37,556
Other security investments......................................................        51,279              51,829
Properties and equipment, net...................................................       173,328             177,355
Long-term leases receivable, less unearned income of $183,619 and
     $186,795, respectively.....................................................       510,671             502,992
Net pension asset...............................................................       233,953             229,678
Other assets  ..................................................................        31,378              33,785
Net assets of discontinued operations...........................................         5,879               5,414
                                                                                  -------------      --------------
              Total assets......................................................  $  1,569,928       $   1,599,905
                                                                                  =============      ==============

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
     Notes payable..............................................................  $    203,973       $     201,980
     Current installments of long-term debt.....................................       144,633             127,946
     Current installments of subordinated debt..................................        53,348              55,948
     Accounts payable...........................................................        99,096              90,684
     Other current liabilities..................................................       108,044             131,209
                                                                                  -------------      --------------
         Total current liabilities..............................................       609,094             607,767
Long-term debt..................................................................       224,699             270,743
Subordinated debt...............................................................       456,147             432,162
Other liabilities...............................................................       121,088             119,903
                                                                                  -------------      --------------
         Total liabilities......................................................     1,411,028           1,430,575
Commitments and contingencies...................................................
Shareholders' equity:
     Preferred stock, net.......................................................        36,554              37,603
     Common stock, net..........................................................         2,433               2,445
     Accumulated other comprehensive income (loss)..............................           812                 (61)
     Retained earnings..........................................................       119,101             129,343
                                                                                  -------------      --------------
         Total shareholders' equity.............................................       158,900             169,330
                                                                                  -------------      --------------
              Total liabilities and shareholders' equity........................  $  1,569,928       $   1,599,905
                                                                                  =============      ==============
</TABLE>

     See accompanying notes to condensed consolidated financial statements.

                                        3

<PAGE>



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

Item 1.  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED EARNINGS
                                   (Unaudited)
                             (Thousands of Dollars)

<TABLE>
<CAPTION>
                                                                                          Three Months Ended
                                                                                    -------------------------------
                                                                                    September 30,     September 23,
                                                                                        2001              2000
                                                                                    -------------    --------------
<S>                                                                                 <C>              <C>
Net sales and revenues from:
     Product sales ...............................................................  $    244,455     $     271,021
     Leasing operations...........................................................        21,928            20,468
     Insurance operations.........................................................         7,212             6,972
                                                                                    -------------    --------------
         Total net sales and revenues.............................................       273,595           298,461

Cost and expenses from:
     Products and plant operations................................................       240,304           265,397
     Leasing operations...........................................................         8,944             9,293
     Insurance operations.........................................................         4,333             4,312
     Selling, general and administrative activities...............................        31,265            32,431
                                                                                    -------------    --------------
         Total operating costs and expenses.......................................       284,846           311,433

Operating loss....................................................................       (11,251)          (12,972)
Interest expense, net.............................................................        (9,045)           (9,011)
Other income, net.................................................................         2,096               989
                                                                                    -------------    --------------
Loss before income taxes..........................................................       (18,200)          (20,994)
Income tax benefit ...............................................................         7,958             8,026
                                                                                    -------------    --------------

Loss before cumulative effect of an accounting change.............................       (10,242)          (12,968)
Cumulative effect of accounting change, net of tax benefit of $723................             0            (1,057)
                                                                                    -------------    --------------

Net loss .........................................................................       (10,242)          (14,025)
                                                                                    --------------   ---------------
Retained earnings, beginning of period............................................       129,343           141,221
                                                                                    --------------   ---------------
Retained earnings, end of period..................................................  $    119,101     $     127,196
                                                                                    ==============   ===============
</TABLE>


















     See accompanying notes to condensed consolidated financial statements.

                                        4

<PAGE>



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

        Item 1. CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
                                   (Unaudited)
                             (Thousands of Dollars)

<TABLE>
<CAPTION>
                                                                                          Three Months Ended
                                                                                    -------------------------------
                                                                                    September 30,    September 23,
                                                                                        2001              2000
                                                                                    -------------    --------------
<S>                                                                                 <C>              <C>
Net earnings (loss)...............................................................  $    (10,242)    $     (14,025)

Other comprehensive income  (loss),  net of tax:  Unrealized  gains  (losses) on
     available-for-sale securities:
         Unrealized holding gains (losses) arising during period..................           822               295
         Reclassification adjustment for (gains) losses included in net earnings..            (5)                0

     Deferred gains (losses) on derivatives, net of tax:
         Cumulative effect of accounting change...................................             0             3,061
         Holding gains (losses) arising during period.............................            82             3,402
         Reclassification adjustment for (gains) losses included in net earnings..           (26)             (664)
                                                                                    -------------  ----------------

Other comprehensive income (loss).................................................           873             6,094
                                                                                    -------------    --------------

Comprehensive loss................................................................  $     (9,369)    $      (7,931)
                                                                                    =============    ==============


</TABLE>



























     See accompanying notes to condensed consolidated financial statements.

                                        5

<PAGE>



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

               Item 1. CONDENSED CONSOLIDATED CASH FLOW STATEMENTS
                                   (Unaudited)
                             (Thousands of Dollars)

<TABLE>
<CAPTION>
                                                                                        Three Months Ended
                                                                                -----------------------------------
                                                                                September 30,         September 23,
                                                                                    2001                  2000
                                                                                -------------        --------------
<S>                                                                             <C>                  <C>
Net cash flows provided by (used in) continuing operations...................   $     26,597         $       8,432
Net cash flows provided by (used in) discontinued operations.................           (466)                9,218
                                                                                -------------        --------------
Net cash flows provided by (used in) operating activities....................         26,131                17,650

Cash flows provided by (used in) investing activities:
     Purchases of property, plant and equipment..............................         (1,794)               (3,351)
     Proceeds from disposal of property, plant and equipment.................          2,235                 2,170
     Leases originated.......................................................        (72,646)              (76,727)
     Leases repaid...........................................................         55,742                52,616
     Proceeds from sale of marketable securities.............................          2,873                 1,473
     Purchases of marketable securities......................................         (3,455)                 (477)
     Net purchase (sale) of investments in cooperatives......................           (199)                  351
                                                                                -------------        --------------

Net cash flows used in investing activities..................................        (17,244)              (23,945)

Cash flows provided by (used in) financing activities:
     Net change in short-term borrowings.....................................          1,993                14,488
     Proceeds from long-term debt............................................            143                   562
     Repayment of long-term debt.............................................        (29,467)              (26,969)
     Proceeds from sale of subordinated debt.................................         38,691                24,604
     Maturity and redemption of subordinated debt............................        (17,353)              (23,291)
     Payments on capital leases..............................................          2,236                   (32)
     Redemption of stock, net ...............................................         (1,061)               (1,433)
     Cash dividends paid.....................................................         (1,521)               (1,592)
                                                                                -------------        --------------

Net cash flows provided by (used in) financing activities....................         (6,339)              (13,663)
                                                                                -------------        --------------

Net increase (decrease) in cash and equivalents..............................          2,548               (19,958)
Cash and equivalents at beginning of period..................................              0                29,244
                                                                                -------------        --------------

Cash and equivalents at end of period........................................   $      2,548         $       9,286
                                                                                =============        ==============

</TABLE>












     See accompanying notes to condensed consolidated financial statements.

                                        6

<PAGE>



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

          Item 1. 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  three-month  period ended
     September 30, 2001, are not necessarily  indicative of the results that may
     be expected for the year ending June 30, 2002,  due to the seasonal  nature
     of certain major segments of our 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, 2001.

     Effective  July 1, 2001, we  simplified  the Agway  corporate  structure by
     merging Agway  Financial  Corporation  (AFC) and Agway  Holdings Inc. (AHI)
     into Agway Inc. The more complex  structure  described  below was no longer
     necessary  due to  changed  circumstances  related  to  Agway's  financing.
     Additionally,  Agway Inc. assumed all the assets and liabilities of AFC and
     AHI and  assumed  the  direct  responsibility  of  securing  financing.  In
     connection  with  the  assumption  by Agway of the  obligations  under  the
     corporate debt instruments,  AFC, Agway and The Chase Manhattan Bank, a New
     York  banking  corporation  (the  Trustee),  entered  into  a  Supplemental
     Indenture  dated as of July 1, 2001 which  provides for the  assumption  by
     Agway of all rights, responsibilities and obligations of AFC under existing
     indentures and the debt securities to which they relate.

     Prior to July 1, 2001 AFC was a wholly  owned  subsidiary  of Agway.  AFC's
     principal business activities  consisted of securing financing through bank
     borrowings and issuance of corporate debt  instruments to provide funds for
     general corporate purposes to Agway and AFC's wholly owned subsidiary, AHI,
     and  AHI's  subsidiaries.  Major  holdings  of AHI  included  Agway  Energy
     Products LLC and Agway Energy Services Inc.  (Energy),  Telmark LLC and its
     subsidiaries  (Leasing),  and Agway  Insurance  Company  and Agway  General
     Agency Inc.  (Insurance) through June 30, 2001. As a result of an exemptive
     relief granted  pursuant to a "no action letter" issued by the staff of the
     Securities and Exchange Commission (SEC), AFC did not file periodic reports
     with the SEC for itself but did report summarized financial  information in
     Agway's financial statement footnotes.  With the merger of AFC and AHI into
     Agway Inc. and the  assumption by Agway of the  obligations  under the debt
     securities initially issued by AFC, such summarized  financial  information
     is no longer  appropriate or relevant and therefore is no longer  provided.
     Leasing and Insurance finance their activities through operations or with a
     combination of short- and long-term  credit  facilities.  Telmark's debt is
     not guaranteed by Agway.

     Fiscal Quarter
     The fiscal  quarter-end  of Agway Inc. for the first quarter of the current
     and prior year was September 30 and September 23,  respectively.  Effective
     July 1, 2001, the fiscal year-end has been changed to June 30 each year for
     the  Company as a whole and for each of its  divisions.  Quarterly  reports
     will be at quarters ended on September 30, December 31, and March 31.

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




                                        7

<PAGE>



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

    Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
     ------------------------------------------------------
     Comprehensive Income
     Comprehensive  income  consists of net earnings  (loss),  the net change in
     unrealized gains and losses on available-for-sale  securities,  net of tax,
     and  deferred  gains  and  losses  on cash  flow  hedges,  net of tax.  The
     unrealized gains and losses on available-for-sale securities are net of tax
     expense of $421 and $152 for the three months ended  September 30, 2001 and
     September  23,  2000,  respectively.  The  deferred  gains  and  losses  on
     derivatives  are net of tax of $37 and  $3,866 for the three  months  ended
     September 30, 2001 and September 23, 2000.

     New Accounting Standards
     The  Financial  Accounting  Standards  Board  (FASB)  issued  Statement  of
     Financial  Accounting  Standards (SFAS) No. 133, "Accounting for Derivative
     Instruments and Hedging  Activities."  SFAS No. 133 (as amended by SFAS No.
     138) is effective  for all fiscal  quarters of all fiscal  years  beginning
     after  June 15,  2000,  (June 25,  2000,  for the  Company).  SFAS No.  133
     requires that all  derivative  instruments be recorded on the balance sheet
     at their fair value.  Changes in the fair value of derivatives are recorded
     each period in current earnings or other comprehensive income, depending on
     whether a derivative is designated as part of a hedge  transaction  and, if
     it is, the type of hedge transaction.

     On June 25, 2000,  upon  adoption of SFAS No. 133,  the Company  recorded a
     net-of-tax  cumulative-effect loss of $1,100 to recognize at fair value the
     component of all option  contracts  associated  with the  Company's  Energy
     segment which is excluded from the  assessment  of hedge  effectiveness  as
     allowed  by the new  standard.  The  Company  also  recorded  a  net-of-tax
     cumulative-effect gain of $3,100 in other comprehensive income to recognize
     at fair value all derivative  instruments  in the Company's  Energy segment
     that are  designated  and  qualify  as cash-  flow  hedges.  See Note 6 for
     further  details of the Company's  accounting for  derivatives  and hedging
     activities.

     In June 2001, the FASB approved SFAS No. 141, "Business  Combinations," and
     SFAS No. 142,  "Goodwill and Other Intangible  Assets," which are effective
     July 1, 2001 and July 1, 2002, respectively,  for the Company. SFAS No. 141
     requires  that the purchase  method of  accounting be used for all business
     combinations  initiated  after June 30, 2001. The adoption of this standard
     has no impact on the financial  statements  of the Company.  Under SFAS No.
     142, amortization of goodwill, including goodwill recorded in past business
     combinations, will discontinue upon adoption of this standard. In addition,
     goodwill recorded as a result of business combinations completed after July
     1, 2001, will not be amortized.  All goodwill and intangible assets will be
     tested for  impairment in accordance  with the provisions of the Statement.
     The  Company is  currently  reviewing  the  provisions  of SFAS No. 142 and
     assessing the impact of its adoption on July 1, 2002.



                                        8

<PAGE>



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

    Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)



2.   BORROWING ARRANGEMENTS
     ----------------------
     Agway's  senior debt  facility (the Agway Senior Debt) is available for all
     business  operations  except for Agway  Insurance  Company  (Insurance) and
     Telmark and Telmark's subsidiaries  (Telmark).  The Agway Insurance Company
     is independently  financed through operations and liquidity provided by its
     investment  portfolio.  Telmark  finances itself through a series of credit
     arrangements that are independent from the Agway Senior Debt. Each of those
     arrangements  is more fully  described in this footnote.  Effective July 1,
     2001,  Agway  Financial  Corporation  (AFC) was merged into Agway,  as more
     fully  described in Note 1. As a result,  Agway  assumed  liability for any
     amounts borrowed by AFC under the Credit Agreement (as defined below).

     As of  September  30, 2001,  Agway had certain  facilities  available  with
     various financial institutions whereby lenders have agreed to provide funds
     up to $564,200 to  separately  financed  units of Agway as follows:  Agway,
     excluding  Telmark  and  Insurance - $175,000  and Telmark - $389,200.  The
     Agway  amount is a $175,000  short-  term line of credit,  up to $35,000 of
     which can be used for letters of credit. At September 30, 2001,  letters of
     credit issued,  primarily to back Agway insurance programs, under the Agway
     Senior Debt totaled approximately  $28,800. The carrying amounts of Agway's
     and Telmark's short-term  borrowings  approximate their fair value and were
     as follows:
<TABLE>
<CAPTION>
     September 2001                                                Agway             Telmark              Total
     --------------                                           -------------       -------------      --------------
<S>                                                           <C>                 <C>                <C>
     Bank lines of credit...................................  $      25,670       $     178,303      $      203,973
                                                              =============       =============      ==============
     Weighted average interest rate.........................          6.93%               3.92%
                                                              =============       =============

     June 2001                                                     Agway             Telmark              Total
     ---------                                                -------------       -------------      --------------
     Bank lines of credit...................................  $      61,342       $     140,638      $      201,980
                                                              =============       =============      ==============
     Weighted average interest rate.........................          7.22%               4.67%
                                                              =============       =============
</TABLE>
     Agway Senior Debt
     The Agway Senior Debt is a syndicated three-year asset-based revolving line
     of credit for up to $175,000  pursuant  to the terms of a credit  agreement
     dated March 28, 2001 (and amended as of September 14, 2001) between  Agway,
     certain of its  subsidiaries  and a syndicated group of lenders (the Credit
     Agreement).  Interest rates are determined at the option of the Company, as
     either  prime  rate,  plus 2.00%,  or the London  Interbank  Offering  Rate
     (LIBOR),  plus 3.50%.  The  interest  rate  charged on bank lines of credit
     ranged from 3.33% to 7.75% at  September  30,  2001.  Up to $35,000 of this
     line of credit can be  designated  for use as  letters  of credit.  In this
     asset-based line of credit,  the amount available to Agway is the lesser of
     the "collateral  borrowing base" or the $175,000 upper limit of the line of
     credit.  The  collateral  borrowing  base  consists  of  certain of Agway's
     eligible  accounts  receivable  and  inventory (as defined under the Credit
     Agreement).  Certain covenants and conditions of the Credit  Agreement,  as
     more  fully  discussed  below,  restrict  the use of funds and  reduce  the
     practical  availability  of financing  under the  agreement by $25,000 to a
     maximum of $150,000.



                                        9

<PAGE>

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

    Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)

2.   BORROWING ARRANGEMENTS (continued)
     ----------------------------------
     Agway Senior Debt (continued)
     As previously reported,  based on Agway's June 30, 2001, financial results,
     Agway was in violation  of certain of the  financial  covenants  within the
     Credit  Agreement  because it had not maintained the required minimum level
     of earnings before interest, taxes, depreciation, and amortization (EBITDA)
     and the minimum  ratios of EBITDA to fixed  charges and  interest on senior
     debt.  On September 14, 2001,  the  syndicated  group of lenders  agreed to
     waive these  violations,  and further  agreed to amend these  covenants for
     each of the  succeeding  four  quarters  through June 2002 based on revised
     operating   budgets  for  that  period  of  time.  In  exchange  for  those
     amendments,  Agway agreed to pay 25 basis points in additional  interest on
     its  borrowings,  grant  additional  security  interests in  equipment  and
     properties not previously pledged as collateral  (including a pledge of its
     membership  interest in Telmark) and increase the required minimum range of
     Minimum  Capital (as defined  below)  balances of $455,000 to $465,000,  an
     increase of $15,000,  to reflect the actual increased balances  outstanding
     at June 30, 2001, and the projections of the balances.  As of September 30,
     2001, the Company has met the amended  covenants and  conditions  under the
     Credit Agreement.  As of September 30, 2001, the collateral  borrowing base
     was $111,700,  which  adequately  supported  Agway's  borrowing needs which
     totaled $54,500.  Management  believes that adequate  collateral exists and
     will continue to exist so that the Agway senior debt financing is, and will
     continue to be, adequate to meet the ongoing needs of Agway.

     The Credit Agreement has a number of financial covenants which restrict our
     capital  spending  and  require us to maintain  minimum  levels of earnings
     before interest, taxes, depreciation, and amortization (EBITDA), as defined
     in the Credit  Agreement,  minimum  ratios of EBITDA to fixed  charges  and
     interest on senior  debt,  and a minimum  outstanding  balance of preferred
     stock,  subordinated  debt, and certain debt of a subsidiary.  That minimum
     outstanding  balance  requirement,  as  amended,  ranges  from  $455,000 to
     $465,000  throughout  the year.  (This  minimum  amount of  capital we must
     maintain is referred to as the Minimum Capital.)

     Other   conditions  of  the  Credit   Agreement   prevent  us,  in  certain
     circumstances, from using funds we borrow under the Credit Agreement to pay
     interest  or  dividends  on,  or  repurchase  or repay  principal  of,  our
     subordinated debt or preferred stock. To avoid these use restrictions,  the
     Credit Agreement requires us to have a minimum excess borrowing capacity as
     defined  in  the  agreement   (collateral   borrowing  base  in  excess  of
     outstanding  loans) of at least  $20,000 if we are not in default under the
     Credit Agreement. If we are in default under the Credit Agreement, to avoid
     these use  restrictions,  the  minimum  excess  borrowing  capacity we must
     maintain  (collateral  borrowing  base  in  excess  of  outstanding  loans)
     increases  to  $25,000.  Further,  if we are in  default  under the  Credit
     Agreement, we are subject to these use restrictions if:

     (a) we default on our payment of principal, interest or  other  amounts due
         to the lenders under the Credit Agreement;
     (b) we fail to maintain the cash management procedures we agree to with the
         lenders under the Credit Agreement;
     (c) we do not maintain the Minimum Capital balance of $455,000 to $465,000;
         or
     (d) the agent under the Credit Agreement  provides us with a written notice
         that such payments are no longer permitted.

     These conditions,  if present,  reduce the practical availability under the
     Agway  Senior  Debt from  $175,000  to  $150,000  or $25,000  less than the
     collateral  borrowing base,  whichever is lower.  The Credit  Agreement was
     designed  in part to allow and enable us to continue  our past  practice of
     repurchasing,  at face value, certain subordinated debt and preferred stock
     when presented for repurchase prior to maturity.  However,  while it is our
     current  intent  to  continue  this  historic  practice,  we are  under  no
     obligation  to  repurchase  subordinated  debt  prior to its  maturity  and
     preferred stock when so presented, and may stop or suspend this practice at
     any time or may be required to stop or suspend  such  practice if we do not
     continue to meet the conditions of the Credit  Agreement,  including  those
     described above.

                                       10

<PAGE>



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

    Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)


2.   BORROWING ARRANGEMENTS (continued)
     ----------------------------------
     Agway Subordinated Debt
     Agway  registers  with  the SEC to  offer  debentures  to the  public  on a
     continuing  basis.  The  debentures are unsecured and  subordinated  to all
     senior debt of Agway.  The Agway  subordinated  debt bears interest payable
     semiannually  on January 1 and July 1 of each year.  The interest  rates of
     Agway's money market  certificates are at the greater of the stated rate or
     a rate based upon an average  discount  rate for U.S.  Government  Treasury
     Bills,  with  maturities  of 26  weeks.  Agway's  subordinated  debt is not
     redeemable by the holder, though Agway,  historically has had a practice of
     repurchasing  at face  value,  plus  interest  accrued at the stated  rate,
     certain  subordinated  debt  whenever  presented  for  repurchase  prior to
     maturity.  However,  Agway is under no obligation  to repurchase  such debt
     when so presented,  and may stop or suspend this repurchase practice at any
     time.  In addition,  the terms or conditions of the lines of credit may, in
     certain  circumstances,  cause  Agway to limit or cease its past  practices
     with regard to the repurchase of subordinated debt.

     Telmark Lines of Credit and Revolving Loans
     At September 30, 2001,  Telmark had credit facilities  available from banks
     aggregating to $389,200.  Uncommitted  short-term line of credit agreements
     with  various  lenders  permit  Telmark  to  borrow  up  to  $89,200  on an
     uncollateralized  basis with  interest paid upon  maturity.  The lines bear
     interest at money market  variable  rates. A committed  $300,000  partially
     collateralized  (by stock in a cooperative  bank, which has a book value of
     $14,695 at September 30, 2001) revolving term loan facility permits Telmark
     to draw  short-term  funds  bearing  interest at money market rates or draw
     long-term  debt at rates  appropriate  for the term of the note drawn.  The
     total  amounts  outstanding  as of September 30 and June 30, 2001 under the
     short-term  lines of credit were  $76,903 and  $71,138,  respectively,  and
     under the  short-term  component of the  revolving  term loan facility were
     $101,400 and $69,500,  respectively. The portion of the revolving term loan
     that is  long-term  at  September  30 and June  30,  2001 is  $127,000  and
     $166,000, respectively. Telmark borrows under its short-term line of credit
     agreements  and its revolving  term agreement from time to time to fund its
     operations.  Short-term  debt  serves  as  interim  financing  between  the
     issuances of long-term debt.  Telmark renews its lines of credit  annually.
     The $89,200 lines of credit all have terms expiring at various times during
     the next 12 months.  The $300,000 revolving term loan facility is available
     through May 1, 2002.

     Telmark Unsecured Notes Payable to Insurance Companies
     Telmark has balances  outstanding on  uncollateralized  senior note private
     placements  totaling  $149,500  at both  September  30 and June  30,  2001.
     Interest is payable  semiannually on each senior note.  Principal  payments
     are paid on both a semiannual  and an annual  basis.  The  principal  bears
     interest at fixed rates ranging from 6.55% to 8.72%. The notes have various
     maturities  through  December 2012. The note  agreements are similar to one
     another and each contains several specific financial covenants that must be
     complied with by Telmark.  As of September  30, 2001,  Telmark has complied
     with all covenants contained in its borrowing agreements.

     Telmark Lease-Backed Notes Payable to Insurance Companies
     Telmark,  through two wholly owned special purpose  subsidiaries,  has four
     classes of lease-backed  notes outstanding  totaling $82,267 and $90,760 at
     September 30 and June 30, 2001, respectively.  The notes are collateralized
     by leases,  which Telmark sold to these  subsidiaries,  having an aggregate
     present value of  contractual  lease  payments equal to or greater than the
     principal balance of the notes, and the notes are further collateralized by
     the residual  values of these leases and by segregated  cash accounts.  The
     principal bears interest at fixed rates ranging from 6.54% to 9.05% and has
     various  final  scheduled  maturity in varying  amounts  and dates  through
     December 2008.



                                       11

<PAGE>



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

    Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)


2.   BORROWING ARRANGEMENTS (continued)
     ----------------------------------
     Telmark Subordinated Debentures
     Telmark  registers  with the SEC to offer  debentures  to the  public  on a
     continuing  basis.  The  debentures are unsecured and  subordinated  to all
     senior debt of Telmark. The interest on the debentures is paid quarterly on
     January  1,  April 1, July 1, and  October  1 of each year and may,  at the
     holder's  option,  be reinvested.  Telmark's  subordinated  debentures bear
     interest  at a rate that is the  greater of the stated rate or a rate based
     upon an average  discount rate for U.S.  Government  Treasury  Bills,  with
     maturities of 26 weeks. Telmark debentures  outstanding as of September 30,
     2001 of $41,544  are due at  various  dates  through  March 2009 and bear a
     weighted average interest rate of 8.2%.

     Telmark  conducts ongoing  discussions and  negotiations  with existing and
     potential  lenders for future financing needs.  Telmark has been successful
     in  arranging  its past  financing  needs  and  believes  that its  current
     financial  arrangements  are  adequate  to meet its  foreseeable  operating
     requirements. There can be no assurance, however, that Telmark will be able
     to obtain future financing in amounts,  or on terms,  that are favorable to
     Telmark.

     The Company's  long-term and subordinated debt outstanding at September 30,
     2001, as compared to June 30, 2001, is as follows:
<TABLE>
<CAPTION>
                                                            AFC
                                    Agway           (excluding Telmark)      Telmark                  Total
                             --------------------  --------------------  -----------------     -----------------
                                9/01       6/01       9/01       6/01       9/01       6/01       9/01       6/01
                             ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
     <S>                     <C>        <C>        <C>        <C>        <C>        <C>        <C>        <C>
     Long-term debt........  $  10,565  $  10,639  $   *      $   1,790  $ 358,767  $ 386,260  $ 369,332  $ 398,689
     Currently payable.....      1,118      1,307      *            143    143,515    126,496    144,633    127,946
                             ---------  ---------  ---------  ---------  ---------  ---------  ---------  ---------
     Net long-term debt....  $   9,447  $   9,332  $   *      $   1,647  $ 215,252  $ 259,764  $ 224,699  $ 270,743
                             =========  =========  =========  =========  =========  =========  =========  =========

     Subordinated debt.....  $ 467,951  $   *      $   *      $ 449,338  $  41,544  $  38,772  $ 509,495  $ 488,110
     Currently payable.....     45,366      *          *         47,628      7,982      8,320     53,348     55,948
                             ---------- ---------  ---------  ---------  ---------  ---------  ---------  ---------
     Net subordinated debt.  $ 422,585  $   *      $   *      $ 401,710  $  33,562  $  30,452  $ 456,147  $ 432,162
                             =========  =========  =========  =========  =========  =========  =========  =========
</TABLE>

   * Effective  July 1, 2001 the Agway  corporate  structure  was  simplified by
     merging AFC and AHI into Agway, Inc. See Note 1 for more details.




                                       12

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

    Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)


3.   FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING
     --------------------------------------------------
     Agway is an agricultural  cooperative  directly  engaged in  manufacturing,
     processing,  marketing and direct  distribution of various animal feeds and
     agronomic products and services for its farmer-members and other customers,
     primarily in the northeastern United States and Ohio. In addition, Agway is
     involved in the  manufacturing,  processing  and  repacking of a variety of
     agricultural   products   marketed   directly  to   consumers,   retailers,
     wholesalers,  and processors;  is involved in the distribution of petroleum
     products;  the  installation  and  servicing of heating,  ventilation,  and
     air-conditioning equipment; marketing of natural gas and electricity, where
     deregulation  makes that possible;  lease  financing;  the underwriting and
     sale of certain types of property and casualty  insurance;  and the sale of
     health insurance. Agway reports its operations principally in five business
     segments.  Total sales and revenues of each industry  segment  includes the
     sale of products and services to unaffiliated customers, as reported in the
     Agway  consolidated  statements  of  operations,  as well as sales to other
     segments of Agway which are competitively priced.

     The Other  category  within the summary of business  segments  includes net
     corporate expenses, pension income,  intersegment  eliminations,  interest,
     and taxes. Interest income for the Leasing segment is reported as net sales
     and  revenues and  interest  expense is reported as cost and expenses  from
     leasing operations (cost of sales).
<TABLE>
<CAPTION>
                                                                  Three Months Ended September 2001
                               ---------------------------------------------------------------------------------------------------
                                               Country
                                               Products
                               Agriculture       Group         Energy         Leasing     Insurance        Other      Consolidated
                               -----------    -----------    -----------    -----------   ---------     -----------   ------------
<S>                            <C>            <C>            <C>            <C>           <C>           <C>            <C>
Net sales and revenues to
  unaffiliated customers ...   $    92,037    $    43,643    $   108,764    $    21,928   $     7,212   $        11    $   273,595
Intersegment sales and
  revenues .................           302          1,063             78            590             0        (2,033)             0
                               -----------    -----------    -----------    -----------   -----------   -----------    -----------
    Total sales and revenues   $    92,339    $    44,706    $   108,842    $    22,518   $     7,212   $    (2,022)   $   273,595
                               ===========    ===========    ===========    ===========   ===========   ===========    ===========

Earnings (loss) before
   income taxes ............   $    (8,214)   $      (370)   $   (10,052)   $     5,299   $       305   $    (5,168)   $   (18,200)
                               ===========    ===========    ===========    ===========   ===========   ===========    ===========

Total assets ...............   $   228,739    $    67,011    $   166,501    $   748,473   $    56,792   $   302,412    $ 1,569,928
                               ===========    ===========    ===========    ===========   ===========   ===========    ===========
<CAPTION>
                                                                  Three Months Ended September 2000
                               ---------------------------------------------------------------------------------------------------
                                               Country
                                               Products
                               Agriculture       Group         Energy         Leasing      Insurance       Other      Consolidated
                               -----------    -----------    -----------    -----------   -----------   -----------   ------------
<S>                            <C>            <C>            <C>            <C>           <C>           <C>            <C>
Net sales and revenues to
  unaffiliated customers ...   $    98,963    $    43,365    $   128,683    $    20,468   $     6,972   $        10    $   298,461
Intersegment sales and
  revenues .................         2,230          1,761             85             76             0        (4,152)             0
                               -----------    -----------    -----------    -----------   -----------   -----------    -----------
    Total sales and revenues   $   101,193    $    45,126    $   128,768    $    20,544   $     6,972   $    (4,142)   $   298,461
                               ===========    ===========    ===========    ===========   ===========   ===========    ===========

Earnings (loss) before
   income taxes ............   $    (8,932)   $    (2,284)   $    (8,912)   $     4,212   $       171   $    (5,249)   $   (20,994)
                               ===========    ===========    ===========    ===========   ===========   ===========    ===========

Total assets ...............   $   248,494    $    67,725    $   202,085    $   693,154   $    55,032   $   300,920    $ 1,567,410
                               ===========    ===========    ===========    ===========   ===========   ===========    ===========
</TABLE>
                                       13

<PAGE>

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

    Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)

4.   DISCONTINUED OPERATIONS
     -----------------------
     In fiscal 2000, the Agway Board of Directors approved a plan to restructure
     the retail store distribution  system, which called for the sale or closure
     of the 227 Agway retail  properties,  and also  authorized  the sale of the
     wholesale  procurement  and supply system to Southern  States  Cooperative,
     Inc. An  agreement  for the sale was executed on June 20, 2000 and the sale
     closed on July 31, 2000. The sale of the wholesale  procurement  and supply
     system,  when  combined  with the sale and  closure of the  Agway-owned  or
     operated retail stores, constituted a plan to discontinue operations of the
     retail services business.  All retail store operations ceased during fiscal
     2001,  and the Company is continuing  to market the remaining  former store
     properties  for sale.  The expected  loss on  discontinuance  of the retail
     operation  was estimated  and reported in fiscal 2000.  No  adjustments  to
     those estimates have been required for these discontinued operations during
     the first quarter of fiscal 2002 or 2001.

     The net sales and revenues from  discontinued  operations  (retail services
     business) for the first quarter of 2002 and 2001 were  approximately $0 and
     $19,200,  respectively.  No interest  expense was allocated to discontinued
     operations for the first quarter of 2002 or 2001.

     A summary of net assets of discontinued operations was as follows:
<TABLE>
<CAPTION>
                                                                                     September 30,      June 30,
                                                                                         2001             2001
                                                                                    -------------    --------------
     <S>                                                                            <C>              <C>
     Net accounts/notes receivable................................................  $      1,041     $       1,118
     Property, plant and equipment, net...........................................         6,349             8,525
     Other assets, net............................................................         8,678             6,651
     Accounts payable and accrued expenses........................................        (9,158)           (9,306)
     Long-term liabilities........................................................        (1,031)           (1,574)
                                                                                    -------------    --------------
     Net assets of discontinued operations........................................  $      5,879     $       5,414
                                                                                    =============    ==============
</TABLE>
5.   AGRICULTURE REALIGNMENT
     -----------------------
     In the second quarter of fiscal 2001, the Agway Board of Directors approved
     a plan  to  realign  the  Agriculture  segment  of  Agway's  business  (the
     Agriculture  Plan).  The  Agriculture  Plan  is  intended  to  realign  the
     Agriculture  segment with the continuing  concentration  of farming and our
     member farmers in the  northeastern  United States.  The  Agriculture  Plan
     calls for the  formation of a Feed and  Nutrition  Division and an Agronomy
     Division  that are being  structured to enable Agway to act as a wholesaler
     of its  agricultural  products  in  its  traditional  marketplace  and as a
     retailer of its  agricultural  products in select  markets.  In addition to
     establishing  the management and systems  support  structure,  62 locations
     have been identified for conversion to dealer operations, sale, or closure.
     Approximately 412 employees at these locations may be paid severance.  Sale
     of closed facilities is estimated to take place through June 2003. Gains on
     the sale of properties are recognized when realized.  Inventories have been
     reduced to their  estimated net realizable  values.  Operating costs during
     the transition period are recognized when incurred.  During this transition
     period,   we  expect  continued  losses  from  the  Agriculture   segment's
     operations,  due in part to the costs associated with the Agriculture Plan.
     The financial  impact  associated  with the Agriculture  Plan  transactions
     incurred  in  the  first  quarter  of  fiscal  2002  is  summarized  below.
     Plan-related  severance  cost  accruals  remaining  at  September  30, 2001
     totaled $700.
<TABLE>
<CAPTION>
                                                                                     Quarter Ended
                                                                                   September 30, 2001
                                                                                  -------------------
     <S>                                                                          <C>
     Net gain on sale of assets.................................................  $              936
     Gain (loss) on sale/liquidation of inventory...............................                 629
     Severance cost adjustments.................................................                 200
     Other transaction costs....................................................                (201)
                                                                                  -------------------
     Net gain (loss) on realignment activity....................................  $            1,564
                                                                                  ===================
</TABLE>
                                       14

<PAGE>



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

    Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)


6.   ACCOUNTING FOR DERIVATIVES AND HEDGING ACTIVITIES
     -------------------------------------------------
     All derivatives are recognized on the balance sheet at their fair value. At
     the  time a  derivative  contract  is  entered  into,  the  Company  either
     designates  the  derivative  as a fair value or cash flow  hedge.  For fair
     value hedge  transactions  in which the Company is hedging  changes in fair
     value of an asset, liability, or firm commitment, changes in the fair value
     of the  derivative  will  generally  be offset in the income  statement  by
     changes in the hedged item's fair value.  For cash flow hedge  transactions
     in which the Company is hedging the  variability of cash flows related to a
     variable-priced asset,  liability,  commitment,  or forecasted transaction,
     changes  in the  fair  value  of  the  derivative  are  reported  in  other
     comprehensive  income.  The gains and  losses on the  derivatives  that are
     reported  in  comprehensive  income are  reclassified  as  earnings  in the
     periods in which earnings are impacted by the variability of the cash flows
     of the hedged item. The ineffective portion of derivatives' changes in fair
     value  and the  change  in fair  value of  derivatives  designated  but not
     qualifying as effective hedges are recognized in current- period earnings.

     For all derivatives  designated as a hedge, the Company formally  documents
     the  relationship  between the hedging  instrument  and the hedged item, as
     well as the  risk  management  objective  and  strategy  for the use of the
     hedging  instrument.  This  documentation  includes linking the derivatives
     that are designated as fair value or cash flow hedges to specific assets or
     liabilities   on  the  balance   sheet,   commitments,   or  to  forecasted
     transactions.  The Company  assesses at the time a  derivative  contract is
     entered into and at least quarterly whether the hedge relationship  between
     the  derivative  and the  hedged  item is highly  effective  in  offsetting
     changes  in fair  value or cash  flows.  Any  change  in fair  value of the
     derivative resulting from  ineffectiveness,  as defined by SFAS No. 133, is
     recognized currently in earnings. Further, for derivatives that have ceased
     to be a highly effective hedge, the Company  discontinues  hedge accounting
     prospectively.

     The Company's  Energy segment enters into a combination of  exchange-traded
     futures  and options  contracts  and,  in certain  circumstances,  over the
     counter  options  (collectively  derivatives)  to  manage  the  price  risk
     associated with future purchases of the commodities sold in its operations,
     principally  heating  oil  and  propane.   Energy  has  fair  value  hedges
     associated  with its fixed price  purchase  contracts and cash flows hedges
     for  its  variable   priced   purchase   contracts.   The  derivatives  are
     specifically  matched  in volume and  maturity  with the  various  purchase
     commitments  of the business and generally  expire within a year. The value
     of option  contracts that Energy enters into has two  components:  time and
     intrinsic value. The intrinsic value is the value by which the option is in
     the money.  The remaining  amount of option value is  attributable  to time
     value.  Energy does not include the time value of option  contracts  in its
     assessment of hedge effectiveness and therefore records changes in the time
     value  component of its options  currently in  earnings.  At September  30,
     2001, Energy had a derivative  liability of $224. An after-tax total of $56
     of deferred net unrealized gains on derivatives instruments was accumulated
     in other  comprehensive  income and is  expected  to be  reclassified  into
     earnings during the next twelve months. The pre-tax earnings impact for the
     time  value   component  of  option  value  not  used  in  assessing  hedge
     effectiveness  totaled $1,800 upon the initial  adoption of SFAS No. 133 at
     July 1, 2000,  and is  included,  net of tax, in the  cumulative  effect of
     accounting change. For the three months ended September 30, 2001, $1,200 is
     included  as a charge to cost of goods sold for the  change in option  time
     value not used in the assessment of hedge effectiveness.

     In the Agriculture  segment,  the purchase of corn, soy complex,  and oats,
     which can be sold directly as ingredients or included in feed products sold
     by Agriculture,  creates price risk for this business.  Agriculture intends
     to use natural hedges of purchase and sales  contracts  whenever  possible;
     however,  exchange-traded  commodity  instruments  are used  principally to
     manage the price risk  associated  with  unmatched  commodity  purchases or
     sales.  Agriculture matches all derivative  contracts with their underlying
     purchase or sale contracts;  however, due to the differences in the changes
     in the commodity cash price at an Agriculture  location  versus the Chicago
     Board of Trade, a highly effective hedging relationship (as defined by SFAS
     No.  133)  has  not  been  achieved.  Therefore,  the  derivatives  used in
     Agriculture  are  marked to market  currently  in  earnings.  The impact of
     marking these  derivatives  to market for the three months ended  September
     30, 2001, was immaterial.

                                       15

<PAGE>



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

    Item 1. NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
                                   (Unaudited)
                             (Thousands of Dollars)


7.   COMMITMENTS AND CONTINGENCIES
     -----------------------------
     Environmental
     We are  subject to various  laws and  governmental  regulations  concerning
     environmental  matters.  We  expect  to be  required  to  expend  funds  to
     participate in the  remediation of certain sites,  including sites where we
     have 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 at sites  with
     underground   fuel  storage  tanks.  We  will  also  incur  other  expenses
     associated with environmental compliance.

     We are designated as a PRP under CERCLA or as a third party by the original
     PRPs in several  Superfund  sites.  The liability under CERCLA is joint and
     several, meaning that we could be required to pay in excess of our pro rata
     share  of  remediation  costs.  As a  result  of the  use and  handling  of
     hazardous substances in our normal operations,  an unexpected environmental
     event or significant changes in environmental compliance requirements could
     have a material  adverse  impact on our financial  condition and results of
     operations.

     We   continually   monitor  our   operations   with  respect  to  potential
     environmental   issues,   including  changes  in  legal   requirements  and
     remediation   technologies.   Our  recorded   liability  in  our  financial
     statements  reflects  those  specific  issues  where we  think  remediation
     activities  are likely and where we can estimate  the cost of  remediation.
     Estimating the extent of our  responsibility  for a particular site and the
     method and ultimate cost of remediation of that site require that we make a
     number of assumptions.  As a result, the ultimate outcome of remediation of
     a site may differ from our  estimates.  However,  we believe  that our past
     experience   provides  us  with  a  reasonable  basis  for  estimating  our
     liability.  When we receive additional  information we adjust our estimates
     as necessary.  While we do not anticipate  that any such adjustment will be
     material to our financial  statements,  the result of ongoing and/or future
     environmental  studies or other  factors could alter this  expectation  and
     require that we record additional liabilities. We currently can't determine
     whether we will incur  additional  liabilities  in the future or, if we do,
     the extent or amount of such additional liabilities.

     Other
     Agway  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 Agway. Agway 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  results  of  operations,
     financial position, or liquidity of Agway.

     Insurance Coverage
     The Company uses various insurance companies to insure its primary casualty
     insurance  risks as well as to  obtain  various  umbrella/excess  liability
     coverages.  On October  3, 2001,  the  Commonwealth  Court of  Pennsylvania
     approved the petition of the  Pennsylvania  Insurance  Commissioner  for an
     Order of  Liquidation  for  Reliance  Insurance  Company  (RIC).  Agway has
     obtained  insurance  coverage from RIC in various segments of its insurance
     programs since 1991.  Presently,  Agway has five pending claims which could
     be  affected by this  liquidation.  Total  covered  amounts by RIC on these
     claims are currently estimated at $1,600. In addition,  future claims could
     be  affected  by this  liquidation.  The  liquidation  statute  establishes
     certain priorities for payment of claims.  Direct  policyholders are one of
     the top  priorities  for payment.  To the extent,  if any, RIC is unable to
     meet its  claim  obligations  to its  policyholders  and  other  creditors,
     certain state insurance  guarantee funds may provide  additional sources of
     claim  payments.  The Company  cannot at this time  determine  the ultimate
     outcome of this  liquidation,  its impact on outstanding  and future claims
     against  RIC  policies  held  by  Agway,  or the  impact  on the  Company's
     financial  results.  It is  anticipated  that  due to this  proceeding  the
     Company,  at a minimum,  can expect delays in receiving cash settlement for
     claims outstanding under RIC policies.

                                       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)


RESULTS OF OPERATIONS
---------------------
Agway 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, Agway. Where any such forward-looking  statement includes a
statement of the assumptions or basis underlying such forward-looking statement,
Agway  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.  Certain
factors  that  could  cause  actual  results  to differ  materially  from  those
projected  have been  discussed in this report and include the factors set forth
below.  Other  factors  that could  cause  actual  results to differ  materially
include uncertainties of economic, competitive, and market conditions and future
business  decisions,  all of  which  are  difficult  or  impossible  to  predict
accurately   and  many  of  which  are  beyond  our  control.   Where,   in  any
forward-looking statement, Agway, 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 "intend,"  "believe,"  "expect," and  "anticipate"  and
phrases  "it is  probable"  and "it is  possible"  or  similar  words or phrases
identify forward-looking statements.

Agway'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  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
the higher demand from cold winter conditions.  Country Products Group, Leasing,
and Insurance are not materially impacted by seasonal fluctuations.

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

Consolidated Results
--------------------
Consolidated  net sales and  revenues of $273,600 for the fiscal  quarter  ended
September 30, 2001, decreased $25,000 (8%) as compared to the same period in the
prior year. The decrease in the three-month  period was substantially the result
of  decreased  sales in the  Energy  and  Agriculture  segments,  as more  fully
described below.

Consolidated  pre-tax loss of $18,200 for the three months ended  September  30,
2001, improved $2,800 (13%) over the same period in the prior year. Improvements
in Agriculture,  Country Products Group,  Leasing,  and Insurance were partially
offset by a decline in Energy.  See further  explanation  of pre-tax  results by
business segment below. Net corporate costs of $5,200 remained  constant for the
three-month period as compared to the prior year.

Effective  June 25, 2000,  Agway adopted a new  accounting  requirement  for all
derivative  instruments.  As a  result,  a loss  on  the  cumulative  effect  of
accounting  change,  net of tax of $1,100,  is reflected in the first quarter of
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)

Agriculture
-----------
Total  Agriculture  sales and  revenues  of $92,300 for the three  months  ended
September  30,2001,  decreased  $8,900 (9%) as compared to $101,200 for the same
period in the prior year. The decrease in sales for the  three-month  period was
principally  due to an $8,700 (21%)  decrease in sales in the Agronomy  business
over the same period in the prior year. About half of the decline in sales was a
result of a return to normal summer sales levels in the current year compared to
a peak in summer sales last year caused by delayed spring planting in that year.
Also contributing to the decrease in sales was the closing of agronomy locations
during  the  latter  half  of the  prior  year as  part  of a  planned  business
realignment.  The Feed  business  sales and  revenues of $58,100 for the quarter
ended September 30, 2001 increased $1,400 (3%) from $56,700 in the first quarter
of the  prior  year.  The  increase  in sales is the  result of an  increase  in
revenues in the tested  specific  pathogen free (TSPF)  heifer-rearing  services
from continued  growth of utilization  of these  facilities.  The remaining feed
operations showed a less than 1% increase in sales. The average selling price of
feed has  remained  flat  compared  to the same  period in the prior  year.  The
selling price of feed products is largely driven by commodity prices, which have
also remained flat compared to the prior year.

Agriculture pre-tax loss of $8,200 for the three months ended September 30, 2001
decreased  $700 (8%) as compared to a pre-tax loss of $8,900 for the same period
in the prior  year.  The  overall  decrease  in  pre-tax  loss  resulted  from a
combination  of factors.  A  negotiated  settlement  of $900 was received in the
first  quarter of fiscal 2002 with no  comparable  amount  received in the first
quarter  of the  prior  year.  Additionally,  the  impacts  of  the  Agriculture
realignment  plan during the first  quarter of fiscal 2002 resulted in $1,600 in
net  gains on the sale of  property  and  inventory  and  also  created  expense
reductions of approximately $2,600 as compared to the prior year, primarily from
fewer operating  Agriculture  locations.  These  improvements were substantially
offset by  declines  in Feed and  Agronomy  margins.  The  declines  in Feed and
Agronomy margins resulted from higher Agronomy  commodity pricing as compared to
the prior year and the loss of revenues from closed Feed and Agronomy  locations
which  combined to reduce margin levels in the first quarter of 2002 as compared
to the same period in the prior year.

Country Products Group
----------------------
Country  Products  Group  (CPG)  total  sales and  revenues  of $44,700  for the
three-months  ended  September 30, 2001,  decreased $400 (1%) as compared to the
same period in the prior year.  The decline in sales is primarily in the Produce
Group due to the closing of the Texas produce  operation,  which accounted for a
decrease  in sales of $2,900  (84%) as  compared to the same period in the prior
year. This decrease was partially offset by an increase in the remaining Produce
Group locations  sales and revenues of $1,700 (6%). The sunflower  business also
experienced  an increase in sales of $1,000 (11%) as compared to the same period
in the prior year. The sales increase was in human edible  sunflower  seeds as a
result of increased  demand for their use in snack  foods,  as well as continued
growth of new bakery product  lines,  which were initiated in the second half of
the prior  year.  Additionally,  poor  sunflower  seed  crop in the  prior  year
adversely  impacted  sunflower  sales in the first  quarter  of the prior  year.
Finally,  the Investment Group sales increased $500 (83%)  substantially  due to
the sale of Optigen 1200, a controlled-release nitrogen feed product.

CPG  pre-tax  loss of  $400  for  the  three-months  ended  September  30,  2001
represents  an  improvement  in results of $1,900 (84%) as compared to a pre-tax
loss of $2,300 for the same period in the prior year.  Produce  operations  that
were shut down during 2001 incurred $1,200 of losses in the first quarter of the
prior year while  generating  $200 of income during the final wind-down of these
operations  in the first quarter of 2002.  In addition,  the sunflower  business
operations pre-tax profits increased $700 over the same period in the prior year
due to higher  margins from the new bakery  products  lines  combined with lower
margins  experienced  in the first quarter of the prior year due to high product
costs and increased  production costs associated with the poor sunflower crop in
that year.  These  improvements  were partially  offset by a decrease of $200 in
CPG's remaining businesses.



                                       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)


Energy
------
Energy sales and revenues of $108,800 for the three months ended  September  30,
2001,  decreased $20,000 (15%) as compared to the same period in the prior year.
Overall,  sales  dollar  decreases  from liquid  product  volume was $9,000 (8%)
during the three-month  period as compared to the same period in the prior year.
The volume  decreases  were the result of both a combination  of warmer  weather
conditions in our primary markets in the current quarter as compared to the same
period in the prior year,  and the timing of Energy's  summer fill program which
occurred  in the spring of 2001 as  compared  to the first  quarter of the prior
year.  As a result of market  conditions  and a decrease  in  commodity  prices,
Energy  experienced  sales  dollars  decreases  relating  to price in its liquid
products of $13,500 (12%) for the three- month period.  Additionally,  sales and
revenues from the electric and natural gas marketing  business improved $2,500 (
51%) while the  heating ,  ventilation  and air  conditioning  installation  and
service business remained constant with the comparable period in the prior year.

Energy pre-tax loss of $10,100 for the  three-month  period ended  September 30,
2001,  represents  an  increased  loss of $1,100  (13%) as  compared to the same
period in the prior year. In the  three-month  period ended  September 30, 2001,
overall  gross margin  dollars  decreased  $800 (3%) over the same period in the
prior year, and were driven by the decrease in sales noted above.  Additionally,
an increase of $300 (19%) in interest expense was incurred to cover the increase
in cost of capital as compared to the same period in the prior year.

Leasing
-------
Total revenue of $22,500 for the  three-month  period ended  September 30, 2001,
increased  $2,000 (10%) as compared to the same period in the prior year.  These
increases  were  primarily  due to a higher  average  investment in leases and a
higher  income  rate  on  the  outstanding  portfolio.   Telmark's  average  net
investment in leases  increased  $63,200 (10%) in the  three-month  period ended
September 30, 2001, as compared to the same period in the prior year.

Pre-tax  earnings from operations of $5,300 for the three months ended September
30,  2001,  increased  $1,100  (26%) as compared to the same period in the prior
year.  The total  revenue  increases  noted  above were  partially  offset by an
increase in total expenses of $900 (5%) for the three months ended September 30,
2001,  as compared to the same period in the prior year.  The  increase in total
expenses  resulted from a $500  increase  provision  for credit  losses,  a $300
increase in selling,  general and  administrative  costs, and a $200 increase in
interest  expense.  The  increases  can be  attributable  to the  growing  lease
portfolio.

Insurance
---------
Insurance  Group total net revenues of $7,200 for the  three-month  period ended
September  30, 2001,  increased  $200 (3%) as compared to the same period in the
prior year.  The  increase  was in net earned  premiums  of the Agway  Insurance
Company as sales  initiatives  caused the increase in net premiums over the same
period in the prior year.

Pre-tax earnings of the Insurance Group of $300 for the three-month period ended
September 30, 2001,  increased  $100 (62%) as compared to the same period in the
prior year.  The  improvement  in pre-tax  earnings for the  three-month  period
resulted  substantially  from  favorable  case reserve  experience.  The General
Agency  experienced  a pre-tax  break-even  position for the first quarter ended
2002 and 2001.



                                       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)


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash  generated  from external  borrowings  and/or  operations are Agway's major
ongoing sources 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 three months ended:
<TABLE>
<CAPTION>
                                                                   September 30,    September 23,       Increase
                                                                       2001             2000           (Decrease)
                                                                  --------------    -------------    -------------
<S>                                                               <C>               <C>              <C>
Net cash flows provided by (used in):
      Operating activities......................................  $      26,131     $     17,650     $      8,481
      Investing activities......................................        (17,244)         (23,945)           6,701
      Financing activities......................................         (6,339)         (13,663)           7,324
                                                                  --------------    -------------    --------------
Net increase (decrease) in cash and equivalents.................  $       2,548     $    (19,958)    $     22,506
                                                                  ==============    =============    ==============
</TABLE>
Cash Flows Provided By Operating Activities
Cash flows from continuing  operations of $26,100 improved $8,500 over the prior
year.  Primarily these  improvements are related to working capital needs. As of
September 30, 2001,  working  capital items  generated  cash flows of $31,000 as
compared  to  generating  cash flows of $9,400 for the same  period in the prior
year.  The  generation of cash flows from working  capital items was a result of
declines in receivables  and inventory,  principally in Energy and  Agriculture.
Cash flows for  discontinued  operations  used cash of $500 as of September  30,
2001,  compared  to  generating  cash flows of $9,200 for the same period in the
prior year.  The  generation  of cash flows from  discontinued  operations as of
September 30, 2000, was from the sale of former retail locations.

As discussed  in Note 7 to the  financial  statements,  the Company has obtained
insurance  coverage from Reliance Insurance Company (RIC) in various segments of
its insurance  programs since 1991. Agway currently has five pending claims with
RIC (estimated at  approximately  $1,600) and may make more claims in the future
under  policies  issued by RIC. On October 3, 2001,  the  Commonwealth  Court of
Pennsylvania  approved the petition of the Pennsylvania  Insurance  Commissioner
for an  Order  of  Liquidation  for  RIC.  While  the  impact,  if  any,  of the
liquidation  of RIC on the Company  cannot be predicted at this time,  if RIC is
unable to satisfy, or is delayed in satisfying,  its obligations to the Company,
such failure or delay in paying claims could negatively affect our liquidity.

Cash Flows Used in Investing Activities
The cash flow used in investing  activities  decreased in the three months ended
September  30, 2001, by $6,700 as compared to the same period in the prior year.
The most  significant  use of cash has been in connection  with Agway's  growing
lease  financing  business  (Telmark).  The  cash  requirements  to  fund  lease
origination  growth in excess of lease  repayments  decreased $7,200 compared to
the same period in the prior year.

Cash Flows Used in Financing Activities
Agway's  senior debt  facility  (the Agway  Senior  Debt) is  available  for all
business  operations except for Agway Insurance Company  (Insurance) and Telmark
and  Telmark's   subsidiaries   (Telmark).   The  Agway  Insurance   Company  is
independently   financed  through  operations  and  liquidity  provided  by  its
investment  portfolio.  Telmark  finances  itself  through  a series  of  credit
arrangements  that are  independent  from the Agway Senior  Debt.  Each of those
arrangements is more fully  described in this footnote.  Effective July 1, 2001,
Agway Financial Corporation (AFC) was merged into Agway, as more fully described
in Note 1. As a result,  Agway assumed liability for any amounts borrowed by AFC
under the Credit Agreement (as defined below).





                                       20

<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 Used in Financing Activities (continued)

Agway Senior Debt
The Agway Senior Debt is a syndicated  three-year  asset-based revolving line of
credit for up to  $175,000  pursuant  to the terms of a credit  agreement  dated
March 28, 2001 (and amended as of September 14, 2001) between Agway,  certain of
its  subsidiaries  and a  syndicated  group of lenders  (the Credit  Agreement).
Interest  rates are  determined  at the option of the  Company,  as either prime
rate, plus 2.00%, or the London Interbank Offering Rate (LIBOR), plus 3.50%. The
interest  rate  charged  on bank lines of credit  ranged  from 3.33% to 7.75% at
September 30, 2001.  Up to $35,000 of this line of credit can be designated  for
use as  letters  of  credit.  In this  asset-based  line of  credit,  the amount
available  to Agway is the  lesser  of the  "collateral  borrowing  base" or the
$175,000  upper  limit of the line of  credit.  The  collateral  borrowing  base
consists of certain of Agway's  eligible  accounts  receivable and inventory (as
defined under the Credit  Agreement).  Certain  covenants and  conditions of the
Credit Agreement,  as more fully discussed below,  restrict the use of funds and
reduce the practical availability of financing under the agreement by $25,000 to
a maximum of $150,000.

As previously reported, based on Agway's June 30, 2001, financial results, Agway
was in  violation  of  certain  of the  financial  covenants  within  the Credit
Agreement  because it had not maintained the required  minimum level of earnings
before interest, taxes, depreciation,  and amortization (EBITDA) and the minimum
ratios of EBITDA to fixed  charges and interest on senior debt. On September 14,
2001, the  syndicated  group of lenders  agreed to waive these  violations,  and
further agreed to amend these covenants for each of the succeeding four quarters
through June 2002 based on revised operating budgets for that period of time. In
exchange for those amendments, Agway agreed to pay 25 basis points in additional
interest on its borrowings, grant additional security interests in equipment and
properties  not  previously  pledged as  collateral  (including  a pledge of its
membership  interest in Telmark)  and increase  the  required  minimum  range of
Minimum Capital (as defined below) balances of $455,000 to $465,000, an increase
of $15,000,  to reflect the actual  increased  balances  outstanding at June 30,
2001, and the projections of the balances. As of September 30, 2001, the Company
has met the amended covenants and conditions under the Credit  Agreement.  As of
September 30, 2001, the collateral borrowing base was $111,700, which adequately
supported  Agway's  borrowing needs which totaled $54,500.  Management  believes
that  adequate  collateral  exists and will  continue to exist so that the Agway
senior debt financing is, and will continue to be,  adequate to meet the ongoing
needs of Agway.

The Credit  Agreement  has a number of financial  covenants  which  restrict our
capital  spending and require us to maintain  minimum levels of earnings  before
interest,  taxes,  depreciation,  and amortization  (EBITDA),  as defined in the
Credit  Agreement,  minimum  ratios of EBITDA to fixed  charges and  interest on
senior debt, and a minimum outstanding balance of preferred stock,  subordinated
debt,  and  certain  debt of a  subsidiary.  That  minimum  outstanding  balance
requirement,  as amended,  ranges from $455,000 to $465,000 throughout the year.
(This  minimum  amount of capital we must maintain is referred to as the Minimum
Capital.)

Other conditions of the Credit Agreement  prevent us, in certain  circumstances,
from  using  funds we borrow  under the  Credit  Agreement  to pay  interest  or
dividends  on, or repurchase or repay  principal  of, our  subordinated  debt or
preferred stock. To avoid these use restrictions,  the Credit Agreement requires
us to have a minimum  excess  borrowing  capacity  as defined  in the  agreement
(collateral  borrowing base in excess of outstanding  loans) of at least $20,000
if we are not in default under the Credit Agreement.  If we are in default under
the Credit  Agreement,  to avoid  these use  restrictions,  the  minimum  excess
borrowing  capacity we must  maintain  (collateral  borrowing  base in excess of
outstanding loans) increases to $25,000. Further, if we are in default under the
Credit Agreement, we are subject to these use restrictions if:

                                       21

<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 Used in Financing Activities (continued)

Agway Senior Debt (continued)

(a)      we default on our payment of principal, interest  or  other amounts due
         to the lenders under the Credit Agreement;
(b)      we fail to maintain the cash management procedures we agree to with the
         lenders under the Credit Agreement;
(c)      we do not maintain the Minimum Capital balance of $455,000 to $465,000;
         or
(d)      the agent under the Credit Agreement  provides us with a written notice
         that such payments are no longer permitted.

These conditions,  if present, reduce the practical availability under the Agway
Senior  Debt from  $175,000  to  $150,000  or $25,000  less than the  collateral
borrowing base, whichever is lower. The Credit Agreement was designed in part to
allow and enable us to  continue  our past  practice  of  repurchasing,  at face
value,  certain  subordinated  debt  and  preferred  stock  when  presented  for
repurchase  prior to  maturity.  However,  while  it is our  current  intent  to
continue  this  historic  practice,  we are under no  obligation  to  repurchase
subordinated  debt prior to its maturity and preferred  stock when so presented,
and may stop or suspend this  practice at any time or may be required to stop or
suspend such practice if we do not continue to meet the conditions of the Credit
Agreement, including those described above.

As of  September  30,  2001,  the total  amount  outstanding  under  the  Credit
Agreement  was $54,500,  of which  $28,800 was  designated  to letters of credit
principally in support of Agway insurance  programs under the Agway Senior Debt.
Interest rates, as amended in the manner  described below, are determined at the
option of the Company, as either prime rate, plus 2.00%, or the London Interbank
Offering Rate (LIBOR) rate, plus 3.50%.

Agway Subordinated Debt
Agway  registers  with the  Securities  and Exchange  Commission  (SEC) to offer
debentures to the public on a continuing basis. The debentures are unsecured and
subordinated  to all senior  debt at Agway.  The Agway  subordinated  debt bears
interest payable semiannually on January 1 and July 1 of each year. The interest
rates of Agway's money market certificates are at the greater of the stated rate
or a rate based  upon an  average  discount  rate for U.S.  Government  Treasury
Bills, with maturities of 26 weeks.  Agway's subordinated debt is not redeemable
by the holder, though Agway,  historically has had a practice of repurchasing at
face value, plus interest accrued at the stated rate, certain  subordinated debt
whenever presented for repurchase prior to maturity.  However, Agway is under no
obligation  to repurchase  such debt when so presented,  and may stop or suspend
this  repurchase  practice at any time. In addition,  the terms or conditions of
the lines of credit may, in certain circumstances, cause Agway to limit or cease
its past practices with regard to the repurchase of subordinated debt.

On  November  1,  2001,   $43,100  of  subordinated   money  market  certificate
obligations  of Agway  matured.  Agway  expects to  refinance  this debt  either
through a new issue of subordinated debt, through cash from operations,  through
sales  of  discontinued  assets,  through  short-term  bank  borrowings,   or  a
combination thereof.



                                       22

<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 Used in Financing Activities (continued)

Sources of Long-Term Financing
Sources of long-term financing include the following as of September 2001:
<TABLE>
<CAPTION>
                                                                               Agway Inc.
                                                                              (excluding
Source of debt                                                                  Telmark)      Telmark        Total
--------------                                                                -----------   -----------   -----------
<S>                                                                           <C>           <C>           <C>
Banks - due 2/02 to 4/04, interest at a weighted average
   rate of 6.9% with a range of 5.36% - 7.47% .............................   $         0   $   127,000   $  127,000
Insurance companies - due 12/01 to 12/12, interest at a weighted average
   rate of 7.49% with a range of 6.55% - 8.72%.............................             0       149,500      149,500
Capital leases and other - due 2001 to 2018, interest at a
   weighted average rate of 9.3% with a range of 6.54% to 10%..............        10,565        82,267       92,832
                                                                              -----------   -----------   -----------
     Long-term debt........................................................        10,565       358,767      369,332
Subordinated money market certificates - due 10/01 to 10/15, interest at
   a weighted average rate of 8.24% with a range of 4.50% - 9.75%..........       464,119             0      464,119
Subordinated debentures - due 3/02 to 3/09, interest at a weighted average
   rate of 8.19% with a range of 6.25% to 9.00%............................         3,832        41,544       45,376
                                                                              -----------   -----------   -----------
     Total debt............................................................   $   478,516   $   400,311   $  878,827
                                                                              ===========   ===========   ===========
</TABLE>
For a further  description  of the  Company's  credit  facilities  available  at
September  30,  2001,  see  Note  2  to  the  Condensed  Consolidated  Financial
Statements.

Telmark Liquidity
Telmark's ongoing availability of adequate financing to maintain the size of our
portfolio and to permit lease  portfolio  growth is key to Telmark's  continuing
profitability and stability.  We have principally financed Telmark's operations,
including the growth of its lease portfolio,  through borrowings under its lines
of credit,  private  placements of debt with  institutional  investors and other
term debt, subordinated debentures, lease-backed notes, principal collections on
leases and cash provided from operations.

Virtually all of the cash flows from both  operations  and financing  activities
were invested in growth of the lease  portfolio.  Telmark has been successful in
arranging  its past  financing  needs and  believes  that its current  financing
arrangements are adequate to meet its foreseeable operating requirements.  There
can be no  assurance,  however,  that  Telmark  will be able  to  obtain  future
financing  in amounts or on terms that are  acceptable.  Telmark's  inability to
obtain  adequate   financing  would  have  a  material  adverse  effect  on  its
operations. In addition, Agway's membership interest in Telmark has been pledged
as additional collateral with respect to certain obligations of Agway. While the
terms of the pledge generally do not restrict Telmark's operations,  Telmark has
acknowledged  and agreed to the pledge,  has agreed to  cooperate  with  Agway's
lenders in respect to their rights  under the pledge,  and has agreed to refrain
from  creating  any lien or  encumbrance  with  respect to the equity of Telmark
subsidiaries.  A foreclosure  on the pledge  following an event of default would
result in a change of control,  giving Telmark's senior lenders rights to demand
repayment of existing outstanding debt. Depending upon the financial markets and
Telmark's  financial  circumstances at that time, if the senior lenders chose to
execute  those  rights,  it could have a material  adverse  effect on  Telmark's
results of operations,  liquidity and financial  position.  Management  conducts
ongoing  discussions and  negotiations  with existing and potential  lenders for
future  financing  needs.  See  Note 2 to the  Condensed  Financial  Statements,
"Borrowing Arrangements."

                                       23

<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 the normal  course of our  operations,  we have  exposure to market risk from
price fluctuations  associated with commodities such as corn, soy complex, oats,
gasoline,  distillate and propane.  These price  fluctuations  impact  commodity
inventories,   product  gross  margins,  and  anticipated  transactions  in  our
Agriculture  and  Energy  businesses.   We  manage  the  risk  of  market  price
fluctuations  of  some  of  these  commodities  by  using  commodity  derivative
instruments.  Commodity derivative instruments include  exchange-traded  futures
and option contracts and, in limited circumstances,  over-the-counter  contracts
with third  parties.  We have  policies  that specify what we can use  commodity
derivative  instruments for and set limits on the maturity of contracts we enter
into and the level of exposure to market price  fluctuations  that we are trying
to protect  ourselves  against (or  hedge).  However,  because  the  commodities
markets  are very  volatile,  our gains or losses on these  contracts  might not
fully offset the corresponding change in the prices of the underlying commodity,
which could lower our earnings.

A sensitivity  analysis has been prepared to estimate Agway's exposure to market
risk of its commodity  instrument  positions as of September  2001 and 2000. 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%  adverse  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  for
which the  commodity  instruments  are managing the price risk.  As of September
2001 and 2000,  assuming a 10%  hypothetical  adverse  change in the  underlying
commodity  price,  the potential  decrease in fair value of our Energy  business
commodity instruments was $2,300 and $5,900, respectively. The potential loss in
fair value of commodity  instruments  for  Agriculture  was  immaterial for both
periods.

                                       24

<PAGE>



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


Item 1.  Legal Proceedings
--------------------------
On May 5, 2000,  approximately  90 North Dakota  farmers  (Jorgenson,  et al. v.
Agway Inc.) filed a Complaint  against  Agway Inc. in the U.S.  District  Court,
District of North Dakota,  Southeastern Division,  alleging that they bought and
planted a variety of  confection  sunflower  seed during the spring of 1999 from
Agway Inc.  which was  defective.  The  farmers  allege  that as a result of the
defective  seed,  they  are  entitled  to  monetary  damages  in the  amount  of
approximately  $2,900. In addition,  upon referral from the U.S. District Court,
the North  Dakota  Supreme  Court ruled in May 2001 that the farmers may proceed
with their  claims that Agway Inc.  is liable  under the North  Dakota  Consumer
Fraud Act (Act).  Possible  remedies  under the Act include  treble  damages and
attorneys' fees. In October 2001, the U.S. District allowed the farmers to amend
their Complaint to add  approximately 18 additional  farmers,  a claim for fraud
and a claim for  punitive  damages.  Agway Inc.  has  denied  and is  vigorously
contesting  the farmers'  allegations.  While we do not  anticipate any material
adjustments to our financial statements from these claims, it is not possible at
this time to determine what the ultimate outcome of these claims will be.

Item 3.  Defaults Upon Senior Securities
----------------------------------------
As previously reported, based on Agway's June 30, 2001, financial results, Agway
was in violation of certain financial covenants within its Credit Agreement.  On
September 14, 2001,  the lenders agreed to waive these  violations,  and further
agreed to amend the covenants. As of September 30, 2001, the Company has met the
amended covenants and conditions under the Credit  Agreement.  See Note 2 of the
condensed financial statements for further details.

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

     (a) Exhibits
         (3) (ii)   By-laws of Agway Inc., as amended October 22, 2001

     (b) Reports on Form 8-K

         Agway filed a report on Form 8-K on July 2, 2001 announcing the July 1,
         2001 merger of Agway Financial Corporation with and into Agway Inc.

         Agway  filed a report on Form 8-K on August  20,  2001  announcing  the
         financial   results   for  the  fiscal   year  ended  June  30,   2001.
         Additionally,  the Company  announced that the Company was in violation
         of bank  covenants  as of June  30,  2001,  and  that it was  currently
         negotiating with the lenders to receive a waiver and amendments. (Note:
         On September 14, 2001,  lenders agreed to waive these  violations,  and
         further  agreed  to amend  these  covenants  for each  succeeding  four
         quarters through June 2002 based on revised  operating budgets for that
         period of time.)



                                       25

<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          November 14, 2001                   /s/ PETER J. O'NEILL
         ---------------------------    ----------------------------------------
                                                    Peter J. O'Neill
                                                 Senior Vice President,
                                                   Finance & Control,
                                            (Principal Financial Officer and
                                                 Chief Accounting Officer)










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