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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549
                                    FORM 10-K
(MARK ONE)
 X    ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
----  ACT OF 1934
For the fiscal year ended June 30, 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 AND ZIP CODE)

        REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: 315-449-6436

SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:

 TITLE OF EACH CLASS                   NAME OF EACH EXCHANGE ON WHICH REGISTERED
 -------------------                   -----------------------------------------
        None                                             None

SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT:
                                        None

      INDICATE BY CHECK MARK  WHETHER THE  REGISTRANT  (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(D) OF THE  SECURITIES  EXCHANGE  ACT OF
1934  DURING  THE  PRECEDING  12 MONTHS  (OR FOR SUCH  SHORTER  PERIOD  THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS),  AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS.
                                                   X
                                                  ---         ---
                                                  Yes         No

      INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S  KNOWLEDGE, IN  ANY  DEFINITIVE  PROXY  OR  INFORMATION
STATEMENTS INCORPORATED  BY  REFERENCE  IN PART  III  OF  THIS  FORM 10-K OR ANY
AMENDMENT TO THIS FORM 10-K.    X
                               ---

      STATE THE  AGGREGATE  MARKET  VALUE OF THE  VOTING AND  NON-VOTING  COMMON
EQUITY HELD BY NON-AFFILIATES OF THE REGISTRANT AS OF AUGUST 22, 1997.

             Membership Common Stock, $25 Par Value - $2,621,425

      INDICATE  THE  NUMBER OF SHARES  OUTSTANDING  OF EACH OF THE  REGISTRANT'S
CLASSES OF COMMON STOCK, AS OF THE LATEST PRACTICABLE DATE.

           CLASS                               OUTSTANDING AT AUGUST 22, 1997
           -----                               ------------------------------
Membership Common Stock, $25 Par Value                104,857 Shares

  PAGE 1 OF 200.  EXHIBIT INDEX APPEARS ON SEQUENTIALLY NUMBERED PAGE 62.
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<PAGE>



                         FORM 10-K ANNUAL REPORT - 1997
                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES

                              CROSS REFERENCE SHEET
<TABLE>
<CAPTION>

                                                                                                                Page

                                     PART I
<S>              <C>                                                                                              <C>
Items 1 & 2.     Business and Properties
                     General...................................................................................   3
                     Agriculture...............................................................................   3
                     Retail....................................................................................   5
                     Energy....................................................................................   6
                     Leasing...................................................................................   6
                     Insurance.................................................................................   6
                     Discontinued Operations...................................................................   6
                     Competition...............................................................................   7
                     Human Resources...........................................................................   8
                     Regulation................................................................................   9
                     Administrative............................................................................   9
                     Stockholder Membership and Control of Agway...............................................   9
                     Patronage Refunds.........................................................................  11
                     Retained Margin...........................................................................  11
Item 3.          Legal Proceedings.............................................................................  11
Item 4.          Submission of Matters to a Vote of Security Holders...........................................  12

                                                      PART II

Item 5.          Market for the Registrant's Common Equity and Related Stockholder Matters.....................  13
Item 6.          Selected Financial Data.......................................................................  13
Item 7.          Management's Discussion and Analysis of Financial Condition and Results of Operations.........  14
Item 8.          Financial Statements and Supplementary Data...................................................  26
Item 9.          Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..........  26

                                                     PART III

Item 10.         Directors and Executive Officers of the Registrant............................................  57
Item 11.         Executive Compensation........................................................................  59
Item 12.         Security Ownership of Certain Beneficial Owners and Management................................  61
Item 13.         Certain Relationships and Related Transactions................................................  61

                                                      PART IV

Item 14.         Exhibits, Financial Statement Schedules and Reports on Form 8-K...............................  62

                 Signatures....................................................................................  72


</TABLE>

                                        2

<PAGE>



                                     PART I

ITEMS 1 AND 2.  BUSINESS AND PROPERTIES
(THOUSANDS OF DOLLARS)


GENERAL

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

Operating as a cooperative,  the Company is eligible to pay patronage refunds to
its members and "contract patrons." For income tax purposes, Agway is subject to
corporate  income tax at applicable  tax rates on all taxable  income  remaining
after deductions for patronage refunds, if or when paid.

Agway Financial  Corporation (AFC), a wholly owned subsidiary of the Company, is
a Delaware  corporation  incorporated in 1986 with principal  executive  offices
located in Wilmington,  Delaware. AFC's principal business activities consist of
securing  financing  through bank  borrowings  and  issuance of  corporate  debt
instruments  to  provide  funds to 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
unconditionally guaranteed by Agway.

Major subsidiary  holdings  of  AHI  include Agway Consumer Products Inc. (Agway
Retail  Services  and  Country  Products  Group),  Agway  Petroleum  Corporation
(Energy), Telmark Inc. and subsidiaries (Leasing), Agway Insurance  Company  and
Agway General Agency (Insurance), as well as  former  holdings in H.P. Hood Inc.
(Hood) and Curtice Burns Foods, Inc. (Curtice Burns), which have been sold.

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 but does report  summarized AFC financial
information in the Company's financial statement footnotes.

AGRICULTURE

AGWAY AGRICULTURAL PRODUCTS

Agway  Agricultural  Products  (AAP) is comprised of seven  geographically-based
enterprise  units which provide animal feed,  agronomic and farm supply products
and services to farmers in their specific  geographic  markets.  Each enterprise
unit is responsible for management,  operations,  sales,  billing,  and customer
service.

ANIMAL  FEEDS:  AAP  operates  16 feed  mills and 20 grind  and mix  facilities,
principally in New York, Pennsylvania, and Vermont. These operations manufacture
livestock  and  poultry  feeds  under  Company  formula  and  provide  grain and
ingredient  brokerage  services.  Products are sold  primarily  through an Agway
sales force, which actively calls on  farmer-customers  and responds to customer
calls to any Agway  facility.  Production  capacity is sufficient to meet market
needs.  During 1996,  AAP and Farmland  Industries,  Inc.  formed AFI, a limited
liability  company,  to provide better  pricing of feed products  through volume
purchasing.



                                        3

<PAGE>



ITEMS 1 AND 2.  BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)


AGWAY AGRICULTURAL PRODUCTS (CONTINUED)

AGRONOMIC  NEEDS:  AAP  operates  120  agronomic  blending  plants  and  storage
facilities.  These operations  manufacture,  process,  and procure  crop-related
products  to be sold as  direct  shipments  to  customers,  farmer-dealers,  and
wholesale  accounts.   The  fertilizer  operations  in  York  and  East  Berlin,
Pennsylvania,  manufacture  yard and  garden  fertilizers  sold to  dealers  and
distributors on the East Coast.  Fertilizer grading equipment has been installed
at East  Liverpool,  Ohio,  and  Kittanning,  Pennsylvania,  to  sell  to  other
commercial fertilizer customers. AAP sources substantially all of its fertilizer
needs through CF Industries,  Inc., of which it is a member cooperative eligible
for patronage refunds. AAP has a significant investment as a result of receiving
part of its patronage refund in stock.

Products  sold  primarily  for farm use  include  plant  nutrients,  lime,  crop
protectants,  and various seed  products.  For certain  products,  customers are
offered  extended  payment  terms and are entitled to return their  purchase for
either  a  replacement  item or  refund  in the  ordinary  course  of  business.
Agronomic  operations  are  seasonal,  with the  majority of sales and demand on
working  capital  generated  in late winter and spring.  Production  capacity is
sufficient to meet market needs.

FARM  SUPPLIES:  While all  Agway-owned  retail  stores (see Retail)  carry farm
supplies,  yard  and  garden  products,  pet  food  and pet  supplies,  67 store
locations have a significantly  heavier emphasis on farm supplies,  due to their
geographic  location and customer base.  These  locations are managed by AAP and
also  coordinate  the delivery of feed and  crop-related  products to farmers in
their territory.

RESEARCH AND APPLIED TECHNOLOGY:  The Research and Applied Technology Department
operates the Agway Farm Research Center  (Research Farm) in Tully, New York, and
the Technical Center in Ithaca,  New York.  Research for the crops operations is
conducted in conjunction with universities, other suppliers, and farmers. During
the fiscal years ended June 30, 1997,  1996 and 1995, net  expenditures of $700,
$600 and $1,300, respectively,  were made on agricultural research activities by
the Company as a whole.  In the fourth quarter of 1997, the following  occurred:
(1) the  Technical  Center  was  transferred  to  Cornell  University  and (2) a
decision was announced that the main dairy nutrition  research program sponsored
by eleven cooperatives that had been conducted at the Research Farm will move to
a new facility owned by another cooperative.  The transition to the new facility
will  occur  in 1998 as well as an  evaluation  as to  alternative  uses  for or
potential sale of the Research Farm.

COUNTRY PRODUCTS GROUP

Country Products Group (CPG) operates four different businesses:  produce repack
operations,  commodity  processing and repack operations,  bag manufacturing and
printing, and forage seed processing. All operations have sufficient capacity to
meet their  operating  requirements.  The seed  operation is seasonal in nature,
with the majority of sales occurring in the spring.

The produce repack  operations  operated eight  distribution  facilities  during
1997,  located in Canastota,  DeWitt,  Elba, and Chittenango,  New York; Winder,
Georgia;  Tampa,  Florida;  and  two  in  Plant  City,  Florida.  These  produce
businesses specialize in the sale of consumer packages of potatoes,  onions, and
other  vegetables to retail  outlets.  During 1997,  the  operations  previously
handled by the Canastota and Chittenango  facilities were  consolidated to a new
183,000 square foot building in DeWitt,  New York. The Canastota  property is no
longer  being  used for  processing  and was sold  July  1997.  The  Chittenango
property continues limited  operations.  Additionally,  a new 31,500 square foot
building was built in fiscal 1997 in Winder,  Georgia,  complete with  packaging
equipment. This business is named Country Best Produce and became operational in
June 1997.  Country Best Produce and Adams Produce Co. Inc. combined  operations
in August 1997 in a new limited liability company,  Country Best Adams,  L.L.C.,
which is 80%  owned by CPG.  Tablestock  and seed  potatoes  are  marketed  from
Presque Isle, Maine.



                                        4

<PAGE>



ITEMS 1 AND 2.  BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)


COUNTRY PRODUCTS GROUP (CONTINUED)

The commodity  processing and repack  operations  purchase  certain  commodities
produced by members  and other  farmers and  conduct  processing  and  repacking
operations as well as marketing,  sales,  and  distribution of the end products.
Principal commodities processed, sold, and distributed include edible dry beans,
human edible  sunflower seed,  bird food, and flour.  Edible dry bean processing
plants are located at Caledonia,  Geneva,  and Moravia,  New York, with combined
storage capacity of 185,000 cwt.  Sunflower  processing and storage  facilities,
located at Grandin,  North  Dakota,  produce and market human  edible  sunflower
seed, hulled millet, wild bird food, and related products. During fiscal 1997, a
major expansion of the sunflower facility was initiated. It is expected that the
expansion  will be complete in the fall of 1997 and will add 230,000  bushels of
storage  capacity  to its  already  existing  2.5  million  bushels  of  storage
capacity.  A flour mill is located in Churchville,  New York, with wheat storage
capacity of 250,000 bushels.

A  multi-walled  bag printing and  manufacturing  plant,  located in Wapakoneta,
Ohio, supplies bags used by external customers as well as by Pro-Pet, L.L.C.

The  seed  operation  produces,  conditions,  and  markets  forage  seed.  These
facilities are located in Nampa, Idaho.

From July through October 1996, two pet food  manufacturing  plants,  located in
Waverly,  New York,  and St. Marys,  Ohio,  produced small animal food products,
which  were   distributed   through  the  Agway  retail  store  and   franchised
representative system, other cooperatives, and direct to users. In October 1996,
all manufacturing ceased at the Waverly facility and was transferred to the Ohio
operation.  In  November  1996,  Agway sold its pet food  manufacturing  brands,
business,  and Ohio facility to Pro-Pet,  L.L.C.,  of which Agway  maintained an
ownership of 16.6%,  and continued to source  substantially  all of its pet food
needs from Pro-Pet, L.L.C. In June 1997, the Waverly facility was sold.

RETAIL

Agway  Retail  Services  (ARS)  provides   support  for  wholesale   purchasing,
warehousing, and distribution activities to AAP and Agway's entire wholesale and
retail system. ARS conducts retail sales and distribution activities through 183
Company-owned stores and 328 franchised  representative stores located in all of
Agway's  primary  states except Ohio. Of the  Agway-owned  stores,  although all
carry farm supplies,  116 locations,  managed by ARS, are in more suburban areas
and therefore have a greater emphasis on yard and garden products,  pet food and
pet supplies. The other 67 Agway-owned stores are managed by AAP. The franchised
representative  stores are authorized to sell Agway-branded  products and, along
with Agway-owned  stores, are located in areas where a retail market presence is
deemed desirable.

The retail system is focused primarily on three product categories: farm-related
products,  yard  and  garden  products,  and  pet  food  and pet  supplies.  ARS
additionally  generates  sales of animal  health  products  directly  to farmers
through a mail-order  catalog service which complements the Agway retail system.
The farm-related and yard and garden products are seasonal, with the majority of
sales and demand on working  capital  generated  in late winter and  spring.  In
1996,  ARS entered into a ten-year  logistics  agreement  with Ryder  Integrated
Logistics (RIL) to manage its  distribution of products with an estimated annual
expense under this agreement of approximately $10,000. In 1997, two distribution
centers, located in Elizabethtown,  Pennsylvania, and Westfield,  Massachusetts,
which are  operated to support the retail  store and  franchised  representative
system, were sold to a third party and leased to RIL.

In 1997,  ARS began  executing  a  business  plan  that  includes  upgrading  or
relocating  existing  store  locations,  store  expansion,   acquisitions,   and
construction  of new store  locations.  ARS completed major upgrades for several
locations,  expanded nine locations, and made three business acquisitions during
1997. Several other store activities are in process,  and it is planned that ARS
will continue to enhance and grow its retail store locations.



                                        5

<PAGE>



ITEMS 1 AND 2.  BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)


ENERGY

Energy is Agway Petroleum  Corporation,  a Delaware  corporation wholly owned by
AHI, doing business as Agway Energy Products (AEP). AEP is a full service energy
company  operating  in  New  York,   Pennsylvania,   New  Jersey,  Vermont,  and
Massachusetts.  AEP markets oil and gas heating and air-conditioning  equipment,
petroleum  products  including  gasolines,  kerosene,  fuel  oil,  diesel  fuel,
propane,  lubricating oils and greases,  antifreeze, and other related items. In
March 1997, AEP began marketing  natural gas to residential and small commercial
customers  in New York.  A product  emphasis  on oil and propane  heating  fuels
creates seasonal increases in sales and working capital requirements in the fall
and winter months. All products are purchased from numerous suppliers or through
open market purchases.

During  1997,  AEP owned and  operated 10  terminals  with  storage  capacity of
approximately  2,900,000 barrels of product. AEP operates 96 retail distribution
centers,  located  throughout  its  operating  territory.  AEP also  distributes
petroleum  products  through   approximately  100  distributors  and  resellers.
Facilities  are  sufficient to meet the current  operating  requirements  of the
business.

LEASE FINANCING

Telmark  Inc.  (Telmark),  a New York  corporation  wholly owned by AHI, and its
consolidated subsidiaries finance equipment,  buildings, and vehicles to farmers
and other customers in rural communities. Telmark operates a captive sales force
as its primary  distribution  system in 27 states in the eastern and  midwestern
United  States.  Telmark  transacts  business in the  continental  United States
through  a  separate  division,  Telease  Financial  Services,  which  generates
business  directly from farm  equipment  dealers and from brokers.  During 1997,
Telmark formed TFS Limited (TFS) and Telmark Lease Funding Corp. I, wholly owned
subsidiaries  of Telmark  Inc. TFS is a Canadian  corporation  formed to conduct
certain lease transactions with Canadian customers.  Telmark Lease Funding Corp.
I is a New York corporation  established solely to enable a lease securitization
financing entered into during 1997.

As of June 30, 1997,  Telmark had approximately  $460,500 of leases  outstanding
with persons other than Agway and its subsidiaries, net of unearned interest and
finance charges of approximately  $152,600.  Telmark finances its operations and
lease portfolio  growth through  borrowings  under its lines of credit,  private
placements  of debt with  institutional  investors,  sales of  debentures to the
public, or lease  securitizations.  As a result of Telmark issuing  subordinated
debentures to the public,  it files  periodic  reports with the  Securities  and
Exchange Commission pursuant to the Securities Exchange Act of 1934.

INSURANCE

Agway Insurance Company  (Insurance) is a New York property and casualty company
wholly owned by AHI. This company is authorized to write  insurance as specified
in the New York Insurance Law, Sections 46 and 341 (1) (d), and currently writes
insurance in 10 eastern states from the Insurance  headquarters  in DeWitt,  New
York. Lines of insurance sold include  Farmowners,  Homeowners,  Farm Commercial
and Personal Auto Liability and Physical Damage,  and  miscellaneous  commercial
policies that support the agricultural marketplace.

DISCONTINUED OPERATIONS

In  1993,  the  Agway  Board  of  Directors  authorized  management  to sell the
Company's  interest in Curtice Burns and Hood, the major investments in what was
Agway's food group segment.  Curtice Burns was sold in 1995 and Hood was sold in
1996.  See  Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations for the specifics of these sales.



                                        6

<PAGE>



ITEMS 1 AND 2.  BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)


COMPETITION

The Company, one of the largest agricultural  cooperatives in the country, deals
in a wide variety of product lines and market segments.  Many of its high-volume
products are sold in highly competitive markets where product differentiation is
difficult to achieve. The Company strives to distinguish itself through superior
customer service, product selection, and product knowledge.

AGRICULTURE

AGWAY AGRICULTURAL  PRODUCTS: In the animal feed business, the Company is one of
the  largest in sales  volume in the  northeastern  United  States.  Competition
exists with large national and regional feed manufacturers as well as with local
independent  mills.  The market  position  held by Agway in the feed business is
significant,  resulting from performance quality of its products,  research,  an
established manufacturing and distribution system, and knowledgeable work force.

In the agronomic business,  Agway plant nutrients,  seed, crop protectants,  and
lime  products  compete  in the  commercial  farm  market.  Although  there  are
substantial  regional  variations  in market share,  the  Company's  competitive
position  is  strong  in  the  commercial   farm  market.   Competition   varies
significantly  by product line and consists of  independent  dealers and several
nationally  integrated  corporations.  Agway  competes on the basis of technical
expertise and field application services,  product performance,  crop management
practices developed by Agway, and expert assistance to the farmer in making crop
management decisions.

COUNTRY  PRODUCTS GROUP:  CPG competes with a large number of firms of all sizes
and  types  in  most  of  its  product  categories.  The  principal  factors  of
competition in the produce repack  operations are product quality,  efficiencies
in product  distribution,  concentration in selected markets, and current market
pricing. In the product lines of dry beans, tablestock and seed potatoes, flour,
and bag  printing  and  manufacturing,  CPG does not occupy a major  position in
national  markets.  The bird food products are  primarily  marketed to the Agway
retail store and franchised  representative  system and other cooperatives,  and
compete based on product  quality.  The human edible  sunflower  seed and hulled
millet are marketed  internationally and compete on the basis of product variety
and quality.  The seed business competes on the basis of technical expertise and
product performance.

RETAIL

ARS competition  varies by product line and location and consists of larger yard
and garden chains, smaller yard and garden nurseries,  building material stores,
home center  stores,  large  discounters,  and specialty  pet stores.  Wholesale
competition  to  franchised  representatives  also  varies by  product  line and
consists of national, regional and local wholesalers;  independent distributors;
and pet food  manufacturers.  ARS competes with this competition on the basis of
product knowledge, expertise, and customer service.

ENERGY

AEP  competes in the  residential,  farm,  and  commercial  markets with a large
number and variety of  competitors,  ranging  from major oil  companies to local
fuel oil  distributors.  The  principal  methods  of  competition  are  service,
quality,  and  price.  AEP  continues  to  maintain  and expand its share of the
heating oil and propane  market in the  geographic  areas where it perceives its
market goals can be achieved.

LEASE FINANCING

Telmark competes with national and regional  financing  companies in addition to
traditional  agricultural  lenders.  Other  major  sources  of  competition  are
manufacturers'  finance and lease programs and regional banks offering financing
products to their  customers.  The Farm  Credit  System,  the major  independent
competitor presently active in the agricultural market,  offers a complete array
of traditional loan programs as well as lease financing.



                                        7

<PAGE>



ITEMS 1 AND 2.  BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)


INSURANCE

Insurance  competes with major direct writers,  national agency  companies,  and
smaller regional  insurance  carriers.  Insurance utilizes an independent agency
distribution system to market insurance products and services for the benefit of
the farm, rural, and suburban community.  Growth  opportunities come through the
development of specialty products for the agricultural  community,  professional
agency  recruitment,  and  dedication of marketing  resources to targeted  rural
markets.

HUMAN RESOURCES

Agway and its subsidiaries employ  approximately  7,100 persons,  2,500 of which
are  part-time.  There  are  approximately  130  employees  represented  by  two
different  unions  with  six  existing  union  contracts.   The  Company  enjoys
satisfactory relations with both its union and nonunion employees as a result of
competitive wage, health, and benefit programs.

                                        8

<PAGE>



ITEMS 1 AND 2.  BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)


REGULATION

The Food and Drug Administration's  regulatory powers are applied throughout the
agricultural  industry  and  many of  Agway's  products  are  subject  to  these
regulations.  The Company believes its business, as currently conducted,  is not
adversely affected by present Food and Drug Administration laws and regulations.

The Company and its  subsidiaries  are subject to various laws and  governmental
regulations  concerning  employee  health,  product  safety,  and  environmental
matters. It can be anticipated that increasingly  stringent requirements will be
imposed upon the Company and the chemical and petroleum distribution  industries
in  general.   Examples  of  federal  environmental  laws  administered  by  the
Environmental  Protection Agency (EPA) are the Toxic Substances Control Act; the
Federal  Insecticide,  Fungicide and Rodenticide Act; the Resource  Conservation
Recovery Act; the Clean Air Act; the Safe Drinking Water Act; the  Comprehensive
Environmental  Response,  Compensation,  and  Liability  Act  (CERCLA);  and the
Superfund Amendments and Reauthorization Act (SARA). The Company is also subject
to  regulations  of the  Occupational  Safety and Health  Administration  (OSHA)
concerning  employee safety and health matters.  Under these and other statutes,
the EPA,  OSHA and other  federal  agencies  have the  authority  to  promulgate
regulations  that result in  expenditures  for pollution  control,  reduction of
chemical exposure,  waste treatment and disposal, and plant modification.  These
regulations  might  also  result  in  discontinuance  of  certain  products  and
operations.   The  Company  is  negotiating  with  various  government  agencies
concerning  Superfund  cleanup sites.  In addition to these federal  activities,
various states have been delegated  certain  authority under the  aforementioned
federal  statues.  These  delegations  of  authority  generally  involve  permit
issuance and  compliance  with the statutes.  Many states have adopted or are in
the  process of  adopting  environmental,  product  safety,  and health laws and
regulations,  some  of  which  may  be  more  burdensome  than  similar  federal
requirements. The state environmental legislation administered by state agencies
includes laws for regulating air, surface and ground water, occupational safety,
solid waste, and hazardous substances cleanup.

As part of its long-term  environmental  protection  program,  the Company spent
approximately  $1,800 in fiscal 1997 on capital projects.  The Company estimates
that during fiscal 1998 and 1999 approximately  $1,600 per year will be spent on
additional  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  $550. The total capital  requirements may change
due to the actual number of USTs actively in use on the effective date.

ADMINISTRATIVE

The Company's principal  administrative office is located at 333 Butternut Drive
in DeWitt, New York. It occupies  approximately  240,000 square feet under terms
of a lease  with 10  remaining  years  with  two  10-year  renewal  options.  In
addition,  under a 5-year  renewable lease,  ARS occupies  approximately  80,000
square feet of  administrative  office  space  located at 301  Plainfield  Road,
Syracuse, New York.

STOCKHOLDER MEMBERSHIP AND CONTROL OF AGWAY

The  membership of Agway  consists of farmers or  cooperative  organizations  of
farmers (members) who are record holders of one share of Membership Common Stock
of Agway and who purchase farm supplies or farm services or market farm products
through Agway or franchised representatives. Present membership is approximately
80,000 farmers.

Only  members of the Company  and certain  "contract  patrons"  are  eligible to
receive patronage refunds. (See Patronage Refunds.) Only members are eligible to
attend  membership  meetings  and to  participate  in the  selection  of  member
committees; be elected or appointed to the Agway Council or elected to the Board
of Directors of the Company (each of the foregoing is described below);  and, by
reason of their ownership of Membership Common Stock of the Company, be entitled
to vote.



                                        9

<PAGE>



ITEMS 1 AND 2.  BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)


STOCKHOLDER MEMBERSHIP AND CONTROL OF AGWAY (CONTINUED)

The Company has presently two classes of capital  stock  outstanding,  preferred
and common.  The series of preferred stock are: 6% Cumulative  Preferred  Stock,
Series A ($100 par value);  8% Cumulative  Preferred  Stock,  Series B ($100 par
value);  8%  Cumulative  Preferred  Stock,  Series B-1 ($100 par value);  and 7%
Cumulative Preferred Stock, Series C ($100 par value) owned by members of Agway,
the Agway Inc.  Employees'  Thrift  Investment Plan and the general public.  The
Honorary  Member  Preferred  Stock,  Series HM ($25 par value),  is held only by
former Agway members.  The Membership  Common Stock ($25 par value) is held only
by active farmers who are patrons of Agway.

The  incidents  of  ownership  of  Membership   Common  Stock  in  Agway  differ
considerably  from  those  of  common  stock  ownership  in a  typical  business
corporation.  The  Membership  Common  Stock may be  purchased  only by  persons
entitled  to   membership   in  the  Company.   Only  farmers  and   cooperative
organizations  of farmers who purchase  farm supplies or services or market farm
products through Agway may be members. By reason of the fact that the Company is
an agricultural  cooperative,  its Membership  Common Stock primarily serves the
purpose of  evidencing  membership  in the Company  rather than of evidencing an
equity  interest  in  the  Company.   The  equity  claim  of  Membership  Common
Stockholders  to the assets of Agway is measured by, and  restricted to, the $25
par value of the share,  plus  dividends  declared  and unpaid,  if any, for the
current year. Except for the dividends, which are limited to 8% of the par value
of Membership  Common Stock, and may be declared in any one year and the capital
invested as represented by the par value of such shares,  the residual  equities
in the net assets of Agway  (Retained  Margin)  are held for the benefit of past
and present member-patrons of the Company.

Agway  members are not  entitled  to a  distribution  of assets with  respect to
Retained  Margin  prior  to the  dissolution  of the  Company.  In the  event of
dissolution  of the  Company  and  after  payment  in full of all  debts and any
amounts to which holders of preferred stock,  revolving fund  certificates,  and
common  stock are  entitled,  pursuant to the  provisions  of the By-laws of the
Company, the Retained Margin will be distributed proportionately among the Agway
past and present member-patrons in accordance with their interests.

The  control  of the  affairs  and  business  of Agway is vested in its Board of
Directors.  All  shareholder  actions,  except  as  otherwise  provided  by law,
including  the  election  of  directors,  are  determined  by the  vote of Agway
stockholder-members  present  by proxy or in person at the  annual  meeting  (or
special meetings) of stockholders.

The Board of Directors  currently numbers 17 persons,  all of whom are nominated
on a district  representation  basis by 93 Agway  Geographic  Member  Committees
representing members within the 17 Director Districts. A plan was adopted by the
Board of Directors in 1994 to reduce the number of Director Districts from 18 to
15 over the period 1994 through 1997,  and after the 1997  stockholders'  annual
meeting of the Company,  the Board of  Directors  will number 15. At each annual
meeting of the Company, the stockholders elect five or six directors to fill the
vacancies  resulting from the expiration of the terms of district  directors and
each  director so elected  holds office for a term of three years.  Although the
directors  are  nominated  on a district  representation  basis,  the persons so
nominated are elected by the vote of all members.

The Agway Council  consists of the chairperson of each Agway  Geographic  Member
Committee and one other committee member appointed  annually by the chairperson.
Being elected  chairperson  of one of these  committees  automatically  places a
person on the Council and removal as chairperson  automatically  removes him/her
from the Council.  The Council meets with the Agway Board of Directors  annually
and  serves as  liaison  between  the Agway  Board,  Agway  management,  and the
chairperson's committee. The objective of the Agway Council is to improve member
communications and to increase the effectiveness of the committees.


                                       10

<PAGE>



ITEMS 1 AND 2.  BUSINESS AND PROPERTIES - CONTINUED
(THOUSANDS OF DOLLARS)


PATRONAGE REFUNDS

The By-laws of the Company  provide  that,  after the close of each fiscal year,
members and so-called "contract patrons" shall be paid patronage refunds in cash
in an amount  equal to  realized  net margin of the Company  (computed  on a tax
basis)  derived from sales of farm supplies for the fiscal year after  deduction
of (a) such  reasonable  reserves as the Board of Directors  may determine to be
necessary for operating  purposes and (b) amounts paid or set aside for payments
as dividends on issued and outstanding  stock of the Company,  provided that the
total of such refunds paid shall not exceed the total net margin attributable to
purchasing  business conducted with such members and contract patrons during the
fiscal year. (The term "purchasing," as referred to herein, refers to the buying
of Agway farm  supplies by Agway  members or contract  patrons.)  Each member or
contract  patron shares the total  patronage  refunds in the proportion in which
his/her  purchases of farm  supplies  transacted  for the year directly with the
Company,  as well as  through  Agway  representatives,  bears to the total  farm
supply business  transacted  with all such members and contract  patrons in such
year. No patronage  refunds are payable with respect to marketing  business done
through Agway except on a contract basis.

Pursuant to the Company's  By-laws,  the Board of Directors has  authorized  the
Company to enter into patronage  refund  contracts  with the following  contract
patrons:  certain  departments  or agencies of state  governments  and political
subdivisions; the Federal Government; and charitable, religious, and educational
institutions engaged in the production or utilization of agricultural  products.
The business  done with such  contract  patrons  represents  less than 1% of the
Company's annual sales volume.

RETAINED MARGIN

All net margin (gross receipts reduced by all operating expenses) of the Company
remaining  after  provision  for the payment of  applicable  income  taxes,  the
payment of dividends on issued and outstanding stock of the Company, the payment
of patronage refunds from purchasing activities,  as well as all net margin from
the business  activities of predecessors in interest to the Company  retained as
reasonable reserves, represent the Retained Margin of the Company. Such Retained
Margin consists of:

(1)   That portion of member margin (net margin derived from purchasing business
      with members) undistributed to member-patrons.
(2)   Residual net margin attributable to nonmember patron business and to
      marketing operations.
(3)   All other income, including dividends and interest from investments.

ITEM 3.  LEGAL PROCEEDINGS

The Company and its  subsidiaries are not involved in any material pending legal
proceedings  other than ordinary routine  litigation  incidental to the business
except the following:

In June 1990,  the State of New York (NYS)  commenced  a lawsuit in the New York
State Supreme Court for Albany County against Agway Petroleum Corporation (APC),
Speedsville  Volunteer Fire Department,  and other defendants  alleging they are
strictly and jointly and severally  liable for $158 in cleanup and removal costs
incurred by the New York  Environmental  Protection and Spill  Compensation Fund
and $200 in statutory  penalties  pursuant to the New York State Navigation Law.
NYS  alleges  that  a  gasoline  storage  system  located  on  property  of  the
Speedsville Volunteer Fire Department discharged gasoline that was detected in a
nearby  residential  well.  NYS also  alleges  that the  owners of the  gasoline
storage system included APC and Speedsville  Volunteer Fire Department.  Because
APC  believes  that at no time did it own the  gasoline  storage  system and its
gasoline did not contribute to the  contamination,  APC denies NYS's allegations
and believes the relief sought by NYS against APC is unjustified. Therefore, APC
intends to contest the allegations in the lawsuit and believes  adjustments,  if
any, will not be material in relation to the consolidated  financial position of
Agway.



                                       11

<PAGE>



ITEM 3.  LEGAL PROCEEDINGS (CONTINUED)
(THOUSANDS OF DOLLARS)


In August  1994,  the  Environmental  Protection  Agency  (EPA)  notified  Motor
Transportation Services, Inc. (MTS), a dissolved wholly owned subsidiary of AHI,
that the EPA has reason to believe that MTS is a potentially  responsible  party
(PRP)  under  the  Comprehensive  Environmental  Response,   Compensation,   and
Liability Act (CERCLA) at the Rosen Site, Cortland,  New York. The EPA requested
that   MTS   and   other   PRPs    participate    in   the   ongoing    Remedial
Investigation/Feasibility  Study  (RI/FS) for the Rosen Site.  MTS believes that
its involvement at the Rosen Site, if any, is minimal and responded  accordingly
to the EPA's request. In a related matter,  other PRPs at the Rosen Site, Cooper
Industries,  Inc., et al.,  filed a complaint  under CERCLA against the Company,
MTS and  other  alleged  PRPs at the  Rosen  Site in the  U.S.  District  Court,
Northern District of New York, in June 1992, seeking  reimbursement for the cost
of the ongoing  RI/FS.  The Company and MTS believe the relief  sought by Cooper
Industries,  Inc., et al. is unjustified  and are contesting the  allegations in
the  lawsuit.  The Company does not believe that  adjustments,  if any,  will be
material in relation to the consolidated financial position of Agway.

In  December  1985,  it  was  asserted  by  the   Massachusetts   Department  of
Environmental  Protection  (MDEP) that certain real  property  located in Acton,
Massachusetts,  previously owned by Agway is contaminated and that Agway and the
current owner of the property are responsible for the cost of investigating  and
cleaning up  environmental  contamination  at the property.  In September  1993,
Agway  entered into an  Administrative  Consent  Order with the MDEP pursuant to
which Agway performed a phase II comprehensive  site assessment.  In March 1995,
Agway and the current  owner entered into a settlement  agreement  whereby Agway
agreed, at Agway's expense, to complete any additional assessment,  containment,
removal or  remediation  actions at the  property.  The current  owner agreed to
cooperate with Agway in achieving a permanent solution  satisfactory to the MDEP
and in compliance with the MDEP's requirements. Agway prepared a risk assessment
scope  of work  that was  approved  by the  MDEP,  and the  MDEP  also  approved
reclassification   of  the   site.   Agway   submitted   drafts   of  its   risk
characterization  and remedial  action plan  reports for public  comment in July
1997 and  plans to  finalize  those  reports  in  September  1997.  The  Company
currently has accrued its best estimate  relative to the cost of any  additional
assessment,  containment, removal or remediation actions regarding the property.
However,  it is reasonably  possible  that the results of ongoing  and/or future
environmental studies or other factors could alter this estimate and require the
recording of additional liabilities.  The extent or amount of such events cannot
be estimated at this time.  However,  Agway  believes  that its past  experience
provides a reasonable basis for its estimates recorded for this matter.

In August 1995,  the EPA notified  Agway that the EPA has reason to believe that
Agway is a PRP under CERCLA at the Tri-Cities Barrel site, Port Crane, New York.
The EPA requested that Agway and other PRPs participate in the ongoing RI/FS for
the Tri-Cities  Barrel site.  Agway continues to participate  with other PRPs in
the  ongoing  RI/FS and the  Removal  Action  for the site.  In June  1997,  the
cooperating PRPs agreed upon an allocation of responsibility for past and future
investigation  and  remediation  costs.  Based on this  allocation  and the cost
estimates for the site,  Agway has accrued its best estimate for any  additional
costs at the site.

In April 1997, the EPA notified Agway Petroleum  Corporation  (APC) that the EPA
has  reason to  believe  that APC is a PRP under  CERCLA at the  Friedrichsohn's
Cooperage,  Inc. Superfund Site, Waterford, NY. In August 1997, the EPA demanded
that APC and other PRPs  reimburse  it for  payment of  approximately  $1,800 in
cleanup  costs.  According to the EPA's  waste-in list for the site, the EPA has
attributed  approximately  6% of  the  total  drums  associated  with  the  drum
reconditioning  operations  at the  site  to APC.  Based  on  prior  information
provided by the EPA to APC and APC's  investigation  of its  involvement  at the
site, APC believes that its  involvement at the site is minimal and responded to
the EPA's demand accordingly. The Company does not believe that adjustments will
be material in relation to the consolidated financial position of Agway.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no items submitted to a vote of security holders for the three months
ended June 30, 1997.


                                       12

<PAGE>



                                     PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
        STOCKHOLDER MATTERS

(a)   Principal Market:
      There is no market for the equity  securities  of the  Company  other than
      through its current practice of repurchasing outstanding securities at par
      ($25)  whenever  registered  holders  thereof  elect  to  tender  them for
      redemption.
(b)   Approximate Numbers of Holders of Common Stock:
      The number of  holders  of record of the  Company's  Common  Stock,  as of
      August 22, 1997,  is 104,857,  of which 24,667 shares have been called for
      those holders no longer meeting the membership eligibility requirements as
      identified in Section 2.1(a) in the By-Laws of Agway Inc.
(c)   Dividends Paid:
      An  annual 6%  dividend,  or $1.50 per  share,  was paid on the  Company's
      Common Stock in 1997 and 1996.
(d)   Limitations  on  Ownership  and  Availability of  Net Margin to Membership
      Common Stockholders:
      Refer  to  Items  1  and  2,  Business  and  Properties   sections  titled
      "Stockholder Membership and Control of Agway" and "Patronage Refunds."

ITEM 6.  SELECTED FINANCIAL DATA
The  following   Selected   Financial  Data  of  the  Company  and  Consolidated
Subsidiaries has been derived from consolidated  financial statements audited by
Coopers & Lybrand  L.L.P.,  whose report for the years ended June 30, 1997, 1996
and  1995  is  included  elsewhere  in the  Form  10-K,  and  should  be read in
conjunction with the full consolidated  financial  statements of the Company and
Notes thereto.
<TABLE>
<CAPTION>

                                           (In Thousands of Dollars Except Per Share Amounts)
                               --------------------------------------------------------------------------------------
                                                                 Years Ended June 30

                                       1997              1996              1995             1994              1993
                                  -------------     -------------    --------------    -------------    -------------
<S>                               <C>               <C>              <C>               <C>              <C>
Net sales and revenues (1)...     $  1,671,122      $  1,662,500     $   1,592,053     $  1,694,274     $   1,719,890

Margin (loss) from
   continuing
    operations (2)(3)........     $     10,670      $     11,147     $      (7,800)    $        555     $      24,969

Net margin (loss) (2)(3).....     $     10,670      $     12,662     $     (15,730)    $     (3,445)    $      18,992

Total assets (1)(2)..........     $  1,300,261      $  1,245,891     $   1,225,193     $  1,273,958     $   1,223,758

Total long-term debt ........     $    329,695      $    291,666     $     268,310     $    253,104     $     216,146

Total long-term subordinated
   debt......................     $    438,127      $    414,927     $     399,064     $    407,144     $     379,619

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

(1) Certain amounts reported in fiscal years ended June 30, 1993-1996, have been
    reclassified to conform to current year presentation.
(2) The Company  changed its method of accounting  for certain  inventory in the
    second  quarter of fiscal 1997. As required,  the Company has  retroactively
    adjusted  prior  years' net margin  (loss)  for this  change.  The effect on
    margin (loss) from continuing operations and on net margin (loss) for fiscal
    years  ended  June 30,  1993-1996,  was  $(758),  $(141),  $178 and  $1,062,
    respectively.
(3) The  1994  data  reflect  a  $6,065   credit   before  taxes  from  business
    restructuring  and an after-tax  operating loss of $4,000 from  discontinued
    operations;  1995 data reflect an after-tax loss of $12,360 in  discontinued
    operations  related to Hood, an after-tax  gain on the sale of Curtice Burns
    of $4,430, and a credit before taxes from business  restructuring of $3,248;
    1996 data reflect a $1,943 credit  before taxes from business  restructuring
    and an after-tax gain on the sale of Hood of $1,515, net of operating losses
    until the time of sale.

                                       13

<PAGE>



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


The following discussion refers to Agway Inc. and Consolidated  Subsidiaries and
should be read in  conjunction  with  Selected  Financial  Data (Item 6) and the
Consolidated  Financial  Statements  of the Company and Notes  thereto (Item 8),
specifically  Financial  Information  Concerning Segment Reporting (Note 15) and
Discontinued  Operations (Note 19). The purpose of this discussion is to outline
the most  significant  factors  having an impact upon the results of operations,
the liquidity,  and the capital  resources of the Company for fiscal years ended
June 30, 1995 through June 30, 1997.

RESULTS OF OPERATIONS

1997 COMPARED WITH 1996

CONSOLIDATED RESULTS

The Company's net margin of $10,700 for 1997 is a $2,000 (15.7%)  decline from a
net margin of $12,700 in 1996. The $2,000 decline  reflects a $1,500 decrease in
gain on sale of  discontinued  operations  and a $500 decrease  from  continuing
operations  as  compared  to 1996.  The  continuing  operations  margin  decline
represents a $4,500 pre-tax  decrease  offset by a $4,000 decline in tax expense
as compared to 1996. The 1997 pre-tax  results,  despite an overall decline from
1996, reflect operational  improvements in AAP Enterprise  operations and in all
other business units,  an increase in pension credit,  and a decline in interest
expense in 1997 as compared to 1996.  These  improvements  to pre-tax results in
1997 were more than offset by (1)  decreased  gross margins that resulted from a
combination  of  increased  commodity  costs  and  unfavorable  experience  with
exchange-traded  futures and options; (2) net charges from the current year sale
of the pet food  manufacturing  brands and  businesses  of the Country  Products
Group  (CPG) as  compared  to  significant  gains on the sale of CPG  businesses
generated  in the  prior  year;  and  (3) a  charge  for the  adoption  of a new
accounting pronouncement on the impairment of long-lived assets.

Consolidated net sales and revenues of $1,671,100 increased $8,600 (.5%) in 1997
compared to  $1,662,500  in 1996.  The increase is  primarily  from higher sales
prices in Agriculture and Energy due to increased product costs in 1997 for feed
products,  heating  oil,  diesel  fuel,  and  propane as  compared  to 1996.  In
addition,  an  increase  in volume was  experienced,  particularly  in AAP seed,
fertilizer, and certain feed products; Energy bulk commercial sales; and Telmark
lease volume.  These increases to sales more than offset significant declines in
sales at CPG and ARS as these business units have refocused their businesses and
exited several  businesses or product lines.  AAP's direct  marketing feed sales
also  experienced  significant  declines  in 1997 over  1996 due to lower  wheat
yields in the Northeast.

Consolidated operating expenses of $1,642,300 increased $15,500 (1%) compared to
$1,626,800. The increase is primarily due to increased product costs noted above
and the  additional  costs  associated  with volume  growth in  Telmark's  lease
portfolio in 1997. The Company's Insurance operations reduced operating expenses
$4,700 (22.4%) in 1997 as compared to 1996 from improved  underwriting  results.
Selling, general and administrative expenses (SG&A) have decreased $5,300 (3.9%)
in 1997 as compared to 1996.  The  declines  reflect  the ongoing  reduction  of
costs, resulting from prior decentralization  efforts and management's continued
efforts to reduce these costs.

The  Company's  interest  expense,  net of interest  income,  of $31,000 in 1997
decreased by $2,100  (6.4%)  compared to $33,100 in 1996.  Average  Company debt
levels and cost of debt in 1997 were the same as compared to 1996. Additionally,
prior year interest  assessments  in the  settlement of federal and state income
tax audits inflated the 1996 net interest expense.

Other income, net, of $18,800 increased $300 (1.9%) compared to $18,400 in 1996.
The  Company  received  an  increase in its  patronage  refund  received  from a
cooperative  supplier in 1997 as compared to 1996.  This  increase was partially
offset  by a gain on the sale of an  investment  in 1996  that did not  recur in
1997.

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


                                       14

<PAGE>



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


AGRICULTURE

Total  sales and  revenues  of  $790,700  in 1997  decreased  by $78,800  (9.1%)
compared to $869,500 in 1996. AAP  experienced a $21,200 (3.2%) decline in sales
and revenues while CPG declined $57,600 (27.3%) in 1997 as compared to 1996.

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

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

The Agriculture  segment  operating  margin of $3,200 in 1997 decreased  $20,200
(86.3%) as compared to $23,400 in 1996.

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

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

                                       15

<PAGE>



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


RETAIL

Total sales and revenues of $246,400 in 1997 decreased  $15,600 (6%) compared to
$262,000 in 1996.  The decrease is the result of Retail's  continued  changes to
focus on its three primary product categories: yard and garden, pet food and pet
supplies, and farm-related products. During 1997, the combination of exiting the
power equipment business at additional locations,  completely exiting the frozen
food  business,  and entering into an agreement with a third party to sell water
systems and pay Retail a commission has resulted in an $8,800  decrease in sales
in 1997 as compared to 1996.  Partially  offsetting  these  declines is a $5,000
improvement in Retail's yard and garden business.  Additionally  impacting sales
was a mild and relatively snow-free winter in many parts of the Northeast, which
reduced by $3,700 the bird food and ice melter salt sales. Finally, a decline in
sales of farm-related products was experienced by Retail during 1997 as compared
to 1996 as farm supply stores managed by AAP are supplying an increasing  amount
of the farmers' supply needs.

The Retail  operating margin of $5,200 in 1997 increased $300 (6.1%) compared to
$4,900 in 1996. The realignment of products,  particularly  the increase in yard
and garden sales, has increased the gross margin percentage for ARS in 1997; but
the overall  reduction  in sales noted above has resulted in a decrease in total
gross margin dollars in 1997 compared to 1996. This was more than offset by a 3%
decrease in costs, principally SG&A expenses.

ENERGY

Net sales and revenues of $606,900 in 1997 increased $60,900 (11.2%) as compared
to $546,000 in 1996. The increase was due to higher  commodity prices in heating
oils and  diesel  fuel as a result of strong  demand  and low  inventory  in the
industry. These higher costs increased the average selling price of all products
by 4.6% in 1997 as compared to 1996. Additionally, total unit volume sold of all
products  increased  6.3% in 1997 as compared to 1996,  despite  1997 being 7.5%
warmer  than in 1996 based on degree  days.  The major  component  of the volume
increase was the result of  significant  increases in bulk unit sales in heating
oils and diesel fuels during 1997 as compared to 1996.

Energy's  operating  margin of $19,500 in 1997 increased $3,400 (21.2%) compared
to $16,100 in 1996.  Overall,  product margins in 1997 were comparable with 1996
mainly due to the increased  volume at a lower margin rate.  The higher  product
costs during 1997 could not be fully recovered through increased selling prices,
particularly in heating oil and diesel fuels. Total operating expenses decreased
$3,400 in 1997 compared to 1996. The decreases were  experienced in distribution
and SG&A expenses and were the result of the combination of lower freight costs,
lower amortization of intangibles, and improved management of these costs.

LEASE FINANCING

Total  revenues of $56,900 in 1997  increased  by $8,300  (17.1%) as compared to
$48,600 in 1996. The increase is  attributable  primarily to the $71,200 (19.0%)
increase in net leases and notes  during 1997 as compared to 1996.  Interest and
finance  charge  income,  as a  percentage  of  average  net  leases  and notes,
increased slightly from 12.9% in 1996 to 13.0% in 1997.

Operating  margin of $13,000 in 1997  increased  $1,400  (12.2%) as  compared to
$11,600  in 1996.  The  increase  in total  revenues  was  partially  offset  by
increased  interest  cost of  $3,200  (15.7%),  increased  SG&A  costs of $2,700
(27.4%),  and an increase in the  provision for credit losses of $900 (13.5%) in
1997 as compared to 1996.  The average cost of interest paid on debt for Telmark
remained  unchanged at 7.5% for 1997 and 1996.  The  increased  SG&A expenses in
1997 are primarily due to increased  payroll costs and increases in  advertising
costs.



                                       16

<PAGE>



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


INSURANCE

Insurance net sales and revenues of $27,000 in 1997  increased  $1,600 (6.2%) as
compared to $25,400 in 1996.  The increase  resulted  from an increase in direct
premiums  written and a reduction  in  reinsurance  costs in 1997 as compared to
1996.

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

1996 COMPARED WITH 1995

During 1997, the following changes were made which affected the segment analysis
as  previously  reported:   (1)  management  of  selected  operating  locations,
particularly  within  Agriculture and Retail,  was transferred  between business
segments; (2) the Company changed its method of accounting for certain petroleum
inventory,  which required retroactive restatement,  the effect thereof has been
set forth in Item 6 above;  and (3) the  management  and allocation of corporate
costs to the business  operations  were revised in a continued  effort to reduce
overall  Company  costs.  As  the  result  of  these  changes,  the  appropriate
reclassifications   and  restatements  have  been  reflected  in  the  following
discussion of prior year results.

CONSOLIDATED RESULTS

The Company's net margin of $12,700 in 1996 is a $28,400 improvement over 1995's
net loss of $15,700. Of that improvement,  $18,900 is from continuing operations
and  $9,500  is  from  discontinued  operations.  The  $18,900  from  continuing
operations reflects a $27,100 pre-tax improvement,  offset by an $8,200 increase
in income tax  expense.  The $27,100  pre-tax  improvement  is the result of (1)
improved  operating results,  particularly in Agway Agricultural  Products (AAP)
and Agway Retail Services (ARS), but also in Leasing (Telmark), Country Products
Group (CPG) and Energy,  offset by reduced results in the Insurance  operations;
(2)  net  gains  on sale of  property,  plant  and  equipment,  investments  and
businesses,   principally  by  CPG,  as  the  Company  continues  to  focus  its
operations; and (3) reduced expenses resulting from decentralization  activities
undertaken in 1995 to reduce costs for 1996,  reduced  severance cost in 1996 as
compared to 1995 and continued  expense reduction efforts during 1996, offset by
increased interest expense.

Consolidated  net sales and revenues of $1,662,500  increased  $70,400 (4.4%) in
1996 compared to $1,592,100 in 1995.  The increase was due  principally to price
increases in AAP and price and volume increases in Energy, but also by sales and
revenue  volume  increases  in Telmark and some lines of business in CPG.  These
increases  were offset by reduced  sales in 1996 from  businesses  sold in 1995,
principally  by ARS;  businesses  sold in 1996,  principally by CPG; and reduced
volume in ARS and Insurance as these units refocus their mix of business.

Consolidated  operating  costs and  expenses  of  $1,626,800  in 1996  increased
$51,500 (3.3%)  compared to $1,575,200 in 1995. The increase was due principally
to price  increases  in product  costs in AAP and  Energy as well as  additional
costs  associated  with an increased  portfolio in Telmark and  increased  claim
costs experienced in Insurance.  The selling,  general and administrative (SG&A)
expenses of $136,200  included  above  reflect a $16,000  (10.5%)  decrease from
$152,200 in 1995. These SG&A reductions  reflect a decrease in severance cost of
$5,200 to $1,100 in 1996 compared to $6,300 in 1995 and also reflect the ongoing
reduction of costs,  net of  inflation,  which result from the  decentralization
activities noted above.

Interest  expense,  net of interest income,  of $33,100 in 1996 increased $3,100
(10.3%) compared to $30,000 in 1995. Of the increase,  $2,100 is due to interest
assessed in the  settlement of state income tax audits of prior years for Energy
and $1,300 is due to interest  assessed in the  settlement of federal income tax
audits of prior years for the Company.


                                       17

<PAGE>



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


CONSOLIDATED RESULTS (CONTINUED)

Other income,  net, of $18,400  increased  $11,300  (158.1%) in 1996 compared to
$7,100 in 1995. The increase is substantially attributable to three items: (1) a
$5,100 increase in patronage  refunds received from cooperative  suppliers;  (2)
$3,800 in gains on the sale of businesses (particularly in the CPG operations of
Agriculture); and (3) a $1,300 gain on the sale of an investment.

Income tax expense of $9,900 and $1,700 for 1996 and 1995, respectively, results
in an  effective  tax  rate of 47.1%  and  28.9%.  See  Note 9 of the  financial
statements of the Company for more details.

AGRICULTURE

Total sales and revenues of $869,500 in 1996 increased $79,200 (10%) compared to
$790,300  in  1995.  AAP  experienced  a  $98,200  (17.5%)   increase  that  was
substantially  the result of price increases  reflecting the increase in cost in
feed and fertilizer ingredients. CPG experienced an overall decline in sales and
revenues in 1996,  as compared to 1995,  totaling  $19,000  (8.3%).  The overall
sales  reduction  resulted  from  the  sales  of  CPG's  Pro-Lawn  Products  and
laboratory  animal diet line of business and Sacramento  Valley Milling,  a bean
seed  operation  in  California,  in 1996.  This was  somewhat  offset  by CPG's
sunflower operation which had significant  improvements in 1996,  increasing its
sales and revenues by $6,900 (20%) over 1995.

The Agriculture  operating  margin  improved  $21,500 from a margin of $1,900 in
1995 to a  margin  of  $23,400  in  1996.  AAP's  1996  operating  margin  had a
significant  improvement of $18,000 (370.0%) over 1995. The largest contributing
factors to this  improvement  were the $14,600  (30.8%)  increase to AAP's gross
margins,  an increase of $5,100 in patronage  refunds  received from cooperative
suppliers,  and a decline in expenses as the result of  management's  success in
reducing  SG&A costs from the  reorganization  and the  realignment  of AAP into
enterprises during 1995.

AAP's gross margins over 1995  resulted  from a change in AAP's feed  ingredient
purchasing  program.  During 1996,  Agway Inc.,  through AAP, joined forces with
Farmland Industries,  Inc., to form AFI, a limited liability company, to provide
a  vehicle  to  achieve  better  pricing  in  the  marketplace   through  volume
purchasing.  Additionally,  in a market year with potentially tight supplies and
increasing  prices for  commodities  needed in the Company's feed business,  the
Company increased the use of forward purchase  contracts,  principally to assure
supply, and the use of exchange-traded futures contracts,  principally to assist
in the management of the cost of these  commodities.  AAP's enhanced  purchasing
program  enabled it to capture the  benefits of the rising  market  during 1996,
which is  reflected  in  reduced  cost of sales.  Due to the  volatility  of the
commodities  market, the benefits  experienced in the feed business from the use
of exchange-traded  futures contracts,  which was a major component of the gross
margin  improvement in 1996 in feed  ingredients,  may or may not be realized at
the same level in future years.

CPG's  operating  margin  increased  $3,500 (51.8%) over 1995,  resulting from a
$1,100 (36.5%) improvement in its sunflower  operations and a net $3,800 gain on
the sales of businesses  noted  previously.  These were offset by a reduction in
operating margin due to businesses having been sold during the year and one-time
costs  attributable to the start-up of the new produce  facility in DeWitt,  New
York.

RETAIL

Total sales and revenues of $262,000 in 1996 decreased  $30,400 (10.4%) compared
to $292,400 in 1995.  Sales  declines  resulted from the exit of the Dairy Route
and  Installation & Service  businesses in late 1995.  Additionally,  the summer
drought and early winter  conditions in the  Northeast  during the first half of
1996 adversely  impacted sales,  particularly with yard and garden product lines
such as fertilizers  and turf seeds.  In order to improve overall margins in the
retail  store system  during 1996,  ARS has made product mix changes and created
marketing  programs  designed to de-emphasize high dollar value and lower margin
products  such as power  equipment  in favor of smaller per unit value  products
with higher turnover and margins.  This focus has resulted in an overall decline
in total sales and revenues and some improvement in margins.


                                       18

<PAGE>



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


RETAIL (CONTINUED)

The  operating  margin  of ARS of  $4,900  in 1996 is an  improvement  of $2,200
(82.3%) compared to $2,700 in 1995. This substantial improvement results in part
from the product mix change noted  above,  but also from a reduction in expenses
as the result of management's  successful  efforts to cut back SG&A costs of the
retail store system by reorganizing its structure and management organization.

ENERGY

Total net sales and  revenues of $546,000 in 1996  increased  $35,200  (6.9%) as
compared  to  $510,800  in  1995.  A  large  part  of this  increase  (85%)  was
attributable to price increases,  while the remaining increase was due to volume
increases.  The prices for Energy's  heating and power fuels increased 8% to 10%
over 1995 as the  result  of a rise in the  market  prices  during  peak  winter
months. The volume increases,  particularly in heating oil and propane, resulted
from 1996  being  8.4%  colder  than 1995  (based on degree  days).  These  were
partially  offset by volume  decreases  resulting from  management  decisions to
close certain company-owned retail  keytrol/cardtrol sites which were determined
not to be economical  to upgrade to comply with the new storage tank  regulatory
requirements,  and  diesel  fuel  volume  lost in the summer and fall of 1995 to
competitors  who sold their excess supplies from the warm 1995 winter at bargain
prices.

Energy's  operating  margin  of  $16,100  in 1996 is a $3,300  (25.5%)  increase
compared to $12,800 in 1995. Product margin improvements  totaled $4,000 in 1996
as compared to 1995 and were mainly  attributable  to a change in propane  sales
mix to higher margin accounts.  The margins in heating oils and power fuels were
reduced by higher product costs as the result of a volatile market price of fuel
oil that  could  not be  fully  recovered  through  increased  selling  price to
customers.  The lower  gross  margins in power  fuels were also due to  volatile
product costs as well as product mix,  competitive  pricing and higher operating
costs.  Additionally,  Energy's  operating  margin was  affected by increases in
administrative  expenses of $2,000 over 1995 offset by increases in other income
of $1,100 from the sale of fixed assets and a restructuring credit.

LEASE FINANCING

Total net revenues of $48,600 in 1996 increased $6,700 (16%) compared to $41,900
in 1995. The increase  resulted from a $41,500 (12.4%) increase in the net lease
portfolio in 1996 compared to 1995. Interest and finance charges as a percent of
average net leases and notes increased from 12.7% in 1995 to 12.9% in 1996.

Operating  profits of $11,600 in 1996  increased  $1,000  (9.4%) as  compared to
$10,600 in 1995. The increase in total revenues was partially offset by interest
expense,  which  increased  $2,600  (14.9%) to $20,300 in 1996 due to  Telmark's
increased borrowings required to finance the growth of the lease portfolio.  The
average  cost of debt for  Telmark  remains  unchanged  from 1995 at 7.5%.  SG&A
expenses  increased $1,600 (20%) to $9,800 in 1996 as compared to 1995.  Telmark
payroll costs for additional  personnel,  incentives on new business  booked and
expansion of its advertising all drove expenses upward in 1996.

INSURANCE

Insurance net sales and revenues of $25,400 in 1996 decreased  $4,200 (14.2%) as
compared to $29,600 in 1995.  The decline in revenues is in  Insurance's  direct
written premium due to competitive price conditions for personal lines business.

Operating  losses for Insurance in 1996 of $5,300  declined  $6,000  compared to
$700 in 1995.  This  decline  was the  result of  adverse  development  in older
claims,  certain  unusually  large farmowner and auto losses and increased claim
activity  in the  second  and  third  quarters  of 1996  due to  severe  weather
conditions in the Northeast.



                                       19

<PAGE>



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


DISCONTINUED OPERATIONS

In  1993,  the  Agway  Board  of  Directors  authorized  management  to sell the
Company's  interest in Curtice Burns Foods,  Inc. (Curtice Burns) and H. P. Hood
Inc.  (Hood),  the major  investments  in what was Agway's  food group  segment.
Curtice Burns was sold in 1995 and Hood was sold in 1996. As a result,  the 1996
results from discontinued operations reflect a net gain of $2,100 on the sale of
Hood and a net loss of $600 on its operations through the date of sale. The 1995
results  from  discontinued  operations  reflect  a  $4,400  gain on the sale of
Curtice Burns and $12,400 of net losses in relation to the  operations  and sale
of Hood.

FINANCIAL CONDITION

LIQUIDITY AND CAPITAL RESOURCES

Cash  generated  from  operations  and external  borrowings  continues to be the
Company's  major  ongoing  source  of funds  to  finance  capital  improvements,
business acquisitions,  shareholder dividends,  and a growing lease portfolio at
Telmark.   During  the  three-year  period  ended  June  30,  1997,  significant
additional  cash was generated from the sale of businesses,  particularly at CPG
and with Agway's discontinued operations.

CASH FLOWS FROM OPERATIONS

The net cash flows generated from operating  activities totaled $22,100,  $9,300
and $16,200 in 1997, 1996 and 1995, respectively. The increase in cash flow from
operations  in 1997  reflects  a  substantially  lesser  demand for cash to fund
working  capital  increases  offset by a somewhat lower amount of cash generated
from  earnings  as  compared  to  1996.  The 1996  decrease  in cash  flow  from
operations as compared to 1995 reflects the generation of cash flow from working
capital reductions in 1995 compared to the working capital demand in 1996 offset
by the improved cash generated from earnings in 1996 compared to 1995.

CASH FLOWS FROM INVESTING

Net cash flows  used in the  Company's  investing  activities  totaled  $74,200,
$28,500 and $20,100 in 1997, 1996 and 1995,  respectively.  The most significant
use of cash  over the past  three  years is from  the  Company's  growing  lease
business  (Telmark).  The cash requirements to fund lease origination  growth in
excess of lease  repayments  amounted to  $79,200,  $48,500 and $62,800 in 1997,
1996 and  1995,  respectively.  Capital  expenditures  in 1997 of  $25,745  were
comparable to 1996 and a decrease from $38,475 in 1995. The Company  anticipates
that capital  expenditures will increase as profits increase from planned growth
in many of its business  units.  This increase in capital  expenditures  will be
somewhat offset as fixed asset upgrades of existing facilities are completed.

Cash flow used in investing was partially funded by cash generated from the sale
of businesses and the sale of discontinued operations, which amounted to a total
of $22,000, $42,400 and $76,400 in 1997, 1996 and 1995, respectively.

CASH FLOWS FROM FINANCING ACTIVITIES

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



                                       20

<PAGE>



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


CASH FLOWS FROM FINANCING ACTIVITIES (CONTINUED)

As of June 30, 1997, the Company had certain  facilities  available with various
banking institutions whereby lenders have agreed to provide funds up to $274,000
to  separately  financed  units of the  Company as  follows:  AFC,  $70,000  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 bank  standby  letter of
credit.  The bank has agreed to  increase  AFC's line of credit to  $100,000  on
October 1, 1997, to provide a facility for interim  funding,  if necessary,  for
maturing  subordinated debt (see below). The lines of credit to Telmark have not
changed  since June 30,  1996,  and are  considered  sufficient  to finance  new
business and support incremental repayments on debt.

AGWAY AND AFC

The $70,000 line of credit  available  to AFC at June 30, 1997,  and the $50,000
commercial  paper  facility  require  collateralization  using  certain  of  the
Company's  accounts  receivable  and  non-petroleum   inventories  (collateral).
Amounts that can be drawn under these AFC short-term agreements are limited to a
specific  calculation based upon the collateral  available.  Adequate collateral
has existed  throughout  the fiscal year to permit AFC to borrow amounts to meet
the  ongoing  needs of the  Company  and is  expected  to  continue to do so. 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.  At June 30, 1997, the
Company violated its interest  coverage  covenant but has subsequently  obtained
waivers from its lenders for June 1997 and amendments  through the term of these
agreements.  AFC bank  lines of  credit  and  commercial  paper  facilities  are
available to the Company  through  December 1997. The amounts  outstanding as of
June  30,  1997 and  1996,  under  AFC's  $70,000  line of  credit  and  $50,000
commercial paper were $0 and $34,300 and $12,200 and $50,000,  respectively. The
Company has ongoing discussions with its lenders and expects to continue to have
appropriate and adequate financing to meet its ongoing needs.

Annually,  AFC offers  subordinated  debentures  and  subordinated  money market
certificates to the public. Of AFC's subordinated  debt,  $337,700 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  semiannually  on  January 1 and July 1 of each year.  The money  market
certificates' interest rate is at the greater of the quoted rate or a rate based
upon the discount rate for U.S. Government Treasury Bills, with maturities of 26
weeks. In October 1997, $52,000 of subordinated money market certificates issued
by  AFC  will  mature.   Additionally,   in  July  1997,   the   restriction  on
transferability of $16,700 of preferred stock issued in connection with the 1993
acquisition of local  cooperative  affiliates  expired.  The Company  expects to
refinance this debt and fund any increased redemptions of preferred stock either
through a new issue of subordinated debt, through short-term bank borrowings, or
a combination of both. An increase in the short-term credit facilities providing
this liquidity is described above.

TELMARK

Telmark finances its operations and lease portfolio growth  principally  through
lease payments  which totaled  $143,900 in 1997.  Additionally,  cash flows from
operations,  which were  $16,000,  $13,200 and $12,000 for 1997,  1996 and 1995,
respectively,  borrowings under lines of credit, private placements of debt with
institutional  investors,  sales of debentures to the public,  and  lease-backed
asset securitization all provide financing sources for Telmark.

At June 30, 1997,  Telmark has 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 amount  outstanding as of
June 30, 1997 and 1996,  under the  short-term  line of credit and the revolving
term loan  facility was $4,000 and $190,900 and $0 and  $146,000,  respectively.
The portion of the  revolving  term loan that is short term at June 30, 1997 and
1996, was $24,900 and $0, respectively.


                                       21

<PAGE>



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


TELMARK (CONTINUED)

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 1997. The $200,000  revolving term agreement loan facility is available
through February 1, 1998.

At June 30, 1997, Telmark also had balances  outstanding on ten unsecured senior
note private placements totaling $119,722.  Interest is payable  semiannually on
each senior note.  Principal  payments are both semiannual and annual.  The note
agreements are similar to one another and each contains financial covenants, the
most  restrictive of which prohibit (i) tangible net worth,  defined as tangible
assets less total  liabilities  (excluding any notes payable to Agway  Holdings,
Inc.),  from being less than $70,000,  (ii) the ratio of total  liabilities less
subordinated notes payable to Agway Holdings,  Inc. to shareholder's equity plus
subordinated notes payable to Agway Holdings, Inc. from exceeding 5:1, (iii) the
ratio of earnings  available for fixed charges from being less than 1.25:1,  and
(iv) dividend  distributions and restricted  investments made after December 31,
1994 that  exceed 50% of  consolidated  net income for the period  beginning  on
January 1, 1995 through the date of determination, inclusive.

On May 28, 1997,  Telmark,  through a newly created wholly owned special purpose
subsidiary,   Telmark  Lease  Funding  Corp.  I,  issued   $23,999  of  Class  A
lease-backed  notes and $1,946 of Class B lease-backed  notes to three insurance
companies.  The subsidiary pays interest at 6.58% on the Class A notes and 7.01%
on the Class B notes.  The notes are  collateralized  by 1,165 leases  having an
aggregate  present value of  contractual  lease  payments equal to the principal
balance of the notes, and the notes are further  collateralized  by the residual
values of these leases.
Final scheduled maturity of the notes is December 15, 2004.

In September  1996,  Telmark's  registration  with the  Securities  and Exchange
Commission  of its third  offering to the public of $22,000 of  debentures,  due
March 31,  2000,  and March 31,  2002,  became  effective.  The  debentures  are
unsecured,  subordinated to all senior debt at Telmark. The interest on the debt
is payable  quarterly on January 1, April 1, July 1, and October 1. The offering
of the debentures is not  underwritten,  and there can be no guarantee as to the
amount of  debentures,  if any,  that will be sold.  This offer of debentures is
continuing  and the proceeds of the offering  will be used to provide  financing
for Telmark's leasing activities.  As of June 30, 1997,  approximately $4,000 of
debentures were sold.  Telmark's first registration of debentures,  due December
31, 1997,  was  effective  February 1, 1994,  and  approximately  $4,700 of that
$25,000 offering was sold and is outstanding at June 30, 1997.  Telmark's second
registration  of  debentures,  due March 31,  1998,  and  March  31,  2000,  was
effective October 31, 1994, and  approximately  $22,100 of that $30,000 offering
was sold and is  outstanding  at June 30, 1997. In addition,  beginning in 1997,
Telmark allows reinvestment of interest in the outstanding debentures.
As of June 30, 1997, Telmark had approximately $198 of reinvested interest.

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



                                       22

<PAGE>



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


Sources of longer-term financing of the Company include the following as of June
30, 1997:
<TABLE>
<CAPTION>

Source of debt                                                 Agway & AFC         Telmark           Total
--------------                                                -------------       ---------        ---------
<S>                                                           <C>                 <C>              <C>
Banks - due 7/97 to 7/00 with interest
     from 6.0% to 8.4%......................................  $      2,625        $ 170,000        $ 172,625
Insurance companies - due 9/97 to 4/04
     with interest from 5.9% to 8.9%........................                        144,492          144,492
Capital leases & other - due 1997 to 2007
     with interest from 6% to 12%...........................        12,488               90           12,578
                                                              --------------      ---------        ---------
         Long-term debt.....................................         15,113         314,582          329,695
Subordinated money market certificates - due
     10/97 to 10/08 with interest from 4.5% to 9.5%.........        385,345                          385,345
Subordinated debentures - due 1997 to 2003
     with interest at 6.0% to 8.5%..........................         21,738          31,044           52,782
                                                              --------------      ---------        ---------
         Total subordinated debt............................  $     407,083       $  31,044        $ 438,127
                                                              --------------      ---------        ---------
              Total debt....................................  $     422,196       $ 345,626        $ 767,822
                                                              ==============      =========        =========

</TABLE>

OTHER MATTERS

CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR" PROVISIONS OF THE PRIVATE
SECURITIES LITIGATION REFORM ACT OF 1995

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

IMPAIRMENT OF LONG-LIVED ASSETS

In the first  quarter  of 1997,  the  Company  adopted  Statement  of  Financial
Accounting   Standards  (SFAS)  No.  121,  "Accounting  for  the  Impairment  of
Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed  Of." SFAS No. 121
requires  impairment  losses to be measured and recorded on  long-lived  assets,
whether  these  assets  are  held  for  disposal  or  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.  The
adoption of this  standard  resulted  in a $1,700  pre-tax  charge to  operating
margin  related  to  certain  AAP  fertilizer  and  feed  plants  and ARS  store
locations.

ENVIRONMENTAL ISSUES

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


                                       23


<PAGE>



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


ENVIRONMENTAL ISSUES (CONTINUED)

At June 30, 1997, the Company has been  designated as a PRP under CERCLA or as a
third party to the original PRPs in several Superfund sites. The liability under
CERCLA is joint and several,  meaning that the Company  could be required to pay
in  excess  of  its  pro  rata  share  of  remediation   costs.   The  Company's
understanding  of the financial  strength of other PRPs at these Superfund sites
has been considered,  where appropriate,  in the Company's  determination of its
estimated liability.

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

As part of its long-term  environmental  protection  program,  the Company spent
approximately  $1,800 in fiscal 1997 on capital projects.  The Company estimates
that during fiscal 1998 and 1999 approximately  $1,600 per year will be spent on
additional  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  $550. The total capital  requirements may change
due to the actual number of USTs actively in use on the effective date.

YEAR 2000

In fiscal  1996,  the  Company  initiated a  Companywide  program to prepare its
computer  systems  and  applications  for the year  2000.  As a  result  of this
program, in fiscal 1997, a comprehensive review to identify the systems affected
by this  issue  was  completed,  an  implementation  plan  was  compiled  and is
currently being executed,  and estimated cost projections were determined.  As a
result of the procedures already completed, the Company expects to either modify
or upgrade  existing  systems or replace  some  systems  altogether  where it is
determined to be cost beneficial.

The Company  expects to incur  internal  staff costs as well as  consulting  and
other expenses related to the execution of the implementation  plan. The Company
has also  identified  that a portion of the cost  estimates are not likely to be
incremental costs to the Company,  but rather will represent the redeployment of
existing information  technology  resources.  Testing and conversion of existing
and replacement system  applications are expected to cost approximately  $14,200
over the next two fiscal years.  Approximately  75% of this estimate  represents
costs to replace  existing  systems for year 2000  compliance,  the  majority of
which  will be  capitalized.  The  accounting  treatment  of costs  incurred  in
connection  with the year 2000  compliance  will be treated as period  costs and
will be expensed as  incurred as compared to the  capitalization  of new systems
implemented.

The Company presently  believes that with the planned  modifications to existing
systems and conversion to new systems,  the year 2000  compliance  issue will be
resolved on a timely basis and will not pose  significant  operational  problems
for the Company's computer systems as so modified and converted.







                                       24

<PAGE>



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


AGRICULTURAL ECONOMY AND OTHER FACTORS

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

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

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

The  Company's  endeavors  to limit the effects of changes in interest  rates by
matching as closely as possible, on an ongoing basis, the maturity and repricing
characteristics  of funds  borrowed to finance its leasing  activities  with the
maturity and repricing  characteristics of its lease portfolio.  However, a rise
in interest  rates would  increase the cost of funds  borrowed by the Company to
finance  its  leasing  business  and  could  lower  the  value of the  Company's
outstanding leases in the secondary market. In addition,  higher interest rates,
inasmuch as they would increase the cost of funds borrowed by the Company, would
also increase the cost of leases and could decrease demand for leases.



                                       25

<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA


                      INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>

                                                                                                              PAGE
                                                                                                              -----
<S>                                                                                                              <C>
AGWAY INC. AND CONSOLIDATED SUBSIDIARIES:
      Agway Inc.'s Report on Financial Statements............................................................    27

      Report of Independent Accountants......................................................................    28

      Consolidated Balance Sheets, June 30, 1997 and 1996....................................................    30

      Consolidated Statements of Operations, fiscal years ended June 30, 1997, 1996 and 1995.................    31

      Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended June 30,
           1997, 1996 and 1995...............................................................................    32

      Consolidated Statements of Cash Flow, fiscal years ended June 30, 1997, 1996 and 1995..................    33

      Notes to Consolidated Financial Statements.............................................................    34
</TABLE>

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

      This item is inapplicable.



                                       26

<PAGE>



                   AGWAY INC.'S REPORT ON FINANCIAL STATEMENTS


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

The   consolidated   financial   statements  of  Agway  Inc.  and   Consolidated
Subsidiaries  have  been  audited  by  Coopers  &  Lybrand  L.L.P.,  independent
auditors,  who  relied  on the  opinion  of Price  Waterhouse  LLP,  independent
auditors,  as it relates to H.P. Hood Inc., a former  investment of the Company,
which has been sold and is reflected as discontinued  operations in the June 30,
1995,  financial  statements.  The Coopers & Lybrand L.L.P. and Price Waterhouse
LLP reports follow.  Agway has made available to Coopers & Lybrand L.L.P. all of
the  Company's  financial  records and related  data,  as well as the minutes of
Directors' meetings.  Furthermore,  Agway believes that all representations made
to Coopers & Lybrand L.L.P. during its audit were valid and appropriate.

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

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




                                          AGWAY INC.

                                               /s/ DONALD P. CARDARELLI
                                               BY DONALD P. CARDARELLI
                                               President and CEO
                                               August 22, 1997



                                               /s/ PETER J. O'NEILL
                                               BY PETER J. O'NEILL
                                               Senior Vice President,
                                               Finance & Control,
                                               Treasurer and Controller
                                               August 22, 1997


                                       27

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors of Agway Inc.:

We have audited the  consolidated  balance sheets of Agway Inc. and Consolidated
Subsidiaries  as of  June  30,  1997  and  1996,  and the  related  consolidated
statements of operations, changes in shareholders' equity and cash flows for the
years ended June 30, 1997,  1996 and 1995.  These  financial  statements are the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these financial  statements based on our audits. We did not audit the
financial  statements of H. P. Hood Inc., for the year ended June 30, 1995. Such
statements of H. P. Hood Inc. (not presented  separately  herein)  reflect total
assets amounting to $147,302,000 at June 30, 1995, and total revenues  amounting
to $482,738,000  for the year ended June 30, 1995. Those statements were audited
by other  auditors  whose  report has been  furnished  to us,  and our  opinion,
insofar as it relates to the amounts  included for this subsidiary  prior to any
adjustment  to reflect this  subsidiary  as  discontinued  operations,  is based
solely on the report of the other auditors.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We  believe  that our  audits  and the  report of the other  auditors  provide a
reasonable basis for our opinion.

In our opinion,  based on our audits and the report of the other  auditors,  the
consolidated  financial  statements  referred to above  present  fairly,  in all
material  respects,  the  financial  position  of Agway  Inc.  and  Consolidated
Subsidiaries,  as of June 30, 1997 and 1996, and the results of their operations
and their  cash  flows for the years  ended  June 30,  1997,  1996 and 1995,  in
conformity with generally accepted accounting principles.

As further discussed in the notes to the consolidated financial statements,  the
Company changed its accounting for long-lived assets and certain  inventories in
1997.




/s/  COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.

Syracuse, New York
August 22, 1997



                                       28

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of H.P. Hood Inc.

In our opinion,  the  accompanying  consolidated  balance  sheet and the related
consolidated  statements  of operations  and retained  deficit and of cash flows
present fairly, in all material  respects,  the financial  position of H.P. Hood
Inc. and its  subsidiaries  (the "Company") at June 24, 1995, and the results of
their  operations and their cash flows for the year in conformity with generally
accepted   accounting   principles.   These   financial   statements   are   the
responsibility of the Company's management;  our responsibility is to express an
opinion on these financial statements based on our audit. We conducted our audit
of these  statements in accordance with generally  accepted  auditing  standards
which require that we plan and perform the audit to obtain reasonable  assurance
about whether the financial  statements  are free of material  misstatement.  An
audit includes examining,  on a test basis,  evidence supporting the amounts and
disclosures in the financial  statements,  assessing the  accounting  principles
used and  significant  estimates made by management,  and evaluating the overall
financial  statement  presentation.   We  believe  that  our  audit  provides  a
reasonable basis for the opinion expressed above.





/s/ PRICE WATERHOUSE LLP
PRICE WATERHOUSE LLP
Boston, Massachusetts
August 11, 1995



                                       29

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
                           CONSOLIDATED BALANCE SHEETS
                             JUNE 30, 1997 AND 1996
                             (THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>


                                 ASSETS
                                                                                      1997                1996
                                                                                  -------------      -------------
<S>                                                                               <C>                <C>
Current assets:
     Trade accounts receivable (including notes receivable of
         $44,074 and $35,182, respectively), less allowance for
         doubtful accounts of $7,864 and $10,062, respectively..................  $     209,868      $     207,327
     Leases receivable, less unearned income of $58,225 and $48,403,
         respectively...........................................................        124,552            105,374
     Advances and other receivables.............................................         29,922             35,900
     Inventories................................................................        150,640            159,959
     Prepaid expenses and other assets..........................................         52,714             57,551
                                                                                  -------------      -------------
         Total current assets...................................................        567,696            566,111
Marketable securities...........................................................         35,586             34,115
Other security investments......................................................         49,668             42,406
Properties and equipment, net...................................................        215,095            237,015
Long-term leases receivable, less unearned income of $94,366 and
     $75,828, respectively......................................................        320,809            268,815
Net pension asset...............................................................        100,052             85,181
Other assets....................................................................         11,355             12,248
                                                                                  -------------      -------------
         Total assets...........................................................  $   1,300,261      $   1,245,891
                                                                                  =============      =============


                      LIABILITIES AND SHAREHOLDERS' EQUITY

                                                                                       1997                1996
                                                                                  -------------      -------------
Current liabilities:
     Notes payable..............................................................  $      59,200      $      62,200
     Current installments of long-term debt.....................................        113,720             94,253
     Subordinated debt, current.................................................         62,999             14,643
     Accounts payable...........................................................        113,067            116,519
     Other current liabilities..................................................        113,927            121,046
                                                                                  -------------      -------------
         Total current liabilities..............................................        462,913            408,661
Long-term debt..................................................................        215,975            197,413
Subordinated debt...............................................................        375,128            400,284
Other liabilities...............................................................         68,494             66,811
                                                                                  -------------      -------------
         Total liabilities......................................................      1,122,510          1,073,169
Shareholders' equity:
     Preferred stock, less amount held in Treasury..............................         57,541             59,319
     Common stock ($25 par--300,000 shares authorized; 171,792 and 162,070
         shares issued, less amount held in Treasury)...........................          2,639              2,689
     Retained margin............................................................        117,571            110,714
                                                                                  -------------      -------------
         Total shareholders' equity.............................................        177,751            172,722
Commitments and contingencies...................................................
         Total liabilities and shareholders' equity.............................  $   1,300,261      $   1,245,891
                                                                                  =============      =============


</TABLE>





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

                                       30

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                 FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
                             (THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>

                                                                   1997               1996                1995
                                                              -------------       -------------      --------------
<S>                                                           <C>                 <C>                <C>
Net sales and revenues from:
     Product sales (including excise taxes).................  $   1,587,159       $   1,588,442      $    1,520,502
     Leasing operations.....................................         56,943              48,627              41,942
     Insurance operations...................................         27,020              25,431              29,609
                                                              -------------       -------------      --------------
         Total net sales and revenues.......................      1,671,122           1,662,500           1,592,053
                                                              -------------       -------------      --------------

Cost and expenses from:
     Products and plant operations..........................      1,471,465           1,451,029           1,391,315
     Leasing operations.....................................         23,486              20,305              17,675
     Insurance operations...................................         16,437              21,176              17,321
     Selling, general and administrative activities.........        130,944             136,200             152,177
     Restructuring credit...................................                             (1,943)             (3,248)
                                                              -------------       -------------      --------------
         Total operating costs and expenses.................      1,642,332           1,626,767           1,575,240
                                                              -------------       -------------      --------------

Operating margin............................................         28,790              35,733              16,813
Interest expense, net of interest income of $9,976,
     $10,330 and $8,829, respectively.......................        (30,970)            (33,085)            (30,003)
Other income, net...........................................         18,763              18,422               7,137
                                                              -------------       -------------      --------------
Margin (loss) from continuing operations before
     income taxes...........................................         16,583              21,070              (6,053)
Income tax expense..........................................         (5,913)             (9,923)             (1,747)
                                                              -------------       -------------      --------------

Margin (loss) from continuing operations....................         10,670              11,147              (7,800)

Discontinued operations:
     Loss from operations, including tax benefit of
         $120 and $13,637, respectively.....................                               (595)            (12,360)
     Gain on disposal of Hood, net of tax expense
         of $1,711..........................................                              2,110
     Gain on disposal of Curtice Burns, net of tax
         expense of $19,700.................................                                                  4,430
                                                              -------------       -------------      --------------
              Margin (loss) from discontinued operations....                              1,515              (7,930)
                                                              -------------       -------------      --------------

Net margin (loss)...........................................  $      10,670       $      12,662       $     (15,730)
                                                              =============       =============      ==============

</TABLE>














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

                                       31

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
           CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
                 FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
                             (THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>

                                                COMMON STOCK
                                             --------------------
                                              (PAR VALUE $25)        PREFERRED   PAID-IN     RETAINED
                                              SHARES      AMOUNT       STOCK     CAPITAL      MARGIN        TOTAL
                                             --------    --------    ---------   --------    --------     ---------
<S>                                           <C>        <C>         <C>         <C>         <C>          <C>
Balance as of June 30, 1994, as
     previously reported .................    110,854    $  2,771    $ 71,338    $  6,371    $123,346     $203,826

Adjustment for the cumulative effect
     on prior years of applying
     retroactively the new method
     of valuing inventories ..............                                                        224          224

Balance as of June 30, 1994, as
      adjusted ...........................    110,854       2,771      71,338       6,371     123,570      204,050

     Net loss ............................                                                    (15,730)     (15,730)
     Dividends declared ..................                                                     (4,785)      (4,785)
     Redeemed, net .......................     (1,735)        (43)     (5,703)                              (5,746)
     Adjustment to unrealized losses
         on available-for-sale securities,
         net of tax ......................                                                       (121)        (121)
     Sale of stock of Curtice Burns ......                                         (4,901)                  (4,901)
                                              --------   --------    --------    --------    --------     --------

Balance June 30, 1995 ....................    109,119       2,728      65,635       1,470     102,934      172,767

     Net margin ..........................                                                     12,662       12,662
     Dividends declared ..................                                                     (4,382)      (4,382)
     Redeemed, net .......................     (1,545)        (39)     (6,316)                              (6,355)
     Adjustment to unrealized losses
         on available-for-sale securities,
         net of tax ......................                                                       (500)        (500)
     Sale of stock of Hood ...............                                         (1,470)                  (1,470)
                                              --------   --------    --------    --------    --------     --------

Balance June 30, 1996 ....................    107,574       2,689      59,319           0     110,714      172,722

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


Common shares,  purchased at par value, held in Treasury at June 30 were: 66,240
in 1997;  54,496 in 1996;  61,734 in 1995. A common stock  dividend per share of
$1.50 was  declared  for  fiscal  1997,  1996 and 1995.  Dividend  payments  are
restricted  to a maximum  of 8% of par value,  as  governed  by the Farm  Credit
Administration. See Note 13 for the details of preferred stock activity.



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

                                       32

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
                      CONSOLIDATED STATEMENTS OF CASH FLOW
                 FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
                             (THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>


                                                                   1997               1996                1995
                                                              -------------       -------------      ------------
<S>                                                           <C>                 <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
   Net margin (loss)........................................  $      10,670       $     12,662       $    (15,730)
   Adjustments to reconcile margins to net cash:
       Depreciation and amortization........................         29,831             33,422             33,720
       Restructuring credit.................................                            (1,943)            (3,248)
       Receivables and other asset provisions...............         10,341             10,993              9,369
       Net pension income...................................        (14,871)           (11,338)            (9,956)
       Patronage refund received in stock...................         (7,762)            (3,264)            (1,123)
       Deferred income tax (benefit) expense................          4,795             11,474            (15,682)
       (Gain) loss on sale of:
           Businesses.......................................           (360)            (3,799)
           Other security investments.......................                            (1,348)
           Properties and equipment.........................         (2,613)               891              1,436
       Changes in assets and liabilities,  net of effects
           of businesses acquired or sold:
           Receivables......................................           (210)           (14,982)            15,333
           Inventory........................................          6,048            (12,527)            20,709
           Payables.........................................         (2,603)           (21,802)            (4,400)
           Other  ..........................................        (11,133)            10,910            (14,247)
                                                              -------------       -------------      ------------
Net cash flows from operating activities....................         22,133              9,349             16,181

CASH FLOWS FROM INVESTING ACTIVITIES:
   Purchases of property, plant and equipment...............        (25,745)           (26,025)           (38,475)
   Cash paid for acquisitions...............................         (2,178)              (688)
   Disposal of property, plant and equipment................         11,429              4,012              6,373
   Purchases of marketable securities available for sale....        (25,084)           (10,973)            (1,704)
   Sale of marketable securities available for sale.........         24,037             11,110                774
   Leases originated........................................       (223,061)          (174,999)          (170,495)
   Leases repaid  ..........................................        143,906            126,529            107,649
   Purchases of investments in related cooperatives.........         (4,657)            (4,401)            (1,700)
   Proceeds from sale of investments in related cooperatives          5,159              4,586              1,069
   Proceeds from disposal of businesses.....................         21,958             26,467
   Proceeds from sale of discontinued operations............                            15,900             55,786
   Net changes in assets of discontinued operations.........                                               20,625
                                                              -------------       -------------      ------------
Net cash flows used in investing activities.................        (74,236)           (28,482)           (20,098)

CASH FLOWS FROM FINANCING ACTIVITIES:
   Net change in short-term borrowing.......................         (3,000)            (8,100)             7,500
   Proceeds from long-term debt.............................        132,771             67,513             90,220
   Repayment of long-term debt..............................        (92,069)           (42,896)           (73,501)
   Proceeds from sale of subordinated debentures............         63,086             81,565             65,398
   Redemption of subordinated debt..........................        (39,887)           (65,701)           (73,479)
   Payments on capitalized leases...........................         (2,673)            (2,311)            (1,512)
   Proceeds from sale of stock..............................          2,291                 13                 33
   Redemption of stock......................................         (4,119)            (6,368)            (5,779)
   Cash dividends paid......................................         (4,297)            (4,582)            (4,963)
                                                              -------------       -------------      ------------

Net cash flows from financing activities....................         52,103             19,133              3,917
                                                              -------------       -------------      ------------
Net increase (decrease) in cash and equivalents.............              0                   0                 0
Cash and equivalents at beginning of year...................              0                   0                 0
                                                              -------------       -------------      ------------
Cash and equivalents at end of year.........................  $           0       $           0      $          0
                                                              =============       =============      ============
</TABLE>




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

                                       33

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                             (THOUSANDS OF DOLLARS)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

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

Fiscal Year
The  Company's  fiscal  year-end is on the last  Saturday in June.  Fiscal years
ended June 1997 and June 1995 were comprised of 52 weeks. Fiscal year ended June
1996 was comprised of 53 weeks.

Basis of Consolidation
The consolidated  financial  statements include the accounts of all wholly owned
subsidiaries. Operations of H.P. Hood Inc. (Hood), which was 99.9% owned through
December 14, 1995, and Curtice Burns Foods, Inc. (Curtice Burns),  which was 34%
owned through  November 3, 1994, are presented as  discontinued  operations (see
Note 19). All  significant  intercompany  transactions  and  balances  have been
eliminated in consolidation.

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

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

Leases Receivable
Telmark lease  contracts,  which qualify as direct  finance leases as defined by
Statement of  Financial  Accounting  Standards  (SFAS) No. 13,  "Accounting  for
Leases," are  accounted  for by recording on the balance  sheet the total future
minimum lease payments receivable plus the estimated unguaranteed residual value
of leased  equipment less the unearned  interest and finance  charges.  Unearned
interest and finance  charges  represent the excess of the total future  minimum
lease  payments plus the estimated  unguaranteed  residual  value expected to be
realized  at the end of the lease term over the cost of the  related  equipment.
Interest  and finance  charge  income is  recognized  as  revenue,  by using the
interest  method  over the term of the  lease,  which  for most  commercial  and
agricultural  leases  is 60 months or less  with a  maximum  of 180  months  for
buildings.  Income recognition is suspended on all leases and notes which become
past due greater than 120 days.  Initial direct costs incurred in consummating a
lease are  capitalized  as part of the  investment in direct  finance leases and
amortized over the lease term as a reduction in the yield.  Gains on lease sales
are reduced for estimated  future  servicing fees and estimated losses under the
recourse  provisions  of the  sale  (limited  to  7.5%  of the  sale  proceeds).
Servicing amounts are amortized over the life of the sold leases.

SFAS No. 125,  "Accounting  for Transfers and Servicing of Financial  Assets and
Extinguishments  of Liabilities,"  effective for the Company on January 1, 1997,
provides new methods of accounting  and reporting for transfers and servicing of
financial  assets and  extinguishments  of liabilities.  The Company has applied
SFAS 125 to  securitization  transactions  occurring  after January 1, 1997. The
effect of  adopting  SFAS 125 has not had a  material  effect  on the  Company's
results of operations, financial position, or liquidity.



                                       34

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

During the second quarter of fiscal 1997, the Company's  Energy segment  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  totaled  $15,900  and $15,600 at June 30, 1997 and
1996,  respectively,  and represent 10% 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  changed to the FIFO  method of  inventory  valuation  for tax
purposes.  Management  believes  the FIFO method will  provide a better match of
current  costs  and  current  revenues.  The  cumulative  effect  of the  change
(reported  as an  increase in  retained  earnings  as of June 30,  1994) of $224
represents  the effect on net  earnings of the  reversal of the LIFO  reserve at
that date.  The  restatement  of income as previously  reported for fiscal years
ended June 30, 1996 and 1995, is as follows:
<TABLE>
<CAPTION>

                                                                                      1996                1995
                                                                                  -------------      -------------
<S>                                                                               <C>                <C>
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)
                                                                                  =============      =============
</TABLE>

Commodity Instruments
The Company has exposure to price fluctuations associated with certain commodity
inventories,  product gross margins and certain anticipated  transactions in its
Agriculture and Energy segments.  Commodities  such as corn, soy complex,  oats,
wheat, gasoline,  fuel oil, and propane are purchased at market prices which are
subject to volatility. In order to manage the risk of market price fluctuations,
the Company enters into various exchange-traded futures and option contracts and
over-the-counter  option  contracts  with third  parties.  The  Company  closely
monitors  and  manages  its  exposure  to market  price risk on a daily basis in
accordance with policies that put certain limitations on this activity.

Agriculture  financial  instrument  contracts  are entered into within the grain
marketing and feed  businesses.  The grain  marketing  program  enters into both
forward  purchase and sales  commitments with farmers and others on a variety of
grain products.  At the same time, grain marketing enters into generally matched
transactions (in both maturity and amount) using offsetting forward  commitments
and/or exchange-traded  futures contracts to hedge against price fluctuations in
the market price of grains.  In the feed business,  exchange-traded  futures and
option  contracts  are entered into to manage  exposure to  fluctuations  in the
prices for its present and anticipated  needs of major  ingredients for its feed
business.  The inventory  futures contracts and forward  commitments  associated
with this activity are marked to market at the end of the reporting  period with
the resulting gains or losses being charged to cost of sales.

Energy  financial  instrument  contracts are  designated at inception as a hedge
where  there is a direct  relationship  to the price  risk  associated  with the
Company's  inventories or future  purchases and sales of commodities used in the
Company's operations. Hedges of inventories are accounted for under the deferral
method with gains and losses from hedging  activity and premiums paid for option
contracts included in the cost of sales as those inventories are sold. Hedges of
anticipated  transactions  are also accounted for under the deferral method with
gains and  losses on these  transactions  recognized  in cost of sales  when the
anticipated hedged transaction occurs. Gains and losses on early terminations of
financial instrument contracts designated as hedges are deferred and included in
cost of sales in the same period as the hedged transaction.



                                       35

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Commodity Instruments (continued)
For derivative financial  instruments not designated as effective hedges of firm
commitments  or  anticipated  transactions,  changes  in the fair value of these
contracts are recognized in cost of sales currently.

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

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

Patronage  refunds  received from the cooperative bank in the form of additional
bank stock and cash are recorded as a reduction of interest  expense and totaled
approximately  $1,200,  $1,400 and $900 for the years ended June 30, 1997,  1996
and  1995,  respectively.  Patronage  refunds  received  on the  stock  of other
cooperatives are reflected in other income.

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

Other Assets
Other assets include  approximately $7,300 and $8,000 at June 30, 1997 and 1996,
respectively,  of  costs in  excess  of the fair  value of net  tangible  assets
acquired in purchase  transactions  (goodwill)  as well as acquired  non-compete
agreements, customer lists, and trademarks. Goodwill and other intangible assets
are amortized on a straight-line  basis over periods ranging from 1 to 40 years.
Amortization  included in continuing  operations totaled  approximately  $1,100,
$1,600  and  $2,400  for  fiscal  years  ending  June 30,  1997,  1996 and 1995,
respectively.

Impairment of Long-Lived Assets
In the first quarter of 1997, the Company adopted SFAS No. 121,  "Accounting for
the  Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed
Of." SFAS No. 121  requires  impairment  losses to be measured  and  recorded on
long-lived  assets,  whether  these  assets  are  held for  disposal  or 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.  The adoption of this  standard  resulted in a $1,700  pre-tax
charge to operating margin related to certain AAP fertilizer and feed plants and
ARS store locations.




                                       36

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


1.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

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

Expendable Costs
The Company expenses  advertising and research and development costs as they are
incurred.  Advertising  expense for the years ended June 30, 1997, 1996 and 1995
was approximately $10,800, $23,200 and $20,700,  respectively.  Net research and
development costs were  approximately  $700, $600 and $1,300 for the years ended
June 30, 1997, 1996 and 1995, respectively.

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

Discontinued Operations
Interest expense allocated from continuing operations to discontinued operations
was based upon the proportion of net assets separately financed to total Company
assets.  Total interest expense allocated was approximately  $400 and $1,000 for
the years ended June 30, 1996 and 1995, respectively.

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




                                       37

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (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 unconditionally guaranteed by the Company.

Major subsidiary  holdings of AHI include Agway Consumer  Products Inc. (ARS and
CPG),  Agway  Petroleum  Corporation  (Energy),  Telmark Inc.  and  subsidiaries
(Leasing), Agway Insurance Company and Agway General Agency (Insurance), as well
as former holdings in Hood and Curtice Burns.

In an exemptive  relief  granted  pursuant to a "no action letter" issued by the
staff of the Securities and Exchange Commission,  AFC, as a separate company, is
not required to file  periodic  reports  with respect to these debt  securities.
However,  as  required by the 1934 Act,  the  summarized  financial  information
concerning AFC and consolidated  subsidiaries,  as of the fiscal year ended June
30, is as follows:
<TABLE>
<CAPTION>


                                                        1997                    1996                    1995
                                                 -----------------       -----------------       ----------------
<S>                                              <C>                     <C>                     <C>
Net sales and revenues.........................  $      1,109,960        $      1,087,317        $     1,089,316
Operating margin...............................            42,428                  33,763                 31,644
Margin (loss) from continuing operations.......             5,183                  (5,212)                13,822
Net margin (loss)..............................             5,183                  (3,697)                 5,892


                                                        1997                    1996
                                                 -----------------       -----------------

Current assets.................................  $        522,514        $        532,158
Properties and equipment, net..................           155,969                 166,504
Noncurrent assets..............................           409,670                 353,377
                                                 -----------------       -----------------
Total assets...................................  $      1,088,153        $      1,052,039
                                                 =================       =================

Current liabilities............................  $        264,679        $        227,782
Long-term debt.................................           209,296                 191,189
Subordinated debt..............................           375,128                 400,284
Noncurrent liabilities.........................            17,813                  17,152
Shareholder's equity...........................           221,237                 215,632
                                                 -----------------       ----------------
Total liabilities and shareholder's equity.....  $      1,088,153        $      1,052,039
                                                 =================       ================

</TABLE>

3.  RESTRUCTURING RESERVES

In June 1992,  the Company  established a $75,000  reserve for the estimated net
cost to  complete  a  significant  restructuring  project of the  Company.  This
project was planned to be completed  over several years.  As initiatives  within
this  project were  completed,  the Company  monitored  the  estimated  costs to
complete the project and  recognized  into income a reduction in costs  totaling
$11,256,  which has been realized as follows:  $1,943 in fiscal 1996;  $3,248 in
fiscal 1995; and $6,065 in fiscal 1994. At June 30, 1996,  all projects  related
to these planned  activities  were  concluded and no further  charges or credits
from these activities will occur.

                                       38

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


4.  LEASES RECEIVABLE AND ALLOWANCE FOR CREDIT LOSSES

Net investments in leases at June 30 were as follows:
<TABLE>
<CAPTION>

                                                                                      1997                1996
                                                                                 --------------      --------------
<S>                                                                              <C>                 <C>
Leases (minimum payments):
     Commercial and agricultural.............................................    $      596,442      $      505,783
     Retail..................................................................            16,682               4,771
                                                                                 --------------      --------------
         Total leases........................................................           613,124             510,554
Unearned interest and finance charges........................................          (152,591)           (124,231)
Net deferred origination costs...............................................             8,842               7,642
                                                                                  -------------      --------------
     Net investment..........................................................           469,375             393,965
Allowance for credit losses..................................................           (24,014)            (19,776)
                                                                                  -------------      --------------
     Net leases receivable...................................................     $     445,361      $      374,189
                                                                                  =============      ==============

</TABLE>

Included within the above are estimated  unguaranteed  residual values of leased
property   approximating  $63,700  and  $54,400  at  June  30,  1997  and  1996,
respectively.  Additionally,  as of June 30, 1997 and 1996,  the  recognition of
interest income was suspended on approximately $2,700 and $2,900,  respectively,
of net leases.

Contractual maturities of leases (minimum payments) over the next five years and
thereafter were as follows at June 30, 1997: $186,645 in 1998; $147,955 in 1999;
$106,314 in 2000; $67,124 in 2001; $38,262 in 2002; and $66,824 thereafter.


5.  INVENTORIES

Inventories at June 30 consist of the following:
<TABLE>
<CAPTION>

                                                                                      1997                1996
                                                                                 --------------      --------------
<S>                                                                              <C>                 <C>
Raw materials.................................................................   $       9,396       $      16,161
Finished goods................................................................         138,691             128,770
Goods in transit and supplies.................................................           2,553              15,028
                                                                                 --------------      --------------
      Total inventories.......................................................   $     150,640       $     159,959
                                                                                 ==============      ==============

</TABLE>



                                       39

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


6.  MARKETABLE SECURITIES

All of the  Company's  marketable  debt  and  equity  securities,  which  relate
entirely   to  the   Company's   insurance   operations,   are   classified   as
available-for-sale marketable securities and include:
<TABLE>
<CAPTION>

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

                                                                           Gross          Gross
                                                          Amortized     Unrealized      Unrealized        Fair
                                                            Cost           Gains         Losses           Value
                                                       -------------   ------------    ------------   -------------- 
June 30, 1996
-------------
U.S. government securities and obligations...........  $       7,620   $         13    $      (229)   $      7,404
Non-U.S. government obligations......................          3,487                          (131)          3,356
Mortgage-backed securities...........................          7,357            156            (30)          7,483
Corporate securities.................................         16,704             10           (842)         15,872
                                                       --------------  -------------   ------------   -------------
     Total available-for-sale marketable securities..  $      35,168   $        179    $    (1,232)   $     34,115
                                                       ==============  =============   ============   =============

</TABLE>

The cost of  securities  sold is based on the  specific  identification  method.
Realized gains and losses, declines in value judged to be  other-than-temporary,
and interest and dividends are included in income.  Gross gains of approximately
$200 and $500 were  realized on sales of debt and equity  securities in 1997 and
1996, respectively.  Gross gains realized in 1995 were immaterial.  Gross losses
realized on sales of debt and equity securities  totaled  approximately $200 and
$300  in 1997  and  1996,  respectively.  Gross  losses  realized  in 1995  were
immaterial.

At June 30,  1997,  the Company did not hold any debt from a single  issuer that
exceeded 10 percent of the Company's shareholders' equity.

The amortized cost and the fair value of  available-for-sale  debt securities at
June 30, 1997, by contractual  maturity,  are shown below.  Expected  maturities
will differ from contractual  maturities because borrowers may have the right to
call or prepay obligations with or without call or prepayment  penalties.  There
were no contractual maturities due in one year or less.

                                                 Amortized             Fair
                                                   Cost                Value
                                                 ---------           ---------
Due after one year through five years.........   $   9,472           $   9,351
Due after five years through ten years........       4,518               4,476
Due after ten years...........................      22,020              21,759
                                                 ---------           ---------
                                                 $  36,010           $  35,586
                                                 =========           ==========

                                       40

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


7.  OTHER SECURITY INVESTMENTS

Other security investments at June 30 consist of the following:
<TABLE>
<CAPTION>

                                                                                      1997                1996
                                                                                  -------------      -------------
<S>                                                                               <C>                <C>
CF Industries, Inc..............................................................  $     22,151       $      17,521
CoBank, ACB.....................................................................        20,643              22,158
Other...........................................................................         6,874               2,727
                                                                                  -------------      -------------
                                                                                  $     49,668       $      42,406
                                                                                  =============      =============
</TABLE>

8.  PROPERTIES AND EQUIPMENT

Properties and equipment,  at cost,  including  capital  leases,  consist of the
following at:
<TABLE>
<CAPTION>

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

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

Properties and equipment, net..............................   $     213,383       $      1,712       $     215,095
                                                              =============       =============      ==============


                                                                   Owned             Leased             Combined
June 30, 1996
-------------
Land and land improvements.................................   $       36,126      $      1,071       $      37,197
Buildings and leasehold improvements.......................          126,419             8,991             135,410
Machinery and equipment....................................          343,728             7,442             351,170
Capital projects in progress...............................            9,484                                 9,484
                                                              --------------      --------------     --------------
                                                                     515,757            17,504             533,261

Less: accumulated depreciation and amortization............          281,861            14,385             296,246
                                                              --------------      -------------      --------------

Properties and equipment, net..............................   $      233,896      $      3,119       $     237,015
                                                              ==============      ==============     ===============
</TABLE>


Depreciation  and  amortization  expense  relating to  properties  and equipment
amounted to approximately  $28,800,  $31,800 and $31,300 in 1997, 1996 and 1995,
respectively.


                                       41

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


9.  INCOME TAXES

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

<TABLE>
<CAPTION>

                                                                   1997               1996                1995
                                                              -------------       -------------      -------------
<S>                                                           <C>                 <C>                <C>
Continuing operations:
     Current:
         Federal...........................................   $      (2,226)      $     (3,736)      $       2,674
         State.............................................           3,344              2,253               1,379
     Deferred..............................................           5,676             11,372              (3,153)
     (Decrease) increase in valuation allowance............            (881)                34                 847
                                                              -------------       -------------      -------------
                                                              $       5,913       $      9,923       $       1,747
                                                              =============       =============      =============
Discontinued operations:
     Current:
         Federal...........................................   $                   $      1,591       $       9,656
         State.............................................                                                  1,553
     Deferred..............................................                                                 (5,146)
                                                              -------------       -------------      --------------
                                                              $          0        $      1,591       $       6,063
                                                              =============       =============      ==============

</TABLE>

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

<TABLE>
<CAPTION>

                                                                   1997               1996                1995
                                                              -------------       -------------      -------------
<S>                                                           <C>                 <C>                <C>
Statutory federal income tax rate..........................        35.0%               35.0%             (35.0%)

Tax effects of:
     State income taxes, net of federal benefit (1)........        14.0                 7.4                8.2
     Items for which no federal tax effect was recognized           1.8                 2.5               20.9
     Dividend received deduction...........................          -                   -                (1.6)
     Amortization of intangibles...........................          .4                  .5                2.2
     Adjustment to prior years' tax liabilities............       (10.8)                2.7               18.1
     Other items...........................................        (4.7)               (1.0)               7.4
     Basis difference in investment........................                              -                 8.7
                                                              -------------       -------------      -------------
         Effective income tax rate.........................        35.7%               47.1%              28.9%
                                                              =============       =============      =============
</TABLE>


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

                                       42

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


9.  INCOME TAXES (CONTINUED)

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


                                                                                      1997                1996
                                                                                  -------------      -------------
<S>                                                                               <C>                <C>
Deferred tax assets:
     Other liabilities and reserves............................................   $     13,246       $      14,644
     Leases receivable.........................................................          7,752               9,900
     Self-insurance reserves...................................................          6,280               6,554
     Medical reserves..........................................................          7,682               7,325
     Inventory.................................................................          4,391               5,833
     Deferred compensation.....................................................          4,350               4,964
     Accounts receivable.......................................................          2,673               3,421
     Environmental.............................................................          3,070               3,540
     NOL carryforward..........................................................          3,673                 368
     Alternative minimum tax credit carryforward...............................          7,135               5,385
     ITC carryforward..........................................................          1,959               1,194
                                                                                  -------------      -------------
     Gross deferred tax asset..................................................         62,211              63,128
     Less valuation allowance..................................................                               (881)
                                                                                  -------------      -------------
         Total net deferred tax asset..........................................         62,211              62,247
                                                                                  -------------      -------------

Deferred tax liabilities:
     Pension assets............................................................         34,018              28,961
     Excess of tax over book depreciation......................................         14,715              15,228
     Prepaid medical...........................................................          6,675               6,455
     Other assets .............................................................          2,269               2,274
                                                                                  -------------      -------------
         Total deferred tax liability..........................................         57,677              52,918
                                                                                  -------------      -------------
              Net deferred tax asset...........................................   $      4,534       $       9,329
                                                                                  =============      =============

</TABLE>

The  Company's  net deferred tax asset at June 30, 1997 and 1996,  of $4,534 and
$9,329,  respectively,  consists of a net  current  asset of $20,714 and $24,267
included  in prepaid  expenses  and a net  long-term  liability  of $16,180  and
$14,938   included  in  other   liabilities  as  of  June  30,  1997  and  1996,
respectively.  The total gross  deferred  tax assets are  partially  offset by a
valuation  allowance of $881 at June 30, 1996. Based on the Company's history of
taxable earnings and its expectations for the future,  management has determined
that  operating  income will likely be  sufficient  to recognize  all of its net
deferred tax asset.

At June 30,  1997,  the  Company's  federal  AMT credit  can be carried  forward
indefinitely. The net operating loss (NOL) carryforwards expire in 2012, and the
ITC credits expire in 2003.


                                       43

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


10.  SHORT-TERM NOTES PAYABLE

As of June 30, 1997, the Company had certain  facilities  available with various
banking institutions whereby lenders have agreed to provide funds up to $274,000
to  separately  financed  units of the  Company as  follows:  AFC,  $70,000  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 bank  letter of  credit.
Short-term borrowings under these credit facilities were as follows:
<TABLE>
<CAPTION>

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


                                                                   Agway
                                                                  and AFC
                                                                (excluding
                                                                 Telmark)            Telmark              Total
                                                              --------------      -------------      -------------
June 30, 1996
-------------
Bank lines of credit.......................................   $      12,200       $                  $      12,200
Commercial paper...........................................          50,000                                 50,000
                                                              --------------      -------------      -------------
                                                              $      62,200       $          0       $      62,200
                                                              ==============      =============      =============
Weighted average interest rate.............................           5.86%                  -
                                                              ==============      =============

</TABLE>

The carrying amount of the Company's  short-term  borrowings  approximates their
fair value.  Interest rates charged on commercial paper  outstanding  range from
5.57% and 5.58% at June 30, 1997, and 5.37% to 5.62% at June 30, 1996.  Interest
rates charged by the banks on cash  drawdowns of the  Company's  lines of credit
approximate  prevailing  short-term  borrowing  rates ranging  between 7.70% and
7.74% at June 30, 1996.

Letters of credit of $28,000, which are primarily used to back general liability
claims,  are also  available to AFC. At June 30, 1997,  letters of credit issued
totaled approximately $24,800.

The $70,000  line of credit  available to AFC  increases  to $100,000  effective
October 1, 1997. This line of credit and the $50,000  commercial paper facility,
as amended in February 1997, are available to the Company through December 1997.
These  AFC   agreements,   including   $2,625   in   long-term   debt,   require
collateralization  using  certain  of  the  Company's  accounts  receivable  and
non-petroleum  inventories  (collateral).  Amounts that can be drawn under these
AFC short-term  agreements are limited to a specific  calculation based upon the
collateral available. Adequate collateral has existed throughout the fiscal year
to permit AFC to borrow  amounts to meet the ongoing needs of the Company and is
expected to continue  to do so. 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.  At June 30, 1997, the Company violated its interest coverage
covenant but has  subsequently  obtained  waivers from its lenders for June 1997
and amendments through the term of these agreements.



                                       44

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)

10.  SHORT-TERM NOTES PAYABLE (CONTINUED)

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.  The current
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 amount  outstanding as of
June 30, 1997 and 1996,  under the  short-term  line of credit and the revolving
term  loan   facility   was  $4,000  and   $190,900  and  $12,200  and  $50,000,
respectively.  The portion of the revolving term loan that is short term at June
30, 1997 and 1996, was $24,900 and $0, respectively.

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

11.  DEBT

Long-Term Debt:

Long-term debt consists of the following at June 30, 1997:
<TABLE>
<CAPTION>

                                                                   Agway
                                                                  and AFC            Telmark              Total
                                                              --------------      -------------      -------------
<S>                                                           <C>                 <C>                <C>
Notes payable - banks (a)..................................   $        2,625      $     170,000      $     172,625
Notes payable - insurance companies (b)(c).................                             144,492            144,492
Other......................................................           10,858                                10,858
                                                              --------------      -------------      -------------
Subtotal long-term debt, excluding capital leases..........           13,483            314,492            327,975
Obligations under capital leases:
     Industrial revenue bonds..............................              358                                   358
     Others................................................            1,272                90               1,362
                                                              --------------      -------------      -------------
Total long-term debt.......................................           15,113            314,582            329,695
Less: current portion......................................            5,521            108,199            113,720
                                                              --------------      -------------      -------------
                                                              $        9,592      $     206,383      $     215,975
                                                              ==============      =============      =============
</TABLE>

(a)   Under  Telmark's  revolving  loan  facility,  principal  of $170,000 bears
      interest at fixed rates ranging from 5.95%  to  8.40%, payments commencing
      July 1997 with final installments due in 2000. Under an AFC loan agreement
      bearing an interest rate of 8.53%, principal  of  $2,625  is  payable  in 
      quarterly  installments  of  $175  commencing  August 1997  and  ending in
      February 2001.  The  bank  notes  of  $172,625  are collateralized  by the
      Company's  investment  in  the  bank  having  a  book  value of $20,643 at
      June 30, 1997.   The Agway  and  AFC  debt agreements contain a  number of
      restrictive financial covenants,the most restrictive of which requires the
      Company  to  maintain  specific quarterly levels of  interest coverage and
      monthly  levels  of  tangible  retained margins.  The  $2,625  AFC  credit
      facility loan covenants are integrated with the short-term facilities.
(b)   Under Telmark loan agreements with various insurance companies,  principal
      of $119,722  bears  interest at fixed rates  ranging  from 5.90% to 8.88%,
      payments commencing September 1997 with final installment due in 2004. The
      note  agreements  are similar to one another and each  contains  financial
      covenants,  the most restrictive of which prohibit Telmark from having (1)
      tangible  net worth  less than  $70,000;  (2) a  debt-to-equity  ratio (as
      defined)  which  exceeds 5:1; (3) a ratio of earnings  available for fixed
      charges less than 1.25:1;  and (4) dividend  distributions  after December
      31, 1994 that exceed 50% of consolidated net income for the period January
      1, 1995 through the date of determination.
(c)   On May 28, 1997,  Telmark,  through a newly  created  wholly owned special
      purpose subsidiary, Telmark Lease Funding Corp. I, issued $23,999 of Class
      A  lease-backed  notes and $1,946 of Class B  lease-backed  notes to three
      insurance companies.  The subsidiary pays interest at 6.58% on the Class A
      notes  and 7.01% on the Class B notes.  The  notes are  collateralized  by
      1,165  leases  having an  aggregate  present  value of  contractual  lease
      payments  equal to the principal  balance of the notes,  and the notes are
      further  collateralized  by the  residual  values of these  leases.  Final
      scheduled maturity of the notes is December 15, 2004.

                                       45

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


11.  DEBT (CONTINUED)

Subordinated Debt:

Subordinated debt consists of the following at June 30, 1997:
<TABLE>
<CAPTION>

                                                                   AFC               Telmark              Total
                                                              ---------------     -------------      -------------
<S>                                                           <C>                 <C>                <C>
Subordinated debentures, due 1997 to 2003,
     interest at 6.0% to 8.5%..............................   $      21,738       $     31,044       $      52,782
Subordinated money market certificates,
     due 1997 to 2008, interest at 4.5% to 9.5%............         385,345                                385,345
                                                              ---------------     -------------      -------------

Total long-term subordinated debt..........................         407,083             31,044             438,127
Less:  current portion.....................................          51,980             11,019              62,999
                                                              ---------------     -------------      -------------
                                                              $     355,103       $     20,025       $     375,128
                                                              ===============     =============      =============
</TABLE>


Of AFC's  subordinated  debt,  $337,700 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  semiannually  on
January 1 and July 1 of each year for AFC and  payable  quarterly  on January 1,
April 1, July 1, and  October 1 for  Telmark.  The  money  market  certificates'
interest  rate is at the  greater  of the  quoted  rate or a rate based upon the
discount rate for U.S. Government Treasury Bills, with maturities of 26 weeks.

Maturities:

Aggregate annual  maturities on long-term debt during the next five fiscal years
ending June 30 and thereafter are as follows:
<TABLE>
<CAPTION>

                                              Capital                                                 Subordinated
                                              Leases            Borrowings            Total               Debt
                                          ------------        -------------       -------------      -------------
<S>                                       <C>                 <C>                 <C>                <C>
1998...................................   $        655        $     113,182       $    113,837       $      62,999
1999...................................            197              108,484            108,681              74,464
2000...................................            190               55,234             55,424              76,479
2001...................................            190               21,346             21,536              42,726
2002...................................            190               10,512             10,702              43,861
Thereafter.............................            870               19,217             20,087             137,598
                                          -------------       -------------       -------------      -------------
                                                 2,292              327,975            330,267             438,127
Imputed interest.......................           (572)                                   (572)
                                          -------------       -------------       -------------      -------------
Total..................................   $      1,720        $     327,975       $    329,695       $     438,127
                                          =============       =============       =============      =============

</TABLE>




                                       46

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


12.  COMMITMENTS AND CONTINGENCIES

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

The Company  continually  monitors  its  operations  with  respect to  potential
environmental  issues,  including  changes in  legally  mandated  standards  and
remediation  technologies.  Agway's recorded  liability  reflects those specific
issues where  remediation  activities  are  currently  deemed to be probable and
where the cost of  remediation  is  estimable.  Estimates  of the  extent of the
Company's  degree of  responsibility  of a  particular  site and the  method and
ultimate  cost of  remediation  require  a number of  assumptions  for which the
ultimate  outcome may differ  from  current  estimates.  At June 30,  1997,  the
Company  has been  designated  as a PRP under  CERCLA or as a third party to the
original PRPs in several  Superfund  sites.  The liability under CERCLA is joint
and several,  meaning that the Company could be required to pay in excess of its
pro  rata  share  of  remediation  costs.  The  Company's  understanding  of the
financial  strength of other PRPs at these Superfund sites has been  considered,
where appropriate,  in the Company's  determination of its estimated  liability.
The Company  believes that its past experience  provides a reasonable  basis for
estimating its liability. As additional information becomes available, estimates
are adjusted as necessary.  While the Company does not anticipate  that any such
adjustment  would be  material to its  financial  statements,  it is  reasonably
possible that the result of ongoing and/or future environmental studies or other
factors  could alter this  expectation  and require the  recording of additional
liabilities. The extent or amount of such events, if any, cannot be estimated at
this time.  The  settlement of the reserves  established  will cause future cash
outlays over approximately  five years based upon current  estimates,  and it is
not expected that such outlays will  materially  impact the Company's  liquidity
position.

As part of its long-term  environmental  protection  program,  the Company spent
approximately  $1,800 in fiscal 1997 on capital projects.  The Company estimates
that during fiscal 1998 and 1999 approximately  $1,600 per year will be spent on
additional  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  $550. The total capital  requirements may change
due to the actual number of USTs actively in use on the effective date.

Year 2000
In fiscal  1996,  the  Company  initiated a  Companywide  program to prepare its
computer  systems  and  applications  for the year  2000.  As a  result  of this
program, in fiscal 1997, a comprehensive review to identify the systems affected
by this  issue  was  completed,  an  implementation  plan  was  compiled  and is
currently being executed,  and estimated cost projections were determined.  As a
result of the procedures already completed, the Company expects to either modify
or upgrade  existing  systems or replace  some  systems  altogether  where it is
determined to be cost beneficial.

The Company  expects to incur  internal  staff costs as well as  consulting  and
other expenses related to the execution of the implementation  plan. The Company
has also  identified  that a portion of the cost  estimates are not likely to be
incremental costs to the Company,  but rather will represent the redeployment of
existing information  technology  resources.  Testing and conversion of existing
and replacement system  applications are expected to cost approximately  $14,200
over the next two fiscal years.  Approximately  75% of this estimate  represents
costs to replace  existing  systems for year 2000  compliance,  the  majority of
which  will be  capitalized.  The  accounting  treatment  of costs  incurred  in
connection  with the year 2000  compliance  will be treated as period  costs and
will be expensed as  incurred as compared to the  capitalization  of new systems
implemented.



                                       47

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


12.  COMMITMENTS AND CONTINGENCIES (CONTINUED)

Year 2000 (continued)
The Company presently  believes that with the planned  modifications to existing
systems and conversion to new systems,  the year 2000  compliance  issue will be
resolved on a timely basis and will not pose  significant  operational  problems
for the Company's computer systems as so modified and converted.

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

Commitments to extend credit at the Company's leasing subsidiary,  Telmark,  are
agreements  to  lend to a  customer  as long as  there  is no  violation  of any
condition  established  in  the  contract.   Commitments  generally  have  fixed
expiration dates or other termination clauses. Since some of the commitments are
expected to expire without being drawn upon, the total commitment amounts do not
necessarily  represent  future cash  requirements.  Outstanding  commitments  to
extend  lease  financing  at June 30,  1997 and 1996,  approximated  $12,900 and
$14,800, respectively.

During 1994 and prior,  Telmark  entered into lease sale  contracts that contain
limited recourse  provisions which are limited to 7.5% of the sale proceeds.  At
June 30, 1997,  Telmark was contingently  liable for approximately  $2,000 under
the limited recourse  provisions.  The Company evaluates the potential liability
in establishing its allowance for credit losses.

The Internal  Revenue  Service  performed a routine  employment tax audit during
fiscal  1996 and  proposed a $6,300  payroll tax  adjustment  against one of the
Company's   operations.   The  proposed  assessment  alleges  that  the  Company
misclassified  certain workers.  The Company has appealed this assessment and at
this time believes the issue will be resolved in the Company's favor. Therefore,
it has accrued no liability.

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

Rent  expense for the fiscal  years 1997,  1996 and 1995  approximated  $12,000,
$9,000 and $10,000,  respectively.  Future minimum payments under  noncancelable
operating leases approximate $8,500,  $7,900,  $5,700, $4,500 and $4,100 for the
fiscal  years  1998  through  2002,   respectively,   and  approximately  $6,200
thereafter.



                                       48

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


13.  PREFERRED STOCK

Values are whole numbers except where noted as (000).
<TABLE>
<CAPTION>

                                                                      Preferred Stock
                                      --------------------------------------------------------------------------
                                                          Cumulative                        
                                      --------------------------------------------------  Honorary     Dollar
                                          6%           8%            8%           7%       Member      Amount
                                       Series A     Series B     Series B-1   Series C    Series HM    in 000s
                                      -----------  -----------  -----------  -----------  ----------  ---------
<S>                                   <C>          <C>          <C>          <C>          <C>          <C>
Par Value...........................  $      100   $      100   $      100   $      100   $       25
                                      ===========  ===========  ===========  ===========  ==========
Shares Authorized...................     350,000      250,000      140,000      150,000       80,000
                                      ===========  ===========  ===========  ===========  ==========
Shares Outstanding:
   Balance June 30, 1994............     337,675      227,100       19,810      128,217        2,291   $ 71,338
     Issued (redeemed), net.........     (54,612)      (1,619)        (400)        (409)          70     (5,703)
                                      -----------  -----------  -----------  -----------  ----------   --------
   Balance June 30, 1995............     283,063      225,481       19,410      127,808        2,361     65,635
     Issued (redeemed), net.........     (50,152)     ( 1,359)        (300)     (11,365)          67     (6,316)
                                      -----------  -----------  -----------  -----------  ----------   --------
   Balance June 30, 1996............     232,911      224,122       19,110      116,443        2,428     59,319
     Issued (redeemed), net.........      (2,972)      13,105         (750)     (27,201)         126     (1,778)
                                      -----------  -----------  -----------  -----------  ----------   --------
Balance June 30, 1997...............     229,939      237,227       18,360       89,242        2,554   $ 57,541
                                      ===========  ===========  ===========  ===========  ==========   ======== 
</TABLE>

<TABLE>
<CAPTION>

                                                            Preferred Stock
                                      ---------------------------------------------------------------
                                                          Cumulative                        
                                      --------------------------------------------------    Honorary 
                                          6%           8%            8%           7%         Member
                                       Series A     Series B    Series B-1   Series C       Series HM
                                      ----------   ----------   ----------   -----------    ----------
<S>                                   <C>          <C>          <C>          <C>            <C>        
Annual Dividends Per Share:
   June 30, 1995....................  $     6.00   $     8.00   $     8.00   $     7.00     $     1.50
   June 30, 1996....................  $     6.00   $     8.00   $     8.00   $     7.00     $     1.50
   June 30, 1997....................  $     6.00   $     8.00   $     8.00   $     7.00     $     1.50

Shares Held in Treasury
   (purchased at par value):
   June 30, 1995....................      66,937       24,519      120,590       22,192            632
   June 30, 1996....................     117,089       25,878      120,890       33,557            729
   June 30, 1997....................     120,061       12,773      121,640       60,758            812

</TABLE>

There are 10,000 shares of authorized preferred stock undesignated as to series,
rate,  and other  attributes.  The Series A preferred  stock has  priority  with
respect to the payment of  dividends.  The  Company  maintains  the  practice of
providing a market by repurchasing, at par, preferred stock as the holders elect
to  tender  the  securities  for  repurchase,  subject  to Board  of  Directors'
approval.  The Company practice of repurchasing preferred stock specifically did
not apply to approximately  166,600 shares of 6% Series A preferred stock issued
in  fiscal  1994  in  connection  with  the  acquisition  of  local  cooperative
affiliates.  As a  condition  of  this  transaction,  the  Company's  repurchase
practice for this preferred  stock was  specifically  suspended until July 1997.
That  restriction is no longer in effect.  The Series HM preferred  stock may be
issued only to former  members of Agway and no more than one share of such stock
may be issued to any one  person.  The  preferred  stock has no  pre-emptive  or
conversion rights.

                                       49

<PAGE>

                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)

14.  RETIREMENT BENEFITS

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

The majority of the plan's  investments  consist of U.S.  government  and agency
securities,  U.S.  corporate bonds, U.S. and foreign  equities,  equity and bond
funds and  temporary  investments  (short-term  investments  in demand notes and
money  market  funds).  At June 30,  1997 and 1996,  the  Company's  plan assets
included  Company debt securities and preferred stock with estimated fair values
of $5,900.

The Employees' Retirement Plan of Agway, Inc. has assets that exceed accumulated
benefit  obligations.  In June 1997,  the Agway  Board of  Directors  approved a
one-time  benefit  increase  to  retirees  and  beneficiaries  of  retirees  who
commenced  receipt of monthly plan  benefits  prior to January 1, 1992,  and are
currently  receiving  these  benefits.   This  benefit  increase  increased  the
unrecognized  prior  service cost in 1997 by $7,100.  The  following  table sets
forth  the  plan's  funded  status  and  amounts  recognized  in  the  Company's
consolidated financial statements at June 30:
<TABLE>
<CAPTION>
                                                                                      1997                1996
                                                                                  -------------      -------------
<S>                                                                               <C>                <C>
Actuarial present value of benefit obligations:
     Vested.....................................................................  $     264,465      $     251,753
     Non-vested.................................................................          9,786              9,574
                                                                                  -------------      -------------
Accumulated benefit obligation..................................................        274,251            261,327
Additional amounts related to projected pay increases...........................         27,207             26,613
                                                                                  -------------      -------------
Projected benefit obligation for service rendered to date.......................        301,458            287,940
Plan assets at fair value ......................................................        538,433            486,650
                                                                                  -------------      -------------
Projected benefit obligation less than plan assets..............................        236,975            198,710
Unrecognized net gain...........................................................       (135,604)          (101,901)
Unrecognized prior service cost.................................................         13,175              7,697
Unrecognized net transition asset...............................................        (14,494)           (19,325)
                                                                                  -------------      -------------
Net pension asset...............................................................  $     100,052      $      85,181
                                                                                  =============      =============
</TABLE>
Net pension income  included the following  income/(expense)  components for the
year ended June 30:
<TABLE>
<CAPTION>
                                                                   1997               1996                1995
                                                              -------------       -------------      -------------
<S>                                                           <C>                 <C>                <C>
Service benefits earned during the period...................  $      (5,236)      $     (6,060)      $      (5,920)
Interest cost on projected benefit obligation...............        (21,527)           (21,216)            (21,033)
Actual return on plan assets................................         73,413             83,238              62,415
Net amortization and deferral...............................        (31,779)           (44,624)            (25,506)
                                                              -------------       -------------      -------------
                                                              $      14,871       $     11,338       $       9,956
                                                              =============       =============      =============
</TABLE>
In determining the actuarial present values of the projected benefit obligations
as of June 30, the following assumptions were used:
<TABLE>
<CAPTION>

                                                                                      1997                1996
                                                                                  -------------      --------------
<S>                                                                                      <C>                 <C>
Weighted average discount rate.................................................           7.75%               7.75%
Rate of increase in future compensation........................................           5.50%               5.50%
Expected long-term rate of return..............................................          10.25%              10.25%
</TABLE>


                                       50

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


14.  RETIREMENT BENEFITS (CONTINUED)

Postretirement Benefits
The Company provides  postretirement  health care and life insurance benefits to
eligible  retirees and their  dependents.  Eligibility for benefits depends upon
age and years of service.  The  Company's  postretirement  benefit plans are not
funded. The accrued  postretirement benefit cost expected to be paid in the next
year is in other current  liabilities  while the remaining amount is included in
other  liabilities.  The  reconciliation  of funded  status and the net periodic
postretirement  benefit cost recognized in the Company's  consolidated financial
statements at June 30 were as follows:
<TABLE>
<CAPTION>

                                                                                      Health and Life Insurance
                                                                                  --------------------------------
                                                                                      1997                1996
                                                                                  ------------       -------------
<S>                                                            <C>                <C>                <C>
Reconciliation of funded status:
--------------------------------
Accumulated postretirement benefit obligation:
     Retirees and surviving spouses.........................                      $     30,818       $      30,538
     Actives eligible to retire.............................                             3,314               3,345
     Actives not yet eligible to retire.....................                             7,905              10,289
                                                                                  -------------      -------------
Total unfunded accumulated postretirement
  benefit obligation....................                                                42,037              44,172
Unrecognized prior service cost.............................                            (1,525)
Unrecognized net gain (loss)................................                             2,174              (1,281)
Unrecognized net transition obligation......................                           (20,093)            (21,348)
                                                                                  -------------      -------------
     Accrued postretirement benefit cost....................                      $     22,593       $      21,543
                                                                                  =============      =============

                                                                    1997               1996                1995
                                                               -------------      -------------      -------------
Annual expense for fiscal year ended June 30:
--------------------------------------------
Interest cost...............................................   $      3,158       $      3,243       $       3,521
Amortization of transition obligation.......................          1,255              1,255               1,452
Service cost-benefits earning during the period.............            723                816                 724
Prior service cost..........................................             66
                                                               -------------      -------------      -------------
     Net periodic postretirement benefit cost...............   $      5,202       $      5,314       $       5,697
                                                               =============      =============      =============
</TABLE>

In determining the accumulated  postretirement benefit obligation,  the weighted
average discount rate used was 7.75% at June 30, 1997 and 1996, respectively.

For  measurement  purposes,  the  assumed  health  care cost  trend rate used to
measure the Company's  accumulated benefit obligation was, for persons under age
65, 7.0% and 7.3% for June 30, 1997 and 1996, respectively. For persons over age
65, the Company has an insured medical program limiting the Company's subsidy to
a per month/per  retiree basis.  The health care cost trend rate  assumption for
fiscal 1998 and forward at June 30,  1997,  decreases  gradually  until the year
2002, when the ultimate trend rate is then fixed at 5.0%. A one percentage point
increase in the  assumed  health  care cost trend rate at June 30,  1997,  would
increase the  aggregate  service and interest  cost  components  of net periodic
postretirement benefit cost by $200, and the accumulated  postretirement benefit
obligation by $1,200.

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

The Company will contribute an amount of at least 10%, but not more than 50%, of
each participant's  regular  contributions,  as defined,  up to 6% of his or her
salary on an annual basis.  Company  contributions to this plan for fiscal years
ended June 30, 1997, 1996 and 1995 were approximately  $1,200,  $1,300 and $500,
respectively.  For the fiscal  years ended June 30, 1997 and 1996,  the Board of
Directors of the Company  approved an additional  match of 20% to supplement the
minimum contribution level of 10%.

                                       51

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


15.  FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING

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

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

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

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

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

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

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

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

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


                                       52

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


15.  FINANCIAL INFORMATION CONCERNING SEGMENT REPORTING (CONTINUED)

<TABLE>
<CAPTION>

Year ended June 30, 1997    Agriculture    Retail          Energy       Leasing      Insurance    Other(a)     Consolidated
-------------------------   -----------   ----------    -----------    ----------    ---------   ----------    ------------
<S>                         <C>           <C>           <C>            <C>           <C>         <C>           <C>
Net sales and revenues to
   unaffiliated customers   $   740,508   $  239,854    $   606,610    $   56,908    $  27,020   $     222     $ 1,671,122
Intersegment sales and
   revenues..............        50,151        6,591            305            35                  (57,082)
                            -----------   ----------    -----------    ----------    ---------   ----------    ------------
   Total sales
    and revenues            $   790,659   $  246,445    $   606,915    $   56,943    $  27,020   $ (56,860)    $ 1,671,122
                            ===========   ==========    ===========    ==========    =========   ==========    ============

Operating margin plus
   other income, net.....   $     3,203   $    5,223    $    19,537    $   13,003    $     694   $   5,893     $    47,553
Interest expense, net of
   interest income.......                                                                                          (30,970)
                                                                                                               ------------
      Margin from
       continuing 
        operations before
         income taxes....                                                                                      $    16,583
                                                                                                               ============

Identifiable assets......   $   341,579   $  105,496    $   165,941    $  462,704    $  53,845   $ 170,696     $ 1,300,261
Depreciation and
  amortization...........         6,660       11,659          9,591           529           55       1,337          29,831
Capital expenditures.....         7,429       12,792          4,632           540                      352          25,745

</TABLE>
<TABLE>
<CAPTION>

Year ended June 30, 1996    Agriculture     Retail       Energy        Leasing      Insurance       Other(a)   Consolidated
-------------------------   -----------   ----------   ----------     ---------     ----------   ----------    ------------
<S>                         <C>           <C>          <C>            <C>           <C>          <C>           <C>
Net sales and revenues to
   unaffiliated customers   $   787,315   $  253,214   $  545,704     $  48,577     $  25,431    $    2,259    $  1,662,500
Intersegment sales and
   revenues..............        82,142        8,823          323            50                     (91,338)
                            -----------   ----------   ----------     ---------     ----------   -----------    ------------
   Total sales and
   revenues..............   $   869,457   $  262,037   $  546,027     $  48,627     $  25,431    $  (89,079)   $  1,662,500
                           ============   ==========   ==========     =========     ==========   ===========   =============   

Operating margin (loss)
   plus other income,
     net.................   $    23,394   $    4,902   $   16,119     $  11,589     $  (5,310)   $    3,461    $     54,155
Interest expense, net of
   interest income.......                                                                                           (33,085)
                                                                                                               -------------
     Margin from
       continuing
        operations before
         income taxes....                                                                                      $     21,070
                                                                                                               =============

Identifiable assets......   $   361,130   $  105,432   $  170,063     $ 394,470     $  53,971    $  160,825    $  1,245,891
Depreciation and
   amortization..........        10,917        9,872       10,545           450           125         1,513          33,422
Capital expenditures.....         8,624       11,645        4,332         1,142            13         1,320          27,076

</TABLE>
<TABLE>
<CAPTION>

Year ended June 30, 1995    Agriculture     Retail        Energy       Leasing      Insurance     Other(a)     Consolidated
-------------------------   -----------   ----------   -----------    ---------     ---------    ----------    ------------ 
<S>                         <C>           <C>          <C>            <C>           <C>          <C>           <C>
Net sales and revenues to
   unaffiliated customers   $   725,445   $  282,114   $   510,439    $  41,874     $  29,609    $    2,572    $  1,592,053
Intersegment sales and
   revenues..............        64,830       10,294           339           68                     (75,531)
                            -----------   ----------   -----------    ----------    ---------    -----------   ------------
   Total sales and
     revenues............   $   790,275   $  292,408   $   510,778    $   41,942    $  29,609    $  (72,959)   $  1,592,053
                            ===========   ==========   ===========    ==========    =========    ===========   ============

Operating margin (loss)
   plus other income,
     net.................   $     1,893   $    2,689   $    12,842    $   10,555    $     652    $   (4,681)   $     23,950
Interest expense, net of
   interest income.......                                                                                           (30,003)
                                                                                                               -------------
     Loss from continuing
       operations before
         income taxes....                                                                                      $     (6,053)
                                                                                                               =============

Identifiable assets......   $   367,101   $  106,517   $   169,430    $  357,653    $  56,339    $  168,153    $  1,225,193
Depreciation and
   amortization..........        15,272        5,013        10,519           257          256         2,403          33,720
Capital expenditures.....        12,725        4,486        18,051           719          144         2,350          38,475

</TABLE>

(a) Represents unallocated net corporate items and intersegment eliminations.

                                       53

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


16.  OTHER INCOME (EXPENSE)

The  components  of  other  income  (expense)  for the  year  ended  June 30 are
summarized below:
<TABLE>
<CAPTION>

                                                                   1997               1996                1995
                                                              -------------       -------------      -------------
<S>                                                           <C>                 <C>                <C>
Patronage refund income.....................................  $      9,534        $      8,037       $       2,904
Rent and storage revenue....................................         4,063               3,552               3,313
Gain/(loss) on sale of:
     Businesses.............................................           360               3,799
     Other security investments.............................                             1,348
     Properties and equipment...............................         2,613                (891)             (1,436)
Dividend income.............................................            57                 320                 206
Other, net..................................................         2,136               2,257               2,150
                                                              -------------       -------------      -------------
                                                              $     18,763        $     18,422       $       7,137
                                                              =============       =============      =============
</TABLE>


17.  SUPPLEMENTAL DISCLOSURES ABOUT CASH FLOWS
<TABLE>
<CAPTION>

                                                                   1997               1996                1995
                                                              -------------       -------------      -------------
<S>                                                           <C>                 <C>                <C>
Additional disclosure of operating cash flows:
   Cash paid during the year for:
         Interest...........................................  $      39,812       $     43,195       $      39,339
                                                              =============       =============      =============
         Income taxes.......................................  $       3,661       $      3,499       $       9,826
                                                              =============       =============      =============

Additional disclosure for non-cash
   investing and financing activities:

     Dividends declared but unpaid at June 30...............  $      2,149        $      2,210       $       2,410
                                                              =============       =============      =============
</TABLE>


18.  FINANCIAL AND COMMODITY INSTRUMENTS

FINANCIAL INSTRUMENTS

Fair Value
Carrying amounts of trade notes and accounts receivable,  financial  instruments
included in other  assets and other  liabilities,  notes  payable  and  accounts
payable  approximate  their fair values because of the short-term  maturities of
these  instruments.   The  fair  value  of  the  Company's  long-term  debt  and
subordinated debentures is estimated based on discounted cash computations using
estimated  borrowing  rates available to the Company ranging from 6.18% to 8.87%
in 1997 and 6.80% to 8.96% in 1996.

The carrying  amounts and  estimated  fair values of the  Company's  significant
financial  instruments  held for purposes  other than trading at June 30 were as
follows:
<TABLE>
<CAPTION>

                                                              1997                           1996
                                                 ------------------------      --------------------------
                                                   Carrying        Fair          Carrying          Fair
                                                    Amount         Value          Amount           Value
                                                 -----------    ---------      ----------        --------
<S>                                              <C>            <C>            <C>               <C>
Liabilities:
Long-term debt  (excluding capital leases).....  $   327,975    $ 333,669      $  287,305        $288,446
Subordinated debentures........................      438,127      433,736         414,927         409,163

</TABLE>


                                       54

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


18.  FINANCIAL AND COMMODITY INSTRUMENTS (CONTINUED)

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

The Company's leasing subsidiary,  Telmark, is a party to financial  instruments
with  off-balance-sheet  risk in the  normal  course  of  business  to meet  the
financing needs of its leasing customers. These financial instruments consist of
commitments to extend credit not  recognized in the balance sheet.  In the event
of nonperformance by the other party to the financial instrument,  the Company's
credit risk is limited to the  contractual  amount of  Telmark's  commitment  to
extend credit.

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

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

COMMODITY INSTRUMENTS

As described in Note 1, the Company uses exchange-traded futures and options and
over-the-counter  options to manage the risk of commodity  price  changes in its
Agriculture and Energy businesses.  As  exchange-traded  futures and options are
actively traded on regulated exchanges, these contracts are subject to movements
in market values. The Company  determines the fair value of its  exchange-traded
contracts  based  on  the  settlement  prices  for  open  contracts,  which  are
established by the exchange on which the instruments are traded.  The fair value
of the Company's  over-the-counter  contracts is  determined  based on obtaining
quotes from brokers.  The margin accounts for open commodity  futures and option
contracts, which reflect daily settlements as market values change, are recorded
in advances and other  receivables.  The margin account represents the Company's
basis in those  contracts.  As of June 30, 1997 and 1996,  the carrying and fair
value of the Company's  investment in commodities  futures and option  contracts
was $3,200 and $3,600, respectively.  The total net deferred gains and losses on
open contracts at June 30, 1997 and 1996, were immaterial.




                                       55

<PAGE>



                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
                             (THOUSANDS OF DOLLARS)


19.  DISCONTINUED OPERATIONS

On March 23, 1993,  the Company's  Board of Directors  authorized  management to
sell its 34%  interest in Curtice  Burns and 99.9%  interest in Hood,  the major
investments  in what was Agway's food group  segment.  On November 3, 1994,  AHI
sold its  interest in Curtice  Burns to Pro-Fac and  received  cash  proceeds of
$55,786  and  recorded  a $4,430  profit,  net of income  taxes of  $19,700.  On
December 15, 1995, AHI sold all of its common stock of Hood. In accordance  with
the Stock  Purchase  Agreement,  AHI received  $25,500 in the form of $15,900 in
cash and $9,600 in a promissory  note in  consideration  of the sale of its Hood
common  stock and  recorded a gain on disposal of Hood of $2,110,  net of income
tax of $1,711. AHI assumed certain specified  obligations of Hood, including the
liability  for  certain  supplemental  executive  retirement  plans and  certain
management bonuses.  Furthermore,  under the Stock Purchase  Agreement,  AHI has
indemnified the Buyer with regard to specified  representations,  warranties and
litigation;  federal and state taxes through  fiscal 1995;  and 50% of all other
indemnification  obligations in excess of $1,000  identified within two years of
the closing  date.  The  obligations  and/or  liabilities  assumed and  expenses
incurred by AHI in the transaction were estimated at $7,000 at the closing date.
Immediately after closing, AHI exchanged the note of $9,600 received as proceeds
for certain  specified  assets of Hood,  including stock of a Farm Credit System
cooperative bank, certain accounts  receivable and certain real estate and fixed
assets.  As of June 30, 1997,  the estimates  made as of the closing date of the
sale remain adequate to cover the indemnifications made.

Net sales and  revenues  from the  discontinued  operations  of Hood and Curtice
Burns for the period of time owned during the years ended June 30, 1996 and 1995
were approximately $188,000 and $749,000, respectively.

The loss from the operation of the discontinued  operations for the fiscal years
ended June 30 related solely to Hood and was comprised of the following:
<TABLE>
<CAPTION>

                                                                                      1996                1995
                                                                                  -------------      --------------
<S>                                                                               <C>                <C>
Transaction costs and allowance..............................................     $       (746)      $     (16,724)
Pre-tax margin (loss) from Hood operations...................................              446              (2,666)
Interest expense.............................................................             (415)             (1,000)
                                                                                  -------------      --------------
Pre-tax loss ................................................................             (715)            (20,390)
Income tax benefit...........................................................              120               5,406
                                                                                  -------------      --------------
     Losses of discontinued operations.......................................             (595)            (14,984)
                                                                                  -------------      --------------

Reclassification in 1995 to reconsolidate Hood,
     net of tax benefit of $8,230............................................                                2,624
                                                                                  -------------      --------------

(Loss) from discontinued operations..........................................     $       (595)      $     (12,360)
                                                                                  =============      ==============
</TABLE>



                                       56

<PAGE>



                                    PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

DIRECTORS
The  directors of the Company  determine  Company  policy and are nominated on a
district  representation  basis by committees  representing  members within each
district.  Each of the  following  directors is a full-time  farmer and has been
engaged in full-time farming during the past five years:
<TABLE>
<CAPTION>

                                                                                            Year
                                                                                           Became
                                                                                             A
         Name                  Age    Office                    Name of Farm              Director    Term Expires
         ----                  ---    ------                    ------------              --------    ------------
<S>                            <C>    <C>                       <C>                         <C>      <C>
Ralph H. Heffner(1)            59     Chairman of the           Jersey Acres Farms Inc.     1973     November 1997
                                      Board and Director
Robert L. Marshman             58     Vice Chairman of the
                                      Board and Director        Marshman Farms              1989     November 1999
Kevin B. Barrett               41     Director                  Heavenly View Farm          1996     November 1999
Keith H. Carlisle              55     Director                  Carlisle Bros., Inc.        1995     November 1998
Vyron M. Chapman               64     Director                  Chapman Farms, Inc.         1985     November 1997
D. Gilbert Couser              56     Director                  Shawangunk View Farm        1995     November 1998
Andrew J. Gilbert              38     Director                  Adon Farms                  1995     November 1998
Peter D. Hanks                 49     Director                  Big Green Farms, Inc.       1984     November 1999
Frederick A. Hough             71     Director                  The Hough Farm              1979     November 1997
Samuel F. Minor                59     Director                  The Springhouse             1987     November 1999
Carl D. Smith                  62     Director                  Hillacre Farms              1984     November 1999
Thomas E. Smith                62     Director                  Lazy Acres                  1986     November 1998
Gary K. Van Slyke              54     Director                  VanSlyke's Dairy Farm       1994     November 1997
Joel L. Wenger                 66     Director                  Weng-Lea Farms              1987     November 1999
Edwin C. Whitehead             56     Director                  White Ayr Farms             1994     November 1997
Christian F. Wolff, Jr.        72     Director                  Pen-Col Farms               1982     November 1997
William W. Young               44     Director                  Will-O-Crest Farm           1989     November 1998

</TABLE>

Ralph H.  Heffner,  Chairman  of the Board of  Directors,  was paid  $47,000 and
Robert L.  Marshman,  Vice Chairman of the Board of Directors,  was paid $21,500
for their services for the fiscal year ended June 30, 1997. All directors of the
Company earn an annual  retainer fee of $12,000 for  participation  on the Agway
Inc. Board.  Each Board Committee  Chairman earns an additional  annual retainer
fee of $3,000.  Each  director  of Agway Inc.  who is also a member of the Agway
Insurance  Company or Telmark  Inc.  Board earns an  additional  $400 or $1,000,
respectively.  A fee of $200 is also earned by such  directors for each day that
they were  involved  in business  for the  Company.  Expenses  of Board  members
incurred in connection with Company business are reimbursed by the Company.

Any director of the Company may elect to defer  compensation for distribution at
a later date. Deferred amounts are invested in interest-bearing accounts and may
be paid in a lump sum or in annual installments over a period of up to 20 years.

A retirement  benefit plan for Board members requires annual payments to retired
or permanently  disabled  directors who served a minimum of six full years.  The
benefit is  computed  at $250 for each full year of  service  and is paid to the
director or surviving spouse for a period equal to the years served on the Board
through December 31, 1995, the date the plan was terminated. All earned benefits
as of December 31, 1995, will be paid when due. As of June 30, 1997, the present
value of accumulated benefits under this plan is approximately $500.

(1)   All correspondence in relation to operational matters should be addressed
      to  D. P. Cardarelli,  President and  Chief Executive Officer, Agway Inc.,
      P.O. Box 4933, Syracuse, New York 13221.

                                       57

<PAGE>



ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT - CONTINUED

EXECUTIVE OFFICERS
The executive officers of the Company provide operating control to carry out the
policies  established  by the Board of Directors and serve at the  discretion of
the Board with no guarantee  of  employment.  There are no  full-time  executive
officers of the Company who are members of the Board of Directors. The principal
occupation  of all  executive  officers  of the Company for the past five years,
except for Mr. Schalk and Ms.  Smith,  has been as an officer or employee of the
Company. The following is a listing of these officers as of July 1, 1997:
<TABLE>
<CAPTION>

                                                                                                  Years Served
          Name                      Age      Office                                                As Officer
          ----                      ---      ------                                                ----------
<S>                                 <C>      <C>                                                      <C>   
Donald P. Cardarelli                41       President and CEO                                         6
Robert A. Fischer, Jr.              49       Vice President, Agway Agricultural Products               2
David M. Hayes                      53       Senior Vice President, General Counsel and Secretary     16
Stephen H. Hoefer                   42       Vice President, Public Affairs                            3
Michael R. Hopsicker                32       Vice President, Agway Energy Products                     1
Dennis J. LaHood                    51       Vice President, Country Products Group                    2
Peter J. O'Neill                    50       Senior Vice President, Finance & Control,
                                               Treasurer and Controller                                8
William L. Parker                   50       Vice President and Chief Information Officer              2
Donald F. Schalk                    46       Vice President, Agway Retail Services                     2
Robert D. Sears                     56       Vice President, Membership                                3
G. Leslie Smith                     54       Vice President and Chief Investment Officer               -

</TABLE>

Mr. Cardarelli served as Vice President,  Treasurer of the Company from May 1992
to August 1994; as Executive  Vice  President and Chief  Operating  Officer from
August 1994 to January  1995;  and as General  Manager and CEO from January 1995
and President from February 1995 to July 1, 1997.

Mr.  Fischer has served as President,  Milford  Fertilizer  Company,  since June
1970; as Executive  Director,  Crops from October 1994 to February  1995; and as
Vice President, Agway Agricultural Products, from February 1995 to July 1, 1997.

Mr.  Hoefer served as Director of  Government  Affairs/Corporate  Transportation
Services  from  June 1992  through  June  1994;  and as Vice  President,  Public
Affairs, from June 1994 to July 1, 1997.

Mr. Hopsicker  served as Assistant  Treasurer,  Finance & Control,  from October
1991 to November  1992; as Director,  Planning & Operations,  AEP, from November
1992 to December 1994; as Director,  Financial Planning, Finance & Control, from
December  1994 to October  1995; as Director,  Business  Development,  ARS, from
October 1995 to April 1996; and as Vice President,  Agway Energy Products,  from
April 1996 to July 1, 1997.

Mr.  LaHood  served as  President,  ADS,  from October  1987 to August 1992;  as
Director, Computer and Communication Services, from August 1992 to October 1992;
as  President,  Country  Foods,  from October 1992 to October 1994; as Executive
Director, Country Foods and Seed Operations, from October 1994 to February 1995;
and as Vice President,  Country  Products  Group,  from February 1995 to July 1,
1997.

Mr. Parker served as Vice President, Systems, for Agway Insurance from July 1985
to January  1993;  as Director of New Project  Management  from  January 1993 to
September 1994; as Vice President,  Information Services, from September 1994 to
May 1996;  and as Vice  President,  Chief  Information  Officer and  Director of
Information Services, ARS, from May 1996 to July 1, 1997.

Mr. Schalk served as Director of Marketing-Agriculture from January 1990 to July
1993; as Executive  Director,  Feed,  from October 1994 to February 1995; and as
Vice President,  Agway Retail Services,  from February 1995 to July 1, 1997. For
the period July 1993 to October 1994,  Mr. Schalk was a region manager of Harris
Moran Seed Co.

Mr.  Sears  served as Director of Member  Relations  from June 1992 through June
1994; and as Vice President, Membership, from June 1994 to July 1, 1997.

Ms. Smith served as Director, Trust Investments, from September 1993 to April
1997;and as Vice President and Chief Investment Officer from May 1997 to July 1,
1997.  For the period October 1989 to August 1993, Ms. Smith was Executive
Administrator for TWA Pilots Trust Annuity Plan.

                                       58

<PAGE>



ITEM 11.  EXECUTIVE COMPENSATION

The  following  table  sets forth  information  regarding  annual and  long-term
compensation  for services in all capacities to the Company for the fiscal years
ended  June  1997,  1996 and 1995 of those  persons  who served as (i) the chief
executive  officer (CEO) at any time during the fiscal year,  and (ii) the other
four most highly  compensated  executive officers of the Company (other than the
CEO) who were serving in such capacity at June 30, 1997.
<TABLE>
<CAPTION>

                                            SUMMARY COMPENSATION TABLE
-----------------------------------------------------------------------------------------------------------
                                               ANNUAL COMPENSATION
                                               -------------------
NAME AND                                                                                  ALL OTHER
PRINCIPAL POSITION              YEAR            SALARY(1)        BONUS(2)              COMPENSATION(3)
-----------------------------------------------------------------------------------------------------------
<S>                             <C>              <C>            <C>                                <C>  
Donald P. Cardarelli            1997             $387,024       $  80,000                          $  3,925
   President and CEO            1996              336,065         330,638                             3,038
                                1995              236,232         125,000                             1,004

Robert A. Fischer, Jr.          1997              220,000          44,000                           118,411
   Vice President,              1996              200,000         175,090                           105,212
   Agway Agricultural           1995              156,370            -                              104,281
   Products

David M. Hayes                  1997              190,008          45,500                             8,203
   Senior Vice President,       1996              187,558          95,000                             7,372
   General Counsel and          1995              180,908            -                                4,110
   Secretary

Dennis J. LaHood                1997              178,293          88,000                             2,877
   Vice President,              1996              165,022         132,000                             2,780
   Country Products             1995              126,598            -                                  759
   Group

Peter J. O'Neill                1997              250,016          50,000                             5,185
   Senior Vice President,       1996              250,016         150,000                             6,137
   Finance and Control,         1995              219,182          75,000                             1,990
   Treasurer and
   Controller

</TABLE>

(1)   Salary is used in determining the average annual compensation  pursuant to
      the Company's  Retirement  Plan. This amount includes all deferred amounts
      under the  Agway  Inc.  Employees'  Thrift  Investment  Plan,  Agway  Inc.
      Employees'  Benefit  Equalization Plan, and the Milford Fertilizer Company
      Employees' Profit Sharing and Savings Plan.

(2)   Members  of the chief  executive  officer's  staff  and  other  executives
      designated  by the  Company's  chief  executive  officer are  eligible for
      participation in the Agway Inc.  management  incentive policy.  Contingent
      upon each individual's performance as determined by the President and CEO,
      the Company's net margin,  and other  performance  factors,  each eligible
      executive  may be paid a bonus.  Bonuses are  reflected in the fiscal year
      earned regardless of payment date.

(3)   Amounts  shown for  certain  officers  include  contributions  made by the
      Company to the Agway Inc.  Employees'  Thrift  Investment  Plan, the Agway
      Inc.  Employees'  Benefit  Equalization  Plan,  the Agway Inc.  Employees'
      Deferred  Compensation  Program,  and any other payments not appropriately
      characterized  as  salary or  bonus.  In  addition,  with  respect  to Mr.
      Fischer,  amounts include non-compete payments and payments to the Milford
      Fertilizer Company Employees' Profit Sharing and Savings Plan.


                                       59

<PAGE>



ITEM 11.  EXECUTIVE COMPENSATION - CONTINUED

EMPLOYEES' RETIREMENT PLAN

The  Employees'  Retirement  Plan of  Agway  Inc.  (the  Retirement  Plan)  is a
non-contributory  defined  benefit  plan  covering  nearly  all  employees.  The
Retirement Plan provides for retirement benefits,  at a normal retirement age of
65,  based upon  average  annual  compensation  received  during the  highest 60
consecutive  months  in the last 10  years  of  service  and  credited  years of
service.  Optional earlier retirement and other benefits are also provided.  The
Retirement  Plan pays a monthly  retirement  benefit based on the greater amount
calculated  under two formulas.  The benefit amount under one formula is subject
to an offset for Social Security benefits.

The following  table shows  estimated  annual  benefits  payable upon retirement
based  on  certain  5-year  average  remuneration  levels  and  years-of-service
classifications. The table was developed assuming a normal retirement at age 65.
<TABLE>
<CAPTION>

                                                PENSION PLAN TABLE
                                             YEARS OF CREDITED SERVICE
------------------------------------------------------------------------------------------------------------------------------
   REMUNERATION            5              10             15             20             25              30             35
------------------------------------------------------------------------------------------------------------------------------
     <S>                 <C>            <C>            <C>            <C>            <C>             <C>            <C>
     $150,000            $ 12,000       $ 24,000       $ 36,000       $ 48,000       $ 60,000        $ 72,000       $ 84,000
      175,000              14,000         28,000         42,000         56,000         70,000          84,000         98,000
      200,000              16,000         32,000         48,000         64,000         80,000          96,000        112,000
      225,000              18,000         36,000         54,000         72,000         90,000         108,000        126,000
      250,000              20,000         40,000         60,000         80,000        100,000         120,000        140,000
      275,000              22,000         44,000         66,000         88,000        110,000         132,000        154,000
      300,000              24,000         48,000         72,000         96,000        120,000         144,000        168,000
      325,000              26,000         52,000         78,000        104,000        130,000         156,000        182,000
      350,000              28,000         56,000         84,000        112,000        140,000         168,000        196,000
      375,000              30,000         60,000         90,000        120,000        150,000         180,000        210,000
      400,000              32,000         64,000         96,000        128,000        160,000         192,000        224,000
      425,000              34,000         68,000        102,000        136,000        170,000         204,000        238,000
      450,000              36,000         72,000        108,000        144,000        180,000         216,000        252,000

</TABLE>

Amount  under the  Retirement  Plan may be subject to  reduction  because of the
limitations imposed under the Internal Revenue Code; however,  the extent of any
reduction will vary in individual cases according to  circumstances  existing at
the  time  pension  payments  commence.   The  Agway  Inc.   Employees'  Benefit
Equalization  Plan has been  established  to provide  for the amount of any such
reduction in annual pension benefits under the Retirement Plan.

The benefits  shown are computed on a straight  life basis and do not reflect an
offset for up to 50% of the Social Security benefits, subject to certain minimum
benefits. Also, the benefits are based on continuing the Plan's benefit formulas
as in effect on June 30,  1997.  As of June 30,  1997,  the  officers  and their
respective number of credited years of service under the Retirement Plan were as
follows:  Messrs.  Cardarelli,  12; Hayes, 24; Lahood,  27; and O'Neill,  8. Mr.
Fischer does not  participate  in the  Retirement  Plan nor any other  long-term
incentive  programs of the  company.  However,  he  participates  in the Milford
Fertilizer Company Employees' Profit Sharing and Savings Plan. "Compensation" is
defined as the regular  salary or wages,  as reported in the "Salary"  column of
the  Summary  Compensation  Table,  which is paid to an  employee  for  services
rendered  to Agway Inc.,  including  overtime  and  vacation  pay but  excluding
bonuses or special pay.


DIRECTOR COMPENSATION

For a discussion of director compensation, see Item 10, "Directors and Executive
Officers of the Registrant," of this Form 10-K.




                                       60

<PAGE>



ITEM 11.  EXECUTIVE COMPENSATION - CONTINUED

COMPENSATION COMMITTEE INTERLOCKS AND INSIDE PARTICIPATION

The Company  has  a  committee  of certain directors, including the Chairman and
Vice Chairman of the Board of Directors, which  determines  the  compensation of
Donald P. Cardarelli, President and CEO of Agway Inc.  The compensation  of  the
other executive officers of Agway Inc. is determined by Mr. Cardarelli. Salaries
of all executive officers are included in  the annual operating budget, which is
approved by the entire Board of Directors of Agway Inc.

None of the executive  officers or directors  who  participate  in  establishing
compensation   policies  had  interlocks  reportable  under  Section  402(J)  of
Regulation S-K.


ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

None of the executive officers of the Company, either individually  or  in  the
aggregate, own greater than 1% of any class of equity securities of Agway Inc.
or its subsidiaries.  Agway is an agricultural  cooperative and each of its
members,  including each director, owns one share of $25 par value common stock.
None of the directors, either individually or in the aggregate, own greater than
1% of any class of equity security of Agway Inc. or its subsidiaries.


ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Agway's  members,  including its Directors,  are customers of the Company and/or
its  subsidiaries.  They purchase products from the Company in the normal course
of operating their farm businesses and may sell certain agricultural products to
the Company at market prices. The prices,  terms, and conditions of any purchase
or sale transaction are on the same basis for all of the Company's members.




                                       61

<PAGE>



                                     PART IV

<TABLE>
<CAPTION>

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
                                                                                                             PAGE
     (A) INDEX TO DOCUMENT LIST                                                                            LOCATION
                                                                                                           --------
         (1)  FINANCIAL STATEMENTS
<S>                                                                                                              <C>
              Among  the  responses  to this  Item  14(a)(1)  are the  following
              financial statements, which are included in Item 8 on page 26:

              (i)   Report of Independent Accountants..........................................................  28

              (ii)  Consolidated Balance Sheets, June 30, 1997 and 1996........................................  30

              (iii) Consolidated Statements of Operations, fiscal years ended June 30, 1997, 1996 and 1995.....  31

              (iv)  Consolidated Statements of Changes in Shareholders' Equity, fiscal years ended
                    June 30, 1997, 1996 and 1995...............................................................  32

              (v)   Consolidated Statements of Cash Flow, fiscal years ended June 30, 1997, 1996 and 1995......  33

              (vi)  Notes to Consolidated Financial Statements.................................................  34

         (2)  FINANCIAL STATEMENT SCHEDULES

              (i)   Report of Independent Accountants..........................................................  63

              (ii)  The following schedules are presented:

                    Schedule I       -     Condensed Financial Information of Registrant, each of the
                                           three years in the period ended June 30, 1997.......................  64

                    Schedule II      -     Valuation and Qualifying Accounts, fiscal years ended
                                           June 30, 1997, 1996 and 1995........................................  68

</TABLE>

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



                                       62

<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors of Agway Inc.:

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

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




/s/  COOPERS & LYBRAND L.L.P.
COOPERS & LYBRAND L.L.P.

Syracuse, New York
August 22, 1997



                                       63

<PAGE>



ITEM 14(A)(2).  FINANCIAL STATEMENT SCHEDULES

                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
           ----------------------------------------------------------
                          AGWAY INC. (PARENT CO. ONLY)
                            CONDENSED BALANCE SHEETS
                             JUNE 30, 1997 AND 1996
                             (THOUSANDS OF DOLLARS)

                                     ASSETS
<TABLE>
<CAPTION>

                                                                                      1997                1996
                                                                                  -------------      -------------
<S>                                                                               <C>                <C>
Current assets:
     Cash.......................................................................  $                  $       1,029
     Trade accounts receivable (including notes receivable of $34,251
         and $30,820, respectively), less allowance for doubtful
         accounts of $4,156 and $5,312, respectively............................        92,262              89,975
     Inventories................................................................        50,072              57,849
     Other current assets.......................................................        53,231              64,344
                                                                                  -------------      -------------
         Total current assets...................................................       195,565             213,197

Investments in subsidiaries.....................................................       203,812             184,707

Properties and equipment, net...................................................        46,855              60,188

Net pension asset...............................................................       100,052              85,181

Other assets  ..................................................................         1,990               1,449
                                                                                  -------------      -------------

         Total assets...........................................................  $    548,274       $     544,722
                                                                                  =============      =============


                      LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
     Accounts payable...........................................................  $     25,006       $      31,525
     Operating advances payable to subsidiaries, net............................       185,464             167,166
     Other current liabilities..................................................       118,032             131,771
                                                                                  -------------      -------------
         Total current liabilities..............................................       328,502             330,462

Other liabilities...............................................................        42,021              41,538

Shareholders' equity............................................................       177,751             172,722
                                                                                  -------------      -------------

         Total liabilities and shareholders' equity.............................  $    548,274       $     544,722
                                                                                  =============      =============

</TABLE>



                                       64

<PAGE>



ITEM 14(A)(2).  FINANCIAL STATEMENT SCHEDULES - CONTINUED

                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
           ----------------------------------------------------------
                          AGWAY INC. (PARENT CO. ONLY)
             CONDENSED STATEMENTS OF OPERATIONS AND RETAINED MARGIN
                 FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
                             (THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>

                                                                   1997               1996                1995
                                                              -------------       -------------      --------------
<S>                                                           <C>                 <C>                <C>
Net sales and revenues from:
     Product sales..........................................  $     526,611       $     594,188      $      500,145
     Other services.........................................         12,215               7,890               7,398
                                                              -------------       -------------      --------------
         Total net sales and revenues.......................        538,826             602,078             507,543
Cost and expenses from:
     Products and plant operations..........................        506,838             551,758             472,137
     Selling, general and administrative activities.........         49,439              49,473              58,887
     Restructuring credit...................................                             (1,301)             (4,179)
                                                              -------------       -------------      --------------
         Total operating costs and expenses.................        556,277             599,930             526,845
                                                              -------------       -------------      --------------

Operating income (loss).....................................        (17,451)              2,148             (19,302)
Interest expense, net.......................................           (876)               (786)               (241)
Other income, net...........................................         21,862              22,744              24,143
                                                              -------------       -------------      --------------
Margin (loss) from continuing operations before
     income taxes and equity in earnings of subsidiaries ...          3,535              24,106               4,600
Income tax benefit (expense)................................          7,904              (2,185)            (17,995)
                                                              -------------       -------------      --------------
Income (loss) before equity in earnings of subsidiaries.....         11,439              21,921             (13,395)
Equity in (loss) earnings of unconsolidated subsidiaries....           (769)            (10,774)              5,595
                                                              -------------       -------------      --------------
Margin (loss) from continuing operations....................         10,670              11,147              (7,800)
Discontinued operations:
     Loss from operations, including tax benefit of
         $120 and $13,637, respectively.....................                               (595)            (12,360)
     Gain on disposal of Hood, net of tax expense
         of $1,711..........................................                              2,110
     Gain on disposal of Curtice Burns, net of tax
         expense of $19,700.................................                                                  4,430
                                                              -------------       -------------      --------------
              Margin (loss) from discontinued operations....                              1,515              (7,930)
                                                              -------------       -------------      --------------

Net margin (loss) ..........................................         10,670              12,662             (15,730)
Retained margin - July 1....................................        110,714             102,934             123,570
Dividends     ..............................................         (4,237)             (4,382)             (4,785)
Equity in net unrealized losses of marketable securities....            424                (500)               (121)
                                                              -------------       -------------      --------------

Retained margin - June 30...................................  $     117,571       $     110,714      $      102,934
                                                              =============       =============      ==============

</TABLE>


                                       65

<PAGE>



ITEM 14(A)(2).  FINANCIAL STATEMENT SCHEDULES - CONTINUED

                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
           SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
           ----------------------------------------------------------
                          AGWAY INC. (PARENT CO. ONLY)
                        CONDENSED STATEMENTS OF CASH FLOW
                 FISCAL YEARS ENDED JUNE 30, 1997, 1996 AND 1995
                             (THOUSANDS OF DOLLARS)

<TABLE>
<CAPTION>


                                                                   1997               1996                1995
                                                              -------------       -------------      -------------
<S>                                                           <C>                 <C>                <C>
Net cash flows from operating activities....................  $      7,695        $     13,162       $      18,795
Cash flows from investing activities:
     Purchases of property, plant and equipment.............           140              (4,588)            (10,091)
     Other..................................................        (1,827)              3,935               2,582
                                                              --------------      -------------      -------------
Net cash flows from investing activities....................        (1,687)               (653)             (7,509)
Cash flows from financing activities:
     Payments on capitalized leases.........................          (830)               (529)               (513)
     Cash dividends paid....................................        (4,297)             (4,582)             (4,963)
     Other..................................................        (1,910)             (6,369)             (5,810)
                                                              --------------      -------------      -------------
Net cash flows from financing activities....................        (7,037)            (11,480)            (11,286)
Net increase in cash and equivalents........................        (1,029)              1,029                   0
Cash and equivalents at beginning of year...................         1,029                   0                   0
                                                              --------------      -------------      -------------
Cash and equivalents at end of year.........................  $          0        $      1,029       $           0
                                                              ==============      =============      =============


</TABLE>

                                       66

<PAGE>



ITEM 14(A)(2).  FINANCIAL STATEMENT SCHEDULES - CONTINUED

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


BASIS OF PRESENTATION

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


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


INVENTORIES

Inventories at June 30 consist of the following:

                                                1997                1996
                                           -------------        -------------

    Raw materials....................      $      2,144         $       7,787
    Finished goods...................            44,895                45,706
    Goods in transit and supplies....             3,033                 4,356
                                           -------------        -------------
                                           $     50,072         $      57,849
                                           =============        =============

DEBT

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


RELATED PARTY TRANSACTIONS

Transactions between  Agway Inc. and its  unconsolidated  subsidiaries  are  as
follows:
<TABLE>
<CAPTION>
                                                                              FISCAL YEARS ENDED JUNE 30
                                                              ----------------------------------------------------
                                                                   1997               1996                1995
                                                              -------------       -------------      -------------
<S>                                                           <C>                 <C>                <C>
Net sales and revenues......................................  $      48,521       $     69,436       $      42,291
Product and plant operation expenses........................          8,960             10,933              11,523
Recovery of selling, general and administrative
     expenses...............................................         19,207             24,821              27,696
Interest expense, net.......................................          6,993              4,775               4,710

</TABLE>


                                       67

<PAGE>



ITEM 14(A)(2).  FINANCIAL STATEMENT SCHEDULES - CONTINUED

                    AGWAY INC. AND CONSOLIDATED SUBSIDIARIES
                 SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                             (THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------


                   COL. A                              COL. B              COL. C             COL. D        COL. E
-------------------------------------------------------------------------------------------------------------------


                                                                           ADDITIONS
                                                                  ------------------------
                                                       BALANCE    CHARGED TO    CHARGED TO                 BALANCE
                                                     AT BEGINNING  COSTS AND    OTHER                      AT END
                 DESCRIPTION                          OF PERIOD    EXPENSES     ACCOUNTS   DEDUCTIONS     OF PERIOD
-------------------------------------------------------------------------------------------------------------------
                                         for the year ended June 30, 1997
-------------------------------------------------------------------------------------------------------------------
Reserves deducted in the balance sheet from assets
to which they apply:  
     <S>                                             <C>          <C>           <C>        <C>            <C>
     Allowance for doubtful notes and accounts
         receivable (current)......................  $  10,062    $     623                $ 2,821(a)     $   7,864
                                                     =========    =========     ========   ==========     =========
     Allowance for doubtful leases receivable......  $  19,776    $   9,718                $ 5,480(a)     $  24,014
                                                     =========    =========     ========   ==========     =========
     Inventory reserve.............................  $   2,547    $     385                $   570(b)     $   2,362
                                                     =========    =========     ========   ==========     =========
     Surplus property reserve......................  $   1,428    $      66                $   638(c)     $     856
                                                     =========    =========     ========   ==========     =========
     Income tax valuation allowance................  $     881                             $  (881)       $       0
                                                     =========    =========     ========    =========     =========
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                         for the year ended June 30, 1996
-------------------------------------------------------------------------------------------------------------------
Reserves deducted in the balance sheet from assets to which they apply:
     <S>                                             <C>          <C>           <C>        <C>            <C>
     Allowance for doubtful notes and accounts
         receivable (current)......................  $   9,716    $   3,993                $ 3,647(a)     $  10,062
                                                     =========    =========     ========   ==========     =========
     Allowance for doubtful leases receivable......  $  15,331    $   7,000                $ 2,555(a)     $  19,776
                                                     =========    =========     ========   ==========     =========
     Inventory reserve.............................  $   2,914                             $   367(b)     $   2,547
                                                     =========    =========     ========   ==========     =========
      Surplus property reserve.....................  $     660    $   1,024                $   256(c)     $   1,428
                                                     =========    =========     ========   ==========     =========
     Income tax valuation allowance................  $     847    $      34                               $     881
                                                     =========    =========     ========   ==========     =========
<CAPTION>
-------------------------------------------------------------------------------------------------------------------
                                         for the year ended June 30, 1995
-------------------------------------------------------------------------------------------------------------------
Reserves deducted in the balance sheet from assets
to which they apply:
     <S>                                             <C>          <C>           <C>        <C>            <C>
     Allowance for doubtful notes and accounts
         receivable (current)......................  $  12,656    $   2,556                $ 5,496(a)     $   9,716
                                                     =========    =========     ========   ==========     =========
     Allowance for doubtful leases receivable......  $  12,434    $   6,813                $ 3,916(a)     $  15,331
                                                     =========    =========     ========   ==========     =========
     Inventory reserve.............................  $       0    $   2,914                               $   2,914
                                                     =========    =========     ========   ==========     =========
     Surplus property reserve......................  $       0    $     660                               $     660
                                                     =========    =========     ========   ==========     =========
     Income tax valuation allowance................  $       0    $     847                               $     847
                                                     =========    =========     ========   ==========     =========
</TABLE>
(a)  Accounts charged off, net of recoveries.
(b)  Difference between cost and market of applicable inventories.
(c)  Locations sold.


                                       68

<PAGE>



ITEM 14(B).       REPORTS ON FORM 8-K
                  No  reports  on Form 8-K for the three  months  ended June 30,
1997, have been filed.

ITEM 14(C)(1).    EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION
                  REGULATION S-K

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

                      ARTICLES OF INCORPORATION AND BY-LAWS

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

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

                      INSTRUMENT  DEFINING  THE  RIGHTS  OF  SECURITY  HOLDERS,
                      INCLUDING INDENTURES

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

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

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

                      4(d)   - The  Indenture  dated  as  of  August  25,  1982,
                             between  Agway and Key Bank of Central  New York of
                             Syracuse,  New York,  Trustee,  including  forms of
                             Subordinated Money Market Certificates  (Minimum 9%
                             per annum) due October 31, 1997,  and  Subordinated
                             Money  Market  Certificates  (Minimum  9  1/2%  per
                             annum) due October 31, 1997,  filed by reference to
                             Exhibit 4 of the Registration Statement (Form S-1),
                             File No. 2-79047, dated August 27, 1982.

                      4(e)   - The  Indenture  dated as of  September  1,  1985,
                             between  Agway and Key Bank of Central  New York of
                             Syracuse,  New York,  Trustee,  including  forms of
                             Subordinated Money Market  Certificates  (Minimum 7
                             1/2%  per  annum)  due   October  31,   2005,   and
                             Subordinated   Member  Money  Market   Certificates
                             (Minimum 8% per annum) due October 31, 2005,  filed
                             by  reference  to  Exhibit  4 of  the  Registration
                             Statement  (Form  S-2),  File  No.  2-99905,  dated
                             August 27, 1985.

                      4(f)   - The  Indenture  dated as of  September  1,  1986,
                             between  AFC and Key  Bank of  Central  New York of
                             Syracuse,  New York,  Trustee,  including  forms of
                             Subordinated   Member  Money  Market   Certificates
                             (Minimum 6% per annum) due October  31,  2006,  and
                             Subordinated Money Market  Certificates  (Minimum 5
                             1/2% per  annum) due  October  31,  2006,  filed by
                             reference   to   Exhibit  4  of  the   Registration
                             Statement (Form S-3), File No.
                             33-8676, dated September 11, 1986.

                                       69

<PAGE>



ITEM 14(C)(1).    EXHIBITS  REQUIRED  BY  SECURITIES  AND  EXCHANGE  COMMISSION
                  REGULATION S-K - CONTINUED

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

                      4(h)   - The  Indenture  dated  as  of  August  24,  1987,
                             between  AFC and Key  Bank of  Central  New York of
                             Syracuse,  New York,  Trustee,  including  forms of
                             Subordinated   Member  Money  Market   Certificates
                             (Minimum 7% per annum) due October  31,  1998,  and
                             Subordinated   Member  Money  Market   Certificates
                             (Minimum 6 1/2% per annum) due  October  31,  2008,
                             and Subordinated Money Market Certificates (Minimum
                             6  1/2%  per  annum)  due  October  31,  1998,  and
                             Subordinated Money Market Certificates  (Minimum 6%
                             per annum) due October 31, 2008, filed by reference
                             to Exhibit 4 of Registration Statement on Form S-3,
                             File No. 33-16734, dated August 31, 1987.

                      4(i)   - The  Indenture  dated  as  of  August  23,  1988,
                             between  AFC and Key  Bank of  Central  New York of
                             Syracuse,  New York,  Trustee,  including  forms of
                             Subordinated   Member  Money  Market   Certificates
                             (Minimum 9 1/2% per annum) due  October  31,  2000,
                             and Subordinated  Member Money Market  Certificates
                             (Minimum 9% per annum) due October  31,  2008,  and
                             Subordinated Money Market Certificates  (Minimum 9%
                             per annum) due October 31, 2000,  and  Subordinated
                             Money  Market  Certificates  (Minimum  8  1/2%  per
                             annum) due October 31, 2008,  filed by reference to
                             Exhibit 4 of  Registration  Statement  on Form S-3,
                             File No. 33-24093, dated August 31, 1988.

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

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

                      4(1)   - Agway Board of Directors resolutions  authorizing
                             the issuance of Honorary  Member  Preferred  Stock,
                             Series   HM  and   Membership   Common   Stock  and
                             authorizing AFC to issue Money Market  Certificates
                             under Indentures dated as of August 23, 1989, filed
                             herein.

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

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

                      LETTER ON CHANGE IN ACCOUNTING PRINCIPLES

                      18   - Letter on change in accounting principles, filed by
                             reference  to  Form  10-Q/A  filed  for  the second
                             quarter ending December 31, 1996.


                                       70

<PAGE>



ITEM 14(C)(1).    EXHIBITS REQUIRED BY SECURITIES AND EXCHANGE COMMISSION
                  REGULATION S-K - CONTINUED

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

                       3 -   AGWAY, INC. BY-LAWS AS AMENDED JUNE 18, 1997

                      10 -   MATERIAL CONTRACTs
                             (a) Directors - Deferred Compensation Agreement
                             (b) Board Officers - Deferred Compensation
                                 Agreement

                      12 -   STATEMENT RE COMPUTATION OF RATIOS

                      13 -   ANNUAL REPORT TO SECURITY HOLDERS, FORM 10-Q OR
                             QUARTERLY REPORT TO SECURITY HOLDERS

                      21 -   SUBSIDIARIES OF THE REGISTRANT

                      23 -   CONSENTS OF EXPERTS AND COUNSEL

                      27 -   FINANCIAL DATA SCHEDULE*

                      99 -   ADDITIONAL EXHIBITS
                             The  Annual  Report  on Form 11-K for year ended
                             June 30, 1997 of the Agway Inc. Employees' Thrift
                             Investment Plan.





* Included with electronic filing only.

                                       71

<PAGE>



                                   SIGNATURES

      Pursuant  to the  requirements  of Section  13 or 15(d) 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)


                                            By /s/ DONALD P. CARDARELLI
                                               ------------------------
                                                   DONALD P. CARDARELLI
                                                   PRESIDENT, CEO AND
                                                    GENERAL MANAGER
                                            (PRINCIPAL EXECUTIVE OFFICER)

                                            Date    August 25, 1997
                                               -------------------------

      Pursuant to the requirements of the Securities  Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
                   SIGNATURE                              TITLE                                           DATE
                   ---------                              ------                                          ----
             <S>                                       <C>                                          <C>
             /s/ Donald P. Cardarelli                  President, CEO and                           August 25, 1997
              (DONALD P. CARDARELLI)                     General Manager
                                                         (Principal Executive Officer)



             /s/ Peter J. O'Neill                      Senior Vice President,                       August 25, 1997
              (PETER J. O'NEILL)                           Finance & Control,
                                                           Treasurer and Controller
                                                           (Principal Financial Officer
                                                           & Principal Accounting Officer)



             /s/ Ralph H. Heffner                      Chairman of the                              August 25, 1997
              (RALPH H. HEFFNER)                           Board and Director



             /s/ Robert L. Marshman                    Vice Chairman of the                         August 25, 1997
             (ROBERT L. MARSHMAN)                      Board and Director



             /s/ Kevin B. Barrett                      Director                                     August 25, 1997
              (KEVIN B. BARRETT)


             /s/ Keith H. Carlisle                     Director                                     August 25, 1997
              (KEITH H. CARLISLE)


             /s/ Vyron M. Chapman                      Director                                     August 25, 1997
              (VYRON M. CHAPMAN)

</TABLE>

                                       72

<PAGE>

<TABLE>
<CAPTION>

                   SIGNATURE                             TITLE                                          DATE
                   ---------                             -----                                          ----

             <S>                                       <C>                                          <C>
             /s/ D. Gilbert Couser                     Director                                     August 25, 1997
              (D. GILBERT COUSER)


             /s/ Andrew J. Gilbert                     Director                                     August 25, 1997
              (ANDREW J. GILBERT)


             /s/ Peter D. Hanks                        Director                                     August 25, 1997
               (PETER D. HANKS)


             /s/ Frederick A. Hough                    Director                                     August 25, 1997
             (FREDERICK A. HOUGH)


             /s/ Samuel F. Minor                       Director                                     August 25, 1997
              (SAMUEL F. MINOR)


             /s/ Carl D. Smith                         Director                                     August 25, 1997
              (CARL D. SMITH)


             /s/ Thomas E. Smith                       Director                                     August 25, 1997
              (THOMAS E. SMITH)


             /s/ Gary K. Van Slyke                     Director                                     August 25, 1997
              (GARY K. VAN SLYKE)


             /s/ Joel L. Wenger                        Director                                     August 25, 1997
               (JOEL L. WENGER)


             /s/ Edwin C. Whitehead                    Director                                     August 25, 1997
              (EDWIN C. WHITEHEAD)


             /s/ Christian F. Wolff, Jr.               Director                                     August 25, 1997
              (CHRISTIAN F. WOLFF, JR.)


             /s/ William W. Young                      Director                                     August 25, 1997
              (WILLIAM W. YOUNG)
</TABLE>

                                       73

<PAGE>


SUPPLEMENTAL  INFORMATION TO BE FURNISHED WITH REPORTS FILED PURSUANT TO SECTION
15(D) OF THE ACT BY REGISTRANTS WHICH HAVE NOT REGISTERED SECURITIES PURSUANT TO
SECTION 12 OF THE ACT.

As of the date of this filing on Form 10-K, the Registrant has not had available
to be sent to security  holders the annual report for fiscal year ended June 30,
1997. Subsequent to the filing of the annual report on Form 10-K, the Registrant
shall furnish security holders with annual reports.





                                       74




<PAGE>

                                   AGWAY INC.
                                    FORM 10-K
                                  JUNE 30, 1997
                                  EXHIBIT INDEX


Exhibit
Number       Title
-------      -----

( 3)         Agway, Inc. By-Laws as amended June 18, 1997

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

(12)         Statements re computation of ratios

(13)         Annual report to security holders, Form 10-Q or
             quarterly report to security holders

(21)         Subsidiaries of registrant

(23)         Consent of experts and counsel

(27)         Financial data schedule*

(99)         Additional exhibits
                  Annual report on Form 11-K for the year ended June 30, 1997 of
                  the Agway Inc. Employees' Thrift Investment Plan


*Included with electronic filing only.