EXHIBIT 13
<PAGE>

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


(Mark One)
 X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the quarterly period ended September 30, 1996
                               ------------------
                                       OR

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

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


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


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


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




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



           Class                             Outstanding at November 8, 1996
--------------------------------             -------------------------------
Membership Common Stock, $25 par                      106,853 shares
value per share



                                        1

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

                                      INDEX
<TABLE>
<CAPTION>


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

           Item 1.  Financial Statements (Unaudited)

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

           Condensed Consolidated Statements of Operations and Retained Margin for the three months
           ended September 30, 1996 and September 30, 1995......................................................  4

           Condensed Consolidated Cash Flow Statements for the three months ended September 30, 1996
           and September 30, 1995...............................................................................  5

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

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


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

           Item 1.  Legal Proceedings..........................................................................  15

           Item 6.  Exhibits and Reports on Form 8-K...........................................................  15


           SIGNATURES..........................................................................................  16

</TABLE>













                                        2

<PAGE>



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

                                                                   September 30,   June 30,
                                                                      1996           1996
                                                                   ------------- ----------
                                                                    (Unaudited) 
<S>                                                                 <C>          <C> 
ASSETS
------                                                              
Current Assets:
     Trade accounts receivable (including notes receivable of
       $36,151 and $35,182, respectively), less allowance for
       doubtful accounts of $10,054 and $10,062, respectively ...   $  173,127   $  207,304
     Leases receivable, less unearned income of $49,235 and
       $48,403, respectively ....................................      105,637      105,374
     Advances and other receivables .............................       34,017       35,914
     Inventories:
       Raw materials ............................................       11,777       16,161
       Finished goods ...........................................      136,075      128,770
       Goods in transit and supplies ............................        9,186       12,587
                                                                    ----------   ----------
         Total inventories ......................................      157,038      157,518
     Prepaid expenses ...........................................       54,625       58,380
                                                                    ----------   ----------
         Total current assets ...................................      524,444      564,490

Marketable securities available for sale ........................       35,238       34,115
Other security investments ......................................       43,959       42,406
Properties and equipment, net ...................................      227,562      237,015
Long-term leases receivable, less unearned income of
  $75,515 and $75,828, respectively .............................      279,307      268,815
Net pension asset ...............................................       88,430       85,181
Other assets ....................................................       11,379       12,249
                                                                    ----------   ----------
         Total assets ...........................................   $1,210,319   $1,244,271
                                                                    ==========   ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
------------------------------------
Current Liabilities:
     Notes payable ..............................................   $   79,100   $   62,200
     Current installments of long-term debt and subordinated debt      111,542      108,896
     Accounts payable ...........................................      100,432      117,457
     Other current liabilities ..................................       96,645      120,099
                                                                    ----------   ----------
         Total current liabilities ..............................      387,719      408,652

Long-term debt ..................................................      184,325      197,413
Subordinated debt ...............................................      413,475      400,284
Other liabilities ...............................................       65,744       66,664
                                                                    ----------   ----------
     Total liabilities ..........................................    1,051,263    1,073,013
Shareholders' equity:
  Preferred stock, net ..........................................       57,906       59,319
  Common stock, net .............................................        2,674        2,689
  Retained margin ...............................................       98,476      109,250
                                                                    ----------   ----------
     Total shareholders' equity .................................      159,056      171,258
                                                                    ----------   ----------
Commitments and contingencies
         Total liabilities and shareholders' equity .............   $1,210,319   $1,244,271
                                                                    ==========   ==========
</TABLE>







     See accompanying notes to condensed consolidated financial statements.

                                        3

<PAGE>



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

                                                                       Three Months Ended
                                                                          September 30,
                                                                     ----------------------
                                                                        1996         1995
                                                                     ---------    ---------
<S>                                                                  <C>          <C> 
Net sales and revenues from:
     Product sales ...............................................   $ 333,179    $ 306,522
     Leasing operations ..........................................      12,962       11,214
     Insurance operations ........................................       6,043        6,887
                                                                     ---------    ---------
         Total net sales and revenues ............................     352,184      324,623

Cost and expenses from:
     Products and plant operations ...............................     318,780      290,124
     Leasing operations ..........................................       5,956        5,257
     Insurance operations ........................................       3,952        4,791
     Selling, general and administrative activities ..............      32,929       33,480
                                                                     ---------    ---------
         Total costs and expenses ................................     361,617      333,652

Operating loss ...................................................      (9,433)      (9,029)
Interest expense, net ............................................      (6,559)      (6,920)
Other income, net ................................................         973        1,961
                                                                     ---------    ---------
Loss from continuing operations before income taxes ..............     (15,019)     (13,988)
Income tax benefit ...............................................       4,165        3,527
                                                                     ---------    ---------
Loss from continuing operations ..................................     (10,854)     (10,461)

Discontinued operations:

     Loss on disposal of Hood, net of tax expense of $39 .........                     (268)
                                                                     ---------    ---------
Net loss .........................................................   $ (10,854)   $ (10,729)

Retained Margin:
     Balance at beginning of period ..............................     109,250      102,532
     Adjustment to unrealized gains (losses) on available-for-sale
         securities, net of tax ..................................          80          (13)
                                                                     ---------    ---------
Balance at end of period .........................................   $  98,476    $  91,790
                                                                     =========    =========
</TABLE>















     See accompanying notes to condensed consolidated financial statements.
                                        4

<PAGE>



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

<TABLE>
<CAPTION>

                                                                 Three Months Ended
                                                                    September 30,
                                                               ---------------------
                                                                  1996        1995
                                                               ---------   ---------

<S>                                                            <C>         <C>     
Net cash flows (used in) provided by operating activities ..   $ (7,584)   $  8,498

Cash flows (used in) provided by investing activities:
     Purchases of property, plant and equipment ............     (1,898)     (3,444)
     Proceeds from disposal of businesses ..................      5,234
     Proceeds from disposal of property, plant and equipment      3,249       1,314
     Leases originated .....................................    (39,714)    (33,889)
     Leases repaid .........................................     27,298      20,732
     Proceeds from sale of marketable securities ...........      2,410       3,947
     Purchases of marketable securities ....................     (3,453)     (2,283)
     Net purchase of investments in related cooperatives ...     (1,553)        (46)
     Net changes in net assets of discontinued operations ..                   (390)
                                                               --------    --------

Net cash flows used in investing activities ................     (8,427)    (14,059)


Cash flows (used in) provided by financing activities:
     Net change in short-term borrowings ...................     16,900      14,200
     Proceeds from long-term debt ..........................      7,541         572
     Repayment of long-term debt ...........................    (17,840)    (10,260)
     Proceeds from sale of subordinated debt ...............     19,612      19,496
     Maturity and redemption of subordinated debt ..........     (6,343)    (13,273)
     Redemption of stock ...................................     (1,432)     (2,763)
     Cash dividends paid ...................................     (2,210)     (2,410)
     Other .................................................       (217)         (1)
                                                               --------    --------

Net cash flows provided by financing activities ............     16,011       5,561
                                                               --------    --------


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


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












     See accompanying notes to condensed consolidated financial statements.
                                        5

<PAGE>



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

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


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------
     Basis of Presentation
     The accompanying  unaudited condensed  consolidated financial statements of
     Agway Inc. (the  "Company") have been prepared in accordance with generally
     accepted accounting  principles for interim financial  information and with
     the   instructions   to  Form  10-Q  and  Article  10  of  Regulation  S-X.
     Accordingly,  they do not  include  all of the  information  and  footnotes
     required by generally accepted accounting principles for complete financial
     statements.  In the opinion of management,  all adjustments  (consisting of
     normal recurring  accruals)  considered  necessary for a fair  presentation
     have been  included.  Operating  results for the  three-month  period ended
     September 30, 1996 are not  necessarily  indicative of the results that may
     be expected for the year ending June 30, 1997 due to the seasonal nature of
     certain major segments of the Company's business.  For further information,
     refer to the consolidated  financial  statements and notes thereto included
     in the annual report on Form 10-K for the year ended June 30, 1996.

     Impairment of Long-Lived Assets
     In March 1995,  SFAS No. 121,  "Accounting for the Impairment of Long-Lived
     Assets and for Long-Lived Assets to Be Disposed Of," was issued.  Statement
     No.  121  requires  impairment  losses  to  be  measured  and  recorded  on
     long-lived  assets used in operations  when  indicators  of impairment  are
     present and the undiscounted  cash flows estimated to be generated by those
     assets are less than the assets'  carrying  amount.  Statement No. 121 also
     addresses  the  accounting  for  long-lived  assets that are expected to be
     disposed of. The Company adopted  Statement No. 121 as of July 1, 1996, the
     effect of which was approximately a $1,700 charge against pre-tax earnings.

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


                                        6

<PAGE>



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

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


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

                                                                             Three Months Ended
                                                                                September 30,
                                                                       ---------------------------
                                                                            1996           1995
                                                                       ------------   ------------
<S>                                                                    <C>            <C>        
Net sales and revenues .............................................   $   239,482    $   221,429
Operating loss .....................................................        (1,267)        (1,042)
Loss from continuing operations ....................................        (2,816)        (7,433)
Net loss ...........................................................        (2,816)        (7,701)


                                                                       September 30,     June 30,
                                                                            1996           1996
                                                                       ------------   ------------
Current assets .....................................................   $   518,201    $   530,547
Properties and equipment, net ......................................       162,737        166,504
Noncurrent assets ..................................................       364,245        353,377
                                                                       -----------    -----------
    Total assets ...................................................   $ 1,045,183    $ 1,050,428
                                                                       ===========    ===========

Current liabilities ................................................   $   226,840    $   227,781
Long-term debt .....................................................       178,211        191,189
Subordinated debt ..................................................       413,475        400,284
Noncurrent liabilities .............................................        15,226         17,006
Shareholder's equity ...............................................       211,431        214,168
                                                                       -----------    -----------
Total liabilities and shareholder's equity .........................   $ 1,045,183    $ 1,050,428
                                                                       ===========    ===========
</TABLE>


                                        7

<PAGE>



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

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


3.   BORROWING ARRANGEMENTS
     ----------------------
     Agway and AFC
     As of September 30, 1996, the Company had certain facilities available with
     various banking  institutions  whereby lenders have agreed to provide funds
     up to $254,000 to separately financed units of the Company as follows:  AFC
     - $50,000 and Telmark - $204,000. In addition,  AFC may issue up to $50,000
     of commercial  paper under the terms of a separate  agreement,  backed by a
     letter of credit.

     The  $50,000  line of  credit  available  to AFC and its  ability  to issue
     $50,000 of commercial paper require  collateralization using certain of the
     Company's accounts receivable and non-petroleum inventories ("collateral").
     Amounts which can be drawn under the AFC short-term  agreements are limited
     to a specific  calculation  based upon the collateral  available.  Adequate
     collateral  has existed  throughout the fiscal year to permit AFC to borrow
     amounts  to meet  the  ongoing  needs of the  Company  and is  expected  to
     continue to do so. In addition,  the agreements  include certain covenants,
     the most  restrictive  of which  requires the Company to maintain  specific
     quarterly  levels of  interest  coverage  and  monthly  levels of  tangible
     retained  margins.  The amounts  outstanding as of September 30, 1996 under
     AFC's $50,000 line of credit and $50,000  commercial paper were $10,900 and
     $50,000,  respectively. In November 1996, the Company renegotiated its line
     of credit facility to extend the  availability  through January 1, 1998 and
     to provide seasonal increases in the line of credit which will be available
     so that total  availability  under  AFC's line of credit  will  increase to
     $60,000 at June 1, 1997 and  $75,000 at  October  1,  1997.  The  Company's
     commercial  paper  program,  which expires  December 31, 1996, is currently
     being  renegotiated  so that it  parallels  the changes made to the line of
     credit   facility.   The  Company   expects  that  these  changes  will  be
     successfully  renegotiated.  The Company has ongoing  discussions  with its
     lenders and expects to continue to have appropriate and adequate  financing
     to meet its ongoing needs.

     Annually,  Agway and AFC offer  subordinated  debentures  and  subordinated
     money market  certificates to the public. Of Agway's and AFC's subordinated
     debt at September  30, 1996,  $382,213 is redeemable in whole or in part at
     the principal amount plus accrued interest, prior to maturity dates, at the
     option  of  the  Company.   The  foregoing  debt  bears  interest   payable
     semi-annually  on  January  l and July 1 of each  year.  The  money  market
     certificates'  interest rate is at the greater of the quoted rate or a rate
     based upon the discount  rate for U. S.  Government  Treasury  Bills,  with
     maturities of 26 weeks.  In October  1996,  $14,700 of  subordinated  money
     market certificates issued by AFC matured.  The Company has refinanced this
     debt  through  the  issuance  of  subordinated  debt  and  short-term  bank
     borrowings.

     Telmark
     As of  September  30,  1996,  Telmark had two  separate  credit  facilities
     available  from banks which allow  Telmark to borrow up to an  aggregate of
     $204,000.  An  uncommitted  short-term  line of  credit  agreement  permits
     Telmark to borrow up to $4,000 on an  unsecured  basis with  interest  paid
     upon maturity.  The line bears interest at money market  variable  rates. A
     committed  $200,000 partially  collateralized  revolving term loan facility
     permits Telmark to draw short-term  funds bearing  interest at money market
     rates or draw long-term debt at rates  appropriate for the term of the note
     drawn.  The total amounts  outstanding as of September 30, 1996,  under the
     short-term  line of credit and the revolving term loan facility were $4,000
     and $156,200, respectively.

     Telmark  borrows  under its  short-term  line of credit  agreement  and its
     revolving  term  agreement  from  time  to time  to  fund  its  operations.
     Short-term  debt  serves as interim  financing  between  the  issuances  of
     long-term  debt.  Telmark renews its lines of credit  annually.  The $4,000
     line of credit has been renewed  through  December  31, 1996.  The $200,000
     revolving  term agreement  loan facility is available  through  February 1,
     1998.

     At September 30, 1996,  Telmark also had balances  outstanding on unsecured
     senior  note  private  placements  totaling  $121,333.  Interest is payable
     semiannually  on each senior note.  Principal  payments are both semiannual
     and annual. The note agreements are similar to one another and each contain
     specific financial covenants.

                                        8

<PAGE>



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

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


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

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

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

                             Agway & AFC            Telmark                Total
                        -------------------   -------------------   -------------------
                           9/96       6/96      9/96       6/96       9/96       6/96
                        --------   --------   --------   --------   --------   --------
<S>                     <C>        <C>        <C>        <C>        <C>        <C>     
Long-term debt ......   $ 17,673   $ 18,666   $263,473   $273,000   $281,146   $291,666
Currently payable ...      6,033      6,065     90,788     88,188     96,821     94,253
                        --------   --------   --------   --------   --------   --------
Net long-term debt ..   $ 11,640   $ 12,601   $172,685   $184,812   $184,325   $197,413
                        ========   ========   ========   ========   ========   ========

Subordinated debt ...   $401,666   $390,669   $ 26,530   $ 24,258   $428,196   $414,927
Currently payable ...     14,721     14,643                           14,721     14,643
                        --------   --------   --------   --------   --------   --------
Net subordinated debt   $386,945   $376,026   $ 26,530   $ 24,258   $413,475   $400,284
                        ========   ========   ========   ========   ========   ========

</TABLE>



                                        9

<PAGE>

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

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

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

     The Company  continually  monitors its operations with respect to potential
     environmental  issues,  including changes in legally mandated standards and
     remediation   technologies.   Agway's  recorded  liability  reflects  those
     specific  issues where  remediation  activities are currently  deemed to be
     probable and where the cost of remediation  is estimable.  Estimates of the
     extent of the Company's degree of  responsibility  relating to a particular
     site and the method and ultimate  cost of  remediation  require a number of
     assumptions  for  which  the  ultimate  outcome  may  differ  from  current
     estimates.  At September 30, 1996, the Company had been designated as a PRP
     under CERCLA or as a third party to the original PRPs in several  Superfund
     sites.  The liability  under CERCLA is joint and several,  meaning that the
     Company  could  be  required  to pay in  excess  of its pro  rata  share of
     remediation costs. The Company's understanding of the financial strength of
     other PRPs at these Superfund sites has been considered, where appropriate,
     in the  Company's  determination  of its estimated  liability.  The Company
     believes  that  its  past  experience   provides  a  reasonable  basis  for
     estimating  its liability.  As additional  information  becomes  available,
     estimates are adjusted as necessary.  While the Company does not anticipate
     that any such adjustment would be material to its financial statements,  it
     is  reasonably   possible   that  the  result  of  ongoing   and/or  future
     environmental  studies or other  factors could alter this  expectation  and
     require the  recording of additional  liabilities.  The extent or amount of
     such events,  if any,  cannot be estimated at this time.  The settlement of
     the reserves  established will cause future cash outlays over approximately
     five years based upon current  estimates,  and it is not expected that such
     outlays will materially impact the Company's liquidity position.

     As part of its  long-term  environmental  protection  program,  the Company
     estimates that during fiscal 1997 and 1998 approximately  $1,300 and $3,700
     per year will be spent, respectively, on capital projects for environmental
     protection.  These  estimates  include the additional  capital  required to
     comply with EPA  Underground  Storage  Tank (UST)  regulations  that become
     effective  in  December  1998.  Presently,  the  total  additional  capital
     required  to  comply  with  the  EPA UST  regulations  is  estimated  to be
     approximately  $3,700. The total capital requirements may change due to the
     actual number of USTs actively in use on the effective date.

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

5.   SUBSEQUENT EVENT
     ----------------
     On October 31, 1996,  the Company's  Country  Products  Group (CPG) entered
     into  an  agreement  with  five  other  cooperative  organizations  to form
     Pro-Pet,  L.L.C.,  of which CPG will be a one-sixth  owner.  As part of the
     formation of this joint venture, CPG sold its pet food manufacturing brands
     and  business,  including  its St.  Marys,  Ohio,  pet food  plant,  to the
     venture.  The  proceeds  from  the  sale,  net of a  reinvestment  into the
     venture,  totaled  approximately  $7,500,  and the gain on sale  was  fully
     offset by losses  experienced  from the  closing of a second pet food plant
     that had also been a part of Agway's pet food manufacturing business. Agway
     will  continue to purchase its pet food product from Pro-Pet,  L.L.C.,  and
     this change in manufacturing  ownership will not materially  affect Agway's
     retail pet food business.

                                       10
<PAGE>
                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

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

RESULTS OF OPERATIONS
---------------------
The  Company's net sales and revenues and  operating  results are  significantly
impacted by seasonal  fluctuations  due to the nature of its  operations and the
geographic  location of its service area,  which is primarily  the  Northeastern
United States.  Agriculture and Retail net sales and revenues are  traditionally
higher in the spring as  customers  acquire  products  to  initiate  the growing
season.  Energy  realizes  significantly  higher net sales and  revenues  in the
winter  months due to cold  winter  conditions.  Leasing and  Insurance  are not
materially impacted by seasonal fluctuations.

                          Results by Operating Segment
                          ----------------------------
<TABLE>
<CAPTION>
                                                                   Three Months Ended
                                                          ------------------------------------ 
                                                                                    $ Increase
                                                           9/30/96      9/30/95     (Decrease)
                                                          ----------   ----------   ----------
<S>                                                       <C>          <C>          <C>
Net Sales and Revenues
----------------------
Agriculture ...........................................   $ 168,862    $ 164,457    $   4,405
Retail ................................................      63,096       58,445        4,651
Energy ................................................     107,943       97,479       10,464
Leasing ...............................................      13,317       11,526        1,791
Insurance .............................................       6,314        7,243         (929)
Other (a) .............................................      (7,348)     (14,527)       7,179
                                                          ---------    ---------    ---------
                                                          $ 352,184    $ 324,623    $  27,561
                                                          =========    =========    =========
Margin (Loss) from Continuing Operations
----------------------------------------
   before Income Taxes
   -------------------
Agriculture ...........................................   $  (8,739)   $  (6,506)   $  (2,233)
Retail ................................................         687          134          553
Energy ................................................      (4,898)      (4,772)        (126)
Leasing ...............................................       2,785        2,434          351
Insurance .............................................         (64)         (29)         (35)
Other...............................................(a)       1,769        1,671           98
                                                          ---------    ---------    ---------
Operating margin (loss) plus other income, net ........      (8,460)      (7,068)      (1,392)
Interest (expense), net of interest income ............      (6,559)      (6,920)         361
                                                          ---------    ---------    ---------
                                                          $ (15,019)   $ (13,988)   $  (1,031)
                                                          =========    =========    =========
</TABLE>
(a) Represents unallocated corporate items and intersegment eliminations.

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

Consolidated Results
--------------------
The sales  increase of $27,600  (9%) for the first  quarter of fiscal  1997,  as
compared to the first  quarter in the prior  year,  was the result of (1) higher
sales prices charged by Agway Agricultural  Products (AAP) for feed products and
by Energy for heating oil due to an increase in the cost of these products;  (2)
delayed spring sales of crop-related services; (3) volume increases in pet food,
bird seeds and lawn & garden seeds; and (4) increased  revenues as the result of
a higher  average net lease  investment at Telmark.  These  increases were after
considering  sales declines due to the sale of businesses of CPG during 1996 and
the first quarter of 1997.

Loss from continuing  operations before tax increased $1,000 (7%) to $15,000 for
the first  quarter of 1997 as compared  to the first  quarter in the prior year.
The operating results from ongoing operations improved $1,000.  However,  during
the first quarter of 1997, the adoption of a new accounting pronouncement on the
impairment of long-lived  assets  negatively  impacted  results by approximately
$1,700,  and one-time  net charges for the exiting of the pet food  business and
the transfer of ARS distribution center management totaled approximately $1,000.
These charges were partially offset by improved  operational results experienced
by CPG due to divested lines of business not incurring  losses in fiscal 1997 as
they had done in the first quarter of the prior year.

                                       11
<PAGE>



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

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


Agriculture
-----------
Agriculture  consists  of Agway  Agricultural  Products  (AAP)  and the  Country
Products  Group (CPG).  Total net sales and  revenues  for the first  quarter of
fiscal 1997 of $168,900  increased  $4,400 (3%) as compared to the first quarter
of fiscal 1996.  This increase  resulted  from a $14,300  (13%)  increase in AAP
sales in the first quarter of fiscal 1997, as compared to the same period during
the prior year, as a result of increased  feed product prices and delayed spring
sales of crop-related services which increased the first quarter 1997 sales. The
AAP sales increase was offset by CPG  experiencing  an overall  decline in total
net sales and revenues of $9,900 (19%) in the first  quarter of 1997 as compared
to the same period during the prior year. The reduction represents the effect on
sales  volume from lines of business  sold during  fiscal 1996,  which  included
Pro-Lawn,  laboratory  animal diet and  Sacramento  Valley  Milling,  as well as
Roberts  Seed  which  was  sold in the  first  quarter  of  fiscal  1997.  These
divestitures were part of CPG's strategic plan. These reductions in sales levels
at CPG were  partially  offset by the improved  volumes in CPG's ongoing  flour,
bean,  produce  and  sunflower  operations  during the first  quarter of 1997 as
compared to the first quarter of the prior year.

The net loss before income taxes of Agriculture increased $2,200 (34%) to $8,800
for the first  quarter of 1997 as compared  to the same period  during the prior
year. AAP's net loss before income taxes of $8,700 for the first quarter of 1997
is  $1,100  (15%)  higher  than the same  period  during  the  prior  year.  AAP
enterprise operations  experienced  significantly  improved operating results in
the first quarter of 1997, as compared to the same period during the prior year,
which  were more than  offset  by  decreased  gross  margins,  due to  increased
commodity costs and adverse  experience with  exchange-traded  futures,  and the
impact  of  adopting  a  new  accounting  pronouncement  on  the  impairment  of
long-lived  assets.  CPG  experienced a $100 loss for the first quarter of 1997,
which is a $1,100  (106%)  decline from a $1,000  margin in the first quarter of
the prior year. This decline was  attributable to the decision to sell CPG's pet
food  manufacturing  brands and business and the associated net asset write-down
and other  one-time  costs.  These  charges  were  partially  offset by improved
operating results from having divested of businesses that incurred losses in the
first  quarter of the prior  year.  The  operating  results  from CPG's  ongoing
businesses  on a combined  basis  resulted  in  positive  results  for the first
quarter of 1997, consistent with the prior year.

Retail
------
Total net sales and revenues for Agway Retail  Services (ARS)  increased  $4,700
(8%) to  $63,100  during  the first  quarter  of 1997 as  compared  to the first
quarter of the prior year. This increase was the result of increases in sales of
pet food,  bird seeds and lawn & garden seeds.  The sales of these products were
enhanced by a trade show held in June 1996,  where no such show was held at that
time in the prior year.  Additionally,  this increase is after  considering  the
declines in sales  associated with planned product mix changes that reduced high
dollar  value/lower  margin  power  equipment in favor of smaller per unit value
products with higher turnover and margins.

The margin before taxes of $700 represents a $600 increase in results during the
first quarter of 1997 as compared to the first  quarter of the prior year.  This
increase was  attributable  to improved  margins through product mix and pricing
strategies which have changed since the prior year as noted above.  These margin
improvements were partially offset by overall  increases in expenses.  Increases
in  manufacturing  and  administrative  expenses were  experienced  in the first
quarter of 1997, as compared to the same period in the prior year, partly due to
one-time  costs  associated  with  the  transfer  of  ARS  distribution   center
management to a third party vendor.  These  one-time costs were greater than the
reductions  in  selling  and  distribution  expense  experienced  from  improved
management of these costs.








                                       12

<PAGE>



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

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


Energy
------
Net sales and  revenues  increased  $10,500  (11%) to $107,900  during the first
quarter of fiscal 1997 as compared to the same period during the prior year. The
increase was  attributable  to 10%-12% price  increases in heating oils,  diesel
fuel and  propane in the first  quarter of 1997 as  compared  to the same period
during the prior year. These price increases resulted from strong demand and low
inventories  in the  marketplace.  The unit volume for all products in the first
quarter of 1997 increased 2% over the same period during the prior year.

Energy's operating loss of $4,900 in the first quarter of 1997 represents a $100
(3%) increase over the first quarter of the prior year. A slight  improvement in
gross  margins  and an  increase  in other  revenues  was more  than  offset  by
increased operating expenses during the first quarter of 1997 as compared to the
same period in the prior year.

Leasing
-------
Total  revenues for Telmark for the first  quarter of 1997 of $13,300  increased
$1,800 (16%) as compared to the first  quarter of the prior year.  The increased
revenues were the result of a higher average net investment in leases during the
first  quarter  of 1997 as  compared  to the first  quarter  of the prior  year.
Telmark's  investment in net leases and notes of $385,000 at September 30, 1996,
is an increase of $40,600 (12%) from September 30, 1995.

Telmark's  operating income for the first quarter of 1997 of $2,800 represents a
$400 (15%) improvement over the first quarter of the prior year. The increase is
due primarily to the larger lease  portfolio in the first quarter of fiscal 1997
as compared to the first quarter in the prior year. Revenues associated with the
larger portfolio grew at a faster rate than the level of expenses.

Insurance
---------
Net revenues (earned premiums) of Insurance totaled $6,300 for the first quarter
of 1997,  which  represents a $900 (13%)  decline from the first  quarter of the
prior year. The decline is the result of increased reinsurance costs required to
limit the Company's potential loss experience.

Insurance  operating loss totaled $64 for the first quarter of 1997,  which is a
$35 (123%)  increase from the first  quarter of the prior year.  Losses and loss
development  significantly  improved  in  the  first  quarter  of  fiscal  1997,
decreasing  approximately  18% over the first  quarter of the prior  year.  This
improvement, however, was offset by the lower net earned premiums and a decrease
in capital gains on investment sales in the first quarter of 1997 as compared to
the first quarter in the prior year.


                                       13

<PAGE>



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

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


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash Flows from Operating Activities
Cash flows from operating  activities  for the three months ended  September 30,
1996  decreased  approximately  $16,000 as  compared to the three  months  ended
September  30,  1995.  The decline in operating  cash flows,  as compared to the
prior year,  resulted  principally  from  fluctuations  in working capital items
(more specifically, inventory and other assets and liabilities).

Cash Flows from Investing Activities
Net cash flows used in the Company's investing activities totaled  approximately
$8,400 for the three months ended September 30, 1996, as compared to $14,100 for
the three months ended  September  30, 1995.  The Company has a growing  leasing
business and cash required to fund lease  origination  growth in excess of lease
repayments  and leases  sold  amounted  to $12,400  for the three  months  ended
September  30, 1996 and $13,200 for the three months ended  September  30, 1995.
Additionally,  proceeds of $5,200  from  business  sold during the three  months
ended  September  30, 1996 were a source of cash that was not  generated  in the
same period in the prior year.

Cash Flows from Financing Activities
The Company  finances its  operations  and the  operations of all its continuing
businesses and subsidiaries, except Telmark and Agway Insurance Company, through
Agway Financial  Corporation (AFC). External sources of short-term financing for
the Company and all its other  continuing  operations  include  revolving credit
lines,  letters of credit,  and  commercial  paper  programs.  Telmark and Agway
Insurance  Company finance  themselves  through  operations or direct  borrowing
arrangements. Each is financed with a combination of short- and long-term credit
facilities.  In  addition,  Telmark  has  occasionally  sold blocks of its lease
portfolio.  Sources  of  longer-term  financing  include  the  following  as  of
September 30, 1996:
<TABLE>
<CAPTION>

Source of debt                                        Agway & AFC      Telmark         Total
--------------                                        -----------     --------       --------
<S>                                                    <C>            <C>            <C>
Banks - due 11/96 to 2/01 with interest
  from 6.0% - 8.5% .............................       $  3,150       $142,000       $145,150
Insurance companies - due 11/96 to 11/00
  with interest from 5.9% - 9.2% ...............                       121,333        121,333
Capital leases & other - due 1996 to 2007
  with interest from 6% to 12% .................         14,523            140         14,663
                                                       --------       --------       --------
    Long-term debt .............................         17,673        263,473        281,146
Subordinated money market certificates  - due
  10/96 to 10/08 with interest from 4.5% - 9.5%         378,768         26,530        405,298
Subordinated debentures  - due 1999 to 2003 with
  interest at 7.0% to 8.5% .....................         22,898                        22,898
                                                       --------       --------       --------
    Total debt .................................       $419,339       $290,003       $709,342
                                                       ========       ========       ========
</TABLE>

For a complete  description  of the  Company's  credit  facilities  available at
September  30, 1996,  see  Footnote 3 to the  condensed  consolidated  financial
statements.



                                       14

<PAGE>



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


Item 1.  Legal Proceedings
--------------------------
In August 1995, the  Environmental  Protection  Agency (EPA) notified Agway that
the EPA has reason to  believe  that Agway is a  potentially  responsible  party
(PRP) under the Comprehensive Environmental Response, Compensation and Liability
Act  (CERCLA) at the  Tri-Cities  Barrel  Site,  Port Crane,  New York.  The EPA
requested  that  Agway  and  other  PRPs  participate  in the  ongoing  Remedial
Investigation/Feasibility  Study (RI/FS) for the Tri-Cities  Barrel Site.  Agway
believes that its  involvement at the Tri-Cities  Barrel Site is minimal.  Agway
has had further  discussions with other PRPs who have been  participating in the
ongoing  RI/FS and decided to  participate  at this time.  In September  1996, a
number of PRPs, including Agway, entered into an Administrative Order or Consent
for Removal Action with the EPA for the site.

Item 6.  Exhibits and Reports on Form 8-K
-----------------------------------------
There were no reports on Form 8-K required to be filed during the first  quarter
ended September 30, 1996.



                                       15

<PAGE>


SIGNATURES
----------

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




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





Date   November 11, 1996              /s/ PETER J. O'NEILL
     --------------------         --------------------------------
                                          Peter J. O'Neill
                                       Senior Vice President,
                                         Finance & Control,
                                      Treasurer and Controller
                                  (Principal Financial Officer and
                                      Chief Accounting Officer)










                                       16



<PAGE>

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


(Mark One)
 X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the quarterly period ended December 31, 1996
                               -----------------

                                       OR

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

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


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


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


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




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



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



                                        1

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

                                      INDEX
<TABLE>
<CAPTION>


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

           Item 1.  Financial Statements (Unaudited)

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

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

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

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

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


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

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

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


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

</TABLE>













                                        2

<PAGE>



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

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

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

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

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






     See accompanying notes to condensed consolidated financial statements.

                                        3

<PAGE>



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

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

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

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

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

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




     See accompanying notes to condensed consolidated financial statements.

                                        4

<PAGE>



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


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

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

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


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

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


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


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












     See accompanying notes to condensed consolidated financial statements.

                                        5

<PAGE>



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

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


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------
     Basis of Presentation
     The accompanying  unaudited condensed  consolidated financial statements of
     Agway Inc. (the  "Company") have been prepared in accordance with generally
     accepted accounting  principles for interim financial  information and with
     the   instructions   to  Form  10-Q  and  Article  10  of  Regulation  S-X.
     Accordingly,  they do not  include  all of the  information  and  footnotes
     required by generally accepted accounting principles for complete financial
     statements.  In the opinion of management,  all adjustments  (consisting of
     normal recurring  accruals)  considered  necessary for a fair  presentation
     have been  included.  Operating  results  for the  six-month  period  ended
     December 31, 1996 are not necessarily indicative of the results that may be
     expected  for the year ending June 30, 1997 due to the  seasonal  nature of
     certain major segments of the Company's business.  For further information,
     refer to the consolidated  financial  statements and notes thereto included
     in the annual report on Form 10-K for the year ended June 30, 1996.

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

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

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

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

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


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


                                        6

<PAGE>



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

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


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

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

</TABLE>

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

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


                                        7

<PAGE>



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

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


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

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

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

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

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

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

                                        8

<PAGE>



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

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


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

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

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

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

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




                                        9

<PAGE>



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

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


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

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

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



                                       10

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

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


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

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

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

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


                                       11
<PAGE>



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

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


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

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

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

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

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



                                       12

<PAGE>



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

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


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

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

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

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

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


                                       13

<PAGE>



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

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


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

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

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

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


                                       14

<PAGE>



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

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


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

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

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


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

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



                                       15

<PAGE>



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


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

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

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

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

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

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



                                       16

<PAGE>


SIGNATURES
----------

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




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





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










                                       17
<PAGE>

                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
   
                                   FORM 10-Q/A
                                 AMENDMENT NO. 1
    

(Mark One)
 X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the quarterly period ended December 31, 1996
                               -----------------

                                       OR

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

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


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


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


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




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



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


                                       1

<PAGE>

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


                                      
Item 6.  Exhibits and Reports on Form 8-K

   
(a)      List of Exhibits
         18.0     Letter re change in accounting principles
         27.0     Financial Data Schedule*

(b)      Reports on Form 8-K
         There were no reports on Form 8-K required to be filed during the three
         months ended December 31, 1996.


*Included with electronic filing only.
    
<PAGE>

SIGNATURES
----------

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




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




   
Date      February 11, 1997                   /s/ PETER J. O'NEILL
      ----------------------           ----------------------------------------
    
                                                  Peter J. O'Neill
                                               Senior Vice President,
                                                 Finance & Control,
                                              Treasurer and Controller
                                          (Principal Financial Officer and
                                              Chief Accounting Officer)

<PAGE>




                                   EXHIBIT 18




<PAGE>

   
(logo)  Coopers & Lybrand L.L.P.  One Lincoln Center   telephone (315) 474-8541
                                  Syracuse, New York   facsimile (315) 473-1385
 

        a professional services firm




Board of Directors
Agway, Inc.
333 Butternut Drive
DeWitt, New York 13214

We are  providing  this letter to you for  inclusion  as an exhibit to your Form
10-Q filing pursuant to Item 601 of Regulation S-K.

We have read  management's  justification  for the change in accounting from the
Last-In First-Out (LIFO) method of inventory  valuation for the liquid petroleum
products to the First-In First-Out (FIFO) method contained in the Company's Form
10-Q for the quarter ended  December 31, 1996.  Based on our reading of the data
and  discussion  with Company  officials  of the business  judgment and business
planning factors relating to the change, we believe  management's  justification
is reasonable. Accordingly, in reliance on management's determination as regards
elements of judgement  and business  planning,  we concur that the newly adopted
accounting   principle   described   above  is   preferable   in  the  Company's
circumstances to the method previously applied.

We have not audited any financial  statements  of Agway,  Inc. as of any date or
any period  subsequent to June 30, 1996, nor have we audited the  application of
the change in accounting principle disclosed in Form 10-Q of Agway, Inc. for the
three months ended December 31, 1996;  accordingly,  our comments are subject to
revision on completion of an audit of the financial  statements that include the
accounting change.


/s/ Coopers & Lybrand L.L.P.
Syracuse, New York
January 7, 1997
    


<PAGE>

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


(Mark One)
 X  QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
--- ACT OF 1934
For the quarterly period ended March 31, 1997
                               --------------
                                       OR

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

Commission file number 2-22791
                       -------

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


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


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


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




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



                       Class                        Outstanding at May 2, 1997
------------------------------------------------    --------------------------
Membership Common Stock, $25 par value per share            105,966 shares




                                        1

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

                                      INDEX
<TABLE>
<CAPTION>


                                                                                                              PAGE NO.
                                                                                                              --------

<S>        <C>                                                                                                     <C> 
PART I.    FINANCIAL INFORMATION
-------    ---------------------

           Item 1.  Financial Statements (Unaudited)

           Condensed Consolidated Balance Sheets as of March 31, 1997 and June 30, 1996...........................  3

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

           Condensed Consolidated Cash Flow Statements for the nine months ended March 31, 1997
           and March 31, 1996.....................................................................................  5

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

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


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

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


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

</TABLE>













                                        2

<PAGE>



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

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

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

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

Long-term debt ..................................................      157,593      197,413
Subordinated debt ...............................................      373,217      400,284
Other liabilities ...............................................       69,932       66,811
                                                                    ----------   ----------
     Total liabilities ..........................................    1,121,528    1,073,169
Shareholders' equity:
  Preferred stock, net ..........................................       57,645       59,319
  Common stock, net .............................................        2,658        2,689
  Retained margin ...............................................       97,136      110,714
                                                                    ----------   ----------
     Total shareholders' equity .................................      157,439      172,722
Commitments and contingencies
         Total liabilities and shareholders' equity .............   $1,278,967   $1,245,891
                                                                    ==========   ==========
</TABLE>






     See accompanying notes to condensed consolidated financial statements.

                                        3

<PAGE>



                    PART I. FINANCIAL INFORMATION (continued)
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
       CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND RETAINED MARGIN
                                   (Unaudited)
                             (Thousands of Dollars)
<TABLE>
<CAPTION>
                                               Three Months Ended             Nine Months Ended
                                                    March 31,                     March 31,
                                           --------------------------    --------------------------
                                               1997           1996          1997            1996
                                           -----------    -----------    -----------    -----------
<S>                                        <C>            <C>            <C>            <C> 
Net sales and revenues from:
     Product sales .....................   $   406,747    $   408,632    $ 1,091,730    $ 1,061,343
     Leasing operations ................        14,290         12,052         41,748         35,746
     Insurance operations ..............         6,834          6,475         19,883         20,063
                                           -----------    -----------    -----------    -----------
         Total net sales and revenues ..       427,871        427,159      1,153,361      1,117,152

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

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

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

Retained Margin:
     Balance at beginning of period,
         as previously reported ........        91,590         88,171        109,250        102,532
     Adjustment for the cumulative
         effect on prior years of
         applying retroactively the
         FIFO method of valuing
         Energy inventories, net of tax                                        1,464            402
                                           -----------    -----------    -----------    -----------
     Balance at beginning of period,
         as adjusted ...................        91,590         88,171        110,714        102,934
     Dividends .........................                                      (2,087)        (2,172)
     Adjustment to unrealized gains
         (losses) on available-for-sale
         securities, net of tax ........          (469)        (1,085)           (11)          (304)
                                           -----------    -----------    -----------    -----------
Balance at end of period ...............   $    97,136    $    93,112    $    97,136    $    93,112
                                           ===========    ===========    ===========    ===========

</TABLE>




     See accompanying notes to condensed consolidated financial statements.

                                        4

<PAGE>



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


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

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

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


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

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


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


Cash and equivalents at end of period ......................   $       0    $       0
                                                               =========    =========

</TABLE>










     See accompanying notes to condensed consolidated financial statements.

                                        5

<PAGE>



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

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


1.   SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
     ------------------------------------------
     Basis of Presentation
     The accompanying  unaudited condensed  consolidated financial statements of
     Agway Inc. (the  "Company") have been prepared in accordance with generally
     accepted accounting  principles for interim financial  information and with
     the   instructions   to  Form  10-Q  and  Article  10  of  Regulation  S-X.
     Accordingly,  they do not  include  all of the  information  and  footnotes
     required by generally accepted accounting principles for complete financial
     statements.  In the opinion of management,  all adjustments  (consisting of
     normal recurring  accruals)  considered  necessary for a fair  presentation
     have been included. Operating results for the nine-month period ended March
     31, 1997 are not necessarily indicative of the results that may be expected
     for the year  ending June 30,  1997 due to the  seasonal  nature of certain
     major segments of the Company's business. For further information, refer to
     the  consolidated  financial  statements and notes thereto  included in the
     annual report on Form 10-K for the year ended June 30, 1996.

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


                                        6

<PAGE>



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

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


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

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

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

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

Current liabilities ......................   $  310,417   $  227,782
Long-term debt ...........................      150,945      191,189
Subordinated debt ........................      373,217      400,284
Noncurrent liabilities ...................       18,568       17,152
Shareholder's equity .....................      211,141      215,632
                                             ----------   ----------
Total liabilities and shareholder's equity   $1,064,288   $1,052,039
                                             ==========   ==========


                                        7

<PAGE>



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

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


3.   BORROWING ARRANGEMENTS
     ----------------------
     Agway and AFC
     As of March 31, 1997,  the Company had certain  facilities  available  with
     banking  institutions  whereby  lenders have agreed to provide  funds up to
     $254,000 to  separately  financed  units of the  Company as follows:  AFC -
     $50,000 and Telmark - $204,000. In addition, AFC may issue up to $50,000 of
     commercial  paper  under the  terms of a  separate  agreement,  backed by a
     letter of credit.

     The  $50,000  line of  credit  available  to AFC and its  ability  to issue
     $50,000 of commercial paper require  collateralization using certain of the
     Company's accounts receivable and non-petroleum inventories ("collateral").
     Amounts which can be drawn under the AFC short-term  agreements are limited
     to a specific  calculation  based upon the collateral  available.  Adequate
     collateral  has existed  throughout the fiscal year to permit AFC to borrow
     amounts  to meet  the  ongoing  needs of the  Company  and is  expected  to
     continue to do so. In addition,  the agreements  include certain covenants,
     the most  restrictive  of which  requires the Company to maintain  specific
     quarterly  levels of  interest  coverage  and  monthly  levels of  tangible
     retained margins.  The amounts outstanding as of March 31, 1997 under AFC's
     $50,000  line of credit and $50,000  commercial  paper were $0 and $39,400,
     respectively.  The  Company's  current  line of credit  facility  continues
     through  January 1, 1998 and  provides  seasonal  increases  in the line of
     credit which will be available so that total  availability under AFC's line
     of credit will  increase to $70,000 at June 1, 1997 and $100,000 at October
     1, 1997. The Company's  current  commercial paper program continues through
     December 31, 1997. The Company has ongoing discussions with its lenders and
     expects to continue to have appropriate and adequate  financing to meet its
     ongoing needs.

     Annually,  Agway and AFC offer  subordinated  debentures  and  subordinated
     money market  certificates to the public. Of Agway's and AFC's subordinated
     debt at March 31, 1997,  $380,800 is  redeemable in whole or in part at the
     principal  amount plus accrued  interest,  prior to maturity  dates, at the
     option  of  the  Company.   The  foregoing  debt  bears  interest   payable
     semi-annually  on  January  l and July 1 of each  year.  The  money  market
     certificates'  interest rate is at the greater of the quoted rate or a rate
     based upon the discount rate for U. S.
     Government Treasury Bills, with maturities of 26 weeks.

     Telmark
     As of March 31, 1997, Telmark had two separate credit facilities  available
     from banks which allow Telmark to borrow up to an aggregate of $204,000. An
     uncommitted  short-term line of credit agreement  permits Telmark to borrow
     up to $4,000 on an unsecured  basis with interest paid upon  maturity.  The
     line bears interest at money market  variable  rates. A committed  $200,000
     partially  collateralized  revolving term loan facility  permits Telmark to
     draw  short-term  funds  bearing  interest  at money  market  rates or draw
     long-term  debt at rates  appropriate  for the term of the note drawn.  The
     total amounts  outstanding as of March 31, 1997,  under the short-term line
     of credit and the  revolving  term loan  facility were $4,000 and $185,400,
     respectively.  On April 23, 1997,  Telmark completed a private placement of
     debt  totaling  $38,000.  Proceeds  of the notes were used to pay down debt
     under the Telmark lines of credit.

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

     At March 31,  1997,  Telmark  also had  balances  outstanding  on unsecured
     senior notes from private placements totaling $111,222. Interest is payable
     semiannually  on each senior note.  Principal  payments are both semiannual
     and annual. The note agreements are similar to one another and each contain
     specific financial covenants.

                                        8

<PAGE>



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

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


3.   BORROWING ARRANGEMENTS (continued)
     ----------------------------------
     Telmark (continued)
     Annually,  Telmark  offers  subordinated  debentures  to  the  public.  The
     debentures  are unsecured and  subordinated  to all senior debt at Telmark.
     The interest on the debt is payable quarterly on January 1, April 1, July 1
     and October 1, and the  proceeds of the  offerings  will be used to provide
     financing for Telmark's leasing activities.

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

     Long-term and subordinated  debt outstanding at March 31, 1997, as compared
     to June 30, 1996, amounted to:
<TABLE>
<CAPTION>

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

Subordinated debt ...   $405,658   $390,669   $ 30,750   $ 24,258   $436,408   $414,927
Currently payable ...     52,223     14,643     10,968     63,191     14,643
                        --------   --------   --------   --------   --------   --------
Net subordinated debt   $353,435   $376,026   $ 19,782   $ 24,258   $373,217   $400,284
                        ========   ========   ========   ========   ========   ========
</TABLE>


                                        9

<PAGE>



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

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


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

     The Company  continually  monitors its operations with respect to potential
     environmental  issues,  including changes in legally mandated standards and
     remediation   technologies.   Agway's  recorded  liability  reflects  those
     specific  issues where  remediation  activities are currently  deemed to be
     probable and where the cost of remediation  is estimable.  Estimates of the
     extent of the Company's degree of  responsibility  relating to a particular
     site and the method and ultimate  cost of  remediation  require a number of
     assumptions  for  which  the  ultimate  outcome  may  differ  from  current
     estimates.  At March 31,  1997,  the Company had been  designated  as a PRP
     under CERCLA or as a third party to the original PRPs in several  Superfund
     sites.  The liability  under CERCLA is joint and several,  meaning that the
     Company  could  be  required  to pay in  excess  of its pro  rata  share of
     remediation costs. The Company's understanding of the financial strength of
     other PRPs at these Superfund sites has been considered, where appropriate,
     in the  Company's  determination  of its estimated  liability.  The Company
     believes  that  its  past  experience   provides  a  reasonable  basis  for
     estimating  its liability.  As additional  information  becomes  available,
     estimates are adjusted as necessary.  While the Company does not anticipate
     that any such adjustment would be material to its financial statements,  it
     is  reasonably   possible   that  the  result  of  ongoing   and/or  future
     environmental  studies or other  factors could alter this  expectation  and
     require the  recording of additional  liabilities.  The extent or amount of
     such events,  if any,  cannot be estimated at this time.  The settlement of
     the reserves  established will cause future cash outlays over approximately
     five years based upon current  estimates,  and it is not expected that such
     outlays will materially impact the Company's liquidity position.

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



                                       10

<PAGE>

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

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


RESULTS OF OPERATIONS
---------------------
The  Company's net sales and revenues and  operating  results are  significantly
impacted by seasonal  fluctuations  due to the nature of its  operations and the
geographic  location of its service area,  which is primarily  the  Northeastern
United States.  Agriculture and Retail net sales and revenues are  traditionally
higher in the spring as  customers  acquire  products  to  initiate  the growing
season. Energy generally realizes significantly higher net sales and revenues in
the winter months due to cold winter  conditions.  Leasing and Insurance are not
materially impacted by seasonal fluctuations.
<TABLE>
<CAPTION>
                                                                        Results by Operating Segment
                                           --------------------------------------------------------------------------------------
                                                      Three Months Ended                            Nine Months Ended
                                           -----------------------------------------    -----------------------------------------
                                                                         $ Increase                                   $ Increase
                                             3/31/97        3/31/96      (Decrease)       3/31/97        3/31/96      (Decrease)
                                           -----------    -----------    -----------    -----------    -----------    ----------- 
Net Sales and Revenues
----------------------
<S>                                        <C>            <C>            <C>            <C>            <C>            <C>         
Agriculture                                $   156,711    $   187,791    $   (31,080)   $   493,856    $   516,875    $   (23,019)
Retail                                          45,454         49,162         (3,708)       157,359        163,616         (6,257)
Energy                                         212,372        191,603         20,769        487,882        429,282         58,600
Leasing                                         14,290         12,052          2,238         41,748         35,746          6,002
Insurance                                        6,834          6,475            359         19,883         20,063           (180)
Other (a)                                       (7,790)       (19,924)        12,134        (47,367)       (48,430)         1,063
                                           -----------    -----------    -----------    -----------    -----------    -----------
                                           $   427,871    $   427,159    $       712    $ 1,153,361    $ 1,117,152    $    36,209
                                           ===========    ===========    ===========    ===========    ===========    ===========

Margin (Loss) from Continuing Operations
----------------------------------------
   before Income Taxes
   -------------------
Agriculture                                $    (1,800)   $     4,650    $    (6,450)   $   (18,075)   $    (3,626)   $   (14,449)
Retail                                          (3,337)        (3,339)             2         (3,942)        (5,197)         1,255
Energy                                          19,931         20,347           (416)        20,205         21,203           (998)
Leasing                                          3,745          3,260            485          9,787          8,659          1,128
Insurance                                           76         (1,226)         1,302            327         (5,110)         5,437
Other(a)                                         1,158           (948)         2,106          4,108          2,782          1,326
                                           -----------    -----------    -----------    -----------    -----------    -----------
Operating margin (loss)
   plus other income, net                       19,773         22,744         (2,971)        12,410         18,711         (6,301)
Interest (expense), net of
   interest income                              (8,902)        (8,454)          (448)       (23,491)       (22,912)          (579)
                                           -----------    -----------    -----------    -----------    -----------    -----------
                                           $    10,871    $    14,290    $    (3,419)   $   (11,081)   $    (4,201)   $    (6,880)
                                           ===========    ===========    ===========    ===========    ===========    ===========
</TABLE>
(a) Represents unallocated corporate items and intersegment eliminations.

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

Consolidated Results
--------------------
Consolidated net sales and revenues of $427,900 and $1,153,400 for the three and
nine  months  ended  March 31,  1997  increased  $700  (.2%) and  $36,200  (3%),
respectively,  as compared to the same periods in the prior year.  The increases
were the result of (1) higher sales prices,  due to increased  product costs, in
Agriculture  for feed products and in Energy for heating  oils,  diesel fuel and
propane;  (2) delayed spring 1996 sales of crop-related  services by Agriculture
which  increased  sales in the first  quarter of fiscal 1997;  and (3) increased
lease  portfolio  revenues,  as compared to the prior year,  primarily  due to a
higher  average net lease  investment.  These  increases in sales were partially
offset  by  the   weather-related   decline   in  demand  for  bird  food  which
significantly  reduced sales to consumers in the Retail business.  Additionally,
the  sale  of  businesses   within  the  Country  Products  Group  component  of
Agriculture (CPG) during the prior year and first nine months of fiscal 1997 has
reduced the overall sales level in CPG.

                                       11
<PAGE>



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

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


Consolidated Results (continued)
--------------------------------
Net income  (loss) from  continuing  operations  before taxes of $10,900 for the
three months ended March 31, 1997  decreased  $3,400  (24%),  as compared to the
same  period  in the prior  year;  and the net  income  (loss)  from  continuing
operations  before taxes of  ($11,100)  for the nine months ended March 31, 1997
represents  a loss that is $6,900  (164%)  greater than the loss during the same
period in the prior year.  The Company's  results  through the nine months ended
March 31, 1997 reflect certain ongoing  operational  improvements of $9,800 over
the same period in the prior year from Agway  Agricultural  Products (AAP) field
operations, Insurance, Retail and Leasing. However, these improvements were more
than offset  mostly by decreased  gross margins that resulted from a combination
of increased  commodity  costs and unfavorable  experience with  exchange-traded
futures.  The  remaining  offsets were (1) the net charges from the current year
sale of the pet food  manufacturing  brands and businesses of CPG as compared to
significant gains on the sales of CPG businesses generated in the prior year and
(2)  a  charge  for  the  adoption  of a new  accounting  pronouncement  on  the
impairment of long-lived assets.

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

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

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



                                       12

<PAGE>



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

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


Agriculture (continued)
-----------------------
CPG net income of $1,700 and $3,300 for the three and nine  months  ended  March
31, 1997 decreased $3,500 (67%) and $4,600 (58%),  respectively,  as compared to
the same periods in the prior year. The sale of the Pro-Lawn business in January
1996 generated a significant  gain, which accounts for $3,000 of the decrease in
net income for the three and nine months  ended March 31,  1997.  The net income
was adversely  impacted in 1997 by a $300 decline in the sunflower  seed margins
due to lower bird food sales volumes;  a decline in potato margins resulted from
price reductions in the potato industry;  and the cost of net asset  write-downs
and  other  costs  attributable  to the  current  year  sale of  CPG's  pet food
manufacturing brands and business.  These adverse items were partially offset by
improvements, as compared to the prior year, in other continuing operations.

Retail
------
Total net sales and  revenues  of $45,500  and  $157,400  for the three and nine
months ended March 31, 1997 decreased $3,700 (8%) and $6,200 (4%), respectively,
as compared to the same periods in the prior year.  The  declines are  primarily
attributable  to a mild and  relatively  snow-free  winter in many  parts of the
Northeast.  This resulted in a significant reduction in bird food and ice melter
salt sales. Additionally,  sales of water systems were significantly reduced, as
compared to the prior year,  as Retail  entered into an agreement  under which a
third party would sell these  products  and pay Retail a  commission.  The third
quarter  decline in sales,  as compared to the prior year,  more than offset the
first  quarter  sales  improvements  in pet food,  bird food and lawn and garden
seeds and the improved sale of wood pellets in the second quarter.

Net loss before  income taxes of $3,300 and $3,900 for the three and nine months
ended March 31, 1997 showed no change and improved  $1,300 (25%),  respectively,
over the same periods in the prior year.  Gross margin  dollars were down 4% for
the third  quarter,  as compared to the prior year,  due to the decline in sales
dollars;  however,  margin  percentages  have improved  through  product mix and
pricing  strategy  changes  since the prior year.  Total  expenses for the third
quarter and for the  nine-month  period ended March 31, 1997 decreased $600 (4%)
and $2,300  (4%),  respectively,  as compared  to the same  periods in the prior
year. The most  significant  decline in both the three- and  nine-month  periods
ended March 31, 1997 was in selling  expenses.  Advertising  expenses  have been
either  reduced or delayed to provide for  enhancement  to sales  efforts in the
upcoming   spring  season.   Additionally,   reductions  in   distribution   and
manufacturing  expenses  were more than offset by transition  costs  incurred to
outsource  distribution  center  management and from the costs of acquisition of
new businesses or improvements to current stores.

Energy
------
Net sales and  revenues of $212,400  and  $487,900 for the three and nine months
ended March 31, 1997 increased $20,800 (11%) and $58,600 (14%), respectively, as
compared to the same periods in the prior year. The increase, as compared to the
prior year, is substantially  due to higher commodity prices in the current year
in heating  oils,  diesel fuel and propane as a result of strong  demand and low
industry  inventories in the marketplace.  Energy's average selling price of all
products increased 8.2% for the nine months ended March 31, 1997, as compared to
the same  periods in the prior year.  The total unit volume of all  products for
both the three and nine months ended March 31, 1997 shows  slight  improvements,
despite temperatures being warmer than the prior year.

Margin  before income taxes of $19,900 and $20,200 for the three and nine months
ended March 31,  1997  decreased  $400 (2%) and $1,000  (5%),  respectively,  as
compared to the same periods in the prior year.  Gross margin dollars  decreased
$3,400 and $3,700 for the third quarter and nine months ended March 31, 1997, as
compared  to the same  periods in the prior  year,  as a result of product  cost
increases not being passed on to the marketplace  through higher product prices.
Total operating expenses decreased for the three and nine months ended March 31,
1997,  as  compared  to the same  periods  in the prior  year,  as the result of
decreased distribution costs, principally payroll costs, due to staff reductions
and a decrease in overtime. Finally, other revenue increased over the prior year
due to gains on the sale of assets in the current year.


                                       13

<PAGE>



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

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


Leasing
-------
Telmark  total  revenues  of $14,300  and  $41,700 for the three and nine months
ended March 31, 1997 increased $2,200 (18%) and $6,000 (17%),  respectively,  as
compared to the same periods in the prior year. The increased revenues over both
periods,  as compared to the same periods in the prior year,  are  primarily the
result of a higher average net investment associated with current period leases.
The net investment increased $41,400 (11%) to $435,800 for the nine-month period
ended March 31, 1997, as compared to an increase of $21,000 (6%) to $369,400 for
the same period in the prior year.

Margin  before  income  taxes of $3,700 and $9,800 for the three and nine months
ended March 31, 1997  increased  $500 (16%) and $1,100 (13%),  respectively,  as
compared to the same periods in the prior year.  Total  revenue  increases  were
partially  offset by an increase in total expenses for the three and nine months
ended March 31, 1997 of $1,800 (20%) and $4,900 (18%), respectively, as compared
to the same periods in the prior year.  The larger net  investment  during those
periods,  as  compared  to the same  periods in the prior  year,  has  increased
interest expense, selling, general and administrative expenses and the provision
for credit losses in the current year.

Insurance
---------
Insurance consists of Agway Insurance Company, a property and casualty insurance
subsidiary,  and Agway General Agency,  a subsidiary  which markets accident and
health insurance and long-term care products.

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

Margin  before  income taxes of $80 and $300 for the three and nine months ended
March 31, 1997  increased  $1,300  (104%) and $5,400  (106%),  respectively,  as
compared to the same periods in the prior year. The increase has been the result
of improvement in loss development.  In the first nine months of the prior year,
Insurance  experienced adverse development in older claims and certain unusually
large  farmowner  and auto  liability  casualty  losses.  These types of adverse
developments did not occur during the first nine months of the current year.


                                       14

<PAGE>



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

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


LIQUIDITY AND CAPITAL RESOURCES
-------------------------------
Cash Flows from Operating Activities
Cash flows  provided from  operating  activities for the nine months ended March
31,  1997 were a net of  $28,700,  an  increase  in cash flows of  approximately
$35,200 as compared to the same period in the prior year.  This  increase is due
primarily to a smaller increase in inventory  ($14,800) and a larger decrease in
receivables  ($26,500)  over the  nine-month  period  ended March 31,  1997,  as
compared to the same period in the prior year.

Cash Flows from Investing Activities
Net cash flows used in the Company's investing activities totaled  approximately
$45,800 for the nine months ended March 31, 1997, as compared to $1,900 provided
for the nine months ended March 31, 1996, an increased  outflow of $47,700.  The
Company  has a  growing  leasing  business  and  cash  required  to  fund  lease
origination  growth in excess of lease  repayments  and leases sold  amounted to
$42,900 for the nine months ended March 31, 1997, as compared to $21,900 for the
nine months  ended March 31,  1996,  a net  increase in cash outflow of $21,000.
Proceeds of $27,500 from businesses and fixed assets sold during the nine months
ended March 31, 1997 were  $17,300  less than the cash  generated  from the same
activity,  including the disposal of discontinued operations, in the same period
in the prior year.

Cash Flows from Financing Activities
The Company  finances its  operations  and the  operations of all its continuing
businesses and subsidiaries, except Telmark and Agway Insurance Company, through
Agway Financial  Corporation (AFC). External sources of short-term financing for
the Company and all its other  continuing  operations  include  revolving credit
lines,  letters of credit,  and  commercial  paper  programs.  Telmark and Agway
Insurance  Company finance  themselves  through  operations or direct  borrowing
arrangements. Each is financed with a combination of short- and long-term credit
facilities.  In  addition,  Telmark  has  occasionally  sold blocks of its lease
portfolio.  Sources of longer-term  financing  include the following as of March
31, 1997:

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

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



                                       15

<PAGE>



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


Item 6.  Exhibits and Reports on Form 8-K
-----------------------------------------
There were no reports on Form 8-K  required to be filed  during the three months
ended March 31, 1997.



                                       16

<PAGE>


SIGNATURES
----------

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



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





Date            May 5, 1997                         /s/ PETER J. O'NEILL
         --------------------------           ---------------------------------
                                                        Peter J. O'Neill
                                                     Senior Vice President,
                                                       Finance & Control,
                                                   Treasurer and Controller
                                               (Principal Financial Officer and
                                                   Chief Accounting Officer)










                                       17