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

(Mark One)
  X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
-----
       ACT OF 1934 For the fiscal year ended June 30, 1998
                                       OR
       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
-----
       EXCHANGE ACT OF 1934
       For the transition period from          to
       Commission file number 2-22791

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

           Delaware                                  15-0277720
 (State or other jurisdiction of                  (I.R.S. Employer
  incorporation or organization)                  Identification No.)
                   333 Butternut Drive, DeWitt, New York 13214
              (Address of principal executive offices and zip code)

        Registrant's telephone number, including area code: 315-449-6436

Securities registered pursuant to Section 12(b) of the Act:

Title of each class                   Name of each exchange on which registered
-------------------                   -----------------------------------------
      None                                              None

Securities registered pursuant to Section 12(g) of the Act:
                                      None

      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.
                                                   X
                                                  ---         ---
                                                  Yes         No

      Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best  of  registrant's  knowledge,  in  any  definitive  proxy  or  information
statements  incorporated  by  reference  in  Part  III of  this Form 10-K or any
amendment to this Form 10-K.    X
                               ---

      State the  aggregate  market  value of the  voting and  non-voting  common
equity held by non-affiliates of the registrant as of September 10, 1999.

               Membership Common Stock, $25 Par Value - $2,493,200

      Indicate  the  number of shares  outstanding  of each of the  registrant's
classes of common stock, as of the latest practicable date.


        Class                                  Outstanding at September 10, 1999
       -------                                 ---------------------------------
Membership Common Stock, $25 Par Value                   99,728 Shares



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<PAGE>



                         FORM 10-K/A ANNUAL REPORT - 1998
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

                              CROSS REFERENCE SHEET

<TABLE>
<CAPTION>
                                                                                                                Page

                                                     PART II
<S>              <C>                                                                                              <C>
Item 6.          Selected Financial Data.......................................................................    3
Item 7.          Management's Discussion and Analysis of Financial Condition and Results of Operations.........    4
Item 7a.         Quantitative and Qualitative Disclosures about Market Risk....................................   18
Item 8.          Financial Statements and Supplementary Data...................................................   21
Item 9.          Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........   21

                                                      PART IV

Item 14.         Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................   54

                 Signatures....................................................................................   64
</TABLE>


                                        2

<PAGE>


                                     PART II
Item 6.  Selected Financial Data

The  following   Selected   Financial  Data  of  the  Company  and  Consolidated
Subsidiaries has been derived from consolidated  financial statements audited by
PricewaterhouseCoopers LLP, whose report for the years ended June 30, 1998, 1997
and  1996  is  included  elsewhere  in the  Form  10-K/A,  and  should  be  read
in conjunction  with the full consolidated  financial  statements of the Company
and Notes thereto.
<TABLE>
<CAPTION>

                                                     (In Thousands of Dollars Except Per Share Amounts)
                                  -----------------------------------------------------------------------------------
                                                                     Years Ended June 30
                                  -----------------------------------------------------------------------------------
                                    Restated
                                      1998              1997              1996             1995              1994
                                  ------------      ------------     -------------     ------------     -------------
<S>                               <C>               <C>              <C>               <C>              <C>
Net sales and revenues (2).....   $  1,562,943      $  1,671,714     $   1,663,085     $  1,592,857     $   1,695,129

Margin (loss) from
   continuing operations(1)(3).   $     12,189      $     10,670     $      11,147     $     (7,800)    $         555

Net margin(loss)(1)(3)(4)(5)...   $     41,145      $     10,670     $      12,662     $    (15,730)    $      (3,445)

Total assets (1)(2)............   $  1,417,294      $  1,300,261     $   1,245,891     $  1,225,193     $   1,273,958

Total long-term debt ..........   $    354,529      $    330,371     $     291,666     $    268,310     $     253,104

Total long-term subordinated
   debt........................   $    462,196      $    438,127     $     414,927     $    399,064     $     407,144

Cash dividends per share
   of common stock ............   $       1.50      $       1.50     $        1.50     $       1.50     $        1.50
</TABLE>

(1) The 1998 data is  restated  to correct  information regarding  Agriculture's
    grain marketing activities as previously reported.  As a result of  recently
    disclosed   losses   in   connection   with   these activities, margins from
    continuing operations, net margins,  and total assets as currently  reported
    for  1998  are  lower  than  originally  reported  by  $600, $600  and $900,
    respectively. See Management's Discussion and  Analysis on pages 4 and 6 and
    Note 20 to the financial statements.
(2) Certain amounts reported in fiscal years ended June 30, 1994-1997, have been
    reclassified to conform to the current year presentation.
(3) The  1994  data   reflects  a  $6,065  credit  before  taxes  from  business
    restructuring;  1995 data  reflects  a credit  before  taxes  from  business
    restructuring of $3,248; and 1996 data reflects a $1,943 credit before taxes
    from business restructuring.
(4) The  1994  data  reflects  an  after-tax   operating  loss  of  $4,000  from
    discontinued operations;  1995 data reflects an after-tax loss of $12,360 in
    discontinued operations related to  H.P. Hood Inc. (Hood) and  an  after-tax
    gain  on  the  sale  of Curtice Burns Foods, Inc. of  $4,430;  and 1996 data
    reflects an after-tax  gain on the  sale of Hood of $1,515, net of operating
    losses until the time of sale.
(5) Effective  July 1, 1997, the Company  changed its method of determining  the
    market-related  value  of its  plan  assets  under  Statement  of  Financial
    Accounting  Standards (SFAS) No. 87, "Accounting for Pensions." A cumulative
    effect adjustment, net of tax, of $28,956 increased net margin in 1998.


                                       3

<PAGE>


Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
                             (Thousands of Dollars)


The following discussion refers to Agway Inc. and Consolidated  Subsidiaries and
should be read in  conjunction  with  Selected  Financial  Data (Item 6) and the
Consolidated  Financial  Statements  of the Company and Notes  thereto (Item 8),
specifically  Financial  Information  Concerning Segment Reporting (Note 15) and
Discontinued  Operations (Note 19). The purpose of this discussion is to outline
the most  significant  factors  having an impact upon the results of operations,
the liquidity,  and the capital  resources of the Company for fiscal years ended
June 30, 1996 through June 30, 1998.


RESULTS OF OPERATIONS

1998 COMPARED WITH 1997

CONSOLIDATED RESULTS

On July  8,  1999,  Agway  announced  that it had  become  aware  of  accounting
irregularities in its grain marketing department and that Agway had initiated an
investigation. It has been determined that unauthorized speculative positions in
commodity  instruments  were taken within the department in violation of express
policies, which resulted in losses to Agway. After-tax losses of $600 related to
grain marketing in 1998 were concealed  within the department  through  improper
accounting  for  premiums on options  sold.  To reflect  these  losses and their
effect on the Company, the following Management Discussion and Analysis has been
restated.

The  Company's  restated  net  margin of  $41,100  for 1998 is a $30,400  (284%)
increase  from a net  margin of  $10,700 in 1997.  (See  Agriculture  Management
Discussion  and  Analysis  for  details of events  requiring  restatement.)  The
$30,400  increase  includes a net  cumulative  effect  adjustment  for a pension
accounting  change  of  $29,000  (see  Note  14 to  the  consolidated  financial
statements) and a $1,500 (14%) increase from  continuing  operations as compared
to 1997. The continuing  operations margin increase  represents a $7,700 pre-tax
increase  from 1997  offset by a $6,200  increase  in tax expense as compared to
1997.

The net business unit restated pre-tax operating results decreased by $7,300 and
are discussed below by business segment.  Additionally,  net corporate  expenses
increased  $1,200 as  compared  to the prior  year.  The net  corporate  expense
increase   was   principally   due  to  a  net  $2,000   increase  in  corporate
self-insurance  costs  based  on  liability  claims  outstanding  and  actuarial
estimates of reserve  development.  These declines in restated pre-tax operating
results were more than offset by the growth of the net pension asset  recognized
in the income  statement during 1998, which was higher by $16,200 as compared to
1997.  Of the  pension-related  increase,  $15,000  was  due to  the  change  in
accounting  noted  previously.  It is  anticipated  that,  due to a pension plan
amendment  effective  July 1, 1998 (see  Note 14 to the  consolidated  financial
statements), the pension income in future years would be at historical levels.

Consolidated  net sales and revenues of  $1,562,900  decreased  $108,800 (7%) in
1998 compared to $1,671,700 in 1997.  The decrease is primarily  from the Energy
segment  ($102,000) due to a combination of reduced costs for petroleum products
resulting  in lower  selling  prices and reduced  volume from the warmer  winter
season as compared to the prior year. The Retail segment experienced lower sales
($16,000)  as this  operating  unit has  refocused  their  business  and  exited
specific  product  lines.  These  decreases  to sales were  offset  slightly  by
increased lease revenues in Telmark ($8,500).

Consolidated  restated  operating  costs and  expenses of  $1,521,200  decreased
$121,700 (7%)  compared to $1,642,900 in 1997.  The decrease is primarily due to
the  decreased  product  costs  and  the  reduced  variable   operational  costs
associated  with the lower  sales  levels  noted  above.  These  decreases  were
partially  offset by additional costs associated with volume growth in the lease
portfolio in 1998. Selling,  general and administrative expenses were consistent
with the prior year.

Other  income,  net, of $13,400  decreased  $5,400 (29%)  compared to $18,800 in
1997. The decline was  substantially due to receiving less patronage refund from
a cooperative supplier in 1998 as compared to 1997.

                                       4
<PAGE>



ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
                             (THOUSANDS OF DOLLARS)


CONSOLIDATED RESULTS (CONTINUED)

Income  tax  expense  of  $12,100  as  restated  for  1998 and  $5,900  in 1997,
respectively,  resulted in effective tax rates of 49.8% and 35.7%, respectively.
The  increase  in the  effective  rate is mainly  attributable  to the change in
adjustments  made  in  the  prior  years'  tax  liabilities  (see  Note 9 to the
consolidated financial  statements).  Tax expense associated with the cumulative
effect  adjustment  totaled  $16,500  and is  reflective  in the net  adjustment
amount.

AGRICULTURE

Total sales and revenues of $769,700 in 1998  decreased by $1,600 (.2%) compared
to $771,300 in 1997. AAP sales and revenues decreased $27,800 (5%) and CPG sales
and revenues increased $26,200 (17%) in 1998 as compared to 1997.

Despite AAP  increased  feed volume  (5%) over the prior year,  the  decrease in
pricing  levels of feed  products has  resulted in an overall  decrease in total
feed sales compared to 1997. Crop sales declined compared to last year,  largely
due to a similar  decrease in pricing level of products as in feed.  Even though
crops sales dollars were down, volume increases were experienced  principally in
fertilizer  (8%),  seed corn units (7%), and soybean seed units (37%).  AAP farm
stores  experienced a decline in sales due to a planned reduction in the sale of
power equipment and the  discontinuation  of the frozen food business as well as
an  increased  emphasis on bagged feed  delivery  routes has  continued to lower
sales.

The  increase  in CPG sales  resulted  from strong  sales  growth in its produce
operations of $32,000 (44%)  compared to 1997.  This growth in produce  resulted
substantially  from an  acquisition  of a business and the  formation of Country
Best  Adams  during  the first  quarter  of 1998.  Additionally,  an  increasing
customer base at the seed operation, principally other cooperative and wholesale
businesses,  has increased  sales by $6,200 (39%) as compared to the prior year.
Sales growth at CPG has been partially  offset by the  elimination of sales from
the pet food  business by  $11,400,  which was sold in the prior year to Pro-Pet
LLC, a company in which CPG has a minority interest.

The Agriculture  segment's  restated operating margin of $6,700 increased $3,500
as compared to $3,200 in 1997. AAP operating margin decreased $300 (16%) and CPG
increased $3,700 (71%) in 1998 compared to 1997.

AAP's restated  operating loss of $2,300 in 1998 represents an increased loss of
$300 (15%)  from an  operating  loss of $2,000 in 1997.  The  increased  loss as
compared to the prior year resulted  partly from  increased  losses of $1,100 in
the grain marketing  department.  Improved operating margins in all other Direct
Marketing operations of $8,100 resulted due to lower unfavorable experience with
exchange-traded  futures  ($5,600) in the feed business and improved  margins in
the seed business  ($2,400) as the result of growth in the commercial  vegetable
seed business. These improved margins were mostly offset by (1) increased losses
in Enterprise  operations of $4,900 due  principally to reduced  margins in feed
and crop sales and (2)  increased  net support  costs of $3,400.  Increased  net
support costs are due to reduced patronage income ($5,100), largely due to lower
CF Industries Inc. earnings,  offset by a non-recurring charge ($1,500) incurred
in the first  quarter  last year for the  adoption  of a new  accounting  policy
regarding the improvement of long-lived assets.



                                        5

<PAGE>



ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
                             (THOUSANDS OF DOLLARS)


AGRICULTURE (CONTINUED)

On June 28, 1999,  it was disclosed to Agway's  management  by personnel  within
Agriculture's  grain marketing  department (the  department) that records within
the department had been falsified to conceal losses from unauthorized  activity.
An  investigation,  under  guidance  from  external  legal counsel and including
internal legal counsel, internal financial staff, external auditors, and private
investigators,  has been conducted.  Reports on the investigation  findings have
been made directly to the Board of Directors.  The  investigation has determined
that  unauthorized  speculative  positions in commodity  instruments  were taken
within the department in violation of express policies, which resulted in losses
to Agway.  Through  falsification  of market  values  on  inventory  held and on
forward  contracts and improper  accounting for premiums on options sold, losses
were concealed within the department, resulting in misreported earnings by Agway
for the fourth  quarter of the year ended  June 30,  1998,  and the first  three
quarters  of fiscal  1999.  To  reflect  these  losses  and their  effect on the
Company,  this report is an amendment to the  previously  filed annual report on
Form 10-K for the year ended June 30, 1998.  To assure  adherence to policies on
use of  commodity  instruments,  Agway  has  since  reorganized  the  operating,
control,  and reporting  structures  of the  department,  reassigned  management
responsibility, and reduced the scope of its business activity.


CPG's operating margin of $8,900 in 1998 represents a $3,700 (71%) increase from
an operating  margin of $5,200 in 1997.  Operating  improvements in a variety of
CPG business  operations during 1998 resulted in increased margins over 1997. In
the produce  operation,  operating  margins  increased  $2,600  principally from
potatoes,  onions and strawberries product lines. The Pro-Pet LLC investment and
net charges in the prior year on the sale of the pet food  manufacturing  brands
and  businesses  improved  margins  in 1998 over the prior year by $1,400 as the
benefits of better inventory  management and cost savings from the joint venture
were  realized.  All other CPG business had a net  improvement  ($300) over last
year. Initial start-up costs associated with new operations decreased margins by
$600.

RETAIL

Total sales and revenues of $251,600 in 1998 decreased  $16,000 (6%) compared to
$267,600 in 1997. The decrease is the result of Retail's  continued focus on its
three primary product  categories:  yard and garden,  pet food and pet supplies,
and farm-related products. An outcome of this focus is reduced sales during 1998
through a planned  reduction  of the power  equipment  business  at most  retail
locations  ($7,100)  and the  discontinuation  of the frozen food  product  line
($3,800). Additionally, sales associated with bag feed and fertilizers, and farm
supplies declined  ($6,000)  principally due to an increasing amount of farmers'
needs being supplied by farm supply stores managed by AAP.  Increased sales were
experienced  from  several  nursery  acquisitions  during  1998  ($5,900).  This
increase was  partially  offset  ($5,000) by reduced  sales from closed  stores,
lower franchisee volume,  which was negatively impacted by the implementation of
a new  franchisee  program  during 1998,  and a net decline in all other primary
product categories.

Retail's  operating loss of $2,700 in 1998  represents a decrease in earnings of
$7,900 (152%) from an operating  margin of $5,200 in 1997.  Gross margin dollars
declined  $2,500 in 1998 as compared to 1997.  The nursery  product lines showed
strong growth in margins ($2,500),  particularly through acquisitions.  However,
the planned product line reductions noted above decreased  margins by $2,900 and
net  declines of $2,100  were  experienced  in the margins of all other  primary
product lines.  Overall,  gross margin percentage improved 2% despite the dollar
reductions.  Total  expenses  increased  $4,100  as  compared  to last  year due
principally  to  increased  costs  from  new  business  locations  ($2,500)  and
non-recurring  costs ($600)  associated with business  restructuring  in Retail.
Other revenue,  principally from the sale of surplus  properties,  also declined
$1,300 as compared to the prior year.



                                        6
<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
                             (Thousands of Dollars)


ENERGY

Total sales and revenues of $505,100 in 1998  decreased  $102,000 (17%) compared
to  $607,100  in 1997.  Reduced  commodity  cost for  petroleum  products in the
current year allowed for reduced selling prices to customers.  The lower selling
prices  decreased sales by $54,100  compared to 1997.  Total unit volume sold of
all products  decreased 10.5%  resulting in sales decline of $56,200,  mostly in
the  residential  sales of heating  oils and  propane.  This  decline was mainly
caused  by  the  current  year's  winter  season  being  8%  warmer,   based  on
degree-days,  compared to 1997. These declines were slightly offset by increases
in sales of $8,300 from a growing natural gas product line for both  residential
and  commercial  customers  and from an increase  in service  revenues as Energy
continues to emphasize its technical strength in servicing heating, ventilating,
and air-conditioning equipment.

Energy's  operating  margin of $15,200 in 1998  represents  a decrease of $4,300
(22%) from an  operating  margin of $19,500 in 1997.  The lower  sales  dollars,
noted above,  partially  offset by stronger gross margin rates,  reduced overall
gross margin  dollars on all  products by $6,900 as compared to 1997.  Operating
expenses  declined  by $1,700 in 1998 as compared  to 1997.  Total  distribution
costs  were  lower  in part  due to the  decline  in  volume  and in part due to
initiatives to lower its delivery costs of products and to reorganize how Energy
manages the markets it serves.

LEASE FINANCING

Total revenues of $65,500 in 1998 increased  $8,600 (15%) compared to $56,900 in
1997.  The increase is  attributable  in part to a $49,900 (11%) increase in net
leases  and  notes  during  1998 as  compared  to 1997.  Increases  in the lease
portfolio  resulting  from new booked volume of $227,300 in 1998 and $231,000 in
1997  exceeded  lease  reductions  from  collection  and net bad debt expense of
$177,400  and $159,800 in 1998 and 1997,  respectively.  The net increase in new
booked  volume has the  effect of  increasing  revenues.  Total  revenues,  as a
percentage  of average net leases and notes,  decreased  slightly  from 13.7% in
1997 to 13.5% in 1998.

Operating  margin of $15,400 in 1998 represents an increase of $2,400 (18%) from
an operating  margin of $13,000 in 1997.  The increase in total  revenues  noted
above was partially offset by increased interest cost of $3,400 (14%), increased
SG&A costs of $3,100 (25%) and a decrease in the  provision for credit losses of
$400 (5%) in 1998 as compared to 1997.  While the average cost of interest  paid
on debt decreased from 7.5% to 7.2%,  interest costs  increased due to increased
borrowings  required  to  finance  the growth of the lease  portfolio.  The SG&A
expense increase was primarily the result of additional personnel and incentives
paid relating to the additional new business  booked and increased  travel costs
as the Company expands its territory.

INSURANCE

Total net revenues of $27,300, in 1998 increased $300(1%) compared to $27,000 in
1997.  From  1997  to  1998, sales  of  the  Insurance  Company's  core  product
offerings increased 3%, while depopulation of mandatory assigned risk automobile
pools resulted in a 27% decrease in premiums allocated to the Insurance Company.
In Agency, 1998 sales of long-term care  and  other insurance products continued
to increase, while revenue related to medical  products  continued  to decrease.
Ongoing healthcare regulatory activity and rising medical costs are expected to
depress future medical product sales.

During 1998,  the  Insurance  Company  experienced  an  operating  gain  of $200
compared to $1,200 in 1997.  The 1998  results  were  impacted principally by an
increase  in  commission  expense  of  $900.  In  addition,  net  claims  losses
increased slightly in  1998  compared  to  1997.  This  resulted from lower 1998
reinsurance recoveries  as  the Insurance  Company  experienced  more  favorable
claims  severity  and  frequency  results  in 1998 compared to 1997.  The Agency
experienced an operating loss of $500 in  1998  and 1997.  This  is  principally
related to expenses associated with the  Agency's  provision  of  administrative
management services to Agway business units.  The $300 decrease in  1998  Agency
net revenues from sales of medical  products  was  offset  by a $300 decrease in
selling,  general  and  administrative  expenses  attributable  to  the  medical
product.



                                       7

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
                             (Thousands of Dollars)



1997 COMPARED WITH 1996

CONSOLIDATED RESULTS

The  Company's  net margin of $10,700 for 1997 is a $2,000 (16%)  decline from a
net margin of $12,700 in 1996. The $2,000 decline  reflects a $1,500 decrease in
gain on sale of  discontinued  operations  and a $500 decrease  from  continuing
operations  as  compared  to 1996.  The  continuing  operations  margin  decline
represents a $4,500 pre-tax  decrease  offset by a $4,000 decline in tax expense
as compared to 1996. The 1997 pre-tax  results,  despite an overall decline from
1996, reflect operational  improvements in AAP Enterprise  operations and in all
other business units,  an increase in pension credit,  and a decline in interest
expense in 1997 as compared to 1996.  These  improvements  to pre-tax results in
1997 were more than offset by (1)  decreased  gross margins that resulted from a
combination  of  increased  commodity  costs  and  unfavorable  experience  with
exchange-traded  futures and options; (2) net charges from the current year sale
of the pet food  manufacturing  brands and  businesses  of the Country  Products
Group  (CPG) as  compared  to  significant  gains on the sale of CPG  businesses
generated  in the  prior  year;  and  (3) a  charge  for the  adoption  of a new
accounting pronouncement on the impairment of long-lived assets.

Consolidated net sales and revenues of $1,671,700 increased $8,600 (.5%) in 1997
compared to  $1,663,100  in 1996.  The increase is  primarily  from higher sales
prices in Agriculture and Energy due to increased product costs in 1997 for feed
products,  heating  oil,  diesel  fuel,  and  propane as  compared  to 1996.  In
addition,  an  increase  in volume was  experienced,  particularly  in AAP seed,
fertilizer, and certain feed products; Energy bulk commercial sales; and Telmark
lease volume.  These increases to sales more than offset significant declines in
sales at CPG and ARS as these business units have refocused their businesses and
exited several  businesses or product lines.  AAP's direct  marketing feed sales
also  experienced  significant  declines  in 1997 over  1996 due to lower  wheat
yields in the Northeast.

Consolidated operating expenses of $1,642,900 increased $15,500 (1%) compared to
$1,627,400. The increase is primarily due to increased product costs noted above
and the  additional  costs  associated  with volume  growth in  Telmark's  lease
portfolio in 1997. The Company's Insurance operations reduced operating expenses
$4,700  (22%) in 1997 as compared to 1996 from  improved  underwriting  results.
Selling,  general and administrative  expenses (SG&A) have decreased $5,300 (4%)
in 1997 as compared to 1996.  The  declines  reflect  the ongoing  reduction  of
costs, resulting from prior decentralization  efforts and management's continued
efforts to reduce these costs.

The  Company's  interest  expense,  net of interest  income,  of $31,000 in 1997
decreased  by $2,100 (6%)  compared  to $33,100 in 1996.  Average  Company  debt
levels and cost of debt in 1997 were the same as compared to 1996. Additionally,
prior year interest  assessments  in the  settlement of federal and state income
tax audits inflated the 1996 net interest expense.

Other income,  net, of $18,800  increased $400 (2%) compared to $18,400 in 1996.
The  Company  received  an  increase in its  patronage  refund  received  from a
cooperative  supplier in 1997 as compared to 1996.  This  increase was partially
offset  by a gain on the sale of an  investment  in 1996  that did not  recur in
1997.

Income tax expense of $5,900 and $9,900 in 1997 and 1996, respectively, resulted
in  effective  tax rates of 35.7%  and  47.1%,  respectively.  The  decrease  in
effective rate is mainly attributable to adjustments made in the current year to
prior years' tax  liabilities.  See Note 9 of the  financial  statements  of the
Company for more details.


                                       8

<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS
                             (THOUSANDS OF DOLLARS)

AGRICULTURE

Total sales and revenues of $771,300 in 1997 decreased by $98,800 (11%) compared
to  $870,100  in 1996.  AAP  experienced  a $41,200  (6%)  decline  in sales and
revenues while CPG declined $57,600 (27%) in 1997 as compared to 1996.

AAP experienced a combination of increased  selling prices and higher volumes on
its principal supply products during 1997 as compared to 1996. Increased selling
prices  in 1997 are due to  higher  feed  product  costs  than in  1996.  Volume
increases in 1997 occurred in seed units, fertilizer tons, and feed tons as well
as  increased   revenues  from  crop-related   services  over  1996.  The  seed,
fertilizer,  and feed volume  improvements  were the result of  improvements  in
enterprise operations and management,  while a delay in the spring 1996 sales of
crop-related  services into the first quarter of 1997 increased  volume in these
services. However, these increases in sales during 1997 were more than offset by
declines in direct  marketing feed sales and farm store power equipment and yard
and garden tool sales.  The  combination of lower Northeast wheat yields and low
carry-in stock that has allowed farmers  increased  storage capacity resulted in
less  marketing of these  products.  Power  equipment  sales were  impacted by a
business  decision to  de-emphasize  the sale of this  equipment in farm stores.
Tool sales were negatively  impacted by mild winter  conditions  which decreased
demand for these products.

The majority of the $57,600  decline in CPG sales in 1997 represents the decline
in sales volume from lines of business  sold,  mainly  during the prior year. As
part of CPG's strategic plan, Agway's laboratory animal diet business, Pro-Lawn,
and Sacramento  Valley Milling were sold in 1996 and the pet food  manufacturing
brands  and  business  and  Roberts  Seed were  sold in the first  half of 1997.
Additional declines in sales were experienced in CPG's ongoing operations.  Seed
and tablestock  potato sales  decreased 50% in 1997 as compared to 1996 due to a
weak potato market which depressed sales prices.  Sunflower seed and printed bag
sales for the production of bird foods in CPG's  specialty  products  operations
declined in 1997 as compared to 1996 from less product demand because of a lower
than normal snow coverage in the Northeast during the winter of 1996-97.

The Agriculture  segment  operating  margin of $3,200 in 1997 decreased  $20,200
(86%) as compared to $23,400 in 1996.

AAP's  operating loss of $2,000 in 1997  represents a decrease of $15,200 (115%)
from an operating  margin of $13,200 in 1996. The operating loss decrease is due
in part to a $1,500 loss from the adoption of a new accounting  pronouncement on
the  impairment of  long-lived  assets but is primarily due to declines in gross
margins  on  feed  sales,   principally   from   unfavorable   experience   with
exchange-traded   futures  and  option  contracts  in  1997  compared  to  gains
experienced  in 1996.  The effect of these  decreases  was  partially  offset by
improved field operations in the enterprises and improved patronage refunds from
a cooperative supplier. The business improvements have resulted from the locally
managed AAP enterprises' responsiveness and competitiveness to the needs of farm
operations in their  territory,  which,  in turn, have improved gross margins at
these field operations.

CPG's operating  margin of $5,200 in 1997 decreased  $5,000 (49%) as compared to
$10,200  in 1996.  During  1996  through  early  1997,  CPG  executed  a planned
divestiture of a number of its businesses.  Divested businesses resulted in $500
of losses in 1997 compared to $3,100 of gains from  operations and sale in 1996.
The remaining  reduction of operating margin in 1997 as compared to 1996 results
from margins earned in 1996 on businesses sold.  Margins from ongoing operations
are comparable to the prior year.

                                       9

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
                             (Thousands of Dollars)


RETAIL

Total sales and revenues of $267,600 in 1997 decreased  $17,300 (6%) compared to
$284,900 in 1996.  The decrease is the result of Retail's  continued  changes to
focus on its three primary product categories: yard and garden, pet food and pet
supplies, and farm-related products. During 1997, the combination of exiting the
power equipment business at additional locations,  completely exiting the frozen
food  business,  and entering into an agreement with a third party to sell water
systems and pay Retail a commission has resulted in an $8,800  decrease in sales
in 1997 as compared to 1996.  Partially  offsetting  these  declines is a $5,000
improvement in Retail's yard and garden business.  Additionally  impacting sales
was a mild and relatively snow-free winter in many parts of the Northeast, which
reduced by $3,700 the bird food and ice melter salt sales. Finally, a decline in
sales of farm-related products was experienced by Retail during 1997 as compared
to 1996 as farm supply stores managed by AAP are supplying an increasing  amount
of the farmers' supply needs.

The Retail  operating  margin of $5,200 in 1997  increased $300 (7%) compared to
$4,900 in 1996. The realignment of products,  particularly  the increase in yard
and garden sales, has increased the gross margin percentage for ARS in 1997; but
the overall  reduction  in sales noted above has resulted in a decrease in total
gross margin dollars in 1997 compared to 1996. This was more than offset by a 3%
decrease in costs, principally SG&A expenses.

ENERGY

Net sales and revenues of $607,100 in 1997  increased  $61,100 (11%) as compared
to $546,000 in 1996. The increase was due to higher  commodity prices in heating
oils and  diesel  fuel as a result of strong  demand  and low  inventory  in the
industry. These higher costs increased the average selling price of all products
by 4.6% in 1997 as compared to 1996. Additionally, total unit volume sold of all
products  increased  6.3% in 1997 as compared to 1996,  despite  1997 being 7.5%
warmer  than in 1996 based on degree  days.  The major  component  of the volume
increase was the result of  significant  increases in bulk unit sales in heating
oils and diesel fuels during 1997 as compared to 1996.

Energy's  operating margin of $19,500 in 1997 increased $3,400 (21%) compared to
$16,100 in 1996.  Overall,  product  margins in 1997 were  comparable  with 1996
mainly due to the increased  volume at a lower margin rate.  The higher  product
costs during 1997 could not be fully recovered through increased selling prices,
particularly in heating oil and diesel fuels. Total operating expenses decreased
$3,400 in 1997 compared to 1996. The decreases were  experienced in distribution
and SG&A expenses and were the result of the combination of lower freight costs,
lower amortization of intangibles, and improved management of these costs.

LEASE FINANCING

Total  revenues  of $56,900 in 1997  increased  by $8,300  (17%) as  compared to
$48,600 in 1996.  The increase is  attributable  primarily to the $71,200  (19%)
increase in net leases and notes  during 1997 as compared to 1996.  Interest and
finance  charge  income,  as a  percentage  of  average  net  leases  and notes,
increased slightly from 12.9% in 1996 to 13.0% in 1997.

Operating  margin of $13,000  in 1997  increased  $1,400  (12%) as  compared  to
$11,600  in 1996.  The  increase  in total  revenues  was  partially  offset  by
increased  interest cost of $3,200 (16%),  increased SG&A costs of $2,700 (27%),
and an  increase  in the  provision  for credit  losses of $900 (14%) in 1997 as
compared to 1996. The average cost of interest paid on debt for Telmark remained
unchanged at 7.5% for 1997 and 1996.  The  increased  SG&A  expenses in 1997 are
primarily due to increased payroll costs and increases in advertising costs.











                                       10

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
                             (Thousands of Dollars)



INSURANCE

Insurance  net sales and  revenues of $27,000 in 1997  increased  $1,600 (6%) as
compared to $25,400 in 1996.  The increase  resulted  from an increase in direct
premiums  written and a reduction  in  reinsurance  costs in 1997 as compared to
1996.

The operating  margin of $700 in 1997 increased $6,000 (113%) as compared to the
net loss of $5,300 in 1996.  The increase has  substantially  been the result of
improvement  in  loss  development.  Insurance  experienced  losses  on  a  more
historical  level during 1997.  Adverse  development in older claims and certain
unusually  large  farmowner and auto liability  casualty  losses in 1996 did not
occur in 1997.

DISCONTINUED OPERATIONS

The  1996  results  from discontinued operations reflect a net gain of $2,100 on
the sale of  H.P. Hood Inc. (Hood) and  a  net  loss  of $600 on  its operations
through the date of sale.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

Cash  generated  from  operations  and external  borrowings  continues to be the
Company's  major  ongoing  source  of funds  to  finance  capital  improvements,
business acquisitions,  shareholder dividends,  and a growing lease portfolio at
Telmark.  During the two-year period ended June 30, 1997, significant additional
cash was generated  from the sale of  businesses,  particularly  at CPG and with
Agway's discontinued operations.
<TABLE>
<CAPTION>
                                                                       1998             1997              1996
                                                                   ------------      -----------      ------------
Net cash flows from/(used in)
<S>                                                                <C>               <C>              <C>
      Operating activities......................................   $     43,856      $    24,234      $      9,349
      Investing activities......................................        (82,331)         (77,014)          (28,482)
      Financing activities......................................         38,475           52,780            19,133
                                                                   ------------      -----------      ------------
Net increase (decrease) in cash and equivalents.................   $          0      $         0      $          0
                                                                   ============      ===========      ============
</TABLE>
Cash Flows From Operations


The increase in cash flow from operating  activities in 1998 as compared to 1997
is due in part ($9,900) to a lesser demand for cash to fund working  capital and
in part ($9,700)  due to increased cash from earnings.  The biggest  contributor
to the  lower  demand  was from a  decline  in  receivables  during  1998  (cash
provided) as compared to increased  receivable  balances in the prior two years.
The  increase  in cash flow from  operations  in 1997  reflects a  substantially
lesser demand for cash to fund working  capital  increases  offset by a somewhat
lower amount of cash generated from earnings as compared to 1996.


Cash Flows From Investing
The most significant use of cash over the past three years is from the Company's
growing lease financing business (Telmark).  The cash requirements to fund lease
origination  growth in excess of lease repayments  amounted to $57,400,  $79,200
and $48,500 in 1998, 1997 and 1996, respectively.  Capital expenditures required
cash of $30,952, $25,745 and $26,025 for 1998, 1997 and 1996, respectively.  The
Company anticipates that capital  expenditures will increase as profits increase
from planned  growth in many of its  business  units.  This  increase in capital
expenditures  will be  somewhat  offset  as fixed  asset  upgrades  of  existing
facilities are completed.


                                       11

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
                             (Thousands of Dollars)


Cash Flows From Investing(continued)
Cash  flow  used in  investing  was  partially  funded  by cash  generated  from
investing  activities,  principally  the  sale of  businesses  and  the  sale of
discontinued operations, which amounted to a total of $0, $21,958 and $42,367 in
1998, 1997 and 1996, respectively.

Cash Flows From Financing Activities
The Company  finances its  operations  and the  operations of all its continuing
businesses  and  subsidiaries,  except  Telmark  and  Insurance,  through  Agway
Financial  Corporation (AFC).  External sources of short-term  financing for the
Company and all its other continuing  operations include revolving credit lines,
letters of credit,  and a commercial  paper program.  Insurance  finances itself
through  operations  or  with a  combination  of  short-  and  long-term  credit
facilities. Telmark's finance arrangements are explained below.

As of June 30, 1998, the Company had certain  facilities  available with various
banking institutions whereby lenders have agreed to provide funds up to $369,000
to  separately  financed  units of the  Company as  follows:  AFC,  $75,000  and
Telmark,  $294,000.  The AFC amount is a $50,000 short-term line of credit and a
$25,000  long-term  revolver.  In  addition,  AFC may  issue  up to  $50,000  of
commercial  paper  under the  terms of a  separate  agreement,  backed by a bank
standby letter of credit.  The bank has agreed to increase AFC's short-term line
of credit to  $75,000 on October  1,  1998,  to provide a facility  for  interim
funding, if necessary,  for maturing subordinated debt (see below). The lines of
credit to Telmark have increased $90,000 since June 30, 1997, and are considered
sufficient to finance new business and support incremental repayments on debt.

Agway and AFC
The  $50,000  short-term  line of  credit  and the  $25,000  long-term  revolver
available to AFC at June 30, 1998,  and the $50,000  commercial  paper  facility
require collateralization using certain of the Company's accounts receivable and
non- petroleum inventories  (collateral).  Amounts that can be drawn under these
AFC short-term  agreements are limited to a specific  calculation based upon the
collateral available. Adequate collateral has existed throughout the fiscal year
to permit AFC to borrow  amounts to meet the ongoing needs of the Company and is
expected  to  continue  to do so.  The line of  credit  and  long-term  revolver
additionally  require the Company's  investment in bank stock,  which had a book
value of $7,100 at June 30, 1998, as  additional  collateral.  In addition,  the
agreements include certain covenants, the most restrictive of which requires the
Company to maintain  specific  quarterly levels of interest coverage and monthly
levels of tangible  retained  margins.  AFC bank short-term  lines of credit and
commercial  paper facilities are available to the Company through December 1998.
The  long-term  revolver  is  available  until  January  1,  2000.  The  amounts
outstanding as of June 30, 1998 and 1997, under AFC's $50,000 short-term line of
credit and $50,000  commercial  paper were $0 and  $30,100  and $0 and  $34,300,
respectively.  The long-term  revolver,  which became available in January 1998,
has $0 outstanding at June 30, 1998.  The Company has ongoing  discussions  with
its lenders and expects to continue to have  appropriate and adequate  financing
to meet its ongoing needs.

AFC offers subordinated debentures and subordinated money market certificates to
the public.  AFC's  subordinated debt is not redeemable by the holder.  However,
AFC does have a practice of repurchasing at face value, plus interest accrued at
the stated rate,  certain  subordinated debt whenever  presented for repurchase.
The foregoing debt bears interest  payable  semiannually on January 1 and July 1
of each year. The money market certificates'  interest rate is at the greater of
the  quoted  rate or a rate  based upon the  discount  rate for U.S.  Government
Treasury  Bills,  with  maturities  of 26 weeks.  In  October  1998,  $75,600 of
subordinated  money market  certificates  issued by AFC will mature. The Company
expects to refinance this debt either through a new issue of subordinated  debt,
through short-term bank borrowings, or a combination of both. An increase in the
short-term credit facilities providing this liquidity is described above.

                                       12

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
                             (Thousands of Dollars)


Telmark

Telmark finances its operations and lease portfolio growth  principally  through
payments  received  on  existing  leases,  which  totaled  $169,800  in 1998 and
$151,900 in 1997. Additionally,  cash flows from operations, which were $21,200,
$15,200 and  $12,600 for 1998,  1997 and 1996,  respectively,  borrowings  under
lines of credit, private placements of debt with institutional investors,  sales
of  debentures  to  the  public,   sales  of  leases,   and  lease-backed  asset
securitization all provide financing sources for Telmark.

At June 30, 1998,  Telmark has several  credit  facilities  available from banks
which  allow  Telmark  to borrow up to an  aggregate  of  $294,000.  Uncommitted
short-term line of credit  agreements  permit Telmark to borrow up to $44,000 on
an unsecured basis with interest paid upon maturity.  The lines bear interest at
money market  variable  rates.  A committed  $250,000  partially  collateralized
revolving term loan facility  permits Telmark to draw  short-term  funds bearing
interest at money market rates or draw long-term debt at rates  appropriate  for
the term of the note drawn.  The total amounts  outstanding  as of June 30, 1998
and 1997,  under the  short-term  lines of credit  and the  revolving  term loan
facility  were $20,000 and $165,000 and $4,000 and $190,900,  respectively.  The
portion of the revolving term loan that is short term at June 30, 1998 and 1997,
was $15,000 and $20,900, respectively. Telmark borrows under its short-term line
of credit  agreement and its revolving  term agreement from time to time to fund
its  operations.  Short-term  debt  serves  as  interim  financing  between  the
issuances of long-term debt.  Telmark renews its lines of credit  annually.  The
$44,000 lines of credit all have terms expiring  during the next 12 months.  The
$250,000 revolving term agreement loan facility is available through February 1,
1999.

At June 30, 1998, Telmark also had balances outstanding on unsecured senior note
private placements totaling $169,000.  Interest is payable  semiannually on each
senior  note.  Principal  payments  are both  semiannual  and  annual.  The note
agreements are similar to one another and each contains financial covenants, the
most  restrictive of which prohibit (i) tangible net worth,  defined as tangible
assets less total  liabilities  (excluding any notes payable to Agway  Holdings,
Inc.),  from being less than $75,000,  (ii) the ratio of total  liabilities less
subordinated notes payable to Agway Holdings,  Inc. to shareholder's equity plus
subordinated notes payable to Agway Holdings, Inc. from exceeding 5:1, (iii) the
ratio of earnings  available for fixed charges from being less than 1.25:1,  and
(iv) dividend  distributions and restricted investments made after September 30,
1997,  that exceed 75% of  consolidated  net income for the period  beginning on
October 1, 1997, through the date of determination, inclusive.

Telmark,  through a wholly  owned  special  purpose  subsidiary,  Telmark  Lease
Funding I, LLC,  originally  issued  $24,000 of Class A  lease-backed  notes and
$2,000 of Class B lease-backed notes to three insurance  companies.  Outstanding
principal at June 30, 1998, is $17,700. The subsidiary pays interest at 6.58% on
the Class A notes and 7.01% on the Class B notes.  The notes are  collateralized
by leases having an aggregate  present value of contractual lease payments equal
to the principal balance of the notes, and the notes are further  collateralized
by the residual values of these leases. Final scheduled maturity of the notes is
December 15, 2004.

Telmark registers with the Securities and Exchange  Commission from time to time
to offer to the public debentures. The debentures are unsecured, subordinated to
all senior debt at Telmark.  The  interest on the debt is payable  quarterly  on
January 1, April 1, July 1, and October 1 and is allowed to be  reinvested.  The
offering of the debentures is not underwritten, and there can be no guarantee as
to the amount of  debentures,  if any,  that will be sold.  The  proceeds of the
offerings are used to provide financing for Telmark's leasing activities.  As of
June 30, 1998,  approximately $34,000 of debentures were outstanding under these
offerings.

Telmark  conducts  ongoing   discussions  and  negotiations  with  existing  and
potential  lenders for future financing needs. The Company believes Telmark will
continue to have appropriate and adequate  short-term and long-term financing to
meet its ongoing needs.



                                       13

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
                             (Thousands of Dollars)


Sources of longer-term financing of the Company include the following as of June
30, 1998:
<TABLE>
<CAPTION>
Source of debt                                              Agway           AFC           Telmark         Total
--------------                                         -------------   ------------   --------------   ------------
<S>                                                    <C>             <C>            <C>              <C>
Banks - due 8/98 to 2/01 with interest
     from 6.6% to 8.4%...............................  $           0   $      1,925   $      150,000   $    151,925
Insurance companies - due 7/98 to 5/04
     with interest from 5.9% to 8.9%.................              0              0          186,660        186,660
Capital leases and other - due 1998 to 2012
     with interest from 6% to 12%....................         11,154          4,773               17         15,944
                                                       -------------   ------------   --------------   ------------
         Long-term debt..............................         11,154          6,698          336,677        354,529
Subordinated money market certificates - due
     10/98 to 10/08 with interest from 4.5% to 9.5%                0        407,488                0        407,488
Subordinated debentures - due 1999 to 2003
     with interest at 7.0% to 8.5%...................              0         20,702           34,006         54,708
                                                       -------------   ------------   --------------   ------------
         Total subordinated debt.....................              0   $    428,190   $       34,006   $    462,196
                                                       -------------   ------------   --------------   ------------
              Total debt.............................  $      11,154   $    434,888   $      370,683   $    816,725
                                                       =============   ============   ==============   ============
</TABLE>
OTHER MATTERS

Cautionary Statement for Purposes of the "Safe Harbor" Provisions of the Private
Securities Litigation Reform Act of 1995

The Company is including the following cautionary statement in this Form 10-K to
make  applicable  and take  advantage  of the "safe  harbor"  provisions  of the
Private  Securities  Litigation  Reform  Act of  1995  for  any  forward-looking
statement made by, or on behalf of, the Company.  Where any such forward-looking
statement  includes a statement  of the  assumptions  or basis  underlying  such
forward-looking  statement,  the Company  cautions that,  while it believes such
assumptions  or basis to be  reasonable  and makes them in good  faith,  assumed
facts or basis  almost  always vary from  actual  results,  and the  differences
between  assumed  facts or basis and actual  results can be material,  depending
upon the  circumstances.  Certain  factors  that could cause  actual  results to
differ  materially from those  projected have been discussed  herein and include
the factors set forth below.  Other  factors that could cause actual  results to
differ  materially  include  uncertainties  of economic,  competitive and market
decisions  and  future  business  decisions,  all  of  which  are  difficult  or
impossible to predict accurately and many of which are beyond the control of the
Company.  Where,  in  any  forward-  looking  statement,  the  Company,  or  its
management,  expresses  an  expectation  or belief as to  future  results,  such
expectation  or  belief  is  expressed  in good  faith  and  believed  to have a
reasonable  basis,  but  there  can  be  no  assurance  that  the  statement  of
expectation  or belief will result or be  achieved  or  accomplished.  The words
"believe,"   "expect,"  and  "anticipate"  and  similar   expressions   identify
forward-looking statements.

Impairment of Long-Lived Assets

In the first  quarter  of 1997,  the  Company  adopted  Statement  of  Financial
Accounting   Standards  (SFAS)  No.  121,  "Accounting  for  the  Impairment  of
Long-Lived  Assets and for Long-Lived  Assets to Be Disposed Of." This statement
requires that long-lived assets and certain identifiable  intangibles to be held
and used by an entity be reviewed for impairment  whenever  events or changes in
circumstances  indicate  that  the  carrying  amount  of an  asset  may  not  be
recoverable.  If the sum of the expected future  undiscounted cash flows is less
than the carrying amount of the asset, an impairment loss is recognized.  Assets
to be disposed of are reported at the lower of the carrying amount or fair value
less cost to sell.  The adoption of this standard  resulted in a $1,700  pre-tax
charge to operating margin in 1997 related to certain feed and fertilizer plants
($1,500) in the  Agriculture  segment and store  locations  ($200) in the Retail
segment. Such facilities are held and used in operations. The pre-tax charge for
impairment is included in the selling,  general and  administrative  expenses on
the consolidated statements of operations and totaled $2,200 in 1998.


                                       14

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
                             (Thousands of Dollars)

Environmental Issues

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

At June 30, 1998, the Company has been  designated as a PRP under CERCLA or as a
third party to the original PRPs in several Superfund sites. The liability under
CERCLA is joint and several,  meaning that the Company  could be required to pay
in  excess  of  its  pro  rata  share  of  remediation   costs.   The  Company's
understanding  of the financial  strength of other PRPs at these Superfund sites
has been considered,  where appropriate,  in the Company's  determination of its
estimated liability.

The Company  continually  monitors  its  operations  with  respect to  potential
environmental  issues,  including  changes in  legally  mandated  standards  and
remediation  technologies.  Agway's recorded  liability  reflects those specific
issues where  remediation  activities  are  currently  deemed to be probable and
where the cost of  remediation  is  estimable.  Estimates  of the  extent of the
Company's  degree of  responsibility  of a  particular  site and the  method and
ultimate  cost of  remediation  require  a number of  assumptions  for which the
ultimate  outcome  may differ  from  current  estimates;  however,  the  Company
believes that its past experience provides a reasonable basis for estimating its
liability.  As additional information becomes available,  estimates are adjusted
as necessary.  While the Company does not  anticipate  that any such  adjustment
would be material to its financial  statements,  it is reasonably  possible that
the result of ongoing and/or future environmental studies or other factors could
alter this expectation and require the recording of additional liabilities.  The
extent or amount of such events,  if any,  cannot be estimated at this time. The
settlement  of the  reserves  established  will cause  future cash  outlays over
approximately  five years based upon current  estimates,  and it is not expected
that such outlays will materially impact the Company's liquidity position.

As part of its long-term  environmental  protection  program,  the Company spent
approximately  $800 in fiscal 1998 on capital  projects.  The Company expects to
incur $600 to complete its compliance  with EPA  Underground  Storage Tank (UST)
regulations that become effective in December 1998.

Year 2000

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

Agway  utilizes a number of  computers  and computer  software  (systems) in the
conduct of its  business.  Many systems are for specific  business  segments and
others have broader  corporate-wide use. Systems are principally involved in the
flow  of  information  rather  than  in  the  processing,   manufacturing,   and
distributing  operations.  Agway initiated its year 2000  compliance  efforts in
January 1996. The initial focus of the Company's  compliance  efforts was on the
Company's  information systems,  including assessment of the issue, planning the
conversion to compliance,  plan  implementation,  and testing.  All systems have
been inventoried.  Those systems determined to be at risk were prioritized,  and
plans  were  put in place  to  upgrade  systems  by  remediation,  replacements,
outsourcing,  or doing without these systems.  Through June 1998, the assessment
and planning  phases,  as well as certain portions of the  implementation,  have
been  completed.  The  remaining  portion  of  these  plans  are in  process  of
implementation,  with a completion for specific systems scheduled throughout the
next fiscal year and the final  implementations  scheduled  to be  completed  in
September  1999.  Testing  of  systems  is being  conducted  for each  system as
implemented.  The  interaction  of  updated  systems  will  be  tested  in  the
enterprise-wide testing environment.



                                       15

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
                             (Thousands of Dollars)


Year 2000 (continued)

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

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

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

The  Company  expects  to  incur  significant  internal  staff  costs as well as
consulting and other expenses related to its year 2000 efforts. Due to the level
of effort  required  to  complete  remediation  for the year 2000,  non-business
critical system enhancements have been deferred until the year 2000 efforts have
been  completed.  The  conversion  and  testing  of  existing  systems  and  the
replacement of systems are expected to cost the Company  approximately  $18,000,
of which  $9,000 has been  incurred  and $9,000 is expected to be incurred  from
July 1998 through  December 1999.  Approximately  75% of these  estimated  costs
represent replacement costs and will be capitalized.  Additionally,  the Company
estimates  the costs to  remediate  all  other  areas  may  approximate  $6,000.
However,  these costs will vary as the Company continues to assess and implement
its plans or if the Company is required to invoke contingency plans. The Company
treats  non-capital costs associated with year 2000 as period costs and they are
expensed when incurred.

Agricultural Economy and Other Factors

The  financial  condition  of the Company  can be  directly  affected by factors
affecting the  agricultural  economy,  since these factors impact the demand for
the  Company's  products and the ability of its  customers to make  payments for
products already purchased through credit extended by the Company. These factors
include: (i) changes in government  agricultural  programs (e.g., milk marketing
orders and acreage  reduction  programs) that may adversely  affect the level of
income of  customers  of the  Company;  (ii)  weather-related  conditions  which
periodically  occur that can impact the agricultural  productivity and income of
the customers of the Company;  and (iii) the  relationship of demand relative to
supply of  agricultural  commodities  produced by customers of the Company.  The
Company can also be affected by major international events, like the downturn in
the Asian economy,  which can affect such things as the price of commodities the
Company uses in its operations as well as the general level of interest rates.


                                       16

<PAGE>



Item 7.  Management's Discussion and Analysis of Financial Condition and Results
         of Operations
                             (Thousands of Dollars)



Agricultural Economy and Other Factors (continued)

Federal  agricultural  legislation,  formally  known as The Federal  Agriculture
Improvement  and Reform Act of 1996, was signed into law on April 4, 1996.  This
legislation  replaced  the former  program of variable  price-linked  deficiency
payments with fixed payments to farmers which decline over a seven-year  period.
This  legislation  also eliminated  federal  planting  restrictions  and acreage
controls  allowing farmers more flexibility to plant for the market.  The impact
of this legislation on the agricultural  economy, and on the financial condition
of the  Company,  is not  expected  to be  significant  in the  short-term.  The
longer-term  impact on the  financial  condition  of the Company of such a major
change in the federal  government's  role in agriculture  cannot be predicted at
this time.

The Company's energy business is impacted by factors such as weather  conditions
in the  Northeast  and the  relationship  of supply  and  demand  for  petroleum
products  worldwide  as  well as  within  Agway's  market.  Agway's  retail  and
insurance  businesses  can be  impacted  by weather  conditions  as well as from
fluctuations in the economy in the northeastern  United States that, in general,
affect consumer demand for products.  To the extent that these factors adversely
affect the  customers of the  Company,  the  financial  condition of the Company
could be adversely affected.

Telmark,  the  Company's  leasing  business,  endeavors  to limit the effects of
changes in  interest  rates by matching  as closely as  possible,  on an ongoing
basis, the maturity and repricing  characteristics  of funds borrowed to finance
its leasing  activities with the maturity and repricing  characteristics  of its
lease portfolio. (See Quantitative and Qualitative Disclosures about Market Risk
- Interest Rate Exposure (Item 7a).)



                                       17

<PAGE>



Item 7a.  Quantitative and Qualitative Disclosures about Market Risk
(Thousands of Dollars)

Market risk represents the risk of loss that may impact the financial  position,
results  of  operations,  or cash  flows  of Agway  due to  adverse  changes  in
financial and commodity market prices and rates. Agway is exposed to market risk
in the areas of  interest  rates  and  commodity  prices.  These  exposures  are
directly  related to its normal funding and investing  activities and to its use
of agricultural and energy commodities in its operations.

Interest Rate Exposure

The Company does not use derivatives and other interest rate  instruments  based
on the fixed rate nature of the majority of the Company's debt obligations.  The
following  table  provides  information  about  the  Company's  other  financial
instruments  that are sensitive to changes in interest rates. The table presents
principal  cash flows and related  weighted  average  interest rates by expected
maturity dates.
<TABLE>
<CAPTION>
                                                                                                                 Fair Value
                                    1999       2000       2001       2002       2003    Thereafter     Total       6/30/98
                                 ---------  ---------  ---------  ---------  ---------  ----------   ---------   ----------
<S>                              <C>        <C>        <C>        <C>        <C>        <C>          <C>         <C>
Assets
Available-for-sale securities    $   3,973  $   3,927  $   3,428  $   4,158  $   3,485  $   17,626   $  36,597   $  37,686
Weighted average interest rate        6.2%      6.55%       6.4%      6.25%      6.46%       6.42%

Liabilities
Bank lines of credit - Telmark      35,000                                                              35,000      35,000
Weighted average interest rate       6.30%

Long-term debt, including
  current portion - Telmark...      93,569     88,565     64,849     43,862     22,982      22,833     336,660     342,628
Weighted average interest rate       7.18%      7.06%      6.96%      6.83%      7.00%       7.01%

Subordinated debentures,
   including current portion -
   Telmark                               0     17,794      2,711      3,398     10,103           0      34,006      34,605
Weighted average interest rate                  8.23%      7.87%      7.50%      8.42%

Commercial paper - AFC.....         30,100                                                              30,100      30,100
Weighted average interest rate       5.59%

Long-term debt, including
  current portion-Agway & AFC.       5,269      2,314      2,638      3,442        111       1,472      15,246      15,241
Weighted average interest rate       8.50%      8.56%      8.54%      8.49%      7.90%       9.93%

Subordinated debentures,
  including current portion -
  AFC.                                   0     11,957          0      3,431          0       5,314      20,702      20,863
Weighted average interest rate                  8.34%                 7.38%                  7.86%

Subordinated money market
     certificates, including
     current portion - AFC....      75,589     45,300     48,097     46,357     36,028     156,117     407,488     414,321
Weighted average interest rate       8.56%      7.86%      9.15%      8.22%      6.90%       8.07%
</TABLE>

Telmark,  the  Company's  leasing  business,  endeavors  to limit the effects of
changes in  interest  rates by matching  as closely as  possible,  on an ongoing
basis, the maturity and repricing  characteristics  of funds borrowed to finance
its lease  activities  with the maturity and  repricing  characteristics  of its
lease  portfolio.  However,  a rise in interest rate would  increase the cost of
that portion of debt which is not precisely  matched to the  characteristics  of
the portfolio and could lower the value of  outstanding  leases in the secondary
market.  Telmark has a formal risk management policy which limits the short-term
exposure to an amount which is  immaterial  to the results of operations or cash
flows. The Telmark  subordinated  debentures' interest rate is at the greater of
the  quoted  rate or a rate  based upon the  discount  rate for U.S.  Government
Treasury Bills (T-Bill),  with maturities of 26 weeks.  Based on the T-Bill rate
as of June 30,  1998,  as  compared  to the  stated  rate of the  debentures,  a
reasonably  possible  near-term  change in interest  rates and the conversion of
debt to a variable  rate  would not cause  material  near-term  losses in future
earnings or cash flows.  Finally, for the portion of debt which is not precisely
matched as of June 30,  1998,  the  Company  does not  believe  that  reasonably
possible near-term changes in interest rates will result in a material effect on
future earnings, fair values, or cash flows of the Company.

                                       18

<PAGE>



Item 7a.  Quantitative and Qualitative Disclosures about Market Risk
(Thousands of Dollars)


Interest Rate Exposure (continued)

Subordinated money market certificates of AFC have interest rates at the greater
of the quoted  rate or a rate  based upon the  discount  rate of  T-Bills,  with
maturities of 26 weeks.  The T-Bill rate at June 30, 1998, of 5.11%  compares to
the money  market  certificates'  stated  rates which range from 4.5% to 9.5% at
June 30, 1998. The Company  believes a reasonably  possible  near-term change in
T-Bill rates and the  conversion  of AFC debt to a variable rate would not cause
material near-term losses in future earnings or cash flows.

Commodity Price Exposure

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

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

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

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



                                       19

<PAGE>



ITEM 7A.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
(THOUSANDS OF DOLLARS)


COMMODITY PRICE EXPOSURE (CONTINUED)

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




                                       20

<PAGE>



Item 8.  Financial Statements and Supplementary Data


                          INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                                                                                                              Pages
                                                                                                              -----

<S>                                                                                                              <C>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES:
      Agway Inc. Report on Financial Statements............................................................      22

      Report of Independent Accountants......................................................................    23

      Consolidated Balance Sheets, June 30, 1998 and 1997....................................................    24

      Consolidated Statements of Operations, fiscal years ended June 30, 1998, 1997 and 1996.................    25

      Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended June 30,
           1998, 1997 and 1996...............................................................................    26

      Consolidated Statements of Cash Flow, fiscal years ended June 30, 1998, 1997 and 1996..................    27

      Notes to Consolidated Financial Statements.............................................................    28

</TABLE>

Item 9. Changes  in  and  Disagreements  with  Accountants  on  Accounting  and
        Financial Disclosure

      This item is inapplicable.



                                       21

<PAGE>



                    AGWAY INC. REPORT ON FINANCIAL STATEMENTS


The  accompanying  consolidated  financial  statements  have  been  prepared  in
conformity with generally  accepted  accounting  principles by the Company.  The
integrity and objectivity of the data in these financial  statements,  including
estimates  and  judgments,  are the  responsibility  of  Agway,  as is all other
information included in this annual report.

The   consolidated   financial   statements  of  Agway  Inc.  and   Consolidated
Subsidiaries  have  been  audited  by  PricewaterhouseCoopers  LLP,  independent
auditors,    whose    report    follows.    Agway   has   made    available   to
PricewaterhouseCoopers  LLP all of the Company's  financial  records and related
data, as well as the minutes of Directors' meetings. Furthermore, Agway believes
that all  representations  made to  PricewaterhouseCoopers  LLP during its audit
were valid and appropriate.

Agway  maintains a system of internal  accounting  controls  intended to provide
reasonable  assurance,  given the inherent  limitations of all internal  control
systems, at appropriate costs, that transactions are executed in accordance with
Company  authorization,  are properly  recorded  and  reported in the  financial
statements, and that assets are adequately safeguarded.

The Budget & Audit Committee of the Board of Directors,  which consists of seven
directors who are not  employees,  meets  periodically  with  management and the
independent  auditors  to review the manner in which they are  performing  their
responsibilities  and to discuss auditing,  internal  accounting  controls,  and
financial  reporting matters.  The independent  auditors have free access to the
Budget & Audit Committee.

As discussed  in  Management's  Discussion  and Analysis and in the Notes to the
Consolidated  Financial  Statements,  on June 28, 1999,  Agway discovered it had
incurred   losses  from   unauthorized   speculative   activities  in  commodity
instruments,  which were concealed within Agway's grain marketing department. As
a result, the previously reported financial  information as of June 1998 and for
the quarters ended  September  1998,  December 1998, and March 1999 did not take
into account such losses.  We have amended  reports filed with the SEC for these
periods,  and the  restated  financial  information  has been  included  in this
report.  An  investigation,  under  guidance  from  external  legal  counsel and
including internal legal counsel,  internal financial staff,  external auditors,
and  private  investigators,  has  been  conducted.  Individuals  identified  as
involved  in the  unauthorized  speculative  activity or  concealment  have been
terminated from  employment.  The  responsibilities  of the department have been
reassigned,   the  operating,   control,  and  reporting  structures  have  been
reorganized,  and the scope of its  business  activity  has  been  reduced.  The
results of the investigation of the grain marketing activities were reported  to
the  entire  Board  of  Directors.




                                            AGWAY INC.

                                            /s/ DONALD P.CARDARELLI
                                            By DONALD P. CARDARELLI
                                            President and CEO
                                            September 2, 1999





                                            /s/ PETER J. O'NEILL
                                            By PETER J. O'NEILL
                                            Senior Vice President
                                            Finance & Control
                                            September 2, 1999



                                       22

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors of Agway Inc.:

In our opinion,  the  accompanying  consolidated  balance sheets and the related
consolidated  statements of operations and  shareholders'  equity and cash flows
present fairly, in all material  respects,  the financial position of Agway Inc.
and  Consolidated  Subsidiaries  at June 30,  1998 and 1997,  and the results of
their  operations and their cash flows for each of the three years in the period
ended  June  30,  1998,  in  conformity  with  generally   accepted   accounting
principles.  These financial  statements are the responsibility of the Company's
management;  our  responsibility  is to express  an  opinion on these  financial
statements  based on our audits.  We conducted our audits of these statements in
accordance with generally accepted auditing standards which require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement.  An audit includes examining, on a
test basis,  evidence  supporting  the amounts and  disclosures in the financial
statements,  assessing the accounting  principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion  expressed
above.  As further  discussed in note 14, the Company changed its accounting for
pensions in 1998.


The previously issued  1998  financial  statements have been restated to correct
for  the  accounting effect of the irregularities as described in Note 20.




/s/ PRICEWATERHOUSECOOPERS LLP
PricewaterhouseCoopers LLP


Syracuse, New York
August 21, 1998, except as to
Note 20, as to which the date
is September 2, 1999




                                       23

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             June 30, 1998 and 1997
                             (Thousands of Dollars)

<TABLE>
<CAPTION>

                                     ASSETS
                                                                                    Restated
                                                                                      1998                1997
                                                                                  -------------      --------------
<S>                                                                               <C>                <C>
Current assets:
     Trade accounts receivable (including notes receivable of
         $49,394 and $44,074, respectively), less allowance for
         doubtful accounts of $7,926 and $7,864, respectively...................  $     203,637      $      209,868
     Leases receivable, less unearned income of $65,048 and $58,225,
         respectively...........................................................        137,493             124,552
     Advances and other receivables.............................................         25,480              29,922
     Inventories................................................................        149,214             150,640
     Prepaid expenses and other assets..........................................         52,774              52,714
                                                                                  -------------      --------------
         Total current assets...................................................        568,598             567,696
Marketable securities...........................................................         36,412              35,586
Other security investments......................................................         51,761              49,668
Properties and equipment, net...................................................        213,795             215,095
Long-term leases receivable, less unearned income of $110,721 and
     $94,178, respectively......................................................        357,777             320,809
Net pension asset...............................................................        176,792             100,052
Other assets....................................................................         12,159              11,355
                                                                                  -------------      --------------
         Total assets...........................................................  $   1,417,294      $    1,300,261
                                                                                  =============      ==============

</TABLE>

                      LIABILITIES AND SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>

                                                                                    Restated
                                                                                      1998                1997
                                                                                  -------------       -------------
<S>                                                                               <C>                 <C>
Current liabilities:
     Notes payable..............................................................  $      65,100       $      59,200
     Current installments of long-term debt.....................................         99,173             114,396
     Subordinated debt, current.................................................         75,589              62,999
     Accounts payable...........................................................        114,548             112,391
     Other current liabilities..................................................        114,311             113,927
                                                                                  -------------       -------------
         Total current liabilities..............................................        468,721             462,913
Long-term debt..................................................................        255,356             215,975
Subordinated debt...............................................................        386,607             375,128
Other liabilities...............................................................        100,381              68,494
                                                                                  -------------       -------------
         Total liabilities......................................................      1,211,065           1,122,510
Commitments and contingencies...................................................
Shareholders' equity:
     Preferred stock, less amount held in Treasury..............................         47,871              57,541
     Common stock ($25 par--300,000 shares authorized; 172,265 and 171,792
         shares issued, less amount held in Treasury)...........................          2,571               2,639
     Retained margin............................................................        155,787             117,571
                                                                                  -------------       -------------
         Total shareholders' equity.............................................        206,229             177,751
              Total liabilities and shareholders' equity........................  $   1,417,294       $   1,300,261
                                                                                  =============       =============

</TABLE>



                 The accompanying notes are an integral part of the consolidated
financial statements.

                                       24

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                      CONSOLIDATED STATEMENTS of OPERATIONS
                 fiscal years ended June 30, 1998, 1997 and 1996
                             (Thousands of Dollars)

<TABLE>
<CAPTION>

                                                                 Restated
                                                                   1998               1997                1996
                                                              -------------       ------------       -------------
<S>                                                           <C>                 <C>                <C>
Net sales and revenues from:
     Product sales (including excise taxes).................  $   1,470,132       $  1,587,751       $   1,589,027
     Leasing operations.....................................         65,476             56,943              48,627
     Insurance operations...................................         27,335             27,020              25,431
                                                              -------------       ------------       -------------
         Total net sales and revenues.......................      1,562,943          1,671,714           1,663,085
                                                              -------------       ------------       -------------
Cost and expenses from:
     Products and plant operations..........................      1,346,276          1,471,885           1,451,574
     Leasing operations.....................................         26,871             23,486              20,305
     Insurance operations...................................         16,653             16,437              21,176
     Selling, general and administrative activities.........        131,413            131,116             136,240
     Restructuring credit...................................              0                  0              (1,943)
                                                              -------------       ------------       -------------
         Total operating costs and expenses.................      1,521,213          1,642,924           1,627,352
                                                              -------------       ------------       -------------
Operating margin............................................         41,730             28,790              35,733
Interest expense, net of interest income of $10,032,
     $9,976 and $10,330, respectively.......................        (30,825)           (30,970)            (33,085)
Other income, net...........................................         13,361             18,763              18,422
                                                              -------------       ------------       -------------
Margin from continuing operations before income taxes.......         24,266             16,583              21,070
Income tax expense..........................................        (12,077)            (5,913)             (9,923)
                                                              -------------       ------------       -------------

Margin from continuing operations...........................         12,189             10,670              11,147

Discontinued operations:
     Loss from operations, including tax benefit of $120....              0                  0                (595)
     Gain on disposal of Hood, net of tax expense of $1,711               0                  0               2,110
                                                              -------------       ------------       -------------
         Margin from discontinued operations................              0                  0               1,515
                                                              -------------       ------------       -------------
Margin before cumulative effect of an accounting change.....         12,189             10,670              12,662
                                                              -------------       ------------       -------------
Cumulative effect of accounting change, net of tax expense
     of $16,500.............................................         28,956                  0                   0
                                                              -------------       ------------       -------------
Net margin..................................................  $      41,145       $     10,670       $      12,662
                                                              =============       ============       =============

</TABLE>












               The  accompanying  notes are an integral part of the consolidated
financial statements.

                                       25

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
           CONSOLIDATED STATEMENTS of CHANGES in SHAREHOLDERS' EQUITY
                 fiscal years ended June 30, 1998, 1997 and 1996
                             (Thousands of Dollars)

<TABLE>
<CAPTION>

                                                Common Stock
                                             -------------------
                                               (Par Value $25)     Preferred    Paid-In     Retained
                                              Shares     Amount      Stock      Capital      Margin       Total
                                             -------   ---------   ---------   ---------   ---------   ----------
<S>                                          <C>       <C>         <C>         <C>         <C>         <C>
Balance June 30, 1995.....................   109,119   $   2,728   $  65,635   $   1,470   $ 102,934   $  172,767

      Net margin..........................                                                    12,662       12,662
      Dividends declared..................                                                    (4,382)      (4,382)
      Redeemed, net.......................    (1,545)        (39)     (6,316)                              (6,355)
      Adjustment to unrealized losses
       on available-for-sale securities,
       net of tax.........................                                                      (500)        (500)
     Sale of stock of Hood................                                        (1,470)                  (1,470)
                                             -------   ---------   ---------   ---------   ---------   ----------
Balance June 30, 1996.....................   107,574       2,689      59,319           0     110,714      172,722

     Net margin...........................                                                    10,670       10,670
     Dividends declared...................                                                    (4,237)      (4,237)
     Redeemed, net........................    (2,022)        (50)     (1,778)                              (1,828)
     Adjustment to unrealized gains
       on available-for-sale securities,
       net of tax.........................                                                       424          424
                                             -------   ---------   ---------   ---------   ---------   ----------
Balance June 30, 1997.....................   105,552       2,639      57,541           0     117,571      177,751

     Net margin, as restated..............                                                    41,145       41,145
     Dividends declared...................                                                    (3,634)      (3,634)
     Redeemed, net........................    (2,714)        (68)     (9,670)                              (9,738)
     Adjustment to unrealized gains
       on available-for-sale securities,
       net of tax.........................                                                       705          705
                                             -------   ---------   ---------   ---------   ---------   ----------
Balance June 30, 1998.....................   102,838   $   2,571   $  47,871   $       0   $ 155,787   $  206,229
                                             =======   =========   =========   =========   =========   ==========

</TABLE>

Common shares,  purchased at par value, held in Treasury at June 30 were: 69,427
in 1998;  66,240 in 1997;  54,496 in 1996. A common stock  dividend per share of
$1.50 was declared for 1998, 1997 and 1996.  Dividend payments are restricted to
a maximum of 8% of par value per annum. See Note 13 for the details of preferred
stock activity.











               The  accompanying  notes are an integral part of the consolidated
financial statements.

                                       26

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                 fiscal years ended June 30, 1998, 1997 and 1996
                             (Thousands of Dollars)
<TABLE>
<CAPTION>

                                                                 Restated
                                                                   1998               1997                1996
                                                              -------------       ------------       -------------
<S>                                                           <C>                 <C>                <C>
Cash flows from operating activities:
   Net margin ..............................................  $      41,145       $     10,670       $      12,662
   Adjustments to reconcile margins to net cash:
       Depreciation and amortization........................         28,797             29,831              33,422
       Restructuring credit.................................              0                  0              (1,943)
       Receivables and other asset provisions...............         11,390             10,341              10,993
       Net pension income...................................        (31,909)           (14,871)            (11,338)
       Cumulative effect of accounting change, net of tax...        (28,956)                 0                   0
       Patronage refund received in stock...................         (2,494)            (4,984)             (3,264)
       Deferred income tax expense..........................         25,768              4,795              11,474
       (Gain) loss on disposition of:
           Businesses.......................................              0               (360)             (3,799)
           Other security investments.......................              0                  0              (1,348)
           Properties and equipment.........................         (1,210)            (2,613)                891
       Changes in assets and liabilities,  net of effects of
           businesses acquired or sold:
           Receivables......................................          7,962               (210)            (14,982)
           Inventory........................................          2,042              6,048             (12,527)
           Payables.........................................            814             (3,278)            (21,802)
           Other............................................         (9,493)           (11,135)             10,910
                                                              -------------       ------------       -------------
Net cash flows from operating activities....................         43,856             24,234               9,349

Cash flows from investing activities:
   Purchases of properties and equipment....................        (30,952)           (25,745)            (26,025)
   Cash paid for acquisitions...............................         (2,969)            (2,178)               (688)
   Disposition of properties and equipment..................          8,770             11,429               4,012
   Purchases of marketable securities available for sale....        (12,529)           (25,084)            (10,973)
   Sale of marketable securities available for sale.........         12,407             24,037              11,110
   Leases originated........................................       (227,270)          (231,006)           (177,502)
   Leases repaid............................................        169,827            151,851             129,032
   Purchases of investments in related cooperatives.........         (2,601)            (4,657)             (4,401)
   Proceeds from sale of investments in related cooperatives          2,986              2,381               4,586
   Proceeds from disposal of businesses.....................              0             21,958              26,467
   Proceeds from sale of discontinued operations............              0                  0              15,900
                                                              -------------       ------------       -------------
Net cash flows used in investing activities.................        (82,331)           (77,014)            (28,482)

Cash flows from financing activities:
   Net change in short-term borrowing.......................          5,510             (3,000)             (8,100)
   Proceeds from long-term debt.............................        133,837            132,771              67,513
   Repayment of long-term debt..............................       (110,644)           (91,394)            (42,896)
   Proceeds from sale of subordinated debentures............        118,371             63,086              81,565
   Redemption of subordinated debt..........................        (94,302)           (39,887)            (65,701)
   Payments on capitalized leases...........................           (617)            (2,671)             (2,311)
   Proceeds from sale of stock..............................             18              2,291                  13
   Redemption of stock......................................         (9,755)            (4,119)             (6,368)
   Cash dividends paid......................................         (3,943)            (4,297)             (4,582)
                                                              -------------       ------------       -------------
Net cash flows from financing activities....................         38,475             52,780              19,133
                                                              -------------       ------------       -------------
Net increase (decrease) in cash and equivalents.............              0                  0                   0
Cash and equivalents at beginning of year...................              0                  0                   0
                                                              -------------       ------------       -------------
Cash and equivalents at end of year.........................  $           0       $          0       $           0
                                                              =============       ============       =============

</TABLE>
               The  accompanying  notes are an integral part of the consolidated
financial statements.

                                       27

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


1.  Summary of Significant Accounting Policies

Organization
Agway Inc.  (the  Company or Agway),  incorporated  under the  Delaware  General
Corporation Law in 1964 and headquartered in DeWitt,  New York,  functions as an
agricultural   cooperative   directly  engaged  in  manufacturing,   processing,
distribution and marketing of products and services for its  farmer-members  and
other  customers,  primarily  in the  states of  Connecticut,  Delaware,  Maine,
Maryland,   Massachusetts,   New  Hampshire,   New  Jersey,   New  York,   Ohio,
Pennsylvania,  Rhode Island,  and Vermont.  The Company,  through certain of its
subsidiaries,  is involved in retail and wholesale sales of farm supplies;  yard
and garden  products;  pet food and pet supplies;  the distribution of petroleum
products;  repackaging  and marketing of  vegetables;  processing  and marketing
sunflower seeds; underwriting and sale of certain types of property and casualty
insurance; sale of health insurance; and lease financing.

Fiscal Year
The  Company's  fiscal  year-end is on the last  Saturday in June.  Fiscal years
ended June 1998 and June 1997 were comprised of 52 weeks. Fiscal year ended June
1996 was comprised of 53 weeks.

Basis of Consolidation
The consolidated  financial  statements include the accounts of all wholly owned
subsidiaries. Operations of H.P. Hood Inc. (Hood), which was 99.9% owned through
December 14, 1995, are presented as  discontinued  operations (see Note 19). All
significant  intercompany  transactions  and balances  have been  eliminated  in
consolidation.

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

Cash and Equivalents
The Company  considers all  investments  with a maturity of three months or less
when purchased to be cash equivalents.

Leases Receivable
Telmark lease  contracts,  which qualify as direct  finance leases as defined by
Statement of  Financial  Accounting  Standards  (SFAS) No. 13,  "Accounting  for
Leases," are  accounted  for by recording on the balance  sheet the total future
minimum lease  payments  receivable,  plus the estimated  unguaranteed  residual
value of leased  equipment,  less the  unearned  interest  and finance  charges.
Unearned  interest and finance charges  represent the excess of the total future
minimum lease payments plus the estimated  unguaranteed  residual value expected
to be  realized  at the end of the  lease  term  over  the  cost of the  related
equipment. Interest and finance charge income is recognized as revenue, by using
the interest  method over the term of the lease,  which for most  commercial and
agricultural  leases  is 60 months or less  with a  maximum  of 180  months  for
buildings.  Income recognition is suspended on all leases and notes which become
past due greater than 120 days.  Initial direct costs incurred in consummating a
lease are  capitalized  as part of the  investment in direct  finance leases and
amortized over the lease term as a reduction in the yield.

Inventories
Inventories  are  stated  at the  lower  of cost or  market,  except  for  grain
inventories  associated with the Company's grain  marketing  program,  which are
marked to market.  For those  inventories  stated at cost,  the Company uses the
average unit cost or the first-in, first-out method.






                                       28

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


1.  Summary of Significant Accounting Policies (continued)

Commodity Instruments
Commodity  instrument  contracts designated at inception as a hedge, where there
is a direct  relationship  to the  price  risk  associated  with the  underlying
exposure,  are  accounted for under the deferral  method,  with gains and losses
from hedging  activity and premiums  paid for option  contracts  included in the
cost of  sales  as  those  inventories  are  sold or as the  anticipated  hedged
transaction  occurs.  Gains  and  losses  on  early  terminations  of  commodity
instrument  contracts  designated as hedges are deferred and included in cost of
sales  in the  same  period  as the  hedged  transaction.  Commodity  instrument
contracts not designated as effective  hedges of firm commitments or anticipated
transactions are marked to market at the end of the reporting  period,  with the
resulting gains or losses recognized in cost of sales.

Marketable Securities
All of the Company's  marketable debt  securities,  which relate entirely to the
Company's insurance operations, are classified as available for sale and carried
at fair  value.  Unrealized  gains and  losses,  net of tax,  are  reported in a
separate component of shareholders' equity.

Other Security Investments
Other security  investments  consist of capital stock of a cooperative  bank and
other cooperative  suppliers  acquired at par or stated value. This stock is not
traded and is  historically  redeemed on a periodic basis by the issuer at cost.
By its nature,  this stock is held to  redemption  and is reported at cost.  The
Company  believes  it is not  practical  to  estimate  the  fair  value of these
investments  without  incurring  excessive  costs since there is no  established
market and it is  inappropriate  to estimate future cash flows which are largely
dependent  on future  earnings  of the  cooperative  bank and other  cooperative
suppliers.

Patronage refunds received from the cooperative bank are recorded as a reduction
of interest expense and totaled  approximately $1,600, $1,200 and $1,400 for the
years  ended  June 30,  1998,  1997 and 1996,  respectively.  Patronage  refunds
received on the stock of other cooperatives are reflected in other income.

Properties and Equipment
Properties and equipment are recorded at cost. Depreciation and amortization are
charged to operations,  principally on a straight-line basis, over the estimated
useful lives of the properties and equipment, and over the term of the lease for
capital  leases.  Ordinary  maintenance and repairs are charged to operations as
incurred.  Gains and losses on disposition or retirement of assets are reflected
in income as incurred.


Other Assets
Other assets include  approximately $9,100 and $7,300 at June 30, 1998 and 1997,
respectively,  of  costs in  excess  of the fair  value of net  tangible  assets
acquired in purchase  transactions  (goodwill)  as well as acquired  non-compete
agreements, customer lists, and trademarks. Goodwill and other intangible assets
are amortized on a straight-line  basis ($2,300 over 1 to 10 years,  $3,500 over
15-20  years,  and $3,300 over 40 years).  Amortization  included in  continuing
operations  totaled  approximately  $1,400,  $1,100 and $1,600 for fiscal  years
ending June 30, 1998, 1997 and 1996, respectively.  Other  assets  are  reviewed
for impairment as described under Impairment of Long-Lived Assets below.




                                       29

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


1.  Summary of Significant Accounting Policies (continued)

Impairment of Long-Lived Assets
In the first quarter of 1997, the Company adopted SFAS No. 121,  "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed
Of." This statement  requires that  long-lived  assets and certain  identifiable
intangibles to be held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be  recoverable.  If the sum of the expected  future  undiscounted  cash
flows is less than the  carrying  amount of the  asset,  an  impairment  loss is
recognized.  Assets to be disposed of are  reported at the lower of the carrying
amount or fair value less cost to sell.  The adoption of this standard  resulted
in a $1,700 pre-tax  charge to operating  margin in 1997 related to certain feed
and fertilizer  plants ($1,500) in the  Agriculture  segment and store locations
($200) in the Retail  segment.  Such facilities are held and used in operations.
The  pre-tax  charge for  impairment  is included  in the  selling,  general and
administrative expenses on the consolidated statements of operations and totaled
$2,200 in 1998.

Environmental Remediation Costs
The  Company  accrues  for  losses  associated  with  environmental  remediation
obligations when such losses are probable and reasonably estimable. Accruals for
estimated  losses  from  environmental  remediation  obligations  generally  are
recognized no later than  completion  of the remedial  feasibility  study.  Such
accruals are adjusted as further information  develops or circumstances  change.
Costs of future expenditures for environmental  remediation  obligations are not
discounted to their present value. Recoveries of environmental remediation costs
from other parties are recorded as assets when their receipt is deemed  probable
and the amount is reasonably estimable.

Expendable Costs
The Company expenses  advertising and research and development costs as they are
incurred.  Advertising  expense for the years ended June 30, 1998, 1997 and 1996
was approximately $11,800, $10,800 and $23,200,  respectively.  Net research and
development  costs were  approximately  $400,  $700 and $600 for the years ended
June 30, 1998, 1997 and 1996, respectively.

Income Taxes
The Company is subject to income taxes on all income not  distributed to patrons
as  patronage  refunds and  provides  for income  taxes in  accordance  with the
provisions of SFAS No. 109,  "Accounting  for Income Taxes." Under the liability
method specified by SFAS No. 109,  deferred tax assets and liabilities are based
on the  difference  between the financial  statement and tax basis of assets and
liabilities  as measured by the tax rates that are  anticipated  to be in effect
when these differences  reverse.  The deferred tax provision  represents the net
change in the assets and liabilities for deferred tax. A valuation  allowance is
established  when it is necessary  to reduce  deferred tax assets to amounts for
which realization is reasonably assumed.

Patronage Refunds
Patronage  refunds  are  declared  and paid at the  discretion  of the  Board of
Directors  in  accordance  with the  provision  of the  By-laws of the  Company.
Patronage refunds are based on taxable earnings on patronage  business and, when
declared, are paid in cash.

Discontinued Operations
Interest expense allocated from continuing operations to discontinued operations
was based upon the proportion of net assets separately financed to total Company
assets.  Total interest expense  allocated was  approximately  $400 for the year
ended June 30, 1996.



                                       30

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


1.  Summary of Significant Accounting Policies (continued)

Use of Estimates
The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of assets  and  liabilities  and  disclosure  of
contingent  assets and  liabilities at the date of the financial  statements and
the  reported  amounts of revenues  and expenses  during the  reporting  period.
Actual results could differ from those estimates.


2.  Agway Financial Corporation

Agway Financial  Corporation  (AFC) is a wholly owned  subsidiary of the Company
whose principal  business activity is securing financing through bank borrowings
and issuance of corporate debt  instruments to provide funds for the Company and
AFC's sole  wholly  owned  subsidiary,  Agway  Holdings  Inc.  (AHI),  and AHI's
subsidiaries,  for general  corporate  purposes.  The payment of  principal  and
interest on this debt is guaranteed by the Company.  This  guarantee is full and
unconditional, and joint and several.

Major subsidiary  holdings of AHI include Agway Consumer  Products Inc. (ARS and
CPG), Agway Energy Products LLC and Agway Energy Services (Energy),  Telmark LLC
and subsidiaries  (Lease Financing or Leasing),  and Agway Insurance Company and
Agway General Agency (Insurance).

In an exemptive  relief  granted  pursuant to a "no action letter" issued by the
staff of the Securities and Exchange Commission,  AFC, as a separate company, is
not required to file  periodic  reports  with respect to these debt  securities.
However,  as  required by the 1934 Act,  the  summarized  financial  information
concerning AFC and consolidated  subsidiaries,  as of the fiscal year ended June
30, is as follows:
<TABLE>
<CAPTION>
                                                      1998                  1997                  1996
                                                 --------------        -------------         -------------
<S>                                              <C>                   <C>                   <C>
Net sales and revenues.........................  $    1,027,964        $   1,109,960         $   1,110,087
Operating margin...............................          34,060               42,428                33,763
Margin (loss) from continuing operations.......          (7,539)               5,183                (5,212)
Net margin (loss)..............................          (7,539)               5,183                (3,697)


                                                      1998                  1997
                                                 --------------        -------------
Current assets.................................  $      524,800        $     523,189
Properties and equipment, net..................         150,618              154,030
Noncurrent assets..............................         451,303              409,669
                                                 --------------        -------------
Total assets...................................  $    1,126,721        $   1,086,888
                                                 ==============        =============

Current liabilities............................  $       15,173        $      29,181
Short-term notes payable.......................          65,100               59,200
Current portion of long-term debt..............         170,836              175,015
Long-term debt.................................         248,128              209,296
Subordinated debt..............................         386,607              375,128
Noncurrent liabilities.........................          26,474               17,831
Shareholder's equity...........................         214,403              221,237
                                                 --------------        -------------
Total liabilities and shareholder's equity.....  $    1,126,721        $   1,086,888
                                                 ==============        =============
</TABLE>


                                       31

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


3.  Restructuring Credit

The  restructuring  credit of $1,943 in 1996 represents a reduction in estimated
costs to complete a restructuring project that began in 1992.


4.  Leases Receivable and Allowance for Credit Losses

Net investments in leases at June 30 were as follows:
<TABLE>
<CAPTION>
                                                                                      1998               1997
                                                                                  -----------         ----------
<S>                                                                               <C>                 <C>
Leases (minimum payments):
     Commercial and agricultural................................................  $   667,050         $  596,254
     Retail.....................................................................       21,464             16,682
                                                                                  -----------         ----------
         Total leases...........................................................      688,514            612,936
Unearned interest and finance charges...........................................     (175,769)          (152,403)
Net deferred origination costs..................................................        9,596              8,842
                                                                                  -----------         ----------
     Net investment.............................................................      522,341            469,375
Allowance for credit losses.....................................................      (27,071)           (24,014)
                                                                                  -----------         ----------
     Net leases receivable......................................................  $   495,270         $  445,361
                                                                                  ===========         ==========
</TABLE>
Included within the above are estimated  unguaranteed  residual values of leased
property   approximating  $72,400  and  $63,700  at  June  30,  1998  and  1997,
respectively.  Additionally,  as of June 30, 1998 and 1997,  the  recognition of
interest income was suspended on approximately $3,000 and $2,700,  respectively,
of net leases.

Contractual maturities of leases (minimum payments) over the next five years and
thereafter were as follows at June 30, 1998: $207,297 in 1999; $158,130 in 2000;
$114,693 in 2001; $75,080 in 2002; $42,858 in 2003; and $90,456 thereafter.


5.  Inventories

Inventories at June 30 consist of the following:
<TABLE>
<CAPTION>
                                                                                      1998               1997
                                                                                  -----------         ----------
<S>                                                                               <C>                 <C>
Finished goods................................................................    $   139,861         $  139,579
Raw materials.................................................................          7,576              9,396
Supplies......................................................................          1,777              1,665
                                                                                  -----------         ----------
     Total inventories........................................................    $   149,214         $  150,640
                                                                                  ===========         ==========
</TABLE>




                                       32

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


6.  Marketable Securities

All of the Company's  marketable debt  securities,  which relate entirely to the
Company's insurance operations, are classified as available-for-sale  marketable
securities.  At June 30,  1998,  the Company did not hold any debt from a single
issuer  that  exceeded  10  percent  of  the  Company's   shareholders'  equity.
Marketable securities are summarized as follows:
<TABLE>
<CAPTION>
                                                                            Gross         Gross
                                                         Amortized       Unrealized     Unrealized        Fair
                                                            Cost            Gains         Losses          Value
                                                        -----------      ----------    -----------     ----------
June 30, 1998
-------------
<S>                                                     <C>              <C>           <C>             <C>
U.S. government securities and obligations...........   $     3,211      $       18    $      (32)     $    3,197
Mortgage-backed securities...........................        12,937             284             0          13,221
Corporate securities.................................        19,621             388           (15)         19,994
                                                        -----------      ----------    -----------     ----------
     Total available-for-sale marketable securities..   $    35,769      $      690    $      (47)     $   36,412
                                                        ===========      ==========    ===========     ==========

                                                                            Gross         Gross
                                                         Amortized       Unrealized     Unrealized        Fair
                                                            Cost            Gains         Losses          Value
                                                        ----------       ----------    -----------     ----------
June 30, 1997
-------------
U.S. government securities and obligations...........   $    5,997       $        5    $     (131)     $    5,871
Mortgage-backed securities...........................       17,875               78          (119)         17,834
Corporate securities.................................       12,138               19          (276)         11,881
                                                        ----------       ----------    -----------     ----------
      Total available-for-sale marketable securities.   $   36,010       $      102    $     (526)     $   35,586
                                                        ==========       ==========    ===========     ==========
</TABLE>

The cost of  securities  sold is based on the  specific  identification  method.
Realized gains and losses, declines in value judged to be  other-than-temporary,
and interest and dividends are included in income.  Gross gains of approximately
$81, $200 and $500 were realized on sales of debt  securities in 1998,  1997 and
1996,  respectively.  Gross losses realized on sales of debt securities  totaled
approximately $150, $200 and $300 in 1998, 1997 and 1996, respectively.

The amortized cost and the fair value of  available-for-sale  debt securities at
June 30, 1998, by contractual  maturity,  are shown below.  Expected  maturities
will differ from contractual  maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment  penalties.  There
were no contractual maturities due in one year or less.
<TABLE>
<CAPTION>
                                                                                    Amortized             Fair
                                                                                      Cost                Value
                                                                                  ------------       -------------
<S>                                                                               <C>                <C>
Due after one year through five years...........................................  $      6,074       $       6,127
Due after five years through ten years..........................................        12,274              12,566
Due after ten years.............................................................        17,421              17,719
                                                                                  ------------       -------------
                                                                                  $     35,769       $      36,412
                                                                                  ============       =============
</TABLE>

                                       33

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


7.  Other Security Investments

Other security investments at June 30 consist of the following:
<TABLE>
<CAPTION>
                                                                                      1998                1997
                                                                                  ------------       -------------
<S>                                                                               <C>                <C>
CF Industries, Inc..............................................................  $     25,260       $      22,151
CoBank, ACB.....................................................................        18,940              20,750
Other...........................................................................         7,561               6,767
                                                                                  ------------       -------------
                                                                                  $     51,761       $      49,668
                                                                                  ============       =============
</TABLE>

8.  Properties and Equipment

Properties and equipment,  at cost,  including  capital  leases,  consist of the
following at:
<TABLE>
<CAPTION>
                                                                   Owned             Leased             Combined
                                                              -------------       ------------       -------------
<S>                                                           <C>                 <C>                <C>
June 30, 1998
-------------
Land and land improvements..................................  $      35,290       $          0       $      35,290
Buildings and leasehold improvements........................        136,163              5,350             141,513
Machinery and equipment.....................................        326,351                780             327,131
Capital projects in progress................................         11,966                  0              11,966
                                                              -------------       ------------       -------------
                                                                    509,770              6,130             515,900

Less: accumulated depreciation and amortization.............        298,355              3,750             302,105
                                                              -------------       ------------       -------------
Properties and equipment, net...............................  $     211,415       $      2,380       $     213,795
                                                              =============       ============       =============

                                                                   Owned             Leased             Combined
                                                              -------------       ------------       -------------
June 30, 1997
-------------
Land and land improvements..................................  $      35,050       $        721       $      35,771
Buildings and leasehold improvements........................        123,025              7,051             130,076
Machinery and equipment.....................................        330,304              4,123             334,427
Capital projects in progress................................          7,713                  0               7,713
                                                              -------------       ------------       -------------
                                                                    496,092             11,895             507,987

Less: accumulated depreciation and amortization.............        282,709             10,183             292,892
                                                              -------------       ------------       -------------

Properties and equipment, net...............................  $     213,383       $      1,712       $     215,095
                                                              =============       ============       =============
</TABLE>

Depreciation  and  amortization  expense  relating  to  properties and equipment
amounted  to  approximately $27,400, $28,800 and $31,800 in 1998, 1997 and 1996,
respectively.


                                       34

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


9.  Income Taxes

The  provision  (benefit)  for  income  taxes  as of  June  30  consists  of the
following:
<TABLE>
<CAPTION>

                                                                Restated
                                                                   1998               1997                1996
                                                              ------------        ------------       -------------
<S>                                                           <C>                 <C>                <C>
Continuing operations:
     Current:
         Federal............................................  $     (1,131)       $     (2,226)      $      (3,736)
         State..............................................         3,940               3,344               2,253
     Deferred...............................................         9,268               5,676              11,372
     (Decrease) increase in valuation allowance.............             0                (881)                 34
                                                              ------------        ------------       -------------
                                                              $     12,077        $      5,913       $       9,923
                                                              ============        ============       =============

</TABLE>

The current  federal  provision for income taxes of  discontinued  operations in
1996 was  $1,591.  The  deferred  tax  provision  on the  cumulative  effect  of
accounting change in 1998 was $16,500.

The  Company's  effective  income  tax rate on  margin  (loss)  from  continuing
operations  before income taxes differs from the federal  statutory  regular tax
rate as of June 30 as follows:
<TABLE>
<CAPTION>

                                                                 Restated
                                                                   1998               1997                1996
                                                              ------------        ------------       -------------
<S>                                                           <C>                 <C>                <C>
Statutory federal income tax rate...........................         35.0%               35.0%               35.0%

Tax effects of:
     State income taxes, net of federal benefit (1).........         14.1                14.0                 7.4
     Items for which no federal tax effect was recognized...          2.6                 2.2                 3.0
     Adjustment to prior years' tax liabilities.............         (2.2)              (10.8)                2.7
     Other items............................................           .3                (4.7)               (1.0)
                                                              ------------        ------------       -------------
         Effective income tax rate..........................         49.8%               35.7%               47.1%
                                                              ============        ============       =============

</TABLE>

(1) For state income tax purposes, the Company does not file combined income tax
returns  and is  therefore  unable to  recognize  the  benefit  of  certain  net
operating losses incurred by subsidiaries.


                                       35

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


9.  Income Taxes (continued)

The components of the deferred tax assets and  liabilities as of June 30 were as
follows:
<TABLE>
<CAPTION>

                                                                                    Restated
                                                                                      1998                1997
                                                                                  ------------       -------------
<S>                                                                               <C>                <C>
Deferred tax assets:
     Other liabilities and reserves.............................................  $     14,849       $      13,246
     Medical reserves...........................................................         9,477               7,682
     NOL carryforward...........................................................         8,771               3,673
     Self-insurance reserves....................................................         7,190               6,280
     Alternative minimum tax credit carryforward................................         6,960               7,135
     Deferred compensation......................................................         4,647               4,350
     Inventory..................................................................         4,250               4,391
     Environmental..............................................................         3,066               3,070
     Leases receivable..........................................................         3,043               7,752
     Accounts receivable........................................................         3,025               2,673
     ITC carryforward...........................................................         2,072               1,959
                                                                                  ------------       -------------
         Total net deferred tax asset...........................................        67,350              62,211
                                                                                  ------------       -------------
Deferred tax liabilities:
     Pension assets.............................................................        63,551              34,018
     Excess of tax over book depreciation.......................................        16,233              14,715
     Prepaid medical............................................................         6,522               6,675
     Other assets ..............................................................         2,278               2,269
                                                                                  ------------       -------------
         Total deferred tax liability...........................................        88,584              57,677
                                                                                  ------------       -------------
              Net deferred tax (liability) asset................................  $    (21,234)      $       4,534
                                                                                  ============       =============

</TABLE>


The Company's net deferred tax  (liability)  asset at June 30, 1998 and 1997, of
$(21,234) as restated and $4,534, respectively,  consists of a net current asset
of $23,693 and  $20,714  included  in  prepaid  expenses  and  a  net  long-term
liability of $44,927 as restated and $16,180 included in other liabilities as of
June 30, 1998  and  1997,  respectively.  Based  on  the  Company's  history  of
taxable earnings and its expectations for the future,  management has determined
that operating income will likely be sufficient to recognize all of its deferred
tax asset.


At June 30,  1998,  the  Company's  federal  AMT credit  can be carried  forward
indefinitely. The net operating loss (NOL) carryforwards expire in 2012, and the
ITC credits expire in 2003.


                                       36

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


10.  Short-Term Notes Payable

As of June 30, 1998, the Company had certain  facilities  available with various
financial  institutions  whereby  lenders  have  agreed to  provide  funds up to
$369,000 to separately  financed units of the Company as follows:  AFC,  $75,000
and Telmark, $294,000. The AFC amount is a $50,000 short-term line of credit and
a $25,000  long-term  revolver.  In  addition,  AFC may issue up to  $50,000  of
commercial  paper  under the  terms of a  separate  agreement,  backed by a bank
standby letter of credit.  The bank has agreed to increase AFC's short-term line
of credit to  $75,000 on October  1,  1998,  to provide a facility  for  interim
funding,  if necessary,  for maturing  subordinated debt. The lines of credit of
Telmark  have  increased  $90,000  since  June  30,  1997,  and  are  considered
sufficient to finance new business and support  incremental  repayments on debt.
Short-term borrowings under these credit facilities were as follows:
<TABLE>
<CAPTION>
                                                                   AFC
                                                               (excluding
                                                                Telmark)            Telmark              Total
                                                              -------------       ------------       -------------
<S>                                                           <C>                 <C>                <C>
June 30, 1998
-------------
Bank lines of credit........................................  $           0       $     35,000       $      35,000
Commercial paper............................................         30,100                  0              30,100
                                                              -------------       ------------       -------------
                                                              $      30,100       $     35,000       $      65,100
                                                              =============       ============       =============
Weighted average interest rate..............................          5.59%              6.30%
                                                              =============       ============

                                                                   AFC
                                                               (excluding
                                                                 Telmark)            Telmark              Total
                                                              -------------       ------------       -------------
June 30, 1997
-------------
Bank lines of credit........................................  $           0       $     24,900       $      24,900
Commercial paper............................................         34,300                  0              34,300
                                                              -------------       ------------       -------------
                                                              $      34,300       $     24,900       $      59,200
                                                              =============       ============       =============
Weighted average interest rate..............................          5.57%              6.53%
                                                              =============       ============
</TABLE>

The carrying amount of the Company's  short-term  borrowings  approximates their
fair value.  Interest rates charged on commercial paper  outstanding  range from
5.56% and 5.62% at June 30, 1998, and 5.57% to 5.58% at June 30, 1997.

Letters of credit of $28,100, which are primarily used to back general liability
claims,  are also  available to AFC. At June 30, 1998,  letters of credit issued
totaled approximately $23,800.

The $50,000 short-term line of credit available to AFC at June 30, 1998, and the
$50,000 commercial paper facility require collateralization using certain of the
Company's  accounts  receivable  and  non-petroleum   inventories  (collateral).
Amounts that can be drawn under these AFC short-term agreements are limited to a
specific  calculation based upon the collateral  available.  Adequate collateral
has existed  throughout  the fiscal year to permit AFC to borrow amounts to meet
the ongoing  needs of the Company and is expected to continue to do so. The line
of credit  additionally  requires the Company's  investment in bank stock, which
had a book value of $7,090 and $9,943 at June 30,  1998 and 1997,  respectively,
as additional collateral. In addition, the agreements include certain covenants,
the  most  restrictive  of which  requires  the  Company  to  maintain  specific
quarterly  levels of interest  coverage and monthly levels of tangible  retained
margins.  AFC bank lines of credit and commercial paper facilities are available
to the Company through December 1998.



                                       37

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


10.  Short-Term Notes Payable (continued)

Telmark  borrows under  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.  The current
uncommitted  short-term line of credit agreements permit Telmark to borrow up to
$44,000 on an unsecured  basis with interest paid upon maturity.  The lines bear
interest  at  money  market  variable  rates.  A  committed  $250,000  partially
collateralized  revolving term loan facility  permits Telmark to draw short-term
funds  bearing  interest at money market rates or draw  long-term  debt at rates
appropriate for the term of the note drawn.  The facility is  collateralized  by
Telmark's  investment  in the bank stock,  which has a book value of $11,850 and
$10,807 at June 30, 1998 and 1997,  respectively.  The total amounts outstanding
as of June 30,  1998 and 1997,  under  the  short-term  lines of credit  and the
revolving  term loan facility were $20,000 and $165,000 and $4,000 and $190,900,
respectively.  The portion of the revolving term loan that is short term at June
30, 1998 and 1997, was $15,000 and $20,900, respectively.

The Company and Telmark have ongoing  discussions  with their lenders and expect
to continue to have  appropriate  and adequate  financing to meet their  ongoing
needs.

11.  Debt

Long-Term Debt:

Long-term debt consists of the following at June 30, 1998:
<TABLE>
<CAPTION>
                                                                            AFC
                                                                        (excluding
                                                            Agway        Telmark)         Telmark         Total
                                                       -------------   ------------    ------------    -----------
<S>                                                    <C>             <C>             <C>             <C>
Notes payable - banks (a)............................  $           0   $      1,925    $    150,000    $   151,925
Notes payable - insurance companies (b)(c)...........              0              0         186,660        186,660
Other................................................          9,977          3,344               0         13,321
                                                       -------------   ------------    ------------    -----------
Subtotal long-term debt, excluding capital leases....          9,977          5,269         336,660        351,906
Obligations under capital leases.....................          1,177          1,429              17          2,623
                                                       -------------   ------------    ------------    -----------
Total long-term debt.................................         11,154          6,698         336,677        354,529
Less: current portion................................          3,926          1,661          93,586         99,173
                                                       -------------   ------------    ------------    -----------
                                                       $       7,228   $      5,037    $    243,091    $   255,356
                                                       =============   ============    ============    ===========

Long-term debt consists of the following
  at June 30, 1997:

                                                                            AFC
                                                                        (excluding
                                                            Agway        Telmark)         Telmark         Total
                                                       -------------   ------------    ------------    -----------
Notes payable - banks ...............................  $           0   $      2,625    $    170,000    $   172,625
Notes payable - insurance companies .................              0              0         145,168        145,168
Other................................................          7,787          3,071               0         10,858
                                                       -------------   ------------    ------------    -----------
Subtotal long-term debt, excluding capital leases....          7,787          5,696         315,168        328,651
Obligations under capital leases:
     Industrial revenue bonds........................              0            358               0            358
     Others..........................................          1,272              0              90          1,362
                                                       -------------   ------------    ------------    -----------
Total long-term debt.................................          9,059          6,054         315,258        330,371
Less: current portion................................          2,380          3,141         108,875        114,396
                                                       -------------   ------------    ------------    -----------
                                                       $       6,679   $      2,913    $    206,383    $   215,975
                                                       =============   ============    ============    ===========
</TABLE>

                                       38

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


11.  Debt (continued)

(a)  Under  Telmark's  revolving  loan  facility,  principal  of $150,000  bears
     interest at fixed rates ranging  from 6.62% to 8.40%,  payments  commencing
     August  1998 with final installments due in October 2000.  The Telmark bank
     notes  of  $150,000 are collateralized by its investment in the bank stock.
     Under an AFC loan agreement bearing an interest rate of 8.58%, principal of
     $1,925  is payable in quarterly installments of $175 commencing August 1998
     and ending in  February 2001.  Additionally, since  January 1998, AFC has a
     $25,000 long-term revolver which is available until January 1, 2000.  There
     are  no  amounts  outstanding  as  of June 30, 1998.  The AFC bank notes of
     $1,925, the long-term  revolver, and  amounts outstanding  on AFC's $50,000
     short-term line of credit are collateralized by the Company's investment in
     the  bank stock.  The  AFC debt  agreements contain a number of restrictive
     financial covenants, the  most restrictive of which requires the Company to
     maintain specific quarterly levels of  interest coverage and monthly levels
     of  tangible  retained  margins.  The  AFC loan agreement and the long-term
     revolver component  of  AFC's line  of  credit have loan covenants that are
     integrated with the short-term facilities.

(b)  Under Telmark loan agreements with various insurance  companies,  principal
     of $169,000  bears  interest at fixed  rates  ranging  from 5.90% to 8.88%,
     payments  commencing  November 1998 with final installment due in May 2004.
     The note agreements are similar to one another and each contains  financial
     covenants,  the most  restrictive of which prohibit Telmark from having (1)
     tangible  net  worth  less than  $75,000;  (2) a  debt-to-equity  ratio (as
     defined)  which  exceeds 5:1; (3) a ratio of earnings  available  for fixed
     charges less than 1.25:1;  and (4) dividend  distributions  after September
     30, 1997, that exceed 75% of consolidated net income for the period October
     1, 1997, through the date of determination.

(c)  Telmark,  through a wholly owned special purpose subsidiary,  Telmark Lease
     Funding I, LLC, originally issued $24,000 of Class A lease-backed notes and
     $2,000  of  Class  B  lease-backed  notes  to  three  insurance  companies.
     Outstanding  principal at June 30, 1998, is $17,700.  The  subsidiary  pays
     interest at 6.58% on the Class A notes and 7.01% on the Class B notes.  The
     notes are  collateralized  by leases  having an aggregate  present value of
     contractual lease payments equal to the principal balance of the notes, and
     the  notes  are  further  collateralized  by the  residual  values of these
     leases. Final scheduled maturity of the notes is December 15, 2004.



                                       39

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)

11.  Debt (continued)

Subordinated Debt:

Subordinated debt consists of the following at June 30, 1998:
<TABLE>
<CAPTION>
                                                                      AFC
                                                                  (excluding
                                                                    Telmark)            Telmark              Total
                                                                 -------------       ------------       -------------
<S>                                                              <C>                 <C>                <C>
Subordinated debentures, due 1999 to 2003,
     interest at a weighted average rate of 8.1%
     with a range of 7.0% to 8.5%...........................     $      20,702       $     34,006       $      54,708
Subordinated money market certificates,
     due 1998 to 2008, interest at a weighted average
     rate of 8.2% with a range of 4.5% to 9.5%..............           407,488                  0             407,488
                                                                 -------------       ------------       -------------
Total long-term subordinated debt...........................           428,190             34,006             462,196
Less:  current portion......................................            75,589                  0              75,589
                                                                 -------------       ------------       -------------
                                                                 $     352,601       $     34,006       $     386,607
                                                                 =============       ============       =============
Subordinated debt consists of the following at June 30, 1997:
                                                                      AFC
                                                                  (excluding
                                                                    Telmark)            Telmark              Total
                                                                 -------------       ------------       -------------
Subordinated debentures, due 1997 to 2003,
     interest at a weighted average rate of 7.9%
     with a range of 6.0% to 8.5%...........................     $      21,738       $     31,044       $      52,782
Subordinated money market certificates,
     due 1997 to 2008, interest at a weighted average
     rate of 8.1% with a range of 4.5% to 9.5%..............           385,345                  0             385,345
                                                                 -------------       ------------       -------------
Total long-term subordinated debt...........................           407,083             31,044             438,127
Less:  current portion......................................            51,980             11,019              62,999
                                                                 -------------       ------------       -------------
                                                                 $     355,103       $     20,025       $     375,128
                                                                 =============       ============       =============
</TABLE>

AFC's subordinated debt is not redeemable by the holder.  However, AFC does have
a practice of  repurchasing at face value,  plus interest  accrued at the stated
rate, certain subordinated debt whenever presented for repurchase. The foregoing
debt bears interest  payable  semiannually  on January 1 and July 1 of each year
for AFC and payable  quarterly  on January 1, April 1, July 1, and October 1 for
Telmark. The money market  certificates'  interest rate is at the greater of the
quoted rate or a rate based upon the discount rate for U.S.  Government Treasury
Bills, with maturities of 26 weeks.

Maturities:

Aggregate annual  maturities on long-term debt during the next five fiscal years
ending June 30 and thereafter are as follows:
<TABLE>
<CAPTION>
                                             Capital                                                 Subordinated
                                             Leases             Borrowings            Total               Debt
                                          ------------        -------------       ------------       -------------
<S>                                       <C>                 <C>                 <C>                <C>
1999....................................  $        416        $      98,838       $     99,254       $      75,589
2000....................................           391               90,879             91,270              75,051
2001....................................           398               67,487             67,885              50,808
2002....................................           399               47,304             47,703              53,186
2003....................................           399               23,093             23,492              46,131
Thereafter..............................         2,082               24,305             26,387             161,431
                                          ------------        -------------       ------------       -------------
Imputed interest........................        (1,462)                   0             (1,462)                  0
                                          ------------        -------------       ------------       -------------
Total...................................  $      2,623        $     351,906       $    354,529       $     462,196
                                          ============        =============       ============       =============
</TABLE>

                                       40

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


12.  Commitments and Contingencies

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

The Company  continually  monitors  its  operations  with  respect to  potential
environmental  issues,  including  changes in  legally  mandated  standards  and
remediation  technologies.  Agway's recorded  liability  reflects those specific
issues where  remediation  activities  are  currently  deemed to be probable and
where the cost of  remediation  is  estimable.  Estimates  of the  extent of the
Company's  degree of  responsibility  of a  particular  site and the  method and
ultimate  cost of  remediation  require  a number of  assumptions  for which the
ultimate  outcome may differ  from  current  estimates.  At June 30,  1998,  the
Company  has been  designated  as a PRP under  CERCLA or as a third party to the
original PRPs in several  Superfund  sites.  The liability under CERCLA is joint
and several,  meaning that the Company could be required to pay in excess of its
pro  rata  share  of  remediation  costs.  The  Company's  understanding  of the
financial  strength of other PRPs at these Superfund sites has been  considered,
where appropriate,  in the Company's  determination of its estimated  liability.
The Company  believes that its past experience  provides a reasonable  basis for
estimating its liability. As additional information becomes available, estimates
are adjusted as necessary.  While the Company does not anticipate  that any such
adjustment  would be  material to its  financial  statements,  it is  reasonably
possible that the result of ongoing and/or future environmental studies or other
factors  could alter this  expectation  and require the  recording of additional
liabilities. The extent or amount of such events, if any, cannot be estimated at
this time.  The  settlement of the reserves  established  will cause future cash
outlays over approximately  five years based upon current  estimates,  and it is
not expected that such outlays will  materially  impact the Company's  liquidity
position.

As part of its long-term  environmental  protection  program,  the Company spent
approximately  $800 in fiscal 1998 on capital  projects.  The Company expects to
incur $600 to complete its compliance  with EPA  Underground  Storage Tank (UST)
regulations that become effective in December 1998.

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

Agway  utilizes a number of  computers  and computer  software  (systems) in the
conduct of its  business.  Many systems are for specific  business  segments and
others have broader  corporate-wide use. Systems are principally involved in the
flow  of  information  rather  than  in  the  processing,   manufacturing,   and
distributing  operations.  Agway initiated its year 2000  compliance  efforts in
January 1996. The initial focus of the Company's  compliance  efforts was on the
Company's  information systems,  including assessment of the issue, planning the
conversion to compliance,  plan  implementation,  and testing.  All systems have
been inventoried.  Those systems determined to be at risk were prioritized,  and
plans  were  put in place  to  upgrade  systems  by  remediation,  replacements,
outsourcing,  or doing without these systems.  Through June 1998, the assessment
and planning  phases,  as well as certain portions of the  implementation,  have
been  completed.  The  remaining  portion  of  these  plans  are in  process  of
implementation,  with a completion for specific systems scheduled throughout the
next fiscal year and the final  implementations  scheduled  to be  completed  in
September  1999.  Testing  of  systems  is being  conducted  for each  system as
implemented. The interaction of updated systems will be tested in the enterprise
-wide testing environment.



                                       41

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


12.  Commitments and Contingencies (continued)

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

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

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

The  Company  expects  to  incur  significant  internal  staff  costs as well as
consulting and other expenses related to its year 2000 efforts. Due to the level
of effort  required  to  complete  remediation  for the year 2000,  non-business
critical system enhancements have been deferred until the year 2000 efforts have
been  completed.  The  conversion  and  testing  of  existing  systems  and  the
replacement of systems are expected to cost the Company  approximately  $18,000,
of which  $9,000 has been  incurred  and $9,000 is expected to be incurred  from
July 1998 through  December 1999.  Approximately  75% of these  estimated  costs
represent replacement costs and will be capitalized.  Additionally,  the Company
estimates  the costs to  remediate  all  other  areas  may  approximate  $6,000.
However,  these costs will vary as the Company continues to assess and implement
its plans or if the Company is required to invoke contingency plans. The Company
treats  non-capital costs associated with year 2000 as period costs and they are
expensed when incurred.

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



                                       42

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


12.  Commitments and Contingencies (continued)

Other (continued)
Commitments to extend credit at the Company's leasing subsidiary,  Telmark,  are
agreements  to  lend to a  customer  as long as  there  is no  violation  of any
condition  established  in  the  contract.   Commitments  generally  have  fixed
expiration dates or other termination clauses. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily  represent  future cash  requirements.  Outstanding  commitments  to
extend lease financing at June 30, 1998, approximated $27,800.

In 1996,  the  Company  entered  into a  ten-year  logistics  agreement  with an
outsourcer to manage its two retail distribution  centers.  The amount of annual
service  fees is  dependent  upon the services  provided,  volume of  activities
required, and the number of shipping destinations.  The estimated annual expense
under this agreement is approximately $10,000.

Rent  expense for the fiscal  years 1998,  1997 and 1996  approximated  $14,000,
$12,000 and $9,000,  respectively.  Future minimum payments under  noncancelable
operating leases approximate $9,900,  $8,500,  $7,400, $6,700 and $6,300 for the
fiscal  years  1999  through  2003,   respectively,   and  approximately  $3,700
thereafter.



                                       43

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


13.  Preferred Stock

Values are whole numbers except where noted as (000).
<TABLE>
<CAPTION>
                                                                       Preferred Stock
                                        ----------------------------------------------------------------------------
                                                          Cumulative
                                        --------------------------------------------------   Honorary      Dollar
                                            6%           8%           8%            7%       Member        Amount
                                         Series A     Series B    Series B-1     Series C    Series HM     in 000s
                                        ----------   ----------   ----------    ----------   ---------   -----------
<S>                                     <C>          <C>          <C>           <C>          <C>         <C>
Par Value...........................    $      100   $      100   $      100    $      100   $      25
                                        ==========   ==========   ==========    ==========   =========
Shares Authorized...................       350,000      250,000      140,000       150,000      80,000
                                        ==========   ==========   ==========    ==========   =========
Shares Outstanding:
   Balance June 30, 1995............       283,063      225,481       19,410       127,808       2,361   $    65,635
     Issued (redeemed), net.........       (50,152)      (1,359)        (300)      (11,365)         67        (6,316)
                                        ----------   ----------   ----------    ----------   ---------   -----------
   Balance June 30, 1996............       232,911      224,122       19,110       116,443       2,428        59,319
     Issued (redeemed), net.........        (2,972)      13,105         (750)      (27,201)        126        (1,778)
                                        ----------   ----------   ----------    ----------   ---------   -----------
   Balance June 30, 1997............       229,939      237,227       18,360        89,242       2,554        57,541
     Issues (redeemed), net.........       (76,763)      (1,081)        (350)      (18,506)         27        (9,670)
                                        ----------   ----------   ----------    ----------   ---------   -----------
   Balance June 30, 1998............       153,176      236,146       18,010        70,736       2,581   $    47,871
                                        ==========   ==========   ==========    ==========   =========   ===========
</TABLE>

<TABLE>
<CAPTION>
                                                             Preferred Stock
                                      --------------------------------------------------------------
                                                          Cumulative
                                      -------------------------------------------------   Honorary
                                          6%           8%           8%           7%        Member
                                       Series A     Series B    Series B-1   Series C     Series HM
                                      ----------   ----------   ----------   ----------   ----------
<S>                                   <C>          <C>          <C>          <C>          <C>
Annual Dividends Per Share:
   June 30, 1996....................  $     6.00   $     8.00   $     8.00   $     7.00   $     1.50
   June 30, 1997....................  $     6.00   $     8.00   $     8.00   $     7.00   $     1.50
   June 30, 1998....................  $     6.00   $     8.00   $     8.00   $     7.00   $     1.50

Shares Held in Treasury (purchased
  at par value):
   June 30, 1996....................     117,089       25,878      120,890       33,557          729
   June 30, 1997....................     120,061       12,773      121,640       60,758          812
   June 30, 1998....................     196,823       13,854      121,990       79,274          970
</TABLE>

There are 10,000 shares of authorized preferred stock undesignated as to series,
rate,  and other  attributes.  The Series A preferred  stock has  priority  with
respect to the payment of  dividends.  The  Company  maintains  the  practice of
providing a market by repurchasing, at par, preferred stock as the holders elect
to  tender  the  securities  for  repurchase,  subject  to Board  of  Directors'
approval.  The Series HM preferred stock may be issued only to former members of
Agway and no more than one share of such stock may be issued to any one  person.
The preferred stock has no pre-emptive or conversion rights.

                                       44

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


14.  Retirement Benefits

Pension Plan
The Company has a  non-contributory  defined  benefit  pension plan covering the
majority of employees of Agway Inc. The plan's benefit formulae through June 30,
1998, base payment to retired employees generally upon years of credited service
and  a  percentage  of  qualifying   compensation  during  the  final  years  of
employment.  Generally,  pension  costs are funded  annually at no less than the
amount  required by law and no more than the maximum  allowed by federal  income
tax guidelines.  The vested benefit obligation is based on the actuarial present
value of the  benefits  that the  employee  would be entitled to at the expected
retirement date.

The majority of the plan's  investments  consist of U.S.  government  and agency
securities,  U.S.  corporate bonds, U.S. and foreign  equities,  equity and bond
funds and  temporary  investments  (short-term  investments  in demand notes and
money  market  funds).  At June 30,  1998 and 1997,  the  Company's  plan assets
included  Company debt securities and preferred stock with estimated fair values
of $10,000 and $5,900, respectively.

The Employees'  Retirement Plan of Agway Inc. has assets that exceed accumulated
benefit obligations. The following table sets forth the plan's funded status and
amounts recognized in the Company's  consolidated  financial  statements at June
30:
<TABLE>
<CAPTION>
                                                                                      1998                1997
                                                                                  ------------       -------------
<S>                                                                               <C>                <C>
Actuarial present value of benefit obligations:
     Vested.....................................................................  $    289,380       $     262,339
     Non-vested.................................................................        10,563               9,580
                                                                                  ------------       -------------
Accumulated benefit obligation..................................................       299,943             271,919
Additional amounts related to projected pay increases...........................        32,776              29,850
                                                                                  ------------       -------------
Projected benefit obligation for service rendered to date.......................       332,719             301,769
Plan assets at fair value ......................................................       582,988             538,433
                                                                                  ------------       -------------
Projected benefit obligation less than plan assets..............................       250,269             236,664
Unrecognized net gain...........................................................       (75,482)           (135,847)
Unrecognized prior service cost.................................................        11,415              13,729
Unrecognized net transition asset...............................................        (9,410)            (14,494)
                                                                                  ------------       -------------
Net pension asset...............................................................  $    176,792       $     100,052
                                                                                  ============       =============
</TABLE>

In determining the actuarial present values of the projected benefit obligations
as of June 30, the following assumptions were used:
<TABLE>
<CAPTION>
                                                                                      1998                1997
                                                                                  -------------      -------------
<S>                                                                               <C>                <C>
Weighted average discount rate..................................................           7.0%              7.75%
Rate of increase in future compensation.........................................           5.0%              5.50%
Expected long-term rate of return...............................................         10.25%             10.25%
</TABLE>

Net pension income  included the following  income/(expense)  components for the
year ended June 30:
<TABLE>
<CAPTION>
                                                                   1998               1997                1996
                                                              --------------      -------------      --------------
<S>                                                           <C>                 <C>                <C>
Service benefits earned during the period...................  $      (5,373)      $     (5,236)      $      (6,060)
Interest cost on projected benefit obligation...............        (22,547)           (21,527)            (21,216)
Actual return on plan assets................................         67,922             73,413              83,238
Net amortization and deferral...............................         (8,093)           (31,779)            (44,624)
                                                              --------------      -------------      --------------
                                                              $      31,909       $     14,871       $      11,338
                                                              ==============      =============      ==============
</TABLE>

                                       45

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


14.  Retirement Benefits (continued)

Pension Plan (continued)
Effective  July 1, 1997,  the  Company  changed  its method of  determining  the
market-related  value of its plan  assets  under  SFAS No. 87,  "Accounting  for
Pensions," from a calculated  value (one that recognized  changes in fair market
value of assets over a number of years) to a fair market value method,  which is
considered a preferable method to that previously applied. The cumulative effect
of this change in accounting principle,  net of tax of $16,500, was $28,956. Had
the Company  remained on its previous method of determining  the  market-related
value,  the margin from  operations  before income taxes for the year ended June
30, 1998, would have been approximately $15,000 lower.

Pro forma amounts (unaudited), assuming the new accounting principle was applied
during all periods presented, follow with a comparison to actual results:
<TABLE>
<CAPTION>

                                                                                  Year ended June 30
                                                              ----------------------------------------------------
                                                                 Restated
                                                                   1998               1997                1996
                                                              -------------       ------------       -------------
<S>                                                           <C>                 <C>                <C>
Margin from continuing operations:
      As reported...........................................  $      12,189       $     10,670       $      11,147
      Pro forma.............................................  $      12,189       $     18,410       $      15,625

Net margin:
      As reported...........................................  $      41,145       $     10,670       $      12,662
      Pro forma.............................................  $      12,189       $     18,410       $      17,140

</TABLE>

Effective July 1, 1998, the Company  amended its defined benefit pension plan to
include a pension equity formula, as well as to recognize incentive compensation
as pensionable compensation for all employees.  This amendment will increase the
projected   benefit   obligation   and   unrecognized   prior  service  cost  by
approximately $24,800. The net pension income in future years will be reduced as
a result of this amendment to approximate historical levels.

Postretirement Benefits
The Company provides  postretirement  health care and life insurance benefits to
eligible  retirees and their  dependents.  Eligibility for benefits depends upon
age and years of service.  The  Company's  postretirement  benefit plans are not
funded. The accrued  postretirement benefit cost expected to be paid in the next
year is in other current liabilities,  while the remaining amount is included in
other  liabilities.  The  reconciliation  of funded  status and the net periodic
postretirement  benefit cost recognized in the Company's  consolidated financial
statements at June 30 were as follows:
<TABLE>
<CAPTION>
                                                                                     Health and Life Insurance
                                                                                  --------------------------------
                                                                                      1998                1997
                                                                                  ------------       -------------
<S>                                                                               <C>                <C>
Reconciliation of funded status:
-------------------------------
Accumulated postretirement benefit obligation:
     Retirees and surviving spouses.............................................  $     32,001       $      30,645
     Actives eligible to retire.................................................         3,790               3,635
     Actives not yet eligible to retire.........................................         8,194               7,866
                                                                                  ------------       -------------
Total unfunded accumulated postretirement benefit obligation....................        43,985              42,146
Unrecognized prior service cost.................................................        (1,393)             (1,525)
Unrecognized net gain (loss)....................................................          (189)              2,065
Unrecognized net transition obligation..........................................       (18,838)            (20,093)
                                                                                  ------------       -------------
   Accrued postretirement benefit cost..........................................  $     23,565       $      22,593
                                                                                  ============       =============
</TABLE>

                                       46

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


14.  Retirement Benefits (continued)

Postretirement Benefits (continued)
<TABLE>
<CAPTION>
                                                                   1998               1997                1996
                                                              ------------        ------------       -------------
<S>                                                           <C>                 <C>                <C>
Annual expense for the year ended June 30:
-----------------------------------------
Interest cost...............................................  $      3,110        $      3,158       $       3,243
Amortization of transition obligation and prior service.....         1,387               1,321               1,255
Service cost................................................           601                 723                 816
                                                              ------------        ------------       -------------
     Net periodic postretirement benefit cost...............  $      5,098        $      5,202       $       5,314
                                                              ============        ============       =============
</TABLE>

In determining the accumulated  postretirement benefit obligation,  the weighted
average  discount  rate  used  was 7.0% and  7.75%  at June 30,  1998 and  1997,
respectively.

For  measurement  purposes,  the  assumed  health  care cost  trend rate used to
measure the Company's  accumulated benefit obligation was, for persons under age
65, 7.5% and 7.0% for June 30, 1998 and 1997, respectively. For persons over age
65, the Company has an insured medical program limiting the Company's subsidy to
a per month/per  retiree basis.  The health care cost trend rate  assumption for
fiscal 1999 and forward at June 30,  1998,  decreases  gradually  until the year
2002, when the ultimate trend rate is then fixed at 4.5%. A one percentage point
increase in the  assumed  health  care cost trend rate at June 30,  1998,  would
increase the  aggregate  service and interest  cost  components  of net periodic
postretirement benefit cost by $200, and the accumulated  postretirement benefit
obligation by $1,300.

Employees' Thrift Investment Plan
The Agway Inc. Employees' Thrift Investment Plan is a defined  contribution plan
covering a  substantial  majority of  employees  of Agway and its  subsidiaries.
Under the plan, each  participant may invest up to 15% of his or her salary,  of
which a maximum of 6% qualifies for Company matching.  Participant contributions
are invested at the option of the participant in any combination of four funds.

The Company will contribute an amount of at least 10%, but not more than 50%, of
each participant's  regular  contributions,  as defined,  up to 6% of his or her
salary on an annual basis.  Company  contributions  to this plan for years ended
June 30, 1998,  1997 and 1996,  were  approximately  $1,300,  $1,200 and $1,300,
respectively.  For the years ended June 30,  1998,  1997 and 1996,  the Board of
Directors of the Company  approved an additional  match of 20% to supplement the
minimum contribution level of 10%.

                                       47

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


15.  Financial Information Concerning Segment Reporting

The Company,  as an agricultural  cooperative in the northeastern United States,
operates principally in five business segments:

(1)  Agriculture,  through AAP, engages in the  manufacturing  and processing of
     various animal feeds,  crop inputs,  fertilizers  and farm  supplies;  and,
     through CPG,  engages in the  manufacturing,  processing and repacking of a
     variety of agricultural products marketed directly to consumers, retailers,
     wholesalers and processors, as well as to AAP and ARS.

(2)  Retail,  through  ARS,  engages in the retail  marketing of yard and garden
     items, pet food and pet supplies,  and agricultural supplies and materials,
     as well as the wholesale  purchase,  warehousing and  distribution of these
     products to Agway franchised representatives and other businesses. ARS also
     provides marketing,  purchasing,  technical,  and strategic support for AAP
     and the Agway retail store outlets.

(3)  Energy,  through  Agway Energy  Products,  operates a  full-service  energy
     company which markets oil and gas heating and  air-conditioning  equipment,
     petroleum products including  gasolines,  kerosene,  fuel oil, diesel fuel,
     propane, lubricating oils and greases, antifreeze, and other related items.
     In March 1997, AEP began  marketing  natural gas to  residential  and small
     commercial customers.

(4)  Leasing,  through  Telmark LLC, is  principally  engaged in the business of
     leasing agricultural-related  equipment, vehicles, and buildings to farmers
     and other customers, primarily in rural communities.

(5)  Insurance,  through  Agway  Insurance  Company,  underwrites  property  and
     casualty insurance and, through Agway General Agency Inc., markets accident
     and health insurance as well as long-term-care products.

Total  revenue  of each  industry  segment  includes  the sale of  products  and
services to unaffiliated  customers,  as reported in the Company's  consolidated
statements  of  operations,  as well as sales to other  segments  of the Company
which are priced on a competitive basis.

Operating  margin (loss)  consists of total  revenues less  operating  expenses.
Certain  shared service  expenses,  including the corporate  insurance  program,
information  services,   payroll  and  accounts  payable   administration,   and
facilities  management,  are allocated based on various allocation formulas.  In
computing  operating margin (loss),  none of the following items have been added
to or deducted from segment  results:  revenue earned at the corporate level and
not  derived  from  operations  of any  industry  segment;  corporate  expenses;
interest expense, net of interest income; other income generated from assets not
allocable to segments;  member refunds;  income taxes; and margin or (loss) from
discontinued operations.

Identifiable assets in the segments of the Company are those assets used by each
segment in its  operations.  General  management  assets consist  principally of
cash, various prepaid expenses, fixed assets, net pension assets, and net assets
of discontinued operations.


                                       48

<PAGE>

                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


15.  Financial Information Concerning Segment Reporting (continued)
<TABLE>
<CAPTION>

Year ended June 30, 1998      Agriculture     Retail       Energy      Leasing    Insurance     Other(a)    Consolidated
------------------------      -----------   ----------   ---------   ----------   ---------   ----------    ------------
<S>                           <C>           <C>          <C>         <C>          <C>         <C>           <C>
Net sales and revenues to
 unaffiliated customers..     $   740,559   $  224,896   $ 504,702   $   65,445   $  27,335   $        6    $  1,562,943
Intersegment sales and
   revenues..............          29,152       26,678         398           31           0      (56,259)              0
                              -----------   ----------   ---------   ----------   ---------   -----------   ------------
   Total sales and revenues   $   769,711   $  251,574   $ 505,100   $   65,476   $  27,335   $  (56,253)   $  1,562,943
                              ===========   ==========   =========   ==========   =========   ===========   ============
Operating margin (loss)
   plus other income, net,
   as restated...........     $     6,675   $   (2,745)  $  15,151   $   15,412   $    (263)  $   20,861    $     55,091
Interest expense, net of
   interest income.......                                                                                        (30,825)
                                                                                                            ------------
      Margin from continuing
       operations before
        income taxes, as
         restated                                                                                           $     24,266
                                                                                                            ============
Identifiable assets,
  as restated............     $   363,961   $   98,741   $ 141,894   $  516,735   $  55,939   $  240,024    $  1,417,294
Depreciation and
  amortization                     13,408        4,974       8,668          607          78        1,062          28,797
Capital expenditures.....          14,101        6,972       5,631          471         297        3,480          30,952

Year ended June 30, 1997      Agriculture     Retail       Energy      Leasing    Insurance     Other(a)    Consolidated
------------------------      -----------   ----------   ---------   ----------   ---------   ----------    ------------
Net sales and revenues to
   unaffiliated customers     $   740,904   $  240,050   $ 606,800   $   56,908   $  27,020   $       32    $  1,671,714
Intersegment sales and
   revenues..............          30,415       27,562         305           35           0      (58,317)              0
                              -----------   ----------   ---------   ----------   ---------   ----------    ------------
   Total sales and revenues   $   771,319   $  267,612   $ 607,105   $   56,943   $  27,020   $  (58,285)   $  1,671,714
                              ===========   ==========   =========   ==========   =========   ==========    ============
Operating margin plus
   other income, net.....     $     3,219   $    5,207   $  19,537   $   13,003   $     694   $    5,893    $     47,553
Interest expense, net of
   interest income.......                                                                                        (30,970)
                                                                                                            ------------
      Margin from continuing
        operations before
        income taxes                                                                                        $     16,583
                                                                                                            ============
Identifiable assets......     $   341,666   $  105,409   $ 166,132   $  470,699   $  53,845   $  162,510    $  1,300,261
Depreciation and
   amortization                     6,660       11,659       9,591          529          55        1,337          29,831
Capital expenditures.....           7,429       12,792       4,632          540           0          352          25,745

Year ended June 30, 1996      Agriculture     Retail       Energy      Leasing    Insurance     Other(a)    Consolidated
------------------------      -----------   ----------   ---------   ----------   ---------   ----------    ------------
Net sales and revenues to
   unaffiliated customers     $   787,815   $  253,299   $ 545,704   $   48,577   $  25,431   $    2,259    $  1,663,085
Intersegment sales and
   revenues..............          82,295       31,593         323           50           0     (114,261)              0
                              -----------   ----------   ---------   ----------   ---------   ----------    ------------
   Total sales and revenues   $   870,110   $  284,892   $ 546,027   $   48,627   $  25,431   $ (112,002)   $  1,663,085
                              ===========   ==========   =========   ==========   =========   ==========    ============
Operating margin (loss) plus
   other income, net.....     $    23,427   $    4,868   $  16,119   $   11,589   $  (5,310)  $    3,462    $     54,155
Interest expense, net of
   interest income.......                                                                                        (33,085)
                                                                                                            ------------
     Margin from continuing
      operations before
      income taxes                                                                                          $     21,070
                                                                                                            ============
Identifiable assets......     $   361,342   $  105,220   $ 170,063   $  394,470   $  53,971   $  160,825    $  1,245,891
Depreciation and
  amortization                     10,917        9,872      10,545          450         125        1,513          33,422
Capital expenditures.....           8,624       10,796       4,332          939          13        1,321          26,025

</TABLE>
(a) Represents unallocated net corporate items and intersegment eliminations.

                                       49

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


16.  Other Income (Expense)

The  components  of  other  income  (expense)  for the  year  ended  June 30 are
summarized below:
<TABLE>
<CAPTION>
                                                                   1998               1997                1996
                                                              ------------        ------------       -------------
<S>                                                           <C>                 <C>                <C>
Patronage refund income.....................................  $      4,344        $      9,534       $       8,037
Rent and storage revenue....................................         4,636               4,063               3,552
Gain/(loss) on disposition of:
     Businesses.............................................             0                 360               3,799
     Other security investments.............................             0                   0               1,348
     Properties and equipment...............................         1,210               2,613                (891)
Other, net..................................................         3,171               2,193               2,577
                                                              ------------        ------------       -------------
                                                              $     13,361        $     18,763       $      18,422
                                                              ============        ============       =============
</TABLE>

17.  Supplemental Disclosures about Cash Flows
<TABLE>
<CAPTION>
                                                                   1998               1997                1996
                                                              ------------        ------------       -------------
<S>                                                           <C>                 <C>                <C>
Additional disclosure of operating cash flows:
   Cash paid during the year for:
         Interest...........................................  $     40,807        $     39,812       $      43,195
                                                              ============        ============       =============
         Income taxes.......................................  $      3,253        $      3,661       $       3,499
                                                              ============        ============       =============
Additional disclosure for non-cash investing
   and financing activities:

     Dividends declared but unpaid at June 30...............  $      1,840        $      2,149       $       2,210
                                                              ============        ============       =============
</TABLE>

18.  Financial and Commodity Instruments

Financial Instruments

Fair Value
Carrying amounts of trade notes and accounts receivable,  financial  instruments
included in other  assets and other  liabilities,  notes  payable,  and accounts
payable  approximate  their fair values because of the short-term  maturities of
these  instruments.   The  fair  value  of  the  Company's  long-term  debt  and
subordinated debentures is estimated based on discounted cash computations using
estimated  borrowing  rates available to the Company ranging from 5.89% to 8.77%
in 1998 and 6.18% to 8.87% in 1997.

The carrying  amounts and  estimated  fair values of the  Company's  significant
financial  instruments  held for purposes  other than trading at June 30 were as
follows:
<TABLE>
<CAPTION>
                                                              1998                               1997
                                                 -------------------------------    -------------------------------
                                                   Carrying            Fair           Carrying            Fair
                                                    Amount             Value           Amount             Value
                                                 -------------    --------------    -------------    --------------
<S>                                              <C>              <C>               <C>              <C>
Liabilities:
Long-term debt  (excluding capital leases).....  $     351,906    $      357,869    $     328,651    $      333,669
Subordinated debentures........................        462,196           469,789          438,127           433,736
</TABLE>

                                       50

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


18.  Financial and Commodity Instruments (continued)

Off-Balance-Sheet Risk
In the normal course of business, the Company has letters of credit, performance
contracts,  and other  guarantees  that are not  reflected  in the  accompanying
consolidated  balance sheets. In the past, no significant  claims have been made
against these financial instruments.  Management believes that the likelihood of
performance under these financial instruments is minimal and expects no material
losses and/or cash requirements to occur in connection with these instruments.

The Company's leasing subsidiary,  Telmark, is a party to financial  instruments
with  off-balance-sheet  risk in the  normal  course  of  business  to meet  the
financing needs of its leasing customers. These financial instruments consist of
commitments to extend credit not  recognized in the balance sheet.  In the event
of nonperformance by the other party to the financial instrument,  the Company's
credit risk is limited to the  contractual  amount of  Telmark's  commitment  to
extend  credit.   The  Company's  exposure  to  credit  loss  in  the  event  of
nonperformance by the other party to the financial instrument for commitments to
extend  credit is  represented  by the  contractual  amount  of the  instrument.
Telmark uses the same credit and collateral policies in making commitments as it
does for on-balance-sheet instruments.

Credit and Market Risk
The  Company,   operating  as  an  agricultural  cooperative  primarily  in  the
Northeast,  has a  concentration  of  accounts  and lease  receivables  due from
farmer-members   throughout  the  region.  This  concentration  of  agricultural
customers may affect the Company's  overall credit risk in that the repayment of
farmer-member  receivables may be affected by inherent risks associated with (1)
the  overall  economic  environment  of the  region;  (2) the  impact of adverse
regional weather conditions on crops; and (3) changes in the level of government
expenditures  on farm  programs  and other  changes in  government  agricultural
programs  that  adversely  affect the level of income of  farmers.  The  Company
mitigates this credit risk by analyzing  farmer-member credit positions prior to
extending  credit and  requiring  collateral on long-term  arrangements  and the
underlying asset with Telmark's lease contracts.

Energy  extends  unsecured  credit  to  petroleum  wholesalers  and  residential
fuel-oil customers. The Retail business extends working capital lines of credit,
secured by inventory and accounts receivable, to its representatives. The credit
function within the Energy and Retail businesses  manages credit risk associated
with these trade  receivables by routinely  assessing the financial  strength of
its customers.

Commodity Instruments


The Company determines the fair value of its exchange-traded  contracts based on
the settlement prices for open contracts,  which are established by the exchange
on which the instruments are traded. The fair value of Agway's  over-the-counter
contracts is determined  based on quotes from brokers.  The margin  accounts for
open commodity futures and option contracts,  which reflect daily settlements as
market values change, are recorded in advances and other receivables. The margin
account  represents  Agway's basis in those  contracts.  As of June 30, 1998 and
1997, the carrying and fair value of Agway's  investment in commodities  futures
and option contracts was $2,200 and $3,200, respectively.


In the Energy segment,  exchange-traded  commodity  instruments  and, in certain
circumstances,   over-the-counter   contracts   with  third   parties  are  used
principally for gasoline,  distillate,  and propane.  They are entered into as a
hedge  against the price risk  associated  with Energy's  inventories  or future
purchases and sales of the commodities  used in its operations.  Generally,  the
price risk extends for a period of one year or less.

                                       51

<PAGE>



                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


18.  Financial and Commodity Instruments (continued)

Commodity Instruments (continued)


In  the   Agriculture   segment's  feed  business,   exchange-traded   commodity
instruments are used principally to hedge corn, soy complex, and oats, which can
be sold directly as  ingredients  or included in feed  products.  Since November
1997, all transactions  involving derivative financial  instruments are required
to have a  direct  relationship  to the  price  risk  associated  with  existing
inventories or future purchase or sale of its products.

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






                                       52

<PAGE>


                    AGWAY INC. and CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (Thousands of Dollars)


19.  Discontinued Operations

On December 15, 1995,  Agway Holdings Inc. (AHI) sold all of its common stock of
Hood.  In  accordance  with the Stock  Purchase  Agreement,  AHI received  total
proceeds  of $25,500  in the form of $15,900 in cash and $9,600 in a  promissory
note in  consideration  of the sale of its Hood common stock and recorded a gain
on disposal of Hood of $2,110,  net of income tax of $1,711. AHI assumed certain
specified   obligations  of  Hood  and   indemnified  the  buyer  for  specified
obligations  identified  within two years of the closing date.  The  obligations
and/or liabilities  assumed and expenses incurred by AHI in the transaction were
estimated  at  $7,000  at the  closing  date.  Immediately  after  closing,  AHI
exchanged the note of $9,600 received as proceeds for certain  specified  assets
of Hood,  including  stock of a Farm Credit  System  cooperative  bank,  certain
accounts  receivable  and certain real estate and fixed  assets.  As of June 30,
1998,  the  estimates  made as of the closing  date of the sale are  adequate to
cover the indemnifications made.

Net sales and revenues from the  discontinued  operations of Hood for the period
of time owned during the year ended June 30, 1996, were approximately  $188,000.
The loss from the operation of the  discontinued  operations  for the year ended
June 30, 1996, related to Hood was $595 (net of tax benefit of $120).

20.   SUBSEQUENT EVENT

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

The  investigation  has determined that  unauthorized  speculative  positions in
commodity  instruments  were taken within the department in violation of express
policies, which resulted in losses to Agway.  Through  improper  accounting  for
premiums on options sold, losses were concealed within the department, resulting
in  misreported  earnings by Agway for the fourth quarter of the year ended June
30, 1998.  Agway has amended its previously filed annual report on Form 10-K for
the year ended June 30,  1998,  with the SEC.  For the year ended June 30, 1998,
the net earnings of $41,754, as previously  reported,  have been reduced by $609
to $41,145 to reflect this restatement.

The total  restated  pre-tax loss from  department  activities is $1,100 for the
year ended June 30, 1998. This compares to a pre-tax loss of $300 in 1997.

Agway has restructured its grain marketing  activities,  substantially  reducing
their  scope,  and  requiring  that its net  position at any point in time to be
effectively hedged.

The net  effect of these  irregularities  on 1999 is  discussed  in the  amended
periodic reports on Form 10-Q for that year.


                                       53
<PAGE>



                                     PART IV
<TABLE>
<CAPTION>

Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K
                                                                                                             Page
     (a) Index to Document List                                                                            Location
                                                                                                           --------
         (1)  Financial Statements
<S>                                                                                                              <C>
              Among  the  responses  to this  Item  14(a)(1)  are the  following
              financial statements, which are included in Item 8 on page 20:

              (i)   Report of Independent Accountants..........................................................  23

              (ii)  Consolidated Balance Sheets, June 30, 1998 and 1997........................................  24

              (iii) Consolidated  Statements of Operations,  fiscal years ended
                    June 30, 1998, 1997 and 1996...............................................................  25

              (iv)  Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended
                    June 30, 1998, 1997 and 1996...............................................................  26

              (v)   Consolidated Statements of Cash Flow, fiscal years ended June 30, 1998, 1997 and 1996......  27

              (vi)  Notes to Consolidated Financial Statements.................................................  28

         (2)  Financial Statement Schedules

              (i)   Report of Independent Accountants..........................................................  55

              (ii)  The following schedules are presented:

                    Schedule I       -     Condensed Financial Information of Registrant, each of the
                                           three years in the period ended June 30, 1998.......................  56

                    Schedule II      -     Valuation and Qualifying Accounts, fiscal years ended
                                           June 30, 1998, 1997 and 1996........................................  60

</TABLE>


Schedules  other  than  these  listed  above  have been  omitted as they are not
required,   inapplicable,  or  the  required  information  is  included  in  the
consolidated financial statements or notes thereto.



                                       54

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors of Agway Inc.:

Our  report  on  the  consolidated   financial  statements  of  Agway  Inc.  and
Consolidated  Subsidiaries has been included in this Form 10-K of Agway Inc. and
Consolidated  Subsidiaries.  In  connection  with our  audits of such  financial
statements,  we have also  audited the  related  financial  statement  schedules
listed in Item 14(a)(2)(ii) of Part IV of this Annual Report on Form 10-K.

In our  opinion,  the  financial  statement  schedules  referred to above,  when
considered  in  relation  to the basic  financial  statements  taken as a whole,
present  fairly,  in all  material  respects,  the  information  required  to be
included therein.


The previously issued  1998  Schedule I - Condensed  Financial  Information  of
Registrant  has  been  restated  to  correct  for  the  accounting effect of the
irregularities  as  described  in  Note  20  of  the Agway Inc. and Consolidated
Subsidiaries Notes to the Consolidated Financial Statements.





/s/ PRICEWATERHOUSE LLP
PricewaterhouseCoopers LLP


Syracuse, New York
August 21, 1998, except to
Note 1, as to which the date
is September 2, 1999




                                       55

<PAGE>



Item 14(a)(2).  Financial Statement Schedules

                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
           ----------------------------------------------------------
                          AGWAY INC. (PARENT CO. ONLY)
                            CONDENSED BALANCE SHEETS
                             June 30, 1998 and 1997
                             (Thousands of Dollars)

                                     ASSETS
<TABLE>
<CAPTION>

                                                                                    Restated
                                                                                      1998                1997
                                                                                  ------------       -------------
<S>                                                                               <C>                <C>
Current assets:
     Cash.......................................................................  $      4,716       $           0
     Trade accounts receivable (including notes receivable of $38,630 and
         $34,251, respectively), less allowance for doubtful
         accounts of $4,432 and $4,156, respectively............................        87,371              92,262
     Inventories................................................................        47,260              50,072
     Other current assets.......................................................        57,541              53,231
                                                                                  ------------       -------------
         Total current assets...................................................       196,888             195,565

Investments in subsidiaries.....................................................       191,063             203,812

Properties and equipment, net...................................................        51,604              48,794

Net pension asset...............................................................       176,792             100,052

Other assets  ..................................................................         2,605               1,990
                                                                                  ------------      --------------
         Total assets...........................................................  $    618,952      $      550,213
                                                                                  ============      ==============


                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable...........................................................  $     25,559      $       25,006
     Operating advances payable to subsidiaries, net............................       197,052             185,464
     Other current liabilities..................................................       121,229             119,970
                                                                                  ------------      --------------
         Total current liabilities..............................................       343,840             330,440

Other liabilities...............................................................        68,883              42,022

Shareholders' equity............................................................       206,229             177,751
                                                                                  ------------      --------------
         Total liabilities and shareholders' equity.............................  $    618,952      $      550,213
                                                                                  ============      ==============

</TABLE>



                                       56

<PAGE>



Item 14(a)(2).  Financial Statement Schedules

                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
           ----------------------------------------------------------
                          AGWAY INC. (PARENT CO. ONLY)
             CONDENSED STATEMENTS of OPERATIONS and RETAINED MARGIN
                 fiscal years ended JUNE 30, 1998, 1997 and 1996
                             (Thousands of Dollars)


<TABLE>
<CAPTION>

                                                                 Restated
                                                                   1998               1997                1996
                                                               ------------       -----------        ------------
<S>                                                            <C>                <C>                <C>
Net sales and revenues from:
     Product sales..........................................   $    498,363       $   506,886        $    594,188
     Other services.........................................         15,302            12,808               8,475
                                                               ------------       -----------        ------------
         Total net sales and revenues.......................        513,665           519,694             602,663
Cost and expenses from:
     Products and plant operations..........................        471,563           487,534             552,304
     Selling, general and administrative activities.........         48,938            49,611              49,512
     Restructuring credit...................................              0                 0              (1,301)
                                                               ------------       -----------        ------------
         Total operating costs and expenses.................        520,501           537,145             600,515
                                                               ------------       -----------        ------------
Operating income (loss).....................................         (6,836)          (17,451)              2,148
Interest expense, net.......................................           (723)             (876)               (786)
Other income, net...........................................         26,441            21,862              22,744
                                                               ------------       -----------        ------------
Margin from continuing operations before income taxes
     and equity in earnings of subsidiaries ................         18,882             3,535              24,106
Income tax benefit (expense)................................          6,891             7,904              (2,185)
                                                               ------------       -----------        ------------
Income (loss) before equity in earnings of subsidiaries.....         25,773            11,439              21,921
Equity in (loss) earnings of unconsolidated subsidiaries....        (13,584)             (769)            (10,774)
                                                               ------------       -----------        ------------
Margin from continuing operations...........................         12,189            10,670              11,147
Discontinued operations:
     Loss from operations, including tax benefit of $120....              0                 0                (595)
     Gain on disposal of Hood, net of tax expense of $1,711               0                 0               2,110
                                                               ------------       -----------        ------------
         Margin from discontinued operations................              0                 0               1,515

Margin before cumulative effect of an accounting change ....         12,189            10,670              12,662
Cumulative effect of accounting change, net of tax
     expense of $16,500.....................................         28,956                 0                   0
                                                               ------------       -----------        ------------
Net margin..................................................         41,145            10,670              12,662
Retained margin - beginning of year.........................        117,571           110,714             102,934
Dividends...................................................         (3,634)           (4,237)             (4,382)
Equity in net unrealized losses of marketable securities....            705               424                (500)
                                                               ------------       -----------        ------------
Retained margin - end of year...............................   $    155,787       $   117,571        $    110,714
                                                               ============       ===========        ============

</TABLE>


                                       57

<PAGE>



Item 14(a)(2).  Financial Statement Schedules

                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
           ----------------------------------------------------------
                          AGWAY INC. (PARENT CO. ONLY)
                        CONDENSED STATEMENTS OF CASH FLOW
                 fiscal years ended JUNE 30, 1998, 1997 and 1996
                             (Thousands of Dollars)


<TABLE>
<CAPTION>
                                                                   1998               1997                1996
                                                              -------------       ------------       -------------
<S>                                                           <C>                 <C>                <C>
Net cash flows from operating activities....................  $      29,260       $      9,633       $      13,162
Cash flows from investing activities:
     Purchases of property, plant and equipment.............        (11,785)               140              (4,588)
     Other..................................................          1,262             (3,765)              3,935
                                                              -------------       ------------       -------------
Net cash flows used in investing activities.................        (10,523)            (3,625)               (653)
Cash flows from financing activities:
     Payments on capitalized leases.........................           (441)              (830)               (529)
     Cash dividends paid....................................         (3,943)            (4,297)             (4,582)
     Other..................................................         (9,637)            (1,910)             (6,369)
                                                              -------------       ------------       -------------
Net cash flows used in financing activities.................        (14,021)            (7,037)            (11,480)
Net increase in cash and equivalents........................          4,716             (1,029)              1,029
Cash and equivalents at beginning of year...................              0              1,029                   0
                                                              -------------       ------------       -------------
Cash and equivalents at end of year.........................  $       4,716       $          0       $       1,029
                                                              =============       ============       =============
</TABLE>


                                       58

<PAGE>



Item 14(a)(2).  Financial Statement Schedules

                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
           ----------------------------------------------------------
                          AGWAY INC. (PARENT CO. ONLY)
                    NOTES TO CONDENSED FINANCIAL INFORMATION
                             (Thousands of Dollars)



1. Basis of Presentation


In the preceding  condensed  financial  statements,  which  represent the parent
company only, the Company's  investment in  subsidiaries  is stated at cost plus
equity in undistributed  earnings of subsidiaries since the date of acquisition.
These  financial  statements  should be read in  conjunction  with the Company's
consolidated financial statements.


The 1998 results have been restated to correct for the accounting effect of the
irregularities  as  described  in  Note  20  of  the  Notes  to  the  Agway Inc.
Consolidated Financial Statements.



2. Reclassifications

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


3. Inventories

Inventories at June 30 consist of the following:
<TABLE>
<CAPTION>
                                                                                      1998                1997
                                                                                  ------------       -------------
<S>                                                                               <C>                <C>
Finished goods..................................................................  $     47,225       $      50,011
Supplies........................................................................            35                  61
                                                                                  ------------       -------------
                                                                                  $     47,260       $      50,072
                                                                                  ============       =============
</TABLE>

4. Debt


Debt capital for Agway is supplied by its wholly owned  subsidiary,  AFC,  which
secures  financing  through  bank  borrowings  and  issuance of  corporate  debt
instruments.   The  payment  of   principal   and   interest  on  this  debt  is
unconditionally  guaranteed by Agway. This guarantee is full and  unconditional,
and joint and several. The total debt of AFC guaranteed by Agway is disclosed in
Note 11.


5. Related Party Transactions

Transactions between Agway Inc. and its unconsolidated subsidiaries are as
 follows:
<TABLE>
<CAPTION>
                                                                            Fiscal Years Ended June 30
                                                              ----------------------------------------------------
                                                                   1998               1997                1996
                                                              -------------       ------------       -------------
<S>                                                           <C>                 <C>                <C>
Net sales and revenues......................................  $      50,051       $     28,800       $      69,436
Product and plant operation expenses........................         17,107              9,072              10,933
Recovery of selling, general and administrative expenses....         19,051             19,207              24,821
Interest expense, net.......................................          8,649              6,993               4,817
</TABLE>




                                       59

<PAGE>



Item 14(a)(2).  Financial Statement Schedules

                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                             (Thousands of Dollars)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------


                   Col. A                              Col. B              Col. C               Col. D       Col. E
----------------------------------------------------------------------------------------------------------------------


                                                                           Additions
                                                                   ------------------------
                                                       Balance     Charged to    Charged to                  Balance
                                                    at Beginning    Costs and      Other                     at End
                 Description                          of Period     Expenses      Accounts     Deductions   of Period
----------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------
                                         for the year ended June 30, 1998
----------------------------------------------------------------------------------------------------------------------
Reserves deducted in the balance sheet from
assets to which they apply:
     <S>                                             <C>          <C>           <C>          <C>            <C>
     Allowance for doubtful notes and accounts
         receivable (current)....................    $   7,864    $   1,820     $      0     $1,758(a)      $   7,926
     Allowance for doubtful leases receivable....    $  24,014    $   9,570     $      0     $6,513(a)      $  27,071
     Inventory reserve...........................    $   2,362    $     100     $      0     $1,871(b)      $     591
     Surplus property reserve....................    $     856    $       0     $      0     $   67(c)      $     789
     Income tax valuation allowance..............    $       0    $       0     $      0     $    0         $       0
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                         for the year ended June 30, 1997
---------------------------------------------------------------------------------------------------------------------
Reserves deducted in the balance sheet from
assets to which they apply:
     <S>                                             <C>          <C>           <C>        <C>              <C>
     Allowance for doubtful notes and accounts
         receivable (current)....................    $  10,062    $     623     $      0   $ 2,821(a)       $   7,864
     Allowance for doubtful leases receivable....    $  19,776    $   9,718     $      0   $ 5,480(a)       $  24,014
     Inventory reserve...........................    $   2,547    $     385     $      0   $   570(b)       $   2,362
     Surplus property reserve....................    $   1,428    $      66     $      0   $   638(c)       $     856
     Income tax valuation allowance..............    $     881    $       0     $      0   $  (881)         $       0
<CAPTION>
---------------------------------------------------------------------------------------------------------------------
                                         for the year ended June 30, 1996
---------------------------------------------------------------------------------------------------------------------


Reserves deducted in the balance sheet from
assets to which they apply:
     <S>                                             <C>          <C>           <C>        <C>              <C>
     Allowance for doubtful notes and accounts
         receivable (current)....................    $   9,716    $   3,993     $      0   $ 3,647(a)       $  10,062
     Allowance for doubtful leases receivable....    $  15,331    $   7,000     $      0   $ 2,555(a)       $  19,776
     Inventory reserve...........................    $   2,914    $       0     $      0   $   367(b)       $   2,547
      Surplus property reserve...................    $     660    $   1,024     $      0   $   256(c)       $   1,428
     Income tax valuation allowance..............    $     847    $      34     $      0   $     0          $     881
</TABLE>



(a) Accounts charged off, net of recoveries.
(b) Difference between cost and market of applicable inventories.
(c) Locations sold.


                                       60

<PAGE>



Item 14(b).       Reports on Form 8-K
                  No  reports  on Form 8-K for the three  months  ended June 30,
                  1998, have been filed.

Item 14(c)(1).    Exhibits  Required  by  Securities  and  Exchange  Commission
                  Regulation S-K

                  (i) The following required exhibits are hereby incorporated by
                      reference to previously filed  Registration  Statements on
                      Forms S-1,  S-2,  S-3, or S-7 or on Form 10-Q filed on the
                      dates as specified:

                      Articles of incorporation and by-laws

                      3(a)    -   Certificate creating series of preferred stock
                                  of  Agway  Inc. dated  July 5, 1977, filed  by
                                  reference  to  Exhibit 3(a)(5) of Registration
                                  Statement on Form S-1, File No. 2-59896, dated
                                  September 16, 1977.

                      3(b)    -   Certificate creating series of Honorary Member
                                  Preferred   Stock of  Agway  Inc.  dated  June
                                  15, 1981,  filed by  reference to Exhibit 1(c)
                                  of the  Registration  Statement  on Form  S-1,
                                  File  No. 2-73928, dated September 3, 1981.

                      Instrument  defining  the  rights  of  security  holders,
                      including indentures

                      4(a)    -   The  Indenture  dated  as of  October 1,  1974
                                  between Agway Inc. and First Trust and Deposit
                                  Company  of  Syracuse,  New  York,  Trustee,
                                  including  forms  of  Subordinated  Debentures
                                  (Minimum  8%  per annum) due July 1, 1999, and
                                  Subordinated   Debentures  (Minimum  8.5%  per
                                  annum) due July 1, 1999, filed by reference to
                                  Exhibit 4 of the Registration Statement (Form
                                  S-7),File No. 2-52179 dated November 21, 1974.

                      4(b)    -   The  Indenture  dated  as of September 1, 1976
                                  between Agway Inc. and First Trust and Deposit
                                  Company  of  Syracuse,  New  York,  Trustee,
                                  including  forms  of  Subordinated  Debentures
                                  (Minimum  7% per  annum) due July 1, 2001, and
                                  Subordinated  Debentures (Minimum  7.5%  per
                                  annum) due July 1, 2001, filed by reference to
                                  Exhibit 4 of the  Registration Statement (Form
                                  S-1),File No. 2-57227,dated September 21,1976.

                      4(c)    -   The  Indenture  dated  as of September 1, 1978
                                  between Agway Inc. and First Trust and Deposit
                                  Company  of  Syracuse,  New  York,  Trustee,
                                  including  forms  of Subordinated   Debentures
                                  (Minimum 7.5% per annum) due July 1, 2003, and
                                  Subordinated Debentures (Minimum 8% per annum)
                                  due July 1,2003, filed by reference to Exhibit
                                  4  of  the  Registration Statement (Form S-1),
                                  File No. 2-62549 dated September 8, 1978.

                      4(d)    -   The  Indenture  dated as of September 1, 1985,
                                  between Agway and Key Bank of Central New York
                                  of Syracuse, New York, Trustee,including forms
                                  of  Subordinated  Money  Market  Certificates
                                  (Minimum 7.5% per annum) due October 31, 2005,
                                  and  Subordinated  Member  Money  Market
                                  Certificates  (Minimum  8%  per  annum)  due
                                  October 31,2005, filed by reference to Exhibit
                                  4 of  the  Registration  Statement (Form S-2),
                                  File No. 2-99905, dated August 27, 1985.

                      4(e)    -   The  Indenture  dated as of September 1, 1986,
                                  between AFC and Key Bank of Central New York
                                  of Syracuse, New York,Trustee, including forms
                                  of  Subordinated  Member  Money  Market
                                  Certificates(Minimum 6% per annum) due October
                                  31, 2006,  and  Subordinated  Money  Market
                                  Certificates  (Minimum  5.5%  per  annum)  due
                                  October 31,2006, filed by reference to Exhibit
                                  4 of  the  Registration  Statement (Form S-3),
                                  File No.33-8676, dated September 11, 1986.

                                       61

<PAGE>

Item 14(c)(1).    Exhibits Required by Securities and Exchange Commission
                  Regulation S-K

                      4(f)    -   The Supplemental Indenture dated as of October
                                  1, 1986, among AFC, Agway Inc. and Key Bank of
                                  Central New York of Syracuse,New York,Trustee,
                                  including   forms  of  subordinated  debt
                                  securities  filed by reference to Exhibit 4 of
                                  the Registration Statement(Form S-3), File No.
                                  33-8676, dated September 11, 1986.

                      4(g)    -   The  Indenture  dated  as  of August 24, 1987,
                                  between AFC and Key Bank of Central New  York
                                  of Syracuse, New York,Trustee, including forms
                                  of  Subordinated  Member  Money   Market
                                  Certificates (Minimum 7% per annum)due October
                                  31, 1998, and Subordinated Member Money Market
                                  Certificates  (Minimum  6.5%  per  annum)  due
                                  October 31, 2008,and Subordinated Money Market
                                  Certificates  (Minimum  6.5%  per  annum)  due
                                  October 31,1998, and Subordinated Money Market
                                  Certificates (Minimum 6% per annum)due October
                                  31, 2008,  filed  by reference to Exhibit 4 of
                                  the Registration Statement (Form S-3),File No.
                                  33-16734, dated August 31, 1987.

                      4(h)    -   The  Indenture  dated  as  of August 23, 1988,
                                  between  AFC  and Key Bank of Central New York
                                  of Syracuse, New York, Trustee,including forms
                                  of   Subordinated   Member   Money    Market
                                  Certificates  (Minimum  9.5%  per  annum)  due
                                  October 31,2000, and Subordinated Member Money
                                  Market Certificates (Minimum 9% per annum) due
                                  October 31, 2008,and Subordinated Money Market
                                  Certificates (Minimum 9% per annum)due October
                                  31,  2000,  and  Subordinated  Money  Market
                                  Certificates  (Minimum  8.5%  per  annum)  due
                                  October 31,2008, filed by reference to Exhibit
                                  4 of  the  Registration  Statement (Form S-3),
                                  File No. 33-24093, dated August 31, 1988.

                      4(i)    -   The Supplemental Indenture dated as of October
                                  14, 1988, among AFC, Agway Inc. and   Key Bank
                                  of Central  New  York,  National  Association,
                                  Trustee, amending the Indentures  dated  as of
                                  August 23, 1988, and August 24, 1988, filed on
                                  October 18, 1988.

                      4(j)    -   The  Indenture  dated as  of  August 23, 1989,
                                  among AFC, Agway Inc. and Key Bank of  Central
                                  New  York  of  Syracuse,  New  York,  Trustee,
                                  including forms of Subordinated   Money Market
                                  Certificates  and  Subordinated  Member  Money
                                  Market  Certificates,  filed  by  reference to
                                  Exhibit  4 of the Registration Statement (Form
                                  S-3), File No. 33-30808,dated August 30, 1989.

                      4(k)    -   Agway    Board    of   Directors   resolutions
                                  authorizing  the  issuance  of Honorary Member
                                  Preferred  Stock,  Series  HM  and  Membership
                                  Common  Stock  and  authorizing  AFC  to issue
                                  Money  Market  Certificates  under  Indentures
                                  dated as of August 23, 1989, filed herein.

                      4(l)    -   AFC   Board   of   Directors   resolutions
                                  authorizing  the  issuance  of  Money  Market
                                  Certificates   under  Indentures  dated  as of
                                  August  23,  1989,  filed herein.

                      4(m)    -   The Supplemental  Indenture dated as of August
                                  24, 1992, among AFC, Agway Inc. and  Key Bank
                                  of New York, Trustee,  amending  the Indenture
                                  dated as of August 23, 1989,filed by reference
                                  to  Exhibit 4  of  the  Registration Statement
                                  (Form S-3), File No. 33-52418, dated September
                                  25, 1992.

                      Letter on change in accounting principles

                      18      -   Letter  on  change  in  accounting principles,
                                  filed by reference to Form 10-Q filed for the
                                  first quarter ending September 30, 1997.


                                       62

<PAGE>



Item 14(c)(1).    Exhibits Required by Securities and Exchange Commission
                  Regulation S-K

                  (ii)The following exhibits are filed as a separate section of
                      this report:

                       3     - Agway, Inc. By-laws as amended to April 28, 1998

                      10     - Material contracts
                               (a) Directors - Deferred Compensation Agreement
                               (b) Board  Officers  -  Deferred  Compensation
                                   Agreement

                      12     - Statement re computation of ratios

                      21     - Subsidiaries of the registrant

                      23     - Consents of experts and counsel

                      27     - Financial data schedule*

                      99     - Additional exhibits
                               The Annual Report on Form 11-K for the year ended
                               June 30, 1998 of the Agway Inc. Employees' Thrift
                               Investment Plan.





* Included with electronic filing only.

                                       63

<PAGE>



SIGNATURES

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


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







Date  September 10, 1999                     /s/ DONALD P. CARDARELLI
                                         --------------------------------------
                                               Donald P. Cardarelli
                                                 President and
                                             Chief Executive Officer
                                           (Principal Executive Officer)






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


                                       64